The Commission wrote to Luxembourg at the end of 2014 indicating that it believed State Aid was in point and issued a redacted version of that letter in January 2015 State Aid action against Luxembourg – Amazon.
On 4 October 2017 the Commission announced the conclusion of its three year enquiry. It concluded that illegal State Aid of €250m plus interest will have to be repaid by Amazon to Luxembourg. The commercially sensitive parts of the decision are now being removed and a redacted version will then be published.
The Press Release sets out the decision and the underlying rationale State Aid: Commission finds Luxembourg gave illegal tax benefits to Amazon worth around €250 million
Amazon had an operating company in Luxembourg to run its retail business throughout Europe and this company paid royalties to a holding company, a Luxembourg limited partnership, in respect of intellectual property rights that the holding company held under a “cost-sharing agreement” with Amazon in the US. The holding company made no use of the IP itself but granted an exclusive licence to the operating company. The Commission did not question the amount of the royalty that the holding company, the limited partnership, paid to the US under the cost sharing agreement.
The conclusion of the Commission is that the level of the royalty payment from the operating company to the holding company was inflated and did not reflect economic reality. Under the method endorsed by the Luxembourg tax ruling of 2003, which was prolonged in 2011, the operating company’s taxable profits were reduced to a quarter of what they were in reality.
The holding company in this set up, as a limited partnership, was regarded as a partnership in Luxembourg and not taxed there. It was treated as a 'check the box' entity for US tax purposes, which meant it was taxed as a company by the US and so not taxed in the US until profits were repatriated. According to the Commission the profits in the holding company remained untaxed.
The State Aid ruling only applies up to June 2014 when Amazon changed the way it operates in Europe.