Luxembourg problems for ENGIE

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Luxembourg problems for ENGIE

The European Commission has opened an in-depth investigation into Luxembourg’s tax treatment of the GDF Suez group (now ENGIE). The Commission has concerns that several tax rulings issued by Luxembourg may have given GDF Suez an unfair advantage over other companies, in breach of EU state aid rules.

DG COMP will assess in particular whether Luxembourg tax authorities selectively derogated from provisions of national tax law in tax rulings issued to GDF Suez. They appear to treat the same nancial transaction between companies of GDF Suez in an inconsistent way, both as debt and as equity. The Commission considers at this stage that the treatment endorsed in the tax rulings resulted in tax bene ts in favour of GDF Suez, which are not available to other companies subject to the same national taxation rules in Luxembourg.

As from September 2008, Luxembourg issued several tax rulings concerning the tax treatment of two similar financial transactions between four companies of the GDFSuez group, all based in Luxembourg. These financial transactions are loans that can be converted into equity and bear zero interest for the lender. One convertible loan was granted in 2009 by LNG Luxembourg (lender) to GDF Suez LNG Supply (borrower); the other in 2011 by Electrabel Invest Luxembourg (lender) to GDF Suez Treasury Management (borrower).

The Commission considers at this stage that in the tax rulings the two financial transactions are treated both as debt and as equity. This is an inconsistent tax treatment of the same transaction.

On the one hand, the borrowers can make provisions for interest payments to the lenders (transactions treated as loan). On the other hand, the lenders’ income is considered to be equity remuneration similar to a dividend from the borrowers (transactions treated as equity).

The tax treatment appears to give rise to double non-taxation for both lenders and borrowers on pro ts arising in Luxembourg. This is because the borrowers can signi cantly reduce their taxable pro ts in Luxembourg by deducting the (provisioned) interest payments of the transaction as expenses.

At the same time, the lenders avoid paying any tax on the pro ts the transactions generate for them, because Luxembourg tax rules exempt income from equity investments from taxation.

The final result seems to be that a significant proportion of the pro ts recorded by GDF Suez in Luxembourg through the two arrangements are not taxed at all.

DG COMP’s preliminary assessment is that GDF Suez was able to avoid paying taxes on such transactions as a result of the tax rulings. It appears to be obtaining a considerable economic advantage not available to other companies subject to the same national tax rules. If confirmed, this would amount to illegal state aid.

According to the Commission findings, the two arrangements between LNG Luxembourg (lender) and GDF Suez LNG Supply (borrower) as well as Electrabel Invest Luxembourg (lender) and GDF Suez Treasury Management (borrower) work as follows:

Under the terms of the convertible zero interest loan the borrower would record in its accounts a provision for interest payments, without actually paying any interest to the lender. Interest payments are tax deductible expenses in Luxembourg.

The provisioned amounts represent a large proportion of the pro t of each borrower. This signficantly reduces the taxes the borrower pays in Luxembourg.

Had the lender received interest income, it would have been subject to corporate tax in Luxembourg. Instead, the loans are subsequently converted into company shares in favour of the lender. The shares incorporate the value of the provisioned interest payments and thereby generate a pro t for the lenders.

However, this profit – which was deducted by the borrower as interest – is not taxed as pro t at the level of the lender, because it is considered to be a dividend-like payment, associated with equity investments.

According to Article 107(1) of the Treaty on the Functioning of the European Union (TFEU), state aid which a affects trade between Member States and threatens to distort competition by favouring certain undertakings is in principle incompatible with the EU Single Market. Since June 2013, the Commission has been investigating the tax ruling practices of Member States and it extended this information inquiry to all Member States in December 2014.

Tax rulings as such are not a problem under EU state aid rules if they simply confirm that tax arrangements between companies within the same group comply with the relevant tax legislation.

However, tax rulings that confer a selective tax advantage to specific companies, and so give them a subsidy, can seriously distort competition within the EU’s Single Market and violate EU state aid rules.

Filippo Giuffrida Répaci