COMMISSION DECISION (EU) 2019/421

of 20 June 2018

on State aid SA.44888 (2016/C) (ex 2016/NN) implemented by Luxembourg in favour of ENGIE

(notified under document C(2018) 3839)

(Only the French version is authentic)

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union (‘the Treaty’), and in particular the first subparagraph of Article 108(2) thereof,

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments pursuant to the provisions cited above (1) and having regard to their comments,

Whereas:

1. PROCEDURE

(1) By letter of 23 March 2015, the Commission sent a request for information to the Grand Duchy of Luxembourg (‘Luxembourg’) (2) regarding its tax ruling practice in relation to the Engie group (then GDF Suez) (3). In that letter, the Commission requested Luxembourg to provide all tax rulings granted to any entity of that group from 2004 until the date of the letter, addressed to that group or to any entity of that group which were in place at that time or which had been in place in the previous 10 years, as well as annual accounts of that group and the legal entities of that group for 2011, 2012 and 2013, and copies of tax declarations.

(2) On 25 June 2015, Luxembourg replied to that request by submitting information about the tax rulings issued by the Luxembourg tax administration in favour of several companies of the Engie group resident in Luxembourg, including GDF Suez LNG Supply S.A. (‘LNG Supply’) (4) and GDF Suez Treasury Management S.à.r.l. (‘GSTM’) (5). In particular, Luxembourg provided two tax ruling requests and their respective approvals that concerned two almost identical intra-group transactions related to transfers of assets from other Engie group companies to, respectively, LNG Supply and GSTM. In both cases, the transfers were financed by interest-free mandatorily convertible loans denominated as ‘ZORA’ (6) (respectively, the ‘LNG ZORA’ and the ‘GSTM ZORA’; collectively, the ‘ZORAs’) and by Prepaid Forward Sale Contracts (respectively the ‘LNG Forward Contract’ and the ‘GSTM Forward Contract’; collectively, the ‘Forward Contracts’).

(3) By letter of 1 April 2016, the Commission indicated that, based on the information submitted by Luxembourg, it could not exclude that the tax rulings issued in favour of those Engie group companies may have included incompatible State aid. Consequently, it requested Luxembourg to provide reasons why those measures would not be selective or why they could otherwise be justified under Union State aid law and to submit further information and clarifications.

(4) By letter of 3 May 2016, the Commission reminded Luxembourg to provide the information referred to in recital 3.

(5) On 23 May 2016, Luxembourg replied to the Commission's request for information of 1 April 2016.

(6) On 19 September 2016, the Commission adopted the decision to open a formal investigation procedure under Article 108(2) of the Treaty on the tax treatment granted to Engie on the basis of the tax rulings issued by Luxembourg on the grounds that it could constitute State aid within the meaning of Article 107(1) of the Treaty (the ‘Opening decision’) (7).

(7) On 21 November 2016, Luxembourg submitted by letter its comments on the Opening decision and the requested information.

(8) On 3 February 2017, the Opening decision was published in the Official Journal of the European Union (8). The Commission invited interested parties to submit their comments on the measure.

(9) On 27 February 2017, the Commission received observations from Engie on the Opening decision. By letter of 10 March 2017, the Commission forwarded them to Luxembourg, which was given the opportunity to react.

(10) By letter of 22 March 2017, following observations by Luxembourg and Engie, the Commission requested Luxembourg to provide additional information.

(11) On 10 April 2017, Luxembourg submitted a letter indicating that the observations made by Engie are in line with its own observations.

(12) On 12 May 2017, Luxembourg submitted the information requested on 22 March 2017.

(13) On 1 June 2017, a meeting was held between the Commission services, Engie and Luxembourg. The content of the meeting was recorded in minutes agreed between the Commission and Luxembourg. Following the meeting, Luxembourg sent additional information on 16 June 2017.

(14) By letter of 11 December 2017, following observations made by Luxembourg and Engie during the meeting of 1 June 2017, the Commission clarified certain aspects of the investigation (‘Letter of 11 December 2017’) and requested additional information. The Commission invited Luxembourg to forward a copy of that letter to Engie.

(15) On 31 January 2018, Luxembourg and Engie submitted their observations to the Letter of 11 December 2017. On the same date, Luxembourg also submitted the information requested in the Letter of 11 December 2017.

2. BACKGROUND

2.1. THE ENGIE GROUP

(16) The Engie group (formerly GDF Suez group) consists of Engie S.A., a company established in France, and all companies directly or indirectly controlled by Engie S.A. (collectively referred to as ‘Engie’). Engie is the result of a merger in 2008 between the French groups GDF and Suez (formerly, Lyonnaise des Eaux) (9). Engie is headquartered in France. Engie S.A. is listed on the Paris, Brussels and Luxembourg stock exchanges (10).

(17) Engie is present in three main sectors: power production, natural gas and liquefied natural gas, and energy efficiency services. Engie is mainly active in the production and supply of energy (11) and energy trading, exploration, production, supply, transportation and distribution of natural gas, energy efficiency services, and energy infrastructure.

(18) Engie employs 153 090 people worldwide in 70 countries (12). In 2016, the revenues of Engie amounted to EUR 66,6 billion (13). Of the total revenues recorded by the group, EUR 52,2 billion were realised in Europe (14). In 2016, 67,3 % of the group's earnings before interest, tax, depreciation and amortisation (EBITDA) were generated in Europe (15).

(19) In Luxembourg, Engie is present through various legal entities, some of which are involved in the transactions which are the object of the contested tax rulings. Compagnie Européenne de Financement C.E.F. S.A. (‘CEF’) (16) is an Engie subsidiary incorporated in Luxembourg in 1933. The purpose of the company is the acquisition of participating interests in Luxembourg and foreign entities and the management, exploitation and control of such interests (17). It is primarily responsible for providing inter-company guarantees and loans for subsidiaries of the group. CEF's income is derived from the interest and fees charged for the provision of these loans and guarantees (18).

(20) GSTM is a Luxembourg company wholly-owned by CEF. It conducts treasury management and financing activities for Engie from Luxembourg. According to the tax ruling request of 15 June 2012, ‘in general, GSTM grants loans in various denominations (notably EUR and USD) to related companies and carries out a cash pooling activity […]. The cash pooling activity of GSTM generally varies between EUR [2-7] and [7-12] EUR 10 billion’ (19).

(21) GDF Suez LNG Holding S.à.r.l. (‘LNG Holding’) (20) is an Engie subsidiary incorporated in Luxembourg in 2009. The object of the company is the acquisition of participating interests in Luxembourg and foreign entities and the management of such participations (21). LNG Holding is wholly-owned by CEF.

(22) LNG Supply is wholly owned by LNG Holding. It is active in the purchase, sale and trading of LNG, gas and gas derivative products, and also in the shipping of LNG. It has a significant number of contracts in place with international energy companies (22). In 2018, Engie announced its intention to sell parts of its LNG business, including LNG Supply, to Total S.A. (23).

2.2. THE CONTESTED TAX RULINGS

2.2.1. INTRODUCTION

(23) The present Decision concerns two sets of tax rulings issued by the Luxembourg tax administration in favour of Engie group companies (the ‘contested tax rulings’). The contested tax rulings concern two similar intragroup transactions implemented by Engie between different companies of the group. In both cases, Engie transfers a set of assets constituting a fully functional business activity to a subsidiary in Luxembourg which will subsequently run this business activity.

(24) The payment of the price by the subsidiary is financed by means of a 15-year interest-free mandatorily convertible loan (the ZORA) granted by an intermediary group company resident in Luxembourg. The ZORA does not bear any periodic interest but, at conversion, the subsidiary will pay to the lender shares representing the nominal of the ZORA plus a ‘bonus’ consisting in all the profits realised by the subsidiary during the life of the ZORA minus a limited margin (24) agreed with the Luxembourg tax authorities (the amount of this ‘bonus’ is referred to in the contested rulings and tax returns of the companies as the ‘ZORA Accretions’) (25).

