Tax rulings granted to Fiat and Starbucks considered illegal State aid

The European Commission orders claw back in the first decisions to emerge in its crackdown on alleged corporate tax avoidance.

On 21 October 2015, the European Commission adopted its first two decisions on the compatibility of tax rulings with EU State aid rules. The first case related to a Dutch tax ruling granted to Starbucks. The second case involved Fiat’s finance company, based in Luxembourg. In both cases, the Commission held that the tax rulings contained illegal State aid to the benefit of Starbucks and Fiat. The decisions make it clear that the Commission considers that under certain circumstances, tax rulings may contain elements of State aid. In particular, the Commission objects to tax rulings that artificially, and without any economic justification, reduce the tax burden of a company and which create an unfair competitive advantage.

At this stage the Commission made only a summary public statement on the two decisions. Details of the Commission’s reasoning will only become available later, when the full texts of the Commission decisions are published.


The Starbucks investigation related to the tax treatment of Starbucks Manufacturing EMEA BV, based in the Netherlands. The Commission established that a Dutch tax ruling artificially lowered taxes paid by this company in two ways.

The first was the result of a substantial royalty that was paid to a UK based company in the Starbucks group. The royalty related to coffee roasting know-how. The Commission noted that no other Starbucks company or third party roasters paid for the use of the same know-how and concluded on that basis that the royalty payment did not reflect market value. The impact of the royalty was that a substantial part of the taxable base was shifted to the UK subsidiary, which was not liable to pay corporate tax itself.

The second shift in taxable base to which the Commission objected related to the price that Starbucks Manufacturing paid to a Swiss Starbucks company. The Commission considered that the transfer price was highly inflated.


The Fiat case focused on Fiat Finance and Trade, based in Luxembourg. This company provides financial services such as intra-group loans to other Fiat group companies. The Commission considered that the activities of Fiat Finance and Trade were comparable to those of a bank, and that the taxable profits therefore had to be determined in a similar way as for a bank, i.e. as a calculation of return on capital deployed by the company for its financing activities. However, the Commission noted that the Luxembourg tax ruling endorsed a complex methodology which led to an artificial lowering of the taxes paid by Fiat Finance and Trade. As a result of a number of techniques, the Commission established that Fiat Finance and Trade only paid taxes on a small portion of its actual accounting capital at a very low remuneration. The Commission estimated that if market conditions had been applied, the taxable profits would have been 20 times higher.


As a result of the Commission decisions, Fiat and Starbucks will no longer be able to benefit from the tax rulings investigated by the Commission. In addition, the Commission calculated the amount of the illegal State aid received so far and ordered the Netherlands and Luxembourg to seek recovery of the unpaid taxes from Starbucks and Fiat. For each company, the amount to be recovered is between €20m to €30m.

Next steps

The Commission’s reasoning is novel and addresses a tax mechanism which is widespread throughout the EU. Although the Commission confirms that tax rulings as such are perfectly legal, it seems to be determined to fight against those rulings which endorse artificial and complex methods to establish taxable profits in a way which does not reflect economic reality. Companies are therefore well advised to check their rulings and make sure that they meet the (new) standards set by the Commission.

The two decisions are generally seen as test cases for other cases that the Commission is currently investigating. Other pending cases involve the Belgian excess profit ruling system and tax ruling granted by Ireland (to Apple) and again by Luxembourg (to Amazon). In general, the Commission reviews tax ruling practices in all Member States as part of its focus in the fight against tax avoidance.

The Commission’s approach raises a number of issues, such as the extent to which the tax rulings under review meet the selectivity criterion, which is one of the basic principles of EU State aid law. Another issue is the implicit review by the Commission of well-established principles of taxation, such as the rules adopted at OECD level, in individual cases. The Netherlands has already announced that it intends to appeal the Commission’s decision. It is likely that the Fiat decision will also be appealed. The Commission’s reasoning will therefore soon be tested in the EU Courts in Luxembourg.

Exchange of information

More recently, the issue of tax rulings has been taken up at the OECD level with proposals contained in the OECD’s report into Action 5 of the BEPS Package. In particular, this recommends that jurisdictions should automatically exchange information on taxpayer specific rulings with other interested jurisdictions. In the EU, the EU Council has already agreed in principle to the introduction of automatic exchange of information on tax rulings to implement Action 5. It is proposed that the new rules should come into effect from 01 January 2017 and would apply a wide definition of a tax ruling for these purposes, covering both advance rulings and advance pricing arrangements which relate to cross border transactions or the question whether a PE exists. Whilst the proposals for automatic exchange of tax rulings do not affect their validity in the way that the State Aid actions do, the greater transparency in relation to rulings may enable other jurisdictions (and the Commission) to identify more easily other cases involving the granting of selective advantages in the future.

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