CFE’s Tax Top 5 – 12 December 2023

ECJ Annuls Tax Findings in Engie State Aid Case   

The Court of Justice of the EU in Joined Cases C-451/21 P | Luxembourg v Commission and C-454/21 P | Engie Global LNG Holding and Others v Commission annulled a General Court judgment which confirmed European Commission’s finding of State aid granted by Luxembourg to Engie, in relation to a financing tax avoidance structure. In 2018, the European Commission found that the Luxembourg approved a complex corporate and tax arrangement of the Engie group which enabled the company to avoid taxation on almost all of the profit made by its Luxembourg subsidiaries. Engie and Luxembourg brought actions before the General Court, which dismissed their actions.

Engie and Luxembourg then brought an appeal before the Court of Justice, where the Commission was found to have erred in determining the reference system, which is a starting point in establishing when taxation measures are considered unlawful State aid under EU law.  In so far as national tax measures do not discriminate between companies, these do not confer a selective advantage within the meaning of EU law. The Court of Justice established that the Commission cannot establish a derogation from a reference framework without taking account of provisions of national law specifying the objective of the tax measure. The Luxembourg tax ruling under scrutiny confirmed deductibility of unpaid charges related to a convertible loan, without any corresponding taxable income at the level of the holder of the convertible loan. Upon conversion of the loan into shares, Luxembourg tax authorities approved no taxation at the level of the holder of the conversion shares. The European Commission considered that the resulting “deduction without inclusion” outcome is a tax advantage for Engie, contrary to EU State aid law.

The Court considered, however, that Member States’ tax sovereignty would be undermined if the Commission could examine tax avoidance structures, relying on a reference framework on the basis of the general objective pursued by national law of taxing all resident companies. The Court decided the matter itself, without returning the case to the General Court, and found directly that the error in establishing a reference framework vitiates the whole analysis, annulling on that basis both the Commission’s decision and the General Court judgment.

The ECJ findings are in line with the opinion of Advocate General Kokott, who argues in favour of restricting the EU State aid law standard of review in respect of tax avoidance practices approved with tax rulings of tax authorities. Only tax rulings which are manifestly erroneous in favour of the taxpayer may constitute State aid, AG Kokott argued in the Engie opinion, advising the ECJ to limit its review to manifest errors and plausibility check. AG Kokott’s opinion in the Engie case (related to financing structures) is in stark contrast with the opinion of AG Pitruzzela in the Apple case (transfer-pricing and profit allocation), who considers that the Commission’s challenge of such tax structures is valid under EU law. 

Spanish EU Presidency Last ECOFIN Meeting 

The Spanish Presidency of the EU held its last ECOFIN Council meeting, where a number of issues were discussed in relation to the EU’s economic governance, fiscal rules, ViDA and blacklist of non-cooperative jurisdictions for tax purposes. 

In relation to the EU economic governance framework, First Vice-President of the Government of Spain and Minister for Economy Nadia Calviño said: “We have made very significant progress on the basis of the intense consultations we’ve had over the past weeks and months. We’re almost there. It was not possible to reach an agreement on all political, legal and technical consultations, but we hope to finalise this in the coming days and weeks, so that we can find a political agreement before the end of the year.

EU’s Finance Ministers approved the Report to the European Council on Tax Issues which includes an overview of the state of play of the most important tax files: “VAT in the Digital Age” package; the Faster and Unshell proposals i.e. proposal on faster and safer relief of excess withholding taxes and proposal to prevent the misuse of shell entities for tax purposes; the HOT proposal for Council Directive establishing a Head Office Tax system for micro, small and medium sized enterprises; Council Directive on Transfer Pricing and Council Directive on Business in Europe: Framework for Income Taxation (BEFIT); as well as update to the EU blacklist of non-cooperative jurisdictions for tax purposes. 

Regarding the ViDA package Progress Report, the Council noted that further technical discussion are needed to agree on the electronic invoicing and digital reporting requirements, as well as the entry into force. On the Single VAT registration, the report notes that discussions at technical level have been concluded. The ViDA package includes proposals for:

  • single VAT registration for businesses across the EU;
  • VAT rules for the platform economy, related to passenger transport and short-term accommodation rental;
  • digital reporting obligations based on e-invoicing for businesses operating across borders in the EU.

