EU Court Upholds Legality Of Amazon Europe's Tax Deal With Luxembourg - Quick Facts

The General Court of the European Union has annulled the European Commission's tax ruling against Amazon.com's (AMZN) subsidiaries in Europe. Amazon pursues its commercial activities in Europe through two companies established in Luxembourg - Amazon Europe Holding Technologies SCS or LuxSCS, and Amazon EU Sàrl or LuxOpCo, a wholly owned subsidiary of LuxSCS.

In November 2003, the Luxembourg tax authorities granted Amazon a tax ruling in response to a request. The tax authorities confirmed that the 'arm's length' royalty to be paid by LuxOpCo to LuxSCS should be calculated according to the transactional net margin method, using LuxOpCo as 'the tested party'.

The tax ruling, first, confirmed that LuxSCS was not subject to Luxembourg corporate income tax because of its legal form and, secondly, endorsed the method of calculating the annual royalty to be paid by LuxOpCo to LuxSCS.

Under a licence agreement, LuxOpCo undertook to pay a royalty to LuxSCS in return for the use of the intangible assets such as intellectual property rights held by it for the operations in Europe. The intellectual property essentially included technology, customer data and trademarks.

However, the EC found in 2017 that the 'arm's length' nature of the method of calculating the royalty to be paid by LuxOpCo to LuxSCS from 2006 to 2014 for Luxembourg corporate income tax purposes constituted State operating aid which is incompatible with the internal market.

The EC found an advantage in favor of LuxOpCo, considering essentially that the royalty paid by LuxOpCo to LuxSCS during the relevant period was too high, with the result that LuxOpCo's remuneration and, consequently, its tax base were artificially reduced.

Ultimately, having found that the tax ruling had been implemented by Luxembourg without notifying the EC in advance, the EC ordered the recovery, from LuxOpCo, of that aid which was unlawful and incompatible with the internal market. This proposed recovery of unpaid taxes reportedly amounted to 250 million euros or $295 million.

In its judgment delivered today, the court upheld, in essence, Amazon's pleas and arguments contesting both the primary and subsidiary findings of an advantage and consequently annulled the contested EC decision in its entirety.

The General Court concluded that none of the findings set out by the EC in the contested decision are sufficient to demonstrate the existence of an advantage for the purposes of Article 107(1) TFEU.

The court said an appeal, limited to points of law only, may be brought before the Court of Justice against the decision of the General Court within two months and ten days of notification of the decision.

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