The implications of State Aid can affect businesses operating within the EU, to protect your business it is vital to understand the risks in terms of both tax and corporate arrangements.

1. State Aid and Tax – Understanding the risks
17 November 2016
Dr Totis Kotsonis – State Aid Partner
Ben Jones – Tax Partner

2. Totis Kotsonis
Partner
totiskotsonis@eversheds.com
0207 919 0700
linkedin.com/in/drtotiskotsonis
Welcome, your presenters today are:
Ben Jones
Partner
benjones@eversheds.com
0207 919 4686
linkedin.com/in/benjones2

3. Overview

4. Eversheds LLP | 12/08/2015 |
• EU State aid – A brief introduction
• Tax State aid investigations – The wider context
• Tax rulings investigations
• The European Commission's case
• Arguments against the European Commission's case
• Where next and how do you protect your position?
• Opportunities?
• Brexit and State aid
• Questions
Overview

5. State aid rules – A brief introduction

6. State aid – A brief introduction
• What are the EU State aid rules all about?
• Why do we need State aid rules?
• Who decides whether State aid is legal?
• What are the key procedural requirements?
• What if State aid has been granted in breach of EU law
requirements?

7. State aid – A brief introduction
Article 107(1) Treaty on the Functioning of the EU
• Save as otherwise provided in the Treaties, any aid
granted by a Member State or through State resources in
any form whatsoever which distorts or threatens to distort
competition by favouring certain undertakings or the
production of certain goods shall, in so far as it affects
trade between Member States, be incompatible with the
internal market.

8. State aid – A brief introduction
EU State aid rules generally prohibit State aid:
• Granted through State resources in any form
• Confers a selective advantage on undertaking(s)
• Can distort competition
• Affects trade between EU Member States

9. State aid – A brief introduction
• Why is State aid generally prohibited?
• Distortion of competition in the single market – inefficient
suppliers kept afloat at the expense of more efficient competitors,
innovation suffers
• Risk of subsidies race between Member States
• But not all State aid is prohibited
• EU law recognises that certain common/wider goals justify
accepting a certain degree of competition distortion (which arises
as a result of the grant of State aid) so as to ensure that these
goals are attained

10. State aid – A brief introduction
• On what grounds will State aid be justified?
• Article 107(2) – e.g. aid:
• having social character granted to individual consumers;
• to make good damage caused by natural disasters
• On what grounds might State aid be justified?
• Article 107(3) – e.g. aid:
• aid to promote the execution of an important project of
common European interest or
• to remedy a serious disturbance in the economy of a
Member State;
• to facilitate the development of certain economic
activities or of certain economic areas, where such aid
does not adversely affect trading conditions to an extent
contrary to the common interest;

11. State aid – A brief introduction
• Who decides whether State aid is compatible with EU law
requirements and how?
• European Commission
• “Notification before implementation” requirement
• Preliminary investigation
• In-depth investigation
• Exemptions from notification if certain conditions met
• GBER
• De minimis
• Commission decisions appealable to EU Courts (for
manifest error or failure to follow due process)

12. State aid – A brief introduction
• Commission investigations
• Preliminary investigation (up to 2 months), may lead to
decision that:
• there is no aid
• there is aid but it is compatible with EU rules
• there is aid and the Commission has serious doubts as to the
compatibility of the measure with EU rules (and so it will open an
in-depth investigation)
• Formal (in-depth) investigation (may take up to 18 months
sometimes longer):
• EU countries and interested parties invited to submit comments
• EU country concerned invited to respond to those comments
• may lead to:
• positive decision
• conditional decision
• negative decision

13. State aid – A brief introduction
• What if State aid has been granted without notification?
• European Commission investigation
• How would the Commission find out?
• Information publicly available
• Complaints
• What if Commission concludes that State measure is State aid
which cannot be justified under EU rules?
• Normally State aid must be recovered (with interest)
• Commission can investigate aid and require its recovery up to
10 years from its grant

