State aid: Commission finds Luxembourg gave illegal tax benefits to Engie; has to recover around €120 million

Vestager Engie 2018 Luxembourg

Press conference by Margrethe Vestager, Member of the EC. © European Union , 2018 / Source: EC – Audiovisual Service / Photo: Jennifer Jacquemart.

This article is brought to you in association with the European Commission.

The European Commission has found that Luxembourg allowed two Engie group companies to avoid paying taxes on almost all their profits for about a decade. This is illegal under EU State aid rules because it gives Engie an undue advantage. Luxembourg must now recover about €120 million in unpaid tax.

Commissioner Margrethe Vestager, in charge of competition policy, said “Luxembourg gave illegal tax benefits to Engie. Its tax rulings have endorsed two complex financing structures put in place by Engie that treat the same transaction in an inconsistent way, both as debt and as equity. This artificially reduced the company’s tax burden. As a result, Engie paid an effective corporate tax rate of 0.3% on certain profits in Luxembourg for about a decade. This selective tax treatment is illegal.”

Following an in-depth investigation launched in September 2016, the Commission concluded that two sets of tax rulings issued by Luxembourg have artificially lowered Engie’s tax burden in Luxembourg for about a decade, without any valid justification.

In 2008 and 2010, respectively, Engie implemented two complex intra-group financing structures for two Engie group companies in Luxembourg, Engie LNG Supply and Engie Treasury Management. These involved a triangular transaction between Engie LNG Supply and Engie Treasury Management, respectively, and two other Engie group companies in Luxembourg.

The Commission concluded that Luxembourg’s tax treatment of these financing structures did not reflect economic reality. Tax rulings issued by Luxembourg endorsed an inconsistent treatment of the same transaction both as debt and as equity. On this basis, the Commission concluded that the tax rulings granted a selective economic advantage to Engie by allowing the group to pay less tax than other companies subject to the same national tax rules. In fact, the rulings enabled Engie to avoid paying any tax on 99% of the profits generated by Engie LNG Supply and Engie Treasury Management in Luxembourg.

 

Details of the two structures

The Commission decision concerns Luxembourg’s tax treatment of the profits made by two companies in the Engie group, namely Engie LNG Supply (whichbuys, sells and trades liquefied natural gas and related products in Luxembourg) and Engie Treasury Management (which manages internal financing within the Engie group).

Both are Luxembourg-incorporated companies that are fully-owned by the Engie group and ultimately controlled by Engie S.A. in France.

In 2008, Engie put in place a complex hybrid convertible loan structure between three Engie group companies. This triangular structure financed Engie LNG Supply‘s acquisition of Engie’s existing gas trading business in Luxembourg. In particular:

  • The financing was provided by Engie LNG Holding to Engie LNG Supply via an intermediary.
  • Engie LNG Supply treated this transaction as a debt: it made significant deductions from its taxable profits, as if it owed interest under a loan. These deductions accounted for 99% of Engie LNG Supply’s profits.
  • However, no payments were actually made to the intermediary or Engie LNG Holding.
  • Instead, these profits were parked in Engie LNG Supply until Engie decided to convert the loan.
  • At that moment, the intermediary received these parked profits in the form of shares, which they would then pass on to Engie LNG Holding.
  • Engie LNG Holding then cancelled these shares to receive in cash the profits made by Engie LNG Supply.

This structure enabled the treatment of the same financing both as debt (from the perspective of Engie LNG Supply) and as an investment in return for shares (from the perspective of Engie LNG Holding). As a result, LNG Supply only paid taxes on about 1% of its profits. The remaining 99% were not taxed neither at the level of LNG Supply nor at the level of Engie LNG Holding, which received these profits in the form of shares. Income from shares is exempted from taxation under standard Luxembourg tax law (as it is in many other countries).

In other words, for about a decade, Engie’s effective tax rate on these profits in Luxembourg was less than 0.3%. This structure was endorsed by Luxembourg under a tax ruling granted in 2008 (which was amended a number of times).

