European Commission investigates Luxembourg and Poland over alleged state aid violations

20 Sep 16

The European Commission has opened an in-depth investigation into Luxembourg’s tax treatment of the GDF Suez group, over concerns it may have given the company an unfair advantage and breached EU state aid rules.

The commission announced today that it will assess whether Luxembourg tax authorities selectively deviated from national tax law on rulings that applied to the French energy company, now known as Engie.

According to a statement, the authorities appear to have treated the same financial transaction in an inconsistent way, both as debt and equity. It stated: “The commission considers at this stage that the treatment endorsed in the tax ruling resulted in tax benefits in favour of GDF Suez, which are not available to other companies subject to the same national taxation rules in Luxembourg.”

Margrethe Vestager, the commissioner in charge of competition policy, acknowledged that financial transactions can be taxed differently depending on the type of transaction – equity or debt – but maintained that “a single company cannot have the best of two worlds for one and the same transaction.”

She said the commission would therefore look carefully at tax rulings issued by Luxembourg to GDF Suez. “They seem to contradict national taxation rules and allow GDF Suez to pay less tax than other companies."

From September 2008, Luxembourg issued several tax rulings concerning the tax treatment of two similar financial transactions between four companies of the GDF Suez group, all based in the country. The transactions are loans that can be converted into equity and bear zero interest for the lender.

According to the statement, the tax treatments appear to give rise to double non-taxation for both lenders and borrowers on profits arising in Luxembourg. This is because the borrowers can significantly reduce their taxable profits in Luxembourg by deducting the interest payments of the transaction as expenses. Moreover, lenders avoid paying tax on the profits the transactions generate for them, because the nation’s tax rules exempt income from equity investment from taxation.

The outcome of this is that a significant proportion of the profit recorded by the company in Luxembourg through the two transactions was not taxed at all.

The statement said the investigation does not call into question the general tax regime of Luxembourg. However, state aid that affects trade between member states in the EU and threatens to distort competition by favouring particular undertakings, is “in principle incompatible with the EU Single Market.”

Tax rulings are not a problem under EU state aid rules if they simply confirm that the tax arrangements between companies within the same group comply with the relevant tax legislation. But rulings that confer a selective advantage to specific companies, in essence, giving them a subsidy, “can seriously distort competition”.

In a separate development, the commission confirmed today that it has launched an in-depth investigation into a tax instigated by Poland on its retail sector. There are concerns that the progressive rates, which are based on turnover, give lower-turnover companies a selective advantage over competitors. This is also thought to be in breach of EU state aid rules.

Subsequently, the commission has issued an injunction that requires Poland to suspend the tax – which was introduced in July – until the investigation has been completed. 

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