Advocate General Kokott finds the European Commission erroneously considered the existence of State aid in the Engie case

Summary

Further to the decision of the General Court in the Engie Cases, Engie and Luxembourg appealed before the CJEU. In her Opinion delivered on 4 May, AG Kokott suggests that the CJEU should uphold the appeals, set aside the judgment of the General Court and annul the decision of the EC.

1. Summary of the facts of the Engie Case

Between 2008 and 2014, the Luxembourg tax authorities (“LTA”) issued two sets of tax rulings (the “Rulings”) concerning intra-group financing structures related to the Luxembourg resident Engie group companies.

The Rulings essentially confirmed the tax treatment of convertible instruments issued by two Luxembourg resident borrowers to two Luxembourg resident lenders under similar conditions.

At the level of the borrowers, the instrument was considered as debt, and the deductibility of the accrued but unpaid charges in connection with it was granted by the LTA. At the level of the lenders, no income was received until the conversion of the instrument into shares. At that time, the shares benefited from the participation exemption regime.

The EC investigated the Rulings because they seemed to treat the same income in an inconsistent manner, both as debt and equity.

2. Decisions of the EC and the General Court

The EC concluded that illegal state aid was given to Engie, as it obtained a favourable treatment by being granted the “deduction without inclusion” outcome. The EC considered that the principle of correspondence can be inferred from national law. Based on this principle, a tax exemption for participation income at the level of the parent company is contingent on taxation of the underlying profits at the level of the subsidiary. Moreover, the EC considered that the LTA unlawfully failed to apply the anti-abuse rule.

Luxembourg and Engie brought an action for annulment of the EC decision before the General Court. The General Court, however, approved the EC’s approach, finding that it was right to determine that a selective advantage was conferred as a result of the non-application of national provisions relating to abuse of law.

Further to the decision of the General Court, Engie and Luxembourg appealed before the CJEU.

3. Opinion of AG Kokott

AG Kokott proposes that the CJEU upholds the appeals and, consequently, sets aside the judgment of the General Court and annuls the EC decision.

She argues that the EC and the General Court proceeded on the basis of an incorrect reference framework for the purpose of determining whether a state intervention is selective. The error was done by assuming that the Luxembourg tax law in force contained a principle of correspondence. However, the link, in view of AG Kokott, is not apparent and cannot be interpreted into Luxembourg law because it might be preferable.

Namely, solely the national law constitutes the reference framework, rather than an ideal or fictitious tax system. In this regard, only manifestly incorrect tax rulings under that national law may constitute a selective advantage.

AG Kokott further emphasises that tax rulings do not, in themselves, constitute illegal State aid, but are instead an important instrument for creating legal certainty. They are unproblematic as long as they are open to all taxpayers and are in line with the relevant national tax law.

In addition, AG Kokott argues in favour of only a restricted standard of review in respect of individual tax assessments (whether normal tax assessments or advance tax rulings), limited to a plausibility check. In her opinion, not any incorrect tax ruling, but only tax rulings which are manifestly erroneous in favour of the taxpayer, may constitute a selective advantage and be considered an infringement of State aid law.

Finally, in view of AG Kokott, the standard of review should also be reduced to a plausibility check in respect of national tax authorities’ review of the application of anti-abuse rules under State aid law. A manifest misapplication should be assumed only where it is not possible to explain plausibly why the case in question should not be considered as abuse. AG Kokott considers that, in the case at hand, the existence of abuse of legal structural possibilities under Luxembourg law is, however, not obvious and has not been established by the EC.

4. Our observations

It is the role of the AG to independently propose to the CJEU a legal solution to the cases for which they are responsible. Even if the Opinion of the AG is not binding, their guidance is generally followed by the CJEU.

The judges of the CJEU are now beginning their discussion on the Engie case, for which a judgment will be given at a later date. We would therefore recommend to taxpayers that used a similar financing structure as Engie to consider the risks and monitor future developments concerning the case.

For more information, you may contact:

• Jean-Nicolas Bourtembourg - Partner, Head of Tax & Transfer Pricing
• Mélina Rondeux - Partner, Tax Compliance