(25) In turn, the intermediary entity simultaneously finances this loan by means of a Prepaid Forward Sale Contract (the Forward Contract) entered into with a holding also resident in Luxembourg which is the sole shareholder of both the subsidiary and the intermediary entity. Under the Forward Contract, the holding pays to the intermediary company an amount equal to the nominal of the ZORA against the acquisition of the rights to the shares that the subsidiary will issue at conversion of the ZORA. Therefore, if the subsidiary realises profits during the life of the ZORA, the holding will receive at conversion of the ZORA the shares incorporating the value of the ZORA Accretions. Consequently, the holding provides to the subsidiary the financing for the acquisition of the assets by means of the Forward Contract and the ZORA.

(26) The contested tax rulings agree to the following tax treatment of the companies involved: the subsidiary will deduct every year provisions for the ZORA Accretions to be paid at conversion. Therefore, the subsidiary will not be taxed except for the limited margin agreed with the tax authorities. When the holding realises the ZORA Accretions (26), this profit will be tax exempt pursuant to the application of the Luxembourg participation exemption regime, which allows for the non-taxation, under certain conditions, of profit stemming from participations held in other companies. The intermediary entity is not taxed either since the profit realised from the conversion of the ZORA (the ZORA Accretions) is compensated by a loss of the same amount resulting from the Forward Contract (27). The final result is that the ZORA Accretions are deducted at the level of the subsidiary and that the same amount is not subject to taxation either at the level of the holding, as it is considered a tax exempt income. Therefore the ZORA Accretions, which represent virtually all the profit realised by the subsidiary during the life of the ZORA, will remain untaxed in Luxembourg (28).

(27) The structure described in the recitals 23 to 26 is illustrated in Figure 1. Figure 1 Illustration of the structures set up in the contested tax rulings Income Shares (including ZORA Accretions ZORA Shares (including ZORA Accretions) Forward Contract Assets Lender Subsidiary Holding

2.2.2. OVERVIEW OF THE CONTESTED TAX RULING

(28) This tax treatment has been endorsed in two sets of tax rulings concerning two different structures set up by Engie.

(29) The first set of tax rulings concerns the transfer of the activity concerning the purchase, sale and trading of LNG gas and gas derivative products (‘LNG Business’) (29) from the Luxembourg company Suez LNG Trading S.A. (‘LNG Trading’) to LNG Supply. It includes five tax rulings issued by the Luxembourg tax administration following tax ruling requests submitted by the tax advisor of Engie (‘tax advisor’) on behalf of different companies of Engie (collectively, the ‘LNG tax rulings’). (1) The first tax ruling was issued on 9 September 2008 (‘2008 LNG tax ruling’). It follows a tax ruling request of the same date (‘2008 LNG tax ruling request’) concerning the tax treatment of the contracts used to finance the transfer of the LNG Business from LNG Trading to LNG Supply (the LNG ZORA and the LNG Forward Contract). The 2008 tax ruling is partially amended and/or complemented by other rulings issued by the Luxembourg tax administration. (2) A tax ruling request dated 30 September 2008 concerning the transfer of the effective management of LNG Trading to the Netherlands. This tax ruling request was approved on the same day by the Luxembourg tax administration. (3) A tax ruling request dated 3 March 2009 (‘2009 LNG tax ruling request’), partially modifying the structure set up in the 2008 LNG tax ruling request. This tax ruling request was approved on the same day by the Luxembourg tax administration. (4) A tax ruling request dated 9 March 2012 (‘2012 LNG tax ruling request’), which clarifies certain accounting terms used to determine the margin on which LNG Supply is taxed. This tax ruling request was approved on the same day by the Luxembourg tax administration. (5) Finally, a tax ruling request dated 20 September 2013 with the object of clarifying the tax treatment of a partial conversion of the LNG ZORA (‘LNG conversion tax ruling request’). This tax ruling request was accepted by the Luxembourg tax administration by letter of 13 March 2014 (‘LNG conversion tax ruling’).

(30) The second set of tax rulings concerns the transfer of the treasury management and financing activities (‘Financing and Treasury Business’) (30) from CEF to GSTM. It includes two tax rulings issued by the Luxembourg tax administration following tax ruling requests submitted by the tax advisor on behalf of different companies of Engie (collectively, the ‘GSTM tax rulings’). (1) The first tax ruling was issued by the Luxembourg tax administration on 9 February 2010 (‘2010 GSTM tax ruling’). It follows a tax ruling request of the same date (‘2010 GSTM tax ruling request’) concerning the tax treatment of the contracts used to finance the transfer of the Financing and Treasury Business from CEF to GSTM (the GSTM ZORA and the GSTM Forward Contract). (2) The 2010 GSTM tax ruling was complemented by a tax ruling request dated 15 June 2012 concerning, inter alia, a potential increase in the amount of the GSTM ZORA (‘2012 GSTM tax ruling request’). This tax ruling request was approved on the same day by the Luxembourg tax administration (‘2012 GSTM tax ruling’).

(31) The holdings in each of the structures set up in the LNG tax rulings and in the GSTM tax rulings are, respectively, LNG Holding and CEF (collectively, the ‘Holdings’). The intermediary entities granting the ZORAs are, respectively, GDF Suez LNG (Luxembourg) S.à.r.l. (‘LNG Luxembourg’) and Electrabel Invest Luxembourg SA (‘EIL’, collectively with LNG Luxembourg, ‘Lenders’). Finally, the subsidiaries acquiring and operating the LNG Business and the Financing and Treasury Business are, respectively, LNG Supply and GSTM (collectively the ‘Subsidiaries’).

2.2.3. DETAILED DESCRIPTION OF THE LNG TAX RULINGS

2.2.3.1. The transactions described in the LNG tax rulings

(32) According to the 2008 LNG tax ruling request, LNG Trading will incorporate two new taxable Luxembourg companies: LNG Luxembourg and LNG Supply. The 2008 LNG tax ruling request stipulated that the LNG Business would be sold to LNG Luxembourg which would in turn sell it to LNG Supply (31). However, this structure was later modified: according to the 2009 LNG tax ruling request, CEF acquired first LNG Trading's shares, and incorporated LNG Luxembourg, LNG Supply and LNG Holding. LNG Holding took then the role of LNG Trading (32) in the structure (33).

(33) The structure is implemented as follows: (1) LNG Supply acquires LNG Trading's business activity (the LNG Business) for an estimated price of approximately USD 750 million. (2) LNG Supply finances the purchase price by means of an USD denominated 15-year interest-free mandatorily convertible loan (the LNG ZORA) granted by LNG Luxembourg. At conversion (34), LNG Supply issues shares (‘LNG Supply Shares’) incorporating the nominal amount of the ZORA plus/minus the ZORA Accretions. (3) In turn, LNG Luxembourg finances the investment in the LNG ZORA by means of the LNG Forward Contract entered into with LNG Holding. Under that contract, LNG Luxembourg agrees to transfer to LNG Holding the LNG Supply Shares. The price for the LNG Supply Shares corresponds to the nominal amount of the LNG ZORA (35).

2.2.3.2. The agreements signed by the parties

(34) Luxembourg has submitted copies of the agreements which reflect the implementation by Engie of the transactions described in the LNG tax rulings: (1) A Business Transfer Agreement entered into by LNG Trading and LNG Supply on 30 October 2009 (‘LNG Transfer Agreement’) (36) whereby the former agrees to transfer to the latter the LNG Business for a price of USD 657 million (37) against two promissory notes issued by LNG Supply (as borrower) in favour of LNG Trading (as lender) of, respectively, USD 11 000 000 and USD 646 000 000 (38). (2) A Mandatorily Exchangeable Loan Agreement entered into by LNG Luxembourg and LNG Supply on 30 October 2009 (‘LNG ZORA Agreement’) (39). Under this agreement, LNG Luxembourg grants a loan to LNG Supply (40) repayable by the issuance of the LNG Supply Shares (41). The loan has a maximum term of 15 years, i.e. it expires on 30 October 2024 (42). At the end of that period, it shall be converted into shares, unless converted into shares earlier by any party with the written consent of the other party (43). The ‘issue price’ of the loan is USD 646 million (44). The conversion price will be equal to the ‘issue price’ plus the ZORA Accretions accumulated until conversion (45). As explained in 2.2.3.6, the LNG ZORA was partially converted in 2014. (3) A Prepaid Forward Share Purchase Agreement entered into by LNG Holding and LNG Luxembourg on the same date (the LNG Forward Contract) (46). According to this agreement, LNG Holding purchases all the rights of LNG Luxembourg in the LNG Supply Shares for a price of USD 646 million (47), i.e. the same amount as the ‘issue price’ of the LNG ZORA. LNG Supply Shares are to be transferred to LNG Holding on the date of their issuance (48).

