EU State Aid – Commission announces an investigation into the Netherlands tax treatment of IKEA

In December 2017 the European Commission Tax Directorate issued a Press Release announcing that it was launching an in-depth investigation into 2006 and 2011 tax rulings given by the Dutch tax authorities to IKEA which the Commission believes may represent illegal tax aid to the Dutch based IKEA company.

A non-confidential version of the Commission decision will be published in the State Aid register of the Commission’s competition website under case number SA 46470 once any confidential issues have been resolved with the company.

The two page Press Release sets out the general background to the decision.

In the early 1980s the IKEA business model changed to a franchising model. The IKEA business was split into two independent groups: Inter IKEA and INGKA. The IKEA shops were transferred to INGKA which today still owns most IKEA stores worldwide. Inter IKEA received the proprietary rights developed until that date, including the IKEA trademarks, trade names and the copyrights. Inter IKEA group is still the owner of the intellectual property concerning the IKEA business and is in charge of the exploitation of the business through the franchise model.

A company in the Netherlands, Inter IKEA Systems, received a  franchise fee of 3% of their turnover from the IKEA shops in the world and this company in turn paid an annual licence fee to another company in the Inter IKEA group, called I.I. Holding, based in Luxembourg.

I.I. Holding held certain intellectual property rights required for the IKEA franchise concept which were licensed exclusively to Inter IKEA Systems.

“Inter IKEA Systems used these intellectual property rights to create and develop the IKEA franchise concept. In other words, it developed, enhanced and maintained the intellectual property rights. Inter IKEA Systems also managed the franchise contracts and collected the franchise fees from IKEA shops worldwide.”

A 2006 ruling endorsed the method of calculation of the licence fee paid to I.I. Holdings which more or less eliminated any potential taxable income in the Netherlands and under a special tax scheme established in Luxembourg under a law from 1929 there was no tax payable in Luxembourg. In July 2006 the Commission concluded that the Luxembourg special tax scheme was illegal under EU state aid rules and Luxembourg had until the end of 2010 to repeal the law. But there was no tax recoverable because the 1929 law predated the EC Treaty.

In 2011 Inter IKEA changed its arrangements and Inter IKEA Systems bought the intellectual property rights formerly held by I.I. Holdings and received an intercompany loan from its parent company in Liechtenstein to finance the acquisition.

A second, 2011, tax ruling from the Dutch authorities endorsed the price paid by Inter IKEA Systems for the acquisition of the intellectual property and they also endorsed the interest to be paid on the intercompany loan to the parent company in Liechtenstein. As a result of the interest payments a significant part of Inter IKEA Systems’ franchise profits after 2011 was shifted to its parent in Liechtenstein.

The Commission investigation is into the two tax rulings and, in the words of the Press Release:

  • The Commission will assess whether the annual licence fee paid by Inter IKEA Systems to I.I. Holding, endorsed in the 2006 tax ruling, reflects economic reality. In particular, it will assess if the level of the annual licence fee reflects Inter IKEA Systems' contribution to the franchise business;
  • The Commission will also assess whether the price Inter IKEA Systems agreed for the acquisition of the intellectual property rights and consequently the interest paid for the intercompany loan, endorsed in the 2011 tax ruling, reflect economic reality. In particular, the Commission will assess if the acquisition price adequately reflects the contribution made by Inter IKEA Systems to the value of the franchise business, and the level of interest deducted from Inter IKEA Systems' tax base in the Netherlands.

Previous State Aid cases

The EU is investigating the UK CFC regime and we posted a news item in October 2017 when that investigation was announced  EU State Aid rules: the competition directorate is to investigate the UK CFC regime Since that posting the EU has posted the detailed “case” against the UK regime which can be read by clicking here.

That earlier posting contains links to other EU State Aid tax cases.