CJEU Judgment: Luxembourg State Aid Case

December 21, 20230

The Court of Justice of the European Union (CJEU) made a ruling, asserting that the European Commission (EC) committed an error in its determination of unlawful State aid granted by Luxembourg to a taxpayer. This ruling, within the case of Commission v. Amazon.com and Others (C-457/21), highlighted a misstep in the EC’s approach regarding the reference system used for evaluating selective advantages. 


Background and EC’s Initial Finding 

In October 2017, the EC concluded that Luxembourg had provided unlawful State aid to the taxpayer through a 2003 tax ruling. This ruling, accepted by Luxembourg tax authorities, pertained to the assessment of a royalty payment for intangibles between two Luxembourg subsidiaries. Ultimately, it had the effect of reducing Amazon’s tax liability in Luxembourg. 

Subsequently, both Luxembourg and the taxpayer appealed to the General Court of the European Union. In May 2021, the General Court annulled the EC’s State aid finding, citing the EC’s failure to demonstrate any erroneous transfer pricing determination within the tax ruling based on the arm’s length principle and the OECD Transfer Pricing Guidelines. Consequently, the taxpayer’s Luxembourg subsidiary was deemed not to have benefited from an undue reduction in its tax burden. 


CJEU’s Decision and Analysis 

The EC later appealed the General Court’s judgment and in December 2023 the CJEU dismissed this appeal. Corresponding with the Advocate General’s opinion issued in June 2023, the CJEU emphasized that the arm’s length principle does not hold an independent status in EU law. Therefore, the EC can only utilize it if explicitly incorporated into national tax law—here, Luxembourg’s tax law. Similarly, the CJEU clarified that the OECD Transfer Pricing Guidelines would only be relevant if explicitly referenced in Luxembourg’s tax legislation.  

The CJEU acknowledged that both the General Court and the EC made an error in considering the arm’s length principle and the OECD Transfer Pricing Guidelines as the correct “reference system”. Even though the General Court also relied on an inappropriate reference system, it had come to the right conclusion. As a result, the CJEU confirmed the annulment of the EC’s state aid decision. 


Implications and Conclusion 

The CJEU’s ruling highlights the necessity for the EC to anchor its assessment of State aid within the framework of respective national tax laws rather than relying solely on international guidelines like the OECD Transfer Pricing Guidelines. This decision reiterates the importance of adherence to domestic tax legislation in determining unlawful State aid, calling for a more context-specific approach in evaluating tax-related disputes within the EU. 


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