2.2.3.3. Tax treatment of LNG Supply

(35) According to the 2008 LNG tax ruling request, as accepted by the Luxembourg tax administration, the yearly profit that LNG Supply generates will be equal to a margin agreed with the Luxembourg tax administration (‘LNG Margin’). Therefore, LNG Supply will only be taxed on that margin. The difference between the profit actually generated each year by LNG Supply and the LNG Margin (the ZORA Accretions) is considered a deductible expense related to the LNG ZORA (49).

(36) The LNG Margin is set in the 2008 LNG tax ruling request at an amount corresponding to ‘an overall net spread of 1/[(50-100) %] of the value of the gross amount of assets as shown in [LNG Supply's] balance sheet, such net spread however not being lower than [0,00-0,50] % of the annual gross turn-over derived from the Enterprise’ (50). According to the 2008 LNG tax ruling request, ‘the [LNG M]argin will qualify as arm's length’ because LNG Supply will not ‘incur foreign exchange and/or bad debt risk on its trade’ (51). The 2008 LNG tax ruling request further explains that ‘the [LNG Supply] gross income […], minus all operational expenses incurred and minus the expense on the ZORA is approximately the [LNG] Margin’ (52).

(37) In other words, before the conversion of the ZORA, the tax base of LNG Supply is limited to the LNG Margin. The conversion has no impact on the tax base of LNG Supply as the amounts of the ZORA Accretions have been deducted by LNG Supply each year before the conversion.

2.2.3.4. Tax treatment of LNG Luxembourg

(38) The 2008 LNG tax ruling request, as accepted by the Luxembourg tax administration, allows LNG Luxembourg, during the life of the LNG ZORA, either to maintain the value of the ZORA in its accounts at book value (53) or, alternatively, to increase (or decrease) its value from its acquisition price to the expected redemption price (54). Therefore, during the lifetime of the LNG ZORA, LNG Luxembourg can choose not to book any taxable income or tax deductible expense related to the ZORA. As it will be explained in recital 52 below, LNG Luxembourg chose to maintain the value of the ZORA at book value.

(39) At conversion, LNG Luxembourg will receive the LNG Supply Shares, the value of which will incorporate the issue price of the ZORA plus the ZORA Accretions accumulated until the date of the conversion. According to the 2008 tax ruling request, the conversion is governed by the special regime laid down in Article 22bis of the Luxembourg Income Tax Code (loi modifiée du 4 décembre 1967 concernant l'impôt sur le revenu, ‘LIR’), unless LNG Supply chooses not to apply it (55). According to this provision, the conversion of the loan into shares will not give rise to any capital gain for tax purposes (56). Therefore, the ZORA Accretions received at conversion by LNG Luxembourg will not be subject to tax at conversion (57).

2.2.3.5. Tax treatment of LNG Holding

(40) According to the 2008 LNG tax ruling request, as accepted by the Luxembourg tax administration, LNG Holding will record the payment under the Forward Contract in its accounts as ‘Financial Fixed Assets’ (58). The 2008 LNG tax ruling request explains that those assets ‘will be and will continue to be valued at cost price’ (59). Therefore, LNG Holding will not book any taxable income or any tax deductible expense before the conversion of the ZORA and the transfer by LNG Luxembourg of the newly issued LNG Supply Shares.

(41) The 2008 LNG tax ruling request also asks for confirmation that ‘for purposes of Article 166 LIR […] the participation purchased by [LNG Holding] under the [LNG] Forward Contract will qualify as such as per the moment the [LNG] Forward Contract is concluded’ (60) and that ‘any income (dividends and capital gains) derived by and from Luxembourg companies will be exempt on the basis of Article 166 LIR’ (61). As explained in Section 2.3.2, Article 166 LIR is the provision of the corporate income tax law that governs the participation exemption in Luxembourg. Under the participation exemption regime, income stemming from the participations held in other entities, such as shares, is tax exempt provided that certain conditions are met.

(42) Consequently, any taxable income related to the ownership of the LNG Supply Shares issued in the framework of the LNG ZORA conversion will be tax exempt at the level of LNG Holding provided that the requirements of Article 166 LIR are met.

2.2.3.6. The LNG conversion tax ruling

(43) According to the LNG conversion tax ruling request, as accepted by the Luxembourg tax administration, Engie would execute a first partial conversion of the LNG ZORA into shares for an amount estimated at that date of USD [300-400] million. On the day of the conversion, a decision would be adopted to reduce the nominal capital of LNG Supply by an amount equal to the conversion amount. According to the tax ruling request, ‘[f]or [LNG Luxembourg] the Partial Conversion of the ZORA has no tax consequences’ (62). ‘Due to the capital reduction by [LNG Supply], [LNG Holding] will recognise a profit equal to the difference between the nominal amount of shares converted and the conversion amount. This profit will be visible in the books of [LNG Holding] and is covered by the participation exemption’ (63). Therefore, the profit realised by LNG Holding at the moment of the cancellation of the shares due to the capital reduction will be exempted from taxation. This profit corresponds to the ZORA Accretions incorporated into the LNG Supply Shares received by LNG Holding at conversion.

2.2.3.7. Implementation of the LNG tax rulings

(44) The tax returns submitted by Luxembourg reflect the tax treatment granted to the companies involved in the transactions as described in the LNG tax rulings.

2.2.3.7.1. LNG Supply

(45) LNG Supply's 2010 statutory accounts indicate that a ‘loan agreement mandatorily exchangeable into shares between LNG Luxembourg and LNG Supply’ was entered into in 2009 for an amount of USD 646 million with a 15-year maturity from 30 October 2009 (64).

(46) The LNG ZORA is reported as a liability in the balance sheet and included in LNG Supply's tax return for an amount equal to the nominal of the ZORA (USD 646 million) from 2009 to 2013 (65). In 2014, the amount was reduced by USD 193,8 million to USD [300-600] million following the partial conversion carried out that year (66).

(47) For each year, an amount equal to the yearly ZORA Accretions is recorded as a liability of LNG Supply (67) against the corresponding expense in the profit and loss account (68) and has consequently been deducted from LNG Supply's tax base. The accumulated ZORA Accretions reported in LNG Supply's tax returns are presented in Table 1. The reduction of the accumulated ZORA Accretions by EUR 193,8 million in 2014 is due to the impact of the partial conversion of the LNG ZORA, which is also partially offset by additional ZORA Accretions for the year (69). Table 1 Accumulated ZORA Accretions recorded in LNG Supply's tax returns 2009 2010 2011 2012 2013 2014 2015 2016 Accumulated ZORA Accretions (USD million) 10,9 46,8 165,6 [350-400] [650-700] [450-550] 0 0

(48) LNG Supply is taxed on the LNG Margin. As illustrated in for the year 2011 (70), the LNG Margin is calculated as [1/(50-100) %] of the total average assets of the company with a minimum of [0,0-0,50] % of the annual gross turnover, in line with the 2008 LNG tax ruling. The average value of assets financing the ZORA amounted in 2011 to USD 752 703 699. Therefore, the [1/(50-100) %] margin amounted to USD [100 000-150 000]. The turnover recorded was USD 1 573 579 569, therefore the margin of [0,0-0,50] % of this amount was USD [3 500 000-4 000 000]. As such, this latter amount was deemed to be LNG Supply's tax base for the 2011 period (71). LNG Supply accordingly paid EUR [500 000-1 500 000] (72) of corporate income tax for tax year 2011. Figure 2 Calculation of the tax base of LNG Supply, as presented in annex 3 to the tax return of 2011 ZORA accretion The amount of the ZORA accretion as indicated in the annual accounts is not in line with the advance agreements signed by the tax authorities on 9 September 2008 and March 2012. Consequently, a tax balance sheet was drawn up in order to record the correct amount. In accordance with the advance agreement, the company is not taxable on its margin (see below). Calculation of the margin Net margin [1/(50-100) %] of the value of the gross assets (i.e. the average value of the assets financing ZORA) with a minimum of [0,0-0,5 %] of the gross turnover derived from the assets that have been transferred to the Company (i.e. the Company's total earnings) Minimum margin Total profit Tax Start date End date Minimum margin (USD) 1 573 579 569 [0,0-0,5 %] 1/1/11 31/12/11 [3 500 000 -4 000 000 ] Net margin of [1/(50-100) %] of the average value of the assets financing ZORA Date Zora 1/1/11 692 817 329 (See 2010 tax return) 31/12/2011 812 590 069 Total 1 505 407 398 Average 752 703 699

