On September 4th 2018, the European Commission (“Commission”) released the public version of its state aid decision ordering the recovery of the alleged illegal state aid granted to Engie by Luxembourg. At issue are two tax rulings issued by the Luxembourg tax authorities in 2008 and 2010 confirming the treatment of two financing transactions involving subsidiaries of the Engie Group.
In brief, the tax rulings endorsed the use of convertible loan structures to finance two intragroup transactions. In the first case, Engie Holding (the “Holding”) indirectly financed the purchase by LNG Supply (the “Subsidiary”) of natural gas by using a mandatorily convertible loan. At the level of the Subsidiary, the loan was treated as debt, meaning that any increase in its repayment obligation was deductible from its taxable profits. The Subsidiary was thus taxed on a margin, the determination of which was set out in the tax ruling. Under the terms of the convertible loan, no income was received by the Holding until conversion of the loan into shares. At that point, the shares benefited from the participation exemption regime and were not taxed in the hands of the Holding. A substantially similar structure was approved by the Luxembourg tax authorities in 2010 in relation to Engie Treasury Management and Compagnie Européenne de Financement.
The Commission concluded that these rulings gave Engie a selective advantage contrary to Article 107 of the Treaty of the Functioning of the European Union. The combined effect of the deductibility of the loans granted to the Subsidiary, and the exemption of the corresponding income under the participation regime resulted in the Subsidiary being taxed on a small amount of its profits.
According to the Commission, the selectivity of the measure lies in the application of an exemption to an income at the level of the Holding which corresponds economically to amounts deducted as expenses at the level of the Subsidiary. This result runs counter to both the general objective of the tax system to tax the profit of all the companies subject to tax in Luxembourg and the objective of the participation exemption which is to relieve double economic taxation.
On this basis, the Commission concluded that the tax rulings issued by Luxembourg gave a selective advantage to the Engie Group contrary to EU state aid rules and ordered Luxembourg to recover the aid, approximating EUR 120 million. Luxembourg has notified it will be appealing the Commission’s decision.