EU Opens Investigation Into Dutch Tax Ruling Of US Sportswear Giant

; posted on
January 15th, 2019

The European Commission has opened an investigation into the tax treatment of US sportswear company Nike Inc in the Netherlands. The investigation aims to examine whether five tax rulings granted by the Dutch tax authorities to two Nike group companies based in the Netherlands (Nike European Operations Netherlands BV and Converse Netherlands BV) between 2006 and 2015 gave the company an unfair advantage over its competitors, potentially in breach of EU State aid rules.

The Rulings

From 2006 to 2015, the Dutch tax authorities issued five tax rulings, two of which are still in force, endorsing a method to calculate the royalty to be paid by Nike European Operations Netherlands and Converse Netherlands for the use of the intellectual property. As a result of the rulings, Nike European Operations Netherlands BV and Converse Netherlands BV are only taxed in the Netherlands on a limited operating margin based on sales.

Due to the favorable rulings, the Commission is concerned that the royalty payments endorsed by the rulings may not reflect economic reality. They appear to be higher than what independent companies negotiating on market terms would have agreed between themselves in accordance with the arm's length principle. Further, the commission found out that Nike European Operation and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property, while the recipients of the royalty are Nike group entities that have no employees and do not carry out any economic activity.

Based on the fact stated earlier, the Commission accused the Netherlands of granting a selective advantage to the Nike group by allowing it to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms.

What does it mean for the Netherlands?

The probing Dutch tax ruling of Nike worsened the tarnished reputation of the Netherlands so far that it has been considered a tax haven and illegal state aid giver. Prior to Nike state aid investigation, the Netherlands has been accused several times as the illegal state aid giver. The countries have been ordered to recover the tax from beneficiaries of such schemes, which have included Amazon, Apple, Starbucks and Fiat.

In response to the state aid and tax rulings, the Dutch Ministry of Finance has announced that from 1 July 2019, stricter requirements will be put in place for the issuance of advance tax rulings with an international character. The proposal aims to prevent the Netherlands from being used as a conduit to tax havens where a company with undesired international structures (e.g. lacking relevant substance) maintaining an accessible and robust ruling process for genuine operations.

Sources: European Commission (Press Release), Reuters, TPA Global

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