Zora Tax Start date End date Margin (USD) 752 703 699 [1/(50-100) %] 1/1/11 31/12/11 [100 000 -150 000 ]

(49) According to LNG Supply's 2014 statutory accounts, the partial conversion of the LNG ZORA was split ‘between a part of the nominal amount and a part of accretion’ (73). Accordingly, both the nominal of the ZORA and the accumulated ZORA Accretions were reduced in 2014 by USD 193,8 million (74). In September 2014, LNG Supply increased its capital by USD 699,9 million (75) to partially reimburse the LNG ZORA. The LNG Supply Shares were issued at nominal value and were subsequently cancelled through a capital decrease at their nominal amount (76). This conversion did not have any tax consequences for LNG Supply.

(50) In 2015, as LNG Supply was in a loss-making position, the ZORA Accretions became negative by USD [650-850] million which therefore reduced, first the remaining accumulated ZORA Accretions (USD [450-550]) to USD 0, and second the outstanding nominal value of the LNG ZORA to USD [200-250] million (77).

(51) In 2016, the ZORA Accretions were again negative by USD [100-200] million, reducing further the outstanding amount of the LNG ZORA to USD [100-200] million (78).

2.2.3.7.2. LNG Luxembourg

(52) According to LNG Luxembourg's tax returns, the value of the LNG ZORA was maintained at its nominal amount (USD 646 million) until its partial conversion in 2014 (79), in line with the 2008 LNG tax ruling (80). The LNG Forward Contract also appears in LNG Luxembourg's tax return as a liability for the same amount (81).

(53) In 2014, as a result of the partial conversion, both the value of the LNG ZORA (asset) and of the LNG Forward Contract (liability) decreased by USD 193,8 million to USD [300-600] million, with no impact on the profit and loss account (82). LNG Luxembourg did not opt for the application of Article 22bis LIR.

(54) In 2015, as explained in recital 50, the value of the LNG ZORA was reduced to USD [300-600] million due to negative ZORA Accretions. LNG Luxembourg therefore decreased the value of the LNG ZORA to this amount and at the same time decreased the value of the LNG Forward Contract to the same amount (83).

(55) In 2016, the same adjustments were realised on the LNG ZORA and the LNG Forward Contract to decrease their value to USD [100-200] million (84).

2.2.3.7.3. LNG Holding

(56) The ZORA is booked in LNG Holding's statutory accounts as a financial asset (85). From 2012, a participation in LNG Supply for an amount equal to the nominal of the LNG ZORA also appears in LNG Holding's tax return under the category of participations eligible under Article 166 LIR (86).

(57) According to the 2014 LNG Holding's tax return and statutory accounts, the cancellation of the LNG Supply Shares, received as a result of the partial conversion of the LNG ZORA in 2014, generated a capital gain of USD 506,2 million (87), which remained entirely untaxed in application of the participation exemption regime (Article 166 LIR).

(58) In 2015 and 2016, LNG Holding booked an impairment adjustment on the LNG Forward Contract reflecting the decrease in value of the LNG ZORA following the negative ZORA Accretions, as explained in recitals 50 and 51 (88). This impairment was reflected as a charge in LNG Holding's profit and loss account.

2.2.4. DETAILED DESCRIPTION OF THE GSTM TAX RULINGS

2.2.4.1. The transactions described in the GSTM tax rulings

(59) According to the 2010 GSTM tax ruling request, Engie will implement a similar structure to the one described in the LNG tax rulings: GSTM acquires the Financing and Treasury Business and finances the acquisition by means of the GSTM ZORA granted by EIL. At conversion (89), GSTM issues shares (‘GSTM Shares’) incorporating the nominal amount of the ZORA plus/minus the ZORA Accretions. In turn, EIL finances the investment in the GSTM ZORA by means of the GSTM Forward Contract entered into with CEF. Under that contract, EIL will agree to transfer to CEF the GSTM Shares. The price for the GSTM Shares corresponds to the nominal amount of the GSTM ZORA (90).

(60) The 2012 GSTM tax ruling request contains a tax position on the same ZORA which is almost identical to that of the 2008 LNG tax ruling request, except that this ruling contemplates, inter alia, a potential future increase in the amount of the GSTM ZORA (91).

2.2.4.2. The agreements signed by the parties

(61) Luxembourg has submitted copies of the documents and agreements which reflect the implementation by Engie of the transactions described in the GSTM tax rulings: (1) A document with the title ‘Proposal of transfer of a branch of activity’ filed at the Registry of commerce and corporations of Luxembourg on 13 May 2011 (‘GSTM Transfer Proposal’) (92). According to this document, CEF proposes to transfer to GSTM the Financing and Treasury Business for an amount of EUR 1 036 912 506,84. According to the GSTM Transfer Proposal, CEF transfers the branch of activity in exchange of a promissory note from GSTM (93). (2) Two Mandatorily Exchangeable Loan Agreements entered into by EIL and GSTM, one dated 17 June 2011 and the other 30 June 2014 (‘GSTM ZORA Agreements’, together with the LNG ZORA Agreement, the ‘ZORA Agreements’) (94) with essentially the same content (95). Under the GSTM ZORA Agreements, EIL grants a loan (96) to GSTM repayable by the issuance of the GSTM Shares (97). The loan expires on 17 June 2026 (98). At the end of that period, it shall be converted into shares, unless it is converted into shares earlier by any party with the written consent of the other party (99). The ‘issue price’ of the loan is EUR 1 036 912 507 (100). The conversion price will be equal to the ‘issue price’ plus the ZORA Accretions accumulated until conversion (101). (3) A Prepaid Forward Share Purchase Agreement entered into by CEF and EIL on 17 June 2011 (the GSTM Forward Contract) (102). According to this agreement, CEF purchases all the rights of EIL in the GSTM Shares for a price equal to the ‘issue price’ of the GSTM ZORA (103). The GSTM Shares are to be transferred to CEF on the date of their issuance (104).

2.2.4.3. Tax treatment of GSTM

(62) According to the 2010 GSTM tax ruling request, as approved by the Luxembourg tax administration, GSTM's yearly taxable profit shall be equal to a margin agreed with the Luxembourg tax administration (‘GSTM Margin’). Therefore, GSTM will be taxed only on that margin. The difference between the profit actually generated by GSTM and the GSTM Margin (the ZORA Accretions) will be considered a deductible expense related to the GSTM ZORA (105).

(63) The GSTM Margin is set out in the 2010 GSTM tax ruling request as an amount corresponding to ‘an overall net spread of [1/(50-100) %] on the principal value of all its assets, including those assets financed with normal borrowings’ (106). The 2010 GSTM tax ruling request considers the GSTM Margin to be at arm's length (107).

(64) The 2012 GSTM tax ruling request contemplates a modification in the GSTM Margin. It states that its amount ‘will be determined in a future APA letter accompanied by a TP [transfer pricing] report’ (108). According to GSTM's 2011 statutory financial accounts (109), the change in the GSTM Margin from 1 January 2012 was due to entry into force of the Administrative Circular of 28 January 2011 concerning intra-group financing activities (‘Circular 164/2’) (110). This Circular required the submission of transfer pricing (‘TP’) studies in relation to any tax ruling request requesting the agreement on transfer prices for intragroup financing transactions (such as the GSTM Margin) (111). Accordingly, the tax advisor submitted, by letters of 11 July 2012 and 11 November 2013, two tax ruling requests with TP studies concerning the establishment of the GSTM Margin (112). According to Luxembourg, these tax ruling requests were not approved by its tax administration. In other words, the Luxembourg tax administration has not issued any tax ruling confirming the value of the GSTM Margin proposed by Engie's tax advisor in its letters of 11 July 2012 and 11 November 2013 (113).