In 2010, Engie put in place the same structure between Engie Treasury Management and Compagnie Européenne de Financement (C.E.F). This was also endorsed by Luxembourg under a separate tax ruling.

 

Commission assessment

The role of EU State aid control is to ensure that Member States do not give selected companies a better tax treatment than others, via tax rulings or otherwise.

The Commission’s State aid investigation concluded that the Luxembourg tax rulings gave Engie a significant competitive advantage in Luxembourg. It does not call into question the general tax regime of Luxembourg.

In particular, the Commission found that the tax rulings endorsed an inconsistent tax treatment of the same structure leading to non-taxation at all levels. Engie LNG Supply and Engie Treasury Management each significantly reduce their taxable profits in Luxembourg by deducting expenses similar to interest payments for a loan. At the same time, Engie LNG Holding and C.E.F. avoid paying any tax because Luxembourg tax rules exempt income from equity investments from taxation.

This is a more favourable treatment than under the standard Luxembourg tax rules, which exempt from taxation income received by a shareholder from its subsidiary, provided that income is in general taxed at the level of the subsidiary.

On this basis, the Commission concluded that the tax rulings issued by Luxembourg gave a selective advantage to the Engie group which could not be justified. Therefore, the Commission decision found that Luxembourg’s tax treatment of Engie endorsed by the tax rulings is illegal under EU State aid rules.

 

Engie graph

 

Financing graph

The infographics are available in high resolution here.

 

Recovery

As a matter of principle, EU State aid rules require that illegal State aid is recovered in order to remove the distortion of competition created by the aid. There are no fines under EU State aid rules and recovery does not penalise the company in question. It simply restores equal treatment with other companies.

In the case of LNG Supply, all income that has been transferred to Engie LNG Holding should have been taxed either as profits of Engie LNG Supply or profits of Engie LNG Holding at the standard Luxembourg corporate tax rate of around 29%. This means that Luxembourg must now recover about 120 million euros in unpaid tax from Engie, plus interest. It is for the Luxembourg tax authorities to determine the exact amount, based on the method set out in our decision.

In the case of the second company, Engie Treasury Management, its profits have not been channelled to C.E.F. yet. They will have to be taxed in line with standard Luxembourg tax rules, as soon as the loan is converted and they are paid to the holding company. This will be closely monitored by the Luxembourg authorities and the Commission.

 

Background on Engie

Engie (former GDF Suez) is a French electric utility company. Engie Treasury Management S.à.r.l., a treasury company, and Engie LNG Supply, S.A, a liquefied natural gas trading company, are both part of the Engie group. In November 2017, Total has signed an agreement with Engie to acquire its LNG business, including Engie LNG Supply.

 

Background on Commission tax State aid investigations

Tax rulings as such are not a problem under EU State aid rules, if they simply confirm that tax arrangements between companies within the same group comply with the relevant tax legislation. However, tax rulings that confer a selective tax advantage to specific companies can distort competition within the EU’s Single Market, in breach of EU State aid rules.

Since June 2013, the Commission has been investigating individual tax rulings of Member States under EU State aid rules. It extended this information inquiry to all Member States in December 2014. In October 2015, the Commission concluded that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively. In January 2016, the Commission concluded that selective tax advantages granted by Belgium to at least 35 multinationals, mainly from the EU, under its “excess profit” tax scheme are illegal under EU State aid rules. In August 2016, the Commission concluded that Ireland granted undue tax benefits of up to €13 billion to Apple. In October 2017, the Commission concluded that Luxembourg granted undue tax benefits of up to €250 million to Amazon.

The Commission also has two ongoing in-depth investigations concerning tax rulings issued by Luxembourg in favour of Mc Donald’s and Inter IKEA, and one investigation concerning a tax scheme for multinationals in the United Kingdom.