14. Tax investigations - The wider context

15. The wider context
• On what basis can tax arrangements constitute State aid?
• Recent tax rulings and the European Commission's position
• The wider political context – Brexit and all that

16. The wider context
• On what basis can tax arrangements constitute State aid?
• When it involves the State foregoing income which it otherwise would
have had, as a result of applying (or dis-applying) a tax measure to
certain type of companies only (i.e. selectively)
• this would be the case, for example, when the State makes an
exemption to the tax rules that would otherwise have applied, in
favour of certain type of companies only
• this then leads to a reduction to the State budget (and the income
which the State would otherwise have received amounts to the use
of “state resources” for EU State aid law purposes)
• it might be possible to justify such “deviation” from the otherwise
applicable tax rules. If this is not possible, then the tax
arrangement would be problematic for EU State aid rules purposes

17. The wider context
• On what basis can a tax ruling constitute State aid?
• Key issue: transfer prices (the prices set for the provision of goods or
services by one group company to another)
• Commission considers that tax rulings are in principle legal but not if
they are based on transfer prices which do not reflect economic reality
in that they endorse artificial and complex methods to establish taxable
profits for companies
• In those circumstances the Commission considers that a tax ruling
confers unfair competitive advantage over other companies (typically
SMEs) that are taxed on their actual profits because they pay market
prices for the goods and services they use

18. The wider context
June 2013 Commission commences investigation into the tax rulings practices of
seven Member States (including the UK)
June 2014 Commission opens in-depth investigation into transfer pricing
arrangements on corporate taxation of Apple (Ireland) Starbucks
(Netherlands) and Fiat Finance and Trade (Luxembourg)
October 2014 Commission opens in-depth investigation into transfer pricing
arrangements on corporate taxation of Amazon
November 2014 LuxLeaks
December 2014 Commission extends information enquiry on tax rulings practices between
2010 – 2013 to all Member States
February 2015 Commission opens in-depth investigation into the Belgian “excess profit”
tax scheme
October 2015 Commission announces decisions on Fiat and Starbucks cases
December 2015 Commission opens in-depth investigation into Luxembourg's tax
treatment of McDonald's
January 2016 Commission announces decision on Belgian “excess profit” tax scheme

19. The wider context
August 2016 Commission announces decision on Apple case finding that Ireland gave
illegal tax benefits to Apple worth up to €13 billion
September 2016 Commission opens an investigation into Luxembourg’s tax arrangements
with Engie, the French utility
November 2016 Ireland launches an appeal against the Commission’s Apple decision
Currently Amazon and McDonald’s investigations still ongoing

20. The wider context
“The Commission is looking at the compliance with EU state aid
rules of certain tax practices in some Member States in the context
of aggressive tax planning by multinationals, with a view to ensure
a level playing field. A number of multinational companies are
using tax planning strategies to reduce their global tax burden, by
taking advantage of the technicalities of tax systems, and
substantially reducing their tax liabilities. This aggressive tax
planning practice erodes the tax bases of Member States, which
are already financially constrained”
Commission press release, June 2014

21. The wider context
"In the current context of tight public budgets, it is particularly
important that large multinationals pay their fair share of taxes.
Under the EU's state aid rules, national authorities cannot take
measures allowing certain companies to pay less tax than they
should if the tax rules of the Member State were applied in a fair
and non-discriminatory way.” (Joaquín Almunia, Commission Vice
President in charge of competition policy at the time, June 2014)
"Fair tax competition is essential for the integrity of the Single
Market, for the fiscal sustainability of our Member States, and for a
level-playing field between our businesses. Our social and
economic model relies on it, so we must do all we can to defend
it.” (Algirdas Šemeta, Commissioner for Taxation at the time, June
2014)