(65) The 2010 GSTM tax ruling request also indicates that ‘in the unlikely event that the accounting treatment would not be totally in line with the obligations under the ZORA agreement, the resulting profit or loss reflected in the annual accounts will not affect the tax position set out above’ (114).

(66) In conclusion, before the conversion of the GSTM ZORA, the tax base of GSTM is limited to the GSTM Margin. The conversion of the GSTM ZORA has no impact on the tax base of GSTM.

2.2.4.4. Tax treatment of EIL

(67) The tax treatment granted to EIL is similar to the one described for LNG Luxembourg (115), and following identical arguments (116). Therefore, during the lifetime of the GSTM ZORA, EIL can choose not to book any taxable income or tax deductible expense. At conversion, if EIL chooses to apply the special regime stipulated in Article 22bis LIR, it will not recognise any income (117) and thus, no corporate income tax will be due (118). As it will be explained in recital 76, EIL chose to maintain the value of the GSTM ZORA at book value.

2.2.4.5. Tax treatment of CEF

(68) The tax treatment granted to CEF is similar to the one described for LNG Holding (119). Accordingly, CEF will not book any taxable income or any tax deductible expense before the conversion of the ZORA (120).

(69) The 2010 GSTM tax ruling request also asks for confirmation that ‘the participation purchased by CEF under the Forward Contract will qualify as direct participation in the capital of GSTM as per the moment that the Forward Contract is concluded for the purposes of the Article 166 LIR’ (121). Consequently, any taxable income related to the ownership of the GSTM Shares will be tax exempt at the level of CEF, provided that the requirements of Article 166 LIR are met.

2.2.4.6. Implementation of the GSTM tax rulings

(70) The tax returns submitted by Luxembourg reflect the tax treatment granted to the companies involved in the transactions as described in the GSTM tax rulings.

2.2.4.6.1. GSTM

(71) GSTM's 2012 statutory accounts indicate that EIL ‘granted a mandatory convertible loan amount of EUR 1 036 912 506,84 to [GSTM] with a maturity of 15 years from June, 17 2011’ (122).

(72) The GSTM ZORA is reported as a liability in the balance sheet included in GSTM's tax returns for an amount equal to the nominal of the ZORA (EUR 1 036 912 506,84). That amount does not vary over the years (123).

(73) For each year, an amount equal to the yearly ZORA Accretion has been recorded as a liability of GSTM (124) against the corresponding expense in the profit and loss account (125) and has consequently been deducted from GSTM's tax base. The accumulated ZORA Accretions reported in GSTM's tax returns over the period 2011 to 2015 are presented in Table 2 below. Table 2 Accumulated ZORA Accretions recorded in GSTM's tax returns 2011 2012 2013 2014 2015 2016 Accumulated ZORA Accretions (EUR million) 44,9 [100-150] [300-350] [450-500] [600-650] [600-900]

(74) In line with the 2010 GSTM tax ruling, GSTM is taxed on the GSTM Margin. Figure 3 below illustrates the determination of the GSTM Margin for the year 2011 (126). The ‘net earnings before tax and ZORA Accretion’ amounted to EUR 45 522 581. GSTM's tax base is calculated as [1/(50-100) %] of the total average assets of the company for the 2011 period, which amounted to EUR 3,7 billion. The taxable profit retained for GSTM on this basis amounts to EUR [500 000-600 000] (to which an amount designated as ‘remuneration of capital’ is added for an amount of EUR [6 000-11 000]). The difference between this amount and the ‘net earnings before tax and ZORA Accretion’ is the amount of EUR 44,9 million, which was recorded in the tax return as the tax deductible ZORA Accretion. Figure 3 The calculation of the tax base of GSTM for the year 2011 as detailed in Annex 3 to the 2011 tax return of GSTM Total assets From To No. Of days Average (*1) 8 691 871 776 2.5.2011 31.12.2011 244 3 729 884 433 Total debts financing assets 3 729 202 241 Net earnings before tax and ZORA accretion [45 000 000 -50 000 000 ] Net earnings before tax and ZORA accretion relating to capital 8 326 Net earnings before tax and ZORA accretion relating to debts financing assets [45 000 000 -50 000 000 ] Total [45 000 000 -50 000 000 ] Margin of [1/(50-100) %] [550 000 -600 000 ] Return on capital Remuneration of debts financing assets (margin of [1/(50-100) %]) [550 000 -600 000 ] Total net margin [550 000 -600 000 ] The margin has already been recorded in the annual accounts so no adjustment needs to be made. Calculation of taxable amount EUR Profit/loss for the year 420 802 Add: taxes [150 000 -200 000 ] Taxable amount [550 000 -600 000 ] Corporate income tax [100 000 -150 000 ]

(75) GSTM's tax returns show that, as indicated earlier (127), the GSTM Margin changed after 2011. As illustrated in for years 2012 and 2013, the GSTM Margin is not set at [1/(50-100) %] on the value of the assets, as was initially contemplated in the 2010 GSTM tax ruling request, but at [0-1 %] on the value of the debts financing the assets (128). In 2014, the GSTM Margin was set at [0-1 %] of the total amount of loans and receivables. The tax returns indicate that the GSTM Margin for these years has been calculated by reference to the tax ruling requests of 11 July 2012 and 11 November 2013 (129) which, as indicated in recital 64 were never accepted by the Luxembourg tax administration. Figure 4 The calculation of the tax base of GSTM in reference to the ruling requests of 2010 and 2012 in Annex 3 to the 2012 GSTM tax return Annexes to the Déclaration pour l'impôt sur le revenu des collectivités et pour l'impôt commercial [corporate income tax and municipal business tax return] for 2012 and declaration of personal assets as of 1 January 2013 in the name of: GDF SUEZ Treasury Management S.à r.l tax No 2011 2416 545 Annex 3 STAW/NGOK Explanatory notes General comments Reference is made to the letters from the tax adviser of 9 February 2010 and 15 June 2012. Margin on financing business Reference is made to the tax advisor's advance transfer pricing agreements of 11 July 2012 and 11 November 2013 (the APAs). The margin on the financing business is calculated as follows: Average amount of debts financing the assets (*) from to days % (**) margin [9 000 000 000 -10 000 000 000 ] 1/1/2012 31/12/2012 366 4,2 bps [3 000 000 -4 000 000 ] Total 366 Return on risk capital Average capital (*) from to days Return on risk capital [2 000 000 -3 000 000 ] 1/1/2012 31/12/2012 366 [20 000 -30 000 ] Total 366 Calculation of ZORA accretion Net earnings before tax and ZORA accretion [100 000 000 -150 000 000 ] Less: capital return [20 000 -30 000 ] Less: minimum margin [3 000 000 -4 000 000 ] ZORA accretion [100 000 000 -150 000 000 ] The amount of the ZORA accretion as indicated in the accounts is not in line with the APAs (not sufficient). Consequently, an adjustment in EUR [40 000 -50 000 ] has been made in the tax balance sheet and the tax profit and loss account, and this adjustment will be recorded in the commercial accounts for 2013. (*) Calculated on a monthly basis (**) We refer to the transfer pricing study as provided for in the APAs

2.2.4.6.2. EIL

(76) The value of the GSTM ZORA in EIL's books was maintained at the nominal amount, EUR 1 036 912 507 (130), in line with the option granted by the GSTM tax rulings (131).

2.2.4.6.3. CEF

(77) Finally, a participation in GSTM for an amount equal to the nominal of the GSTM ZORA also appears in CEF's tax returns under the category of participations eligible under Article 166 LIR (132).

2.3. DESCRIPTION OF THE RELEVANT NATIONAL LEGAL FRAMEWORK

2.3.1. DESCRIPTION OF THE GENERAL PRINCIPLES OF THE LUXEMBOURG CORPORATE INCOME TAX SYSTEM

(78) The ordinary rules of corporate taxation in Luxembourg can be found in the LIR. According to Article 159 LIR, resident tax companies are subject to tax on the totality of their profits (133). Article 163 LIR provides that the Luxembourg corporate income tax is applicable to the taxable profit of a taxpayer in a given year (134). Before 2013, all companies subject to tax in Luxembourg were taxed on their taxable profit at the standard tax rate of 28,80 % (135). Since 2013, the standard tax rate is 29,22 %.

