Luxembourg: European Commission erred in finding grant of State aid based on OECD Transfer Pricing Guidelines

CJEU Advocate General opinion

CJEU Advocate General opinion

The Advocate General of the Court of Justice of the European Union (CJEU) today issued an opinion that the European Commission (EC) erred in finding that Luxembourg had granted unlawful State aid to the taxpayer because the EC incorrectly relied on the OECD Transfer Pricing Guidelines, rather than Luxembourg law, as the reference system in determining whether there was a selective advantage.

The case is: Commission v. and Others (C-457/21).


As explained in a release [PDF 129 KB] from the CJEU, the EC found in October 2017 that Luxembourg had granted the taxpayer unlawful State aid under a tax ruling made in 2003. In that tax ruling, the Luxembourg tax authorities set out their position regarding the appropriate amount of a royalty between two Luxembourg subsidiaries of the taxpayer group, using a particular method agreed upon with the taxpayer, which had an effective on the taxpayer’s corporate income tax liability in Luxembourg.

The EC regarded that transfer pricing agreement as State aid because, in the EC’s view, it was not consistent with the arm’s length principles of the OECD. The EC made its own calculation to determine the appropriate amount of the royalty using a different method and arrived at a lower royalty that would have resulted in a higher corporate income tax burden. The EC thus found that the tax ruling granted a selective advantage.

Luxembourg and the taxpayer appealed to the General Court of the European Union, which annulled the EC’s finding of State aid. The General Court could not, on the basis of the OECD Transfer Pricing Guidelines, find that the determination of transfer pricing under the tax ruling was erroneous. The EC had not demonstrated that the tax burden had been artificially reduced as a result of over-pricing the royalty. Whether the arm’s length principles of the OECD could actually be the correct reference system for a review of State aid was not the subject of dispute before the General Court.

The EC appealed that judgment of the General Court to the CJEU.

The Advocate General today issued an opinion proposing that the EC’s appeal be dismissed, and that the General Court’s judgment be upheld as to the result, if not as to the reasoning.

  • The Advocate General emphasized that, consistent with the CJEU’s prior judgments (read TaxNewsFlash), in determining whether there is a selective advantage, parameters and rules external to the national tax system at issue cannot be taken into account, unless that national tax system makes explicit reference to them.
  • The EC based its review of the appropriate amount of the royalty exclusively on the OECD transfer pricing guidelines, although Luxembourg law at the time when the tax ruling was issued did not refer to those guidelines. The EC therefore incorrectly failed to take the Luxembourg national law as the relevant reference system for its review of a selective advantage. On the basis of that error, all the subsequent considerations in the EC decision are vitiated by an error of law.
  • Moreover, even if the CJEU were to consider itself bound by the choice of the incorrect reference system, the EC’s argument would be unfounded. In the view of the Advocate General, the method selected in the Luxembourg tax ruling would not have been manifestly incorrect under the OECD Transfer Pricing Guidelines. In view of the fiscal autonomy of Member States, only tax rulings that are manifestly erroneous in favor of the taxpayer can constitute a selective advantage.

The Advocate General’s opinion is not binding on the CJEU. The role of the Advocates General is to propose to the court, a legal solution to the cases for which they are responsible. The CJEU judges will now begin their deliberations in this case with a judgment to be given at a later date.

Read a June 2023 report prepared by the KPMG EU Tax Centre


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