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Database of Transfer Pricing Case Laws

European Commission vs Amazon and Luxembourg, December 2023, European Court of Justice, Case No C‑457/21 P

Posted on December 14, 2023 | By Courts of the European Union | No comments

Category: Comparability Analysis, Digital Economy, EU State Aid, Royalty and License Payments, Transfer Pricing Methods | Tag: Amazon, CCA/CSA, Choice of tested party, Comparability analysis, Cost Sharing Arrangement (CSA), Did not reflect economic reality, Empty shell, FAR analysis, Functional analysis, Intangibles, Luxembourg, Profit Level Indicator (PLI), Profit split method (PSM), Royalty, State aid, Tax avoidance, Tested party, Transactional net margin method (TNMM)

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In 2017 the European Commission concluded that Luxembourg had granted undue tax benefits to Amazon of around €250 million.

According to the Commission, a tax ruling issued by Luxembourg in 2003 – and prolonged in 2011 – lowered the tax paid by Amazon in Luxembourg without any valid justification. The tax ruling enabled Amazon to shift the vast majority of its profits from an Amazon group company that is subject to tax in Luxembourg (Amazon EU) to a company which is not subject to tax (Amazon Europe Holding Technologies). In particular, the tax ruling endorsed the payment of a royalty from Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU’s taxable profits.

This decision was brought before the European Courts by Luxembourg and Amazon, and in May 2021 the General Court found that Luxembourg’s tax treatment of Amazon was not illegal under EU State aid rules.

An appeal was then filed by the European Commission with the European Court of Justice.

Judgment of the Court

The European Court of Justice upheld the decision of the General Court and annulled the decision of the European Commission. However, it did so for different reasons.

According to the Court of Justice, the OECD Transfer Pricing Guidelines were not part of the legal framework against which a selective advantage should be assessed, since Luxembourg had not implemented these guidelines.

Thus, although the General Court relied on an incorrect legal framework, it had reached the correct result.
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Related Guidelines

TPG2022 Chapter III paragraph 3.21Where the most appropriate transfer pricing method in the circumstances of the case, determined following the guidance in paragraphs 2.1- 2.12, is a transactional profit split, financial information on all the parties to the transaction, domestic and foreign, is needed. Given the two-sided nature of this method, the application of...

TPG2022 Chapter III paragraph 3.19This can be illustrated as follows. Assume that company A manufactures two types of products, P1 and P2, that it sells to company B, an associated enterprise in another country. Assume that A is found to manufacture P1 products using valuable, unique intangibles that belong to B and following technical...

TPG2022 Chapter I paragraph 1.85 (Example 3)Company A has acquired ownership of a tangible asset and enters into contracts for the use of the asset with unrelated customers. Under step 1 utilisation of the tangible asset, that is the risk that there will be insufficient demand for the asset to cover the costs Company A has...

TPG2022 Chapter I paragraph 1.84 (Example 2)Company B manufactures products for Company A. Under step 1 capacity utilisation risk and supply chain risk have been identified as economically significant in this transaction, and under step 2 it has been established that under the contract Company A assumes these risks. The functional analysis under step 3 provides...

TPG2022 Chapter I paragraph 1.83 (Example 1)Company A seeks to pursue a development opportunity and hires a specialist company, Company B, to perform part of the research on its behalf. Under step 1 development risk has been identified as economically significant in this transaction, and under step 2 it has been established that under the contract...

TPG2022 Chapter I paragraph 1.82In this step the functions in relation to risk of the associated enterprises that are parties to the transaction are analysed. The analysis provides information about how the associated enterprises operate in relation to the assumption and management of the specific, economically significant risks, and in particular about which enterprise...

TPG2022 Chapter I paragraph 1.81The assumption of risk has a significant effect on determining arm’s length pricing between associated enterprises, and it should not be concluded that the pricing arrangements adopted in the contractual arrangements alone determine which party assumes risk. Therefore, one may not infer from the fact that the price paid between...

TPG2022 Chapter I paragraph 1.80However, it does not follow that every contractual exchange of potentially higher but riskier income for lower but less risky income between associated enterprises is automatically arm’s length. The rest of the steps set out in this section describe the information required to determine how the associated enterprises operate in...

TPG2022 Chapter I paragraph 1.79It is economically neutral to take on (or lay off) risk in return for higher (or lower) anticipated nominal income as long as the net present value of both options are equal. Between unrelated parties, for example, the sale of a risky income-producing asset may reflect in part a preference...

TPG2022 Chapter I paragraph 1.78A contractual assumption of risk constitutes an ex ante agreement to bear some or all of the potential costs associated with the ex post materialisation of downside outcomes of risk in return for some or all of the potential benefit associated with the ex post materialisation of positive outcomes. Importantly,...

Supplemental Guidance

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