European Commission has opened investigation into Luxembourg’s tax treatment of the GDF Suez group (now Engie), September 2016

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The European Commission has opened an in-depth investigation into Luxembourg’s tax treatment of the GDF Suez group (now Engie). The Commission has concerns that several tax rulings issued by Luxembourg may have given GDF Suez an unfair advantage over other companies, in breach of EU state aid rules.

The Commission will assess in particular whether Luxembourg tax authorities selectively derogated from provisions of national tax law in tax rulings issued to GDF Suez. They appear to treat the same financial transaction between companies of GDF Suez in an inconsistent way, both as debt and as equity. The Commission considers at this stage that the treatment endorsed in the tax rulings 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.

As 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 Luxembourg. These financial transactions are loans that can be converted into equity and bear zero interest for the lender. One convertible loan was granted in 2009 by LNG Luxembourg (lender) to GDF Suez LNG Supply (borrower); the other in 2011 by Electrabel Invest Luxembourg (lender) to GDF Suez Treasury Management (borrower).

The Commission considers at this stage that in the tax rulings the two financial transactions are treated both as debt and as equity. This is an inconsistent tax treatment of the same transaction. On the one hand, the borrowers can make provisions for interest payments to the lenders (transactions treated as loan). On the other hand, the lenders’ income is considered to be equity remuneration similar to a dividend from the borrowers (transactions treated as equity).

The tax treatment appears 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 (provisioned) interest payments of the transaction as expenses. At the same time, the lenders avoid paying any tax on the profits the transactions generate for them, because Luxembourg tax rules exempt income from equity investments from taxation.

The final result seems to be that a significant proportion of the profits recorded by GDF Suez in Luxembourg through the two arrangements are not taxed at all.

The two arrangements between LNG Luxembourg (lender) and GDF Suez LNG Supply (borrower) as well as Electrabel Invest Luxembourg (lender) and GDF Suez Treasury Management (borrower) work as follows:

  • Under the terms of the convertible zero interest loan the borrower would record in its accounts a provision for interest payments, without actually paying any interest to the lender. Interest payments are tax deductible expenses in Luxembourg. The provisioned amounts represent a large proportion of the profit of each borrower. This significantly reduces the taxes the borrower pays in Luxembourg.
  • Had the lender received interest income, it would have been subject to corporate tax in Luxembourg. Instead, the loans are subsequently converted into company shares in favour of the lender. The shares incorporate the value of the provisioned interest payments and thereby generate a profit for the lenders.
  • However, this profit – which was deducted by the borrower as interest – is not taxed as profit at the level of the lender, because it is considered to be a dividend-like payment, associated with equity investments.
State aid Luxembourg GDF Suez sept 2016

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