Brussels has opened an investigation into Luxembourg’s tax arrangements with Engie, the French utility, as it expands its state-aid clampdown on “sweetheart” tax deals.
The European Commission probe comes shortly after it hit Apple with a €13bn bill for back taxes in Ireland, a record-breaking penalty that has enraged Washington and corporate America.
The Engie case opens up a new front by targeting the treatment of intra-group financial transactions, which accounts show ran to more than €1bn. The commission alleges that Engie, formerly known as GDF Suez, enjoyed “double non-taxation” because the loans were treated as both debt and equity for tax purposes.
Margrethe Vestager, the EU’s competition commissioner, said: “Financial transactions can be taxed differently depending on the type of transaction, equity or debt — but a single company cannot have the best of two worlds for one and the same transaction.
“Therefore, we will look carefully at tax rulings issued by Luxembourg to GDF Suez. They seem to contradict national taxation rules and allow GDF Suez to pay less tax than other companies.”
The decision to confront a big European champion over its tax dealings in Europe is symbolically important for Ms Vestager as she begins a three-day tour of the US. Apart from showing that she is determined to press on with more investigations, the Engie probe will be used to counter claims that the commission is targeting American multinationals.
Engie, which is 33 per cent owned by the French state, said it was co-operating with the probe. Engie has had operations in Luxembourg since 1933 and employs about 300 people in the country, said a spokesperson.
Ms Vestager’s drive against tax avoidance has triggered an angry response from Apple, the US administration and corporate America. Some 185 US chief executives described the decision last week as a “grievous self-inflicted wound” for Europe’s economy.
As well as ordering Ireland to recover €13bn from Apple, the commission has hit Fiat in Luxembourg, Starbucks in the Netherlands and a number of companies in Belgium. There are also investigations into Luxembourg’s tax arrangements with Amazon and McDonald’s.
Jean-Claude Juncker, the European Commission president who was Luxembourg’s premier when the tax deals were struck, has strongly backed the probes into “illegal backroom deals”. “Very often, bank robbers and poachers are among the very best police forces,” he said last week.
Brussels’ Luxembourg-Engie investigation turns on several tax rulings — letters confirming the interpretation of tax laws — regarding financial transactions in 2009 and 2011 between four companies in the Engie group.
The loans can be converted to equity and bear zero interest for the lender. An FT review of company accounts shows the first 2009 loan to be worth around €1.3bn at the end of 2014. The size of the second 2011 loan is not disclosed in public records.
By allowing the loans to be treated as both debt and equity, the investigators argue ”a significant proportion” of profits on the arrangements recorded by Engie in Luxembourg “are not taxed at all”.
“This is because the borrowers can significantly reduce their taxable profits in Luxembourg by deducting the (provisioned) interest payments of the transaction as expenses,” the commission said. “At the same time, the lenders avoid paying any tax on the profits the transactions generate for them, because Luxembourg tax rules exempt income from equity investments from taxation.”