The European Commission has published a non-confidential version of the decision to open a state aid investigation into tax rulings granted by the Luxembourg tax authorities to the Huhtamaki Group in relation to the treatment of interest-free loans granted by an Irish group company to a Luxembourg group company, Huhtalux S.a.r.l.
The investigation will focus on three rulings obtained by a Luxembourg subsidiary of a group from the Luxembourg tax administration in 2009, 2012 and 2013.
The Luxembourg subsidiary which carried out intra-group financing activities was granted interest-free loans from an Irish group subsidiary and used the funds to grant interest bearing loans to other group companies.
In the rulings the tax authorities in Luxembourg confirmes that the financing subsidiary can deduct an amount of deemed interest on the interest-free loans corresponding to interest payments that an independent third party would have demanded for the loans in question.
As in the “Belgian excess profits” State aid case, the Commission considers that the system of reference against which a selective treatment is to be assessed is the general Luxembourg tax system which subjects companies to taxation on their accounting profits and not the domestic transfer pricing provisions;
The European Commission considers that the unilateral downward adjustment applied on the interest-free loans represents a selective advantage because in the European Commission’s view it deviates from the principle of taking the accounting profit as the starting point for the assessment of the tax;
Furthermore the Commission considers that the provisions of the Luxembourg income tax law invoked by the Luxembourg tax administration as allowing a downwards as well as an upwards adjustment of the profits of a company cannot support a downwards adjustment in the situation where there is no corresponding inclusion of income in the counter-party jurisdiction.