On 3 September 2012, the Luxembourg tax authorities issued a tax ruling in favor of Fiat Finance and Trade Ltd (FFT) endorsing the remuneration method for the treasury and financing intra-group services provided by FFT. The ruling enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in Luxembourg.
In 2015, the EC held that the Luxembourg tax ruling constituted illegal State aid under Article 107 TFEU. In this decision (as endorsed by the European General Court), the EC argued the following:
- Under Luxembourg corporate income tax (the reference tax system) the arm's length principle strives to tax integrated companies in the same way as standalone companies.
- The tax ruling granted to FFT did not comply with the arm's length principle in determining the taxable profit of FFT. This constituted a derogation from the reference tax system.
- The derogation was not justifiable under the inherent logic and objectives of the reference system and thus constituted a selective advantage to FFT granted by Luxembourg.
In its judgment of 24 September 2019, the General Court dismissed the action brought by Luxembourg and FFT to annul the EC's decision and required Luxembourg to recover the unlawful and incompatible State aid. Following the dismissal, Ireland (C-898/19 P) and Fiat Chrysler Finance Europe (C-895/19 P), formerly FFT, separately appealed against the European General Court's judgment upholding the validity of the EC's decision.
In particular, the claimants challenged the General Court's (i) analysis of the existence of an economic advantage; (ii) choice of legal basis; and (iii) alleged breach of the principle of legal certainty.
In this context, the Advocate General Priit Pikamäe rendered its opinion, advising the European Court of Justice to annul the General Court's judgment and the EC's decision.
Apart from the above, the Advocate General suggested that all other pleas in law raised by both Ireland and FFT be dismissed, including those alleging that the EC failed to show that the tax ruling was not in line with the arm's length principle.
The Advocate General's opinion is not binding on the European Court of Justice and it remains to be seen if the European Court of Justice will follow the reasoning of the Advocate General.
For further information and to discuss what these developments might mean for you, please get in touch with your usual Baker McKenzie contact.