(79) Article 18(1) LIR provides the method to establish a corporate taxpayer's annual profit: ‘The profit is determined as the difference between net assets as of the end and net assets as of the beginning of the reporting period, increased by the withdrawals for personal use and decreased by additional contributions performed during the reporting period’.

(80) Article 23 LIR explains that the value of the net assets should be determined following accounting rules and principles (136).

(81) Article 40 LIR establishes the principle of linking the tax balance sheet to the commercial balance sheet (‘accrochement du bilan fiscal au bilan commercial’). According to this principle, the tax balance sheet – which sets out the annual tax base — should correspond to the commercial balance sheet unless a specific tax rule applies requiring the use of a different value (137).

2.3.2. THE PARTICIPATION EXEMPTION REGIME AND THE TAXATION OF PROFIT DISTRIBUTIONS

(82) According to Article 97(1) LIR, revenues from investment income shall include dividends, profits participations and any other profit allocated based on shares or other participations in companies (138).

(83) As regards the taxation of the dividends and other income stemming from participations, Article 166 LIR introduces the so-called ‘participation exemption regime’ in Luxembourg. This regime provides for an exemption from corporate income tax, withholding tax and net wealth tax for income stemming from participations held by entities that meet certain criteria. In its opinion on the draft law incorporating this provision into the LIR, the Luxembourg State Council states that this regime is justified in order to avoid triple taxation for reasons of fiscal equity and economic order (139).

(84) Article 166(2) LIR lists the entities that can benefit from the participation exemption, which include joint-stock companies subject to tax in Luxembourg (such as ‘société anonyme’ and ‘société à responsabilité limitée’), and the companies listed under Article 2 of Council Directive 90/435/EEC (140).

(85) In order to benefit from the exemption, two cumulative conditions need to be met: first, the entities must hold or commit to hold the participation for an uninterrupted period of at least 12 months; second, the participation must not fall below either 10 % of the capital of the participated entity or a EUR 1,2 million acquisition price (141).

(86) Provided that these two conditions are met, the income derived from the participation (dividends, capital gains or any other revenues derived from the participation) is fully exempt from Luxembourg corporate income tax. Pursuant to Article 166(9) LIR and the Règlement grand-ducal du 21 décembre 2001 (‘Decree of 21 December 2001’) (142), the participation exemption applies also to capital gains (revenus dégagés par la cession de la participation) (143).

(87) The taxation of profits distributed at the level of the distributing entity is governed by Article 164 LIR. Article 164(1) LIR provides that, in order to determine the tax base, it is irrelevant whether the profit has been distributed or not (144). Article 164(2) LIR explains what should be understood as ‘distribution’ for the purposes of Article 164(1) LIR and includes in this category the distributions of any kind to shareholders, to holders of participation certificates, founder's shares, shares in enjoyment, or any other securities, including variable-yield bonds (145).

2.3.3. TEMPORARY DEFERRAL OF TAXATION OF CAPITAL GAINS ARISING FROM CONVERSIONS

(88) The general principle concerning conversion of assets is laid down in Article 22(5) LIR, according to which an exchange of assets should be considered as the sale of the given asset, followed by the acquisition of the asset acquired in return at a price corresponding to its estimated disposal value (146), thus potentially giving rise to a taxable capital gain.

(89) As an exception to this general rule, Article 22bis(2) number 1 LIR stipulates that the conversion of a loan into the share capital of the debtor will not lead to the realisation of a capital gains for corporate income tax purposes. That same provision provides that such an exception does not cover the interest accrued on the loan corresponding to the year of the conversion up until the date of the exchange (147).

2.3.4. ANTI-ABUSE PROVISION

(90) Article 6 of the Luxembourg Tax Adaptation Law or Steueranpassungsgesetz (‘StAnpG’) prohibits that taxes are evaded or mitigated by abuse of forms or constructions which are legal under civil law. According to Article 6 StAnpG, if the legal form or the construction surrounding a transaction is not appropriate in terms of its substance, tax should be assessed in accordance with the substance of the transaction, as if it had been concluded in the appropriate legal form (148).

3. GROUNDS FOR INITIATING THE PROCEDURE

(91) In its Opening decision, the Commission took the preliminary view that the tax treatment granted on the basis of the contested tax rulings appeared to constitute State aid within the meaning of Article 107(1) of the Treaty and raised doubts as to the compatibility of those measures with the internal market.

(92) More specifically, in the Opening decision, the Commission raised the following doubts: (1) whether the Luxembourg tax authorities correctly allowed the deduction of the ZORA Accretions and whether the ZORAs were at arm's length; (2) in case the Luxembourg tax authorities were right to allow for the deduction of the ZORA Accretions first, whether the Luxembourg tax authorities were right to accept the application of Article 22bis LIR; and second, whether the method used to determine the taxable profit of GSTM and LNG Supply was in line with the arm's length principle; (3) whether the combined effect of the deductibility of expenses (ZORA Accretions) at the level of LNG Supply and GSTM together with the non-taxation of the corresponding income at the level of EIL and LNG Luxembourg departs from the general objective of the Luxembourg tax system, thus providing a selective advantage to the holding companies LNG Holding and CEF.

(93) Under the first doubt, the Commission questioned the deduction of the ZORA Accretions (149). The Commission questioned the qualification of the ZORA Accretions as interest within the meaning of Article 109 LIR and therefore their deductibility. More precisely, the Commission considered that the ZORA Accretions should be considered as profit distributions in line with Article 164(1) and (2) LIR and therefore the deduction should not have been allowed. The Commission also raised doubts that by allowing the deduction of the ZORA Accretions, Luxembourg misapplied Article 164(3) LIR. This provision requires the inclusion in the tax base of a company, as hidden profit distribution, of any amounts paid to its shareholder which are not at arm's length. More precisely, the Commission questioned whether an independent company negotiating at arm's length would have granted a loan to LNG Supply and GSTM under the same terms as the ZORAs.

(94) In case the Luxembourg tax authorities were right to allow for the deductions of the ZORA Accretions, the Commission raised a second doubt that can be split into two legs: (1) Under the first leg, the Commission questioned the application of Article 22bis LIR according to which no corporate income tax is due upon conversion of the ZORA into shares (150). If the ZORA Accretions were to be considered as deductible debt interests, which the Commission contested under the first doubt, then they should have been taxed as income at the level of EIL and LNG Luxembourg or at the level of the holding companies and should not have qualified for an exemption under Article 22bis LIR. (2) Under the second leg, the Commission raised doubts regarding the method used in the contested tax rulings for determining the taxable profit of LNG Supply and GSTM – a taxable margin not based on any economic analysis – and its compliance with the arm's length principle (151).

(95) Finally, the third doubt was based on the combined effect of the deductibility of the ZORA Accretions at the level of the Subsidiaries and the non-taxation of the corresponding income at the level of EIL and LNG Luxembourg due to the application of Article 22bis LIR (152). By combining both, Luxembourg endorsed the effective non-taxation of a sizeable portion of the profits generated by the businesses of GSTM and LNG Supply in Luxembourg. The Commission questioned whether this result departed from the objective of the Luxembourg corporate income tax system, which according to Article 163 LIR is to tax the profits of all companies subject to tax in Luxembourg (153).

(96) As part of this third doubt, the Commission also questioned whether the tax treatment endorsed by the tax rulings could constitute a misapplication of Article 166 LIR, the objective of which is to eliminate economic double taxation of the same profit. In particular, the Commission noted that the application of Article 166 LIR appeared to have been relied upon by CEF and LNG Holding to exempt profits which had not been taxed at the level of GSTM and LNG Supply (154).

(97) The Commission indicated that the contested tax rulings appeared to provide a selective advantage not only to the holding companies CEF and LNG Holding but also to the Engie group as a whole (155).

(98) The Commission also took the preliminary view that the effect of the contested tax rulings could derogate from the Luxembourg provisions concerning abuse of law in the tax field (Articles 5 and 6 StAnpG) (156).