22. The wider context
“Tackling potential distortions of competition through selective tax
advantages is another area where I will maintain our efforts.
Unlawful reductions of the tax burden for selected companies harm
not only competitors in the market, but also every taxpayer… All
our efforts converge on meeting the ultimate objective of
competition policy: making markets function better for the benefit
of the European consumers – both households and businesses.”
Margrethe Vestager, Commissioner for Competition (Forward to the
Annual Competition Report 2014)

23. The wider context
• National corporation tax rates (whether low or not) do not give
rise to any State aid law issues
• Brexit and all that

24. Tax rulings investigations

25. Why tax rulings?
• What are tax rulings?
• Why are tax rulings being targeted?
• “perfectly legal” and acceptable UNLESS results in lower
taxation than for other similar entities in similar circumstances
• Selective treatment

26. Why tax rulings?
• Examples:
• significant discretion exercised by tax authority
• ruling not available to similar entities
• “favourable” discretionary tax treatment
• contradicts applicable tax treatment

27. Targeting transfer pricing rulings
• Investigations have initially targeted transfer pricing rulings
• Starbucks
• Fiat
• Amazon
• Apple
• “arm’s length principle under EU state aid rules”

28. Apple
Apple
International
IrelandNo
jurisdiction
Europe
Internal
allocation of
profit to “head
office”
Payments for
products
Customers
head
office
Reduced tax
liability

29. Starbucks
Starbucks
Manufacturing
Starbucks
Coffee Trading
Alki
NetherlandsUK Switzerland
Royalties for
coffee-roasting
know-how
Payments for
green coffee
beans
Reduced tax
liability

30. Fiat
Fiat Finance
and Trade
Fiat group
companies
Luxembourg
Other
European
countries
Intra-group
loans
Reduced tax
liability

31. Amazon
Amazon EU
Luxembourg
Non-Lux
partners
Royalty
payment
Reduced tax
liability
Amazon
LLP
Tax transparent
in Luxembourg
so no tax

32. Widening investigations
• Scope of investigations now widening:
• Belgian excess profit regime
• Engie (GDF Suez)
• MacDonald’s
• Targeting:
• entire domestic regime administered through rulings
• rulings on application of double tax treaties

33. MacDonald's
MacDonald’s
European
Franchising
European /
Russian
operations
Luxembourg
Europe /
Russia
Royalty
payments
No tax liability
US
branch
Internal
allocation of
royalty
payments
No tax liability

34. Widening investigations
• But are these investigations justifiable and what are the
defences?
• Selectivity not proven – no comparable circumstances
• No EU arm’s length principle
• No proof of advantage
• Legal certainty

35. Where next and how do you protect your
position?

36. Where next and how do you protect your
position?
• What does all this mean for business?
• What does this mean for tax settlements with EU tax
authorities?
• Can business actually rely on tax rulings?
• Can businesses ensure that any ruling is state aid compliant?
• Should businesses get an indemnity from buyers when selling?

37. Opportunities?

38. Opportunities?
• Damages claim
• Complaints to EU Commission

39. Brexit and State aid

40. Brexit and State aid
• Will some form of State aid regulation continue to apply in the
UK post-Brexit?
• Three main possibilities:
• UK continues to comply with WTO anti-subsidy rules (but not
EU state aid rules)
• New post-Brexit arrangements with the EU provide for
continued compliance with EU State aid rules in relation to
all or certain specific sectors
• Post-Brexit the UK implements a national State aid system
similar to that which applies in the EU, CMA becomes State
aid regulator
• Government’s intention to introduce of Great Repeal Bill

41. Questions? Comments!

42. Useful links
• Procurement/State Aid Page
• Brexit/State Aid article
• Eversheds Tax page
• Brexit/Tax article
• Eversheds Brexit hub - www.eversheds.com/brexit

43. eversheds.com
©2016 Eversheds LLP
Eversheds LLP is a limited liability partnership
Totis Kotsonis
Partner
totiskotsonis@eversheds.com
0207 919 0700
Ben Jones
Partner
benjones@eversheds.com
0207 919 4686