Judgment of the General Court Second Chamber, Extended Composition of 12 May 2021, Luxembourg v Commission, T-516/18 and T-525/18

• Date: 12 May 2021
• Year: 2021

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in practice the possibility, for an individual, of obtaining the effective annulment of the requir ement at

issue.

VII. STATE AID

Judgment of the General Court (Second Chamber, Extended Composition) of 12 May 2021,

Luxembourg v Commission, T-516/18 and T-525/18

State aid – Aid implemented by Luxem bourg in favour of ENGIE – Decision declaring the aid incompatible

with the internal market and unlawful and ordering its recovery – Tax rulings – State resources –

Advantage – Co mbined effect of two tax measures – Participation exemption regime – Taxation of profit

distributions – Abuse of law – Selectivity – Reference framework – Finding of a derogation – Comparability

of situations – Parent-subsidiary arrangement – Group of companies – Recovery – Indirect

harmonisation – Procedural rights – Obligation to state reasons

Between 2008 and 2014, the Luxembourg tax authori ties adopted two sets of tax rulings (‘the

contested tax rulings’) in connection with intra-group financing structures relating to the transfer of

activities between companies of the Engie group resident in Luxembourg.

In broad outline, the transactions carried out under each structure are implemented in three

successive stages. First, a holding company transfers shares to a subsidiary. Secondly, in order to

finance the shares transferred, that subsidiary takes out an interest-free mandatorily convertible loan

(ZORA) with an intermediary. Besides the fact that the loan granted generates no periodic interest, the

subsidiary that has received the ZORA repays the loan, upon its conversion, by issuing shares the

amount of which is equivalent to the nominal amount of the loan, plus a premium representing, in

essence, all of the profits made by the subsidiary during the term of the loan (ZORA accretions).

Thirdly, the intermediary finances the loan granted to the subsidiary by entering into a prepaid

forward sale contract with the holding company under which the holding company pays to the

intermediary an amount equal to the nominal amount of the loan in exchange for the acquisition of

the rights to the share s that the subsidiary will issue on conversion of the ZORA. Therefore, if the

subsidiary makes profits during the life of the ZORA, the holding company will own the right to all the

shares issued, which will incorporate the value of any profits made as well as the nominal amount of

the loan.

Those structures were endorsed by the contested tax rulings. For tax purposes, under the contested

tax rulings, only the subsidiary is taxed on a margin agreed with the Luxembourg tax administration.

After requesting information about the contested tax rulings from the Luxembourg authorities, the

Commission initiated a formal investigation procedure at the end of which it determined that the

result of the structures approved by the tax administration is that alm ost all of the profits made by

the subsidiaries established in Luxembourg have not been taxed. Consequently, in a decision adopted

in 2018 (‘the contested decision’), the Commission concluded that the contested tax rulings constitute

illegal State aid that is incompatible with the internal market, which must be recovered from the

recipients by the Luxembourg authorities.

Luxembourg (Case T-516/18) and the Engie group companies (Case T-525/18) brought an action for

annulment of the contested decision before the General Court of the European Union.

In its judgment, the General Court approves the Commission’s approach, when presented with a

complex intra-group financing structure, which entails looking at the economic and fiscal reality,

rather than a formalistic approach that takes in isolation each of the transacti ons under the structure.

In addition, the Gener al Court finds that the Commission was right to determine that a selective

advantage was conferred as a result of the non-application of national provisions relating to abuse of

law.