(99) In a meeting of 1 June 2017 and in the Letter of 11 December 2017, following the submission of additional information by Luxembourg and Engie, the Commission developed further some aspects of its assessment of the case. The Commission noted that Article 109(1) LIR is not applicable to companies incorporated under Luxembourg law and/or to companies tax resident in Luxembourg. The Commission also noted that Article 22bis LIR is an optional regime and that the companies involved in the present case have not opted for its application as of today. Finally, the Commission indicated that, according to Luxembourg, the contested tax rulings are based on the general corporate tax regime (‘se fondent sur le régime général d'imposition sur les sociétés’) (157) and in particular on the principle of linking the tax balance sheet to the commercial balance sheet (‘le principe de l'accrochement du bilan fiscal au bilan commercial’) (158). In this regard, and as indicated in the Opening decision (159), the applicable reference system could be the Luxembourg corporate income tax system, the objective of which is to tax the profit of companies subject to corporate tax in Luxembourg.

(100) Furthermore, the Commission explained in the Letter of 11 December 2017, as regards the advantage to Engie group (160), that since the objective of the Luxembourg corporate income tax system is to include in principle in the tax base all profits recorded in the accounts of the company, intra-group financing transactions between Luxembourg tax resident companies should not have any impact on the sum of the tax bases of these entities or, in other words, on their combined tax base. However, in the present case, the Commission noted that the contested tax rulings lead to a decrease in the combined tax base of Engie in Luxembourg (reasoning at group level).

4. COMMENTS FROM LUXEMBOURG

(101) Luxembourg first recalls that, in line with Article 114 of the Treaty, tax provisions fall within the remit of the Member States. Only if a tax provision infringes Article 107 of the Treaty the Commission can assess it.

(102) Second, Luxembourg contests the presence of a selective advantage, based on the following grounds.

4.1. THE SYSTEM OF REFERENCE USED BY THE COMMISSION IN THE OPENING DECISION IS ERRONEOUS

(103) First, according to Luxembourg, Article 109 LIR applies only to individuals and is not applicable to companies.

(104) Second, Luxembourg argues that ZORAs are, from a Luxembourg tax perspective, a debt instrument; therefore, they cannot be assimilated to equity participations (161). This classification is mainly justified by the absence of any associated voting rights, management rights, dividends or liquidation dividends, the obligation to be reimbursed at a fixed date, the absence of a notarised act recognising a capital increase and the legal form of the contract. Moreover, Luxembourg argues that ZORAs are not a note instrument giving right to any annual profit sharing or liquidation dividends. Therefore, Articles 164(1) and 164(2) LIR are, in Luxembourg's view, not applicable.

(105) Third, regarding the arm's length character of ZORAs, Luxembourg considers that the Commission ignored the different categories of investors. ZORAs are not standard loan agreements but atypical instruments that cover the borrower against any operational risk and allow the investor to benefit from a better return on investment. Given the volatility of the market and the dependence on financing, the use of a ZORA is logical for the lender and similar instruments can be observed on the financial market like securities replicating the performance of a given underlying. Therefore the terms of the ZORA are at arm's length and Article 164(3) LIR is, according to Luxembourg, not applicable.

(106) According to Luxembourg, the system of reference consists, first, of Articles 18, 40 and 23 LIR, which stipulate the determination of the tax base, the linking of the commercial balance sheet with the tax balance sheet and the prudence principle; and second, of Article 22bis LIR.

(107) Luxembourg argues that the determination of the taxable profit, as defined in Article 18 LIR, follows two main concepts: first, the linking of the commercial balance sheet with the tax balance sheet (Article 40 LIR), and second, the prudence concept, according to which a profit cannot be taxed as long as it has not been realised.

(108) Regarding Article 22bis LIR, Luxembourg states that it is an optional regime applicable to companies in line with Article 162 LIR (162).

(109) Luxembourg contests that Article 163 LIR enshrines any objective, or principle, of the Luxembourg corporate income tax system according to which all profits recorded by companies resident in Luxembourg should be taxed. Luxembourg considers that this objective is neither consecrated nor reflected in any provision of the law. According to Luxembourg, the definition of a system of reference should be based on laws and not on a hypothetical principle or objective, the interpretation of which would risk deviating from the precise terms of the law.

4.2. THE CONTESTED TAX RULINGS DO NOT DEPART FROM THE SYSTEM OF REFERENCE

(110) Luxembourg argues that, by accepting the deductibility of expenses related to the ZORAs, the tax treatment endorsed by the contested tax rulings was fully in line with Articles 14 to 60 LIR and thus with Articles 18, 40 and 23 LIR. Luxembourg considers that the Commission ignored that the deductible expenses at the level of GSTM and LNG Supply are neither interests nor dividends. The reimbursement of the ZORA can be at a higher price than the nominal of the instrument. In line with the prudence concept, the borrower has to recognise an expense reflecting this risk. According to Articles 18, 40 and 23 LIR, this expense is tax deductible.

(111) Luxembourg considers that the tax treatment endorsed by the contested tax rulings was fully in line with Articles 97 and 22bis LIR. Luxembourg argues that the Commission was wrong to consider that any capitalised interest should be taxable. More generally, Luxembourg supports that the Commission did not take into account that, as explained in recital 110, the deductible expenses are neither interest nor dividends. The concept of prudence supposes that an expense, which is tax deductible for one party, does not necessarily lead to a taxable profit for the other party. ZORAs should be valued at the level of the lender at the acquisition price and not at market price. Therefore, Luxembourg considers that ZORAs do not lead to any taxable income at the level of the lender until the conversion date.

(112) From a tax perspective, at the date of the conversion, a profit, equal to the difference between the acquisition price and the market value of shares, is recognised. However, Luxembourg argues that EIL and LNG Luxembourg can opt for the mechanism of Article 22bis LIR. The shares received by the lender can be considered as substituting the ZORAs. In such a case, the shares can be valued in the accounts at the nominal amount of the ZORAs.

(113) However, Luxembourg clarifies that following the partial reimbursement of the ZORA by LNG Supply that took place in 2014, LNG Luxembourg did not opt for the optional regime of Article 22bis LIR and recognised a taxable profit.

(114) Luxembourg considers that the contested tax rulings do not depart from the arm's length principle by accepting a method of determination of profits of GSTM and LNG Supply based on the risks, functions and assets involved by each entity.

(115) Luxembourg contests any misapplication of Article 166 LIR, as the contested tax rulings only confirm a strict and correct reading of the different tax provisions applicable to any undertaking subject to corporate income tax.

(116) Luxembourg contests that the objective of Article 166 LIR is to prevent economic double taxation. Luxembourg considers that according to Article 166 LIR, profits do not need to have been previously taxed to benefit from the participation exemption. The only conditions to benefit from the participation exemption are the nature of the instrument, the percentage held in the capital of the participated entity or the acquisition price, and the holding period of the participations. In the present case, Article 166 LIR has been applied in line with all these conditions. On this basis, Luxembourg considers not only that the Luxembourg corporate income tax system does not require that all profits should be taxed but also that according to Article 166 LIR, profits eligible to participation exemption should not necessarily result from taxed profits.

(117) Luxembourg also claims that if the Commission considers that Article 166 LIR does not derogate from the reference system, then it should demonstrate that the contested tax rulings allow a derogatory application of Article 166 LIR to CEF and LNG Holding. Luxembourg contests in particular the combined application of Articles 164 LIR and 166 LIR, since Article 164 LIR is not a pre-requisite for applying Article 166 LIR. Article 164 LIR applies only to profits distributed by a domestic company, while Article 166 LIR has a larger scope, the participation exemption regime being applicable to profits coming from domestic or foreign participations. That being said, Luxembourg expressly acknowledges that, except for the case of foreign participations, all participations the profit of which can benefit from Article 166 are also subject to Article 164 LIR (163).

(118) As regards the reasoning at group level (see recital 100), Luxembourg reiterates its position that the Commission's reasoning cannot be based on an inadequate and non-existent reference system. Luxembourg highlights that the Luxembourg law does not specify that intra-group financing transactions between entities tax resident in Luxembourg cannot increase or decrease the sum of the tax bases of those entities in Luxembourg, or in other words the combined tax base of the group in Luxembourg. Moreover, Luxembourg explains that in order to determine if a measure is selective, the Commission needs to demonstrate that it derogates from the reference system itself and not from the objective of the reference system.

