On March 7th 2019, the European Commission (“Commission”) announced it was opening an in-depth investigation into the tax treatment of the Huhtamaki group in Luxembourg in order to determine whether Huhtamaki, a multinational consumer packaging manufacturer, was granted an unfair advantage contrary to EU state aid rules.
The formal investigation concerns three tax rulings granted in 2009, 2012 and 2013 by Luxembourg to Huhtalux S.à.r.l (“Huhtalux”), a Luxembourg based company. The 2009 ruling was part of the tax rulings uncovered by the “LuxLeaks” investigation. Huhtalux is part of the Huhtamaki group headquartered in Finland and conducts intra-group financing activities for the group. In that capacity, it received an interest free loan (“IFL”) from another member of the Huhtamaki group based in Ireland, which it then used to grant interest bearing loans to other group companies.
The tax rulings in question confirmed the deductibility of a deemed interest on the IFL. According to the Commission, since Huhtalux did not in fact pay this interest, the deductions allowed Huhtalux to reduce its taxable base and thus its tax liability. Such “downward adjustment” granted by Luxembourg could amount, according to the Commission, to an unlawful selective advantage because “it allows the group to pay less tax than other stand-alone or group companies whose transactions are priced according to market terms”.
According to the Commission’s press release, Luxembourg’s position is that the deemed interest deductions are in line with the arm’s length principle since a third party lender would have charged Huhtalux interest on the loan and such interest would have been deductible, so that Huhtalux was in fact in the same position as a stand-alone company who would not have received an IFL.
The opening of an in-depth investigation is the first step of the formal state aid investigation procedure. While other state aid procedures against Luxembourg are currently underway (e.g. Amazon, Fiat and Engie), the Commission found, in September 2018, that Luxembourg’s treatment of McDonald’s did not amount to illegal state aid (Please refer to our October 2018 Newsletter for further details).