Luxembourg: EC erred in finding grant of State aid based on OECD Transfer Pricing Guidelines (CJEU judgment)

EC incorrectly relied on the OECD Transfer Pricing Guidelines, rather than Luxembourg law

Based on OECD Transfer Pricing Guidelines (CJEU judgment)

The Court of Justice of the European Union (CJEU) today held 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 119 KB] from the CJEU, the EC found in October 2017 that Luxembourg had granted the taxpayer unlawful State aid under a 2003 tax ruling. In that tax ruling, the Luxembourg tax authorities accepted the taxpayer’s position regarding the appropriate amount of a royalty between two Luxembourg subsidiaries of the taxpayer group, which had an effect on the taxpayer’s corporate income tax liability in Luxembourg.

Luxembourg and the taxpayer appealed to the General Court of the European Union, which in May 2021 annulled the EC’s finding of State aid on the grounds that the EC had not demonstrated under the arm’s length principle and the OECD Transfer Pricing Guidelines that the transfer pricing determination under the tax ruling was erroneous and thus that the taxpayer’s Luxembourg subsidiary had benefited from an undue reduction in its tax burden.

The EC appealed that judgment of the General Court to the CJEU, and the CJEU today rejected the EC’s appeal. The court found that although the General Court erred in applying the arm’s length principle and the OECD Transfer Pricing Guidelines as the correct “reference system” for determining State aid, the EC also incorrectly relied on those principles and thus its finding of State aid must be annulled.

Consistent with the opinion of the Advocate General issued in June 2023 (read TaxNewsFlash), the court found that the General Court wrongly recognized the arm’s length principle as having general application within the context of the implementation of State aid rules. Because that principle has no autonomous existence in EU law, the EC may rely on it only if it is incorporated into the national tax law concerned, in this case the tax law of Luxembourg. Likewise, contrary to the General Court’s finding, the OECD Transfer Pricing Guidelines would be relevant only if Luxembourg tax law made explicit reference to them. 

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


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