In 2012, the Luxembourg tax authorities issued a tax ruling in favour of Fiat Chrysler Finance Europe (‘FFT’), an undertaking in the Fiat group that provided treasury and financing services to the group companies established in Europe. The tax ruling at issue endorsed a method for determining FFT’s remuneration for these services, which enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in the Grand Duchy of Luxembourg.
In 2015, the Commission concluded that the tax ruling constituted State aid under Article 107 TFEU and that it was operating aid that was incompatible with the internal market. The Commission found that the Grand Duchy of Luxembourg was required to recover the unlawful and incompatible aid from FFT.
FFT brought an action before the General Court for annulment of the Commission’s decision.
In it’s Judgement of September 2019 Union , the General Court dismissed the actions brought by FFT and confirmed the validity of the Commission’s decision.
This decision was then appealed to the European Court of Justice by FFT.
AG Opinion from the European Court of Justice
The Advocate General opined that the decisions of the General Court should be set aside because the arm’s length principle had been used incorrectly as the benchmark for “normal” taxation in Luxembourg at that time.
“…I share Ireland’s view that the approach adopted by the Commission in the decision at issue and endorsed by the General Court in the judgment under appeal ultimately amounts to introducing into the national tax system constituting ‘normal’ taxation a rule, namely the arm’s length principle, which is extraneous to that system. For the reasons set out inter alia in the preceding point, the reference to the purported objective pursued by the national legislature is not capable of justifying the arm’s length principle’s belonging to the said system.”
“110. It has not escaped my attention that, if the arm’s length principle were incorporated into the national legal order, the number of national tax authorities whose tax rulings might be subject to Commission scrutiny from a State aid perspective would be reduced and the OECD guidelines would become de facto binding by restricting the Commission’s discretion in examining those rulings. Nevertheless, this is, in my view, the only reasoning that the General Court can regard as legally correct, since it respects the exclusive competence of the Member States in matters of direct taxation.
111. By contrast, the legal reasoning followed by the Commission, principally, and endorsed by the General Court in the judgment under appeal defines the reference framework constituting ‘normal’ taxation by relying on a version of the arm’s length principle based on an uncodified element such as the (purported) objective of Luxembourg tax law. Is this not precisely the undue interference in the Member States’ tax autonomy which the Court has always carefully condemned until now? I think that it is.”
” It follows from the reasoning set out in points 101 to 113 and points 167 to 174 of this Opinion that the General Court committed an error of law, in the judgment under appeal, in approving the examination of the existence of an economic advantage on the basis of a reference framework comprising an arm’s length principle which does not derive from national tax law and thereby also infringed the provisions governing the division of competences between the European Union and its Member States.”