Calviño Appointed to the European Investment Bank; Vestager Returns to Brussels 

Margarethe Vestager lost the battle to win the presidency of the European Union lending and investment body, the European Investment Bank (EIB), to Nadia Calviño, Spain’s Deputy PM and Minister of Economy. Calviño secured a unanimous support of all EU Member states, in spite of Vestager’s campaigning since September to win this role. 

European Commission President Ursula von der Leyen relieved Vestager of her duties as Competition Commissioner in September 2023, Commission’s most powerful portfolio, and appointed Didier Reynders as Competition Commissioner ad interim. Vestager will now resume her Commission duties until the next European elections, with only a few months left. Described as a “waning star”, Vestager’s EU career was called into question following unsuccessful appointment of a US economics professor and tech-lobbyist as Chief Economist of the EU, in charge of economic assessment of corporate market power. 

Vincent van Peteghem, Belgium’s Finance minister and Chair of EIB’s Board of Governors, told reporters that EU finance ministers had formed consensus over Nadia Calviño, who will be “a strong next president of the EIB, the biggest investment bank in the world,” van Peteghem said. Calviño told reporters she was “grateful and honoured” to have her colleagues’ backing. “This support reflects the respect, appreciation and leadership that we have gained through the hard intense work of the last year.”, Ms Calviño said. 

EU Approves Artificial Intelligence Act 

The European Parliament and the Council of the EU provisionally approved the proposal on harmonised rules on artificial intelligence (AI), the Artificial Intelligence Act (AAI), making it the world’s first regulatory standard for AI. Following the provisional agreement, work will continue at technical level in the coming weeks to finalise the details of the new regulation. The provisional agreement provides that the AI act should apply 2 years after its entry into force, with some exceptions for specific provisions. The key elements include: 

  • rules on high-impact general-purpose AI models that can cause systemic risk in the future, as well as on high-risk AI systems;
  • a revised system of governance with some enforcement powers at EU level;
  • extension of the list of prohibitions but with the possibility to use remote biometric identification by law enforcement authorities in public spaces, subject to safeguards;
  • better protection of rights through the obligation for deployers of high-risk AI systems to conduct a fundamental rights impact assessment prior to putting an AI system into use.

The European Commission welcomed the political agreement, President Ursula von der Leyen, said of the occasion: “Artificial intelligence is already changing our everyday lives. And this is just the beginning. Used wisely and widely, AI promises huge benefits to our economy and society. Therefore, I very much welcome today’s political agreement by the European Parliament and the Council on the Artificial Intelligence Act. The EU’s AI Act is the first-ever comprehensive legal framework on Artificial Intelligence worldwide. So, this is a historic moment. The AI Act transposes European values to a new era. By focusing regulation on identifiable risks, today’s agreement will foster responsible innovation in Europe. By guaranteeing the safety and fundamental rights of people and businesses, it will support the development, deployment and take-up of trustworthy AI in the EU. Our AI Act will make a substantial contribution to the development of global rules and principles for human-centric AI.” 

The AI agreement was criticised by French President Emmanuel Macron who said the regulations, which are the ‘toughest in the world’, will constrain European tech companies compared to their rivals in the US, UK and China. “When I look at France, it is probably the first country in terms of artificial intelligence in continental Europe. We are neck and neck with the British. They will not have this regulation on foundational models. But above all, we are all very far behind the Chinese and the Americans.”, Mr. Macron said for the FT


OECD Forum on Tax and Crime in Rome, Italy

The Sixth OECD Forum on Tax and Crime (FTC) took place last week in Rome, Italy, where delegates discussed how countries can further enhance international co-operation in order to maximise the disruption of tax crimes and related illicit financial flows. 

Italy’s Deputy Minister of Economy and Finance, Maurizio Leo, said at the Forum: “We are very proud to have hosted the Sixth OECD Forum on Tax and Crime in Rome, bringing together heads of tax crime, and senior officials from other law enforcement agencies and international organisations to agree further priority actions. The Rome FTC also marked the 10th anniversary of the launch of the highly successful international centre of the OECD Academy for Tax and Financial Crime Investigation which now has global reach through its three regional centres and new pilot programmes.”

In related developments, the Report on Dividend Tax Fraud was published by the OECD, analysing the complex mechanism of trading, selling and repurchasing shares over a certain period to unlawfully avoid payment of dividend taxes, or to claim unjustified tax reimbursements.

The selection of the remitted material has been prepared by:
Aleksandar Ivanovski & Brodie McIntosh