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The Commission has today adopted a decision that Luxembourg's tax treatment of Engie is illegal under EU State aid rules.
Many people in Belgium, France and the Netherlands may be familiar with Engie as their electricity and gas supplier. Or, they may know the company under its old name, GDF Suez.
Our decision today concerns Luxembourg's tax treatment of profits that Engie made from certain activities in Luxembourg. Tax rulings issued by the Luxembourg authorities in 2008 and 2010 have artificially reduced Engie's tax bill for about a decade.
This gave Engie an undue advantage. Our common EU State aid rules prevent Member States from giving unfair tax benefits only to selected companies. Member States cannot treat some companies better than others subject to the same national laws. That distorts competition and is illegal under EU State aid rules.
That is why Luxembourg must now recover about 120 million euros in unpaid tax from Engie, plus interest. And Engie must start paying taxes on its profits in Luxembourg like any other company.
Details of the two Engie structures
I will now tell you a bit more about the two structures that Engie put in place in Luxembourg. Each of them involved an artificial financing arrangement that did not reflect economic reality. I hope you will bear with me because they are very complex – they are designed that way. But their effect is very simple: they enabled two Engie group companies to avoid paying taxes on almost all their profits in Luxembourg. These two companies make up only a small slice of the Engie group's overall profits – but this small slice remained basically untaxed. And this was endorsed by the Luxembourg tax authorities.
The first of these businesses is an Engie group company called "LNG Supply". LNG Supply operated Engie's business to buy, sell and trade liquefied natural gas and related products.
It started doing so in 2008, when LNG Supply bought Engie's existing gas trading business in Luxembourg. The financing that LNG Supply needed for this purchase was provided by another Engie company in Luxembourg called "LNG Holding". But in their respective books, each recorded this financing in a different way – one as a loan and the other as an investment in return for shares.
According to the books of LNG Supply, it took out a loan. Therefore, LNG Supply deducted expenses from its profits, as if it owed interest for a loan.
According to the books of LNG Holding, it invested in LNG Supply in return for shares. This means LNG Holding did not get any interest payments. Instead, LNG Holding received shares in LNG Supply. And, like in many countries, LNG Holding's income from these shares is not taxed in Luxembourg because the law assumes taxes were paid at the level of LNG Supply.
The deductions LNG Supply made to cover its interest payments amounted to more than 99% of its profits. As a result, LNG Supply paid taxes on less than 1% of its profits. 99% of its profits were not taxed anywhere, neither at the level of LNG Supply nor at the level of LNG Holding.
So, the effect of this structure is non-taxation. And this tax treatment was endorsed by the tax rulings issued by Luxembourg.
In 2010, Engie implemented a very similar arrangement for a second company in Luxembourg, Engie Treasury Management. The role of Engie Treasury Management was essentially to serve as a group internal bank and to manage Engie's intra-group financing. Its tax treatment in Luxembourg was also endorsed by Luxembourg in separate tax rulings.
As a result of these rulings, Engie avoided paying taxes on more than 99% of the profits it made from both activities since 2008 and 2010, respectively. In other words, for about a decade, Engie's effective tax rate on these profits was less than 0.3%.
Engie's illegal advantage
As such, these financing arrangements are not a matter for State aid rules. Nor does our decision put in question Luxembourg's general tax system. But we take issue with the fact that the Luxembourg tax authorities accepted an inconsistent tax treatment of the same financing, which artificially reduced Engie's tax burden.
In general, any company can provide financing to another company either by granting a loan or capital. But, under the standard Luxembourg tax laws, the two sides of a financing transaction have to mirror each other – each side has to reflect a loan or, alternatively, each side has to reflect a capital injection.
The Luxembourg tax rulings in favour of Engie replaced this standard mirror with a distorted mirror – it allows you to see not the reality but whatever suits you better from both worlds. The result is non-taxation at all levels.
This selective tax treatment gave Engie a significant competitive advantage in Luxembourg, which is illegal under EU State aid rules.
Conclusions from our State aid investigation
So, what are the consequences of this decision for Luxembourg and for Engie?
Luxembourg must now recover about 120 million euros in unpaid tax from Engie, plus interest. This relates to profits that LNG Supply has made and that have been channelled to LNG Holding. It is for the Luxembourg tax authorities to determine the exact amount, based on the method set out in our decision.
For the second company, Engie Treasury Management, no profits have been channelled to the holding yet. As soon as they are, Engie will have to pay taxes on these profits in Luxembourg like any other company. We will monitor this very closely.
And, as always, we will publish our decision as soon as we agree with Luxembourg and Engie on any business secrets which need to be removed from it.
Bringing national taxation laws in line with EU rules
So, today's decision is another step to make sure that companies pay their fair share of tax. But to reach our goal we also need Member States to bring their tax laws in line with EU rules.
That's why I welcome the announcement of the Luxembourg Government last week that it will make changes to its income tax laws. These seek to implement new EU rules to tackle cross-border tax avoidance, the so-called ATAD. And in addition, I understand the changes would also close other loopholes in the Luxembourg law, which can lead to non-taxation on profits from intra-group financing.
Furthermore, I understand Luxembourg will also make changes to prevent for the future an issue, which came to light as part of the McDonald's case. In particular, this relates to the way Luxembourg defines whether a Luxembourg company has a taxable presence abroad. The current definition can lead to double non-taxation, if the company does not in fact have a taxable presence abroad. Separately, the Commission continues to investigate Luxembourg's past tax treatment of McDonald's under EU State aid rules. We are not done yet, so I cannot prejudge its outcome.
But all these amendments in Luxembourg are important steps in the right direction to avoid non-taxation in the future.
Because the enforcement of EU State aid rules alone is not sufficient to tackle tax avoidance. We need to use this momentum to reform our corporation taxation framework to make it both fairer and more efficient both at the international level and in Europe. My colleagues Valdis Dombrovskis and Pierre Moscovici have already made a lot of progress on this. Just last month, the Council has given its green light to new rules proposed by the Commission, which will provide more transparency on the role of intermediaries who sell products and tax structures that can help clients to avoid tax.
Our ultimate goal is that all companies, big or small, pay their fair share of tax where their profits are earned. Because only then, companies can compete on equal terms – and not at the expense of European citizens and companies that do pay their fair share of tax.