The non-confidential versions of the decision will be made available under the case number SA.44888 in the State aid register on the Commission’s competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

The EU cuts roaming charges further while the UK weighs Brexit impact

Does Draghi have another ace up his sleeve given his Quantitative Easing failure?

We need a reskilling revolution. Here’s how to make it happen

8 amazing facts to help you understand China today

Is it just visa-free travel that Erdogan demands from the EU to not break the migration deal?

Can a Bavarian Oktoberfest beer indulger bring down the Berlin government?

2018 ‘terrifying’ for Yemenis but ultimately a ‘year for hope’ says UN Special Envoy

Crimea: The last bloodless secession of a Ukraine region?

EU Copyright Directive: Google News threatens to leave Europe while media startups increasingly worry

Lithuania needs to get rid of the victim mentality

A day in the life of a refugee: the wait

The cost of healthcare is rising in ASEAN. How can nations get the most for their money?

Climate change and health – can medical students be the solution?

Terrorist content online should be removed within one hour, says EP

Parliamentary bid to democratize Myanmar constitution a ‘positive development’ says UN rights expert

North Korean families facing deep ‘hunger crisis’ after worst harvest in 10 years, UN food assessment shows

What does reimagining our energy system look like?

OECD Steel Committee concerned about excess capacity in steel sector

UN chief saddened at news of death of former US President George H.W. Bush

COP21 Breaking News_04 December: Building a Sustainable Future – speech by UNEP Deputy Executive Director Ibrahim Thiaw at the LPAA Thematic Event on Buildings

Globalization 4.0 must provide for the poorest, or it risks causing chaos for everyone

We can save the Earth. Here’s how

EU job-search aid worth €9.9m for 1,858 former Air France workers

Three ways the world must tackle mental health

The banks dragged Eurozone down to fiscal abyss

Global Citizen-Volunteer Internships

It’s not kids’ screen time you should worry about – it’s yours

Israeli security forces’ response to Gaza protests ‘a recipe for more bloodshed’, says UN expert

EU budget 2019 approved: focus on the young, innovation and migration

The cost of housing is tearing our society apart

Chinese Premier Li Keqiang’s speech from World Economic Forum’s Annual Meeting of New Champions

Japanese law professor elected new judge at the International Court of Justice

At Ministerial session, UN regional office in Beirut to focus on technology for sustainable development

It’s time to stop talking about ethics in AI and start doing it

Eurozone: Inflation plunge to 0.4% in July may trigger cataclysmic developments

Office workers in these economies clock up the most extra hours

When connectivity is not enough: the key to meaningful digital inclusion

Nearly 900 children released by north-east Nigeria armed group

From ‘dead on the inside’ to ‘truly alive’: Survivor of genocide against the Tutsi in Rwanda recounts her story as UN marks 25th anniversary

Japanese banks to move their European HQ from London to Frankfurt after Brexit

Europe bows to Turkey’s rulers, sends Syrian refugees back to chaos

The Schengen area is at a crossroads

AI has huge potential – but it won’t solve all our problems

Climate change and health: an everyday solution

China-EU Relations: Broader, Higher and Stronger

Consumer product quality: Parliament takes aim at dual standards

EU-US Trade: European Commission endorses rebalancing duties on US products

Erdogan vies to become Middle East Sultan over Khashoggi’s killing

A Sting Exclusive: EU Commission’s Vice President Šefčovič accentuates the importance of innovation to EU’s Energy Union

Commission takes further action to ensure professionals can fully benefit from the Single Market

CHINA: five letters that could mean…

Who really cares for the environment?

Is a deal over EU budget possible today?

Trump asked Merkel to pay NATO arrears and cut down exports ignoring the EU

Here’s how to build energy infrastructures fit for the future

EU-China relations under investigation?

UN rights office calls for action to end ‘repression and retaliation’ in crisis-torn Nicaragua

How can we build a workforce for our digital future?

Let’s Learn

Why growth is now a one way road for Eurozone

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s