(119) Luxembourg argues that to establish the selectivity of a measure, the Commission needs to demonstrate that companies from a specific sector are treated in a preferential way compared to others and refers to the annulment of the Commission's decision in case Comunidad Autonoma de Galicia (164).

(120) Luxembourg also contests the statement made by the Commission that any tax deductible expense recorded by the issuer of a ZORA in relation with the ZORA Accretions would have been included in the tax base of the holder, therefore with no impact on the tax base of the group in Luxembourg. Luxembourg reminds that Article 22bis LIR allows the lender of a convertible loan not to book any capital gain at the moment of the conversion. Therefore, according to Luxembourg, the intervention of EIL and LNG Luxembourg did not decrease the tax base of the Engie group compared to a situation in which it would have used a direct ZORA.

(121) Luxembourg also contests any abuse of rights. In particular, Luxembourg denounces the insinuation by the Commission that it approved a simulated transaction within the meaning of Article 5 of the StAnpG and reminds that all parties have a real legal existence and performed their contractual obligations. Luxembourg also rejects the argument that the legal structure of the transaction is not in line with the substance, the transactions being set up to finance the transfer of assets within the group in the meaning of Article 6 of the StAnpG.

4.3. ABSENCE OF RECOVERY

(122) Finally, in case the Commission were to adopt a negative decision, Luxembourg considers that it should apply only for the future and that the Commission should not request a recovery of the alleged State aid, in line with the principles of legal certainty and legitimate expectations.

5. COMMENTS FROM ENGIE

(123) Engie considers the ZORAs to be debt instruments. The total amount to be reimbursed depends on the performance of the borrower. Therefore, Engie argues that the lender should not receive any income before the conversion. Moreover, until its conversion, the ZORA is a debt instrument in the accounts and is treated as such both for accounting and fiscal purposes.

(124) Engie argues that the deductibility of the expenses related to a ZORA at the level of the borrower is in line with the applicable tax law. The expenses related to the reimbursement of the ZORA which are booked in the accounts in line with the applicable accounting rules, is tax deductible according to the basic tax principle of linking the accounting balance sheet and the tax balance sheet. In line with the accounting prudence principle, the lender is not allowed to book a profit in its accounts before the conversion of the ZORA into shares. Therefore, it is only at the date of the conversion that the lender books a profit, which is taxable. However, according to Engie, Article 22bis LIR allows a company to get a temporary tax deferral in case of conversion of a convertible loan. Finally, EIL and LNG Luxembourg have covered their risks by entering into the Forward Contracts with, respectively, CEF and LNG Holding. The income of CEF and LNG Holding coming from their investments are taxable according to the relevant tax law, including Article 166 LIR.

(125) Engie explained in further details the activities transferred to LNG Supply and GSTM which consist, respectively, of a long term (around 20 years) liquefied natural gas supply contract (‘LNG contract’) in Yemen and its ancillary assets (terminal capacity and shipping capacity) on the one hand, and the group's cash pooling activities on the other (165).

(126) Engie also explained that only the ZORA between LNG Supply and LNG Luxembourg was partially converted in 2014 due to large profits made by LNG Supply. Following the partial conversion, LNG Luxembourg booked a taxable income. LNG Luxembourg did not opt for the regime set by Article 22bis LIR. In the same fiscal year, the entity booked a deductible expense of the same amount due to the transfer of the shares to LNG Holding in the framework of the LNG Forward Contract.

(127) Engie also confirmed that the application of Article 22bis LIR would in fact have had no impact on the taxable income of the ZORA lenders (LNG Luxembourg or EIL) as the sale price and the sale date are fixed in advance by the Forward Contracts. In this regard, during the meeting of 1 June 2017 it was discussed under which scenario LNG Luxembourg or EIL would realise a taxable profit or loss, since the ZORAs have been hedged against the Forward Contracts. Engie clarified that any taxable income stemming from the conversion of the ZORAs is mirrored by a corresponding tax deductible loss on the Forward Contracts.

(128) Finally, as regards the applicable legal framework at the level of the holding companies (i.e. CEF and LNG Holding), Engie specified that at the date of the transfer of shares, and in case the value of the shares is higher than the acquisition price fixed in the Forward Contracts, the holding company does not book any profit. Such profit can only be booked later on if and when the issuers' shares are sold or cancelled. According to Engie, this potential profit can be tax exempt under the participation exemption regime applicable to all Luxembourg companies as per Article 166 LIR.

(129) Engie argues that the implementation of the GSTM and LNG ZORAs respects the tax rulings adopted in line with the tax law and does not lead to double non-taxation. Engie further explained in the meeting of June 2017 that, in case one follows an economic reasoning and not a legal one, account should be taken of the long duration of the ZORA and not focus on the profitable years during which limited taxes were paid. Engie explained that, in case one follows an entity-by-entity reasoning and not an economic or global approach, the regime is symmetrical.

(130) Engie further explained that the GSTM ZORA has not led to any conversion yet. No profit was booked at the level of EIL at this date. The LNG ZORA was partially converted into shares in 2014 giving rise to a profit equal to the accumulated ZORA Accretions at the level of LNG Luxembourg. LNG Luxembourg did not opt for the optional regime of deferral of taxation provided by Article 22bis LIR and the profit realised from the conversion was taken into account in the determination of its tax base for 2014.

(131) Engie further explained the precise roles of EIL and LNG Luxembourg. The roles are being described in TP reports prepared by Engie to justify the ZORAs and submitted to the Commission together with its observations to the Opening decision (the ‘TP Reports’). EIL and LNG Luxembourg are described in the TP Reports as the ‘Investor’ bearing all risks linked to the businesses and performing the key functions pertaining to the latter while at the same time these entities are fully covered from a risk point of view by the Forward Contracts (166). Engie explained that, from a transfer pricing perspective, in order to determine the remuneration of the ZORA issuer, it is possible to amalgamate the ZORA lender with the purchaser of the converted shares under the Forward Contracts.

(132) Considering that the intervention of EIL and LNG Luxembourg is neutral from an economic and commercial perspective, the Commission asked in the meeting of 1 June 2017 to explain the necessity to have these entities for the financing of the transfer of assets. Engie confirmed that it could have structured the financing of the transfer of activities differently. While there exist other ways to structure this operation, the present structure was chosen because it provided more flexibility for the management of the companies and more options for future operations, which are important criteria for the organisation of a group of companies.

5.1. ENGIE REJECTS THE PRESENCE OF ANY ADVANTAGE

(133) Engie argues that the concerned companies do not benefit from any advantage as they do not benefit from any unjustified tax reduction. Engie states that the deduction of ZORA Accretions does not constitute a competitive advantage. Furthermore, Engie considers that there cannot be any competitive advantage from the combination of the regime applied to the borrowers of the ZORAs and the regime applied to the lenders, as this advantage did not materialise due to the absence of conversion for the GSTM ZORA and the decision not to opt for Article 22bis LIR for the LNG ZORA.

5.2. ENGIE REJECTS THE SELECTIVITY OF THE CONTESTED MEASURES.

(134) Firstly, Engie considers that the contested tax rulings do not entail any individual aid measure.

(135) Engie contests the system of reference used by the Commission in the Opening decision. Engie considers that Articles 109(1) and 164 LIR are not applicable, the first one because it concerns only individuals and the second one because it does not concern loans. The correct system of reference is constituted of Articles 18 to 45 LIR, which enshrine the fundamental principles of Luxembourg tax law for determining the taxable basis of a company, e.g. the principle of prudence (Article 23 LIR), the linking of the tax balance sheet to the commercial balance sheet (Article 40 LIR) and the deductibility of business expenses (Article 45 LIR).

(136) According to Engie, the contested tax rulings do not depart from the applicable system of reference. The increase of the debt is a financial expense for the borrowers. This financial expense is booked in the annual accounts and is deductible in line with the principle of linking the tax balance sheet with the commercial balance sheet and the deduction of operating expenses. Conversely, in case of negative ZORA Accretions, the decrease of the debt leads to the booking of a taxable income. The subsequent conversion of the loan into shares does not call into question the initial qualification of the instrument as debt. Regarding EIL and LNG Luxembourg, Article 22bis LIR gives them the possibility to opt, at the time of the conversion, for a tax deferral. LNG Luxembourg did not opt for this regime following the partial conversion of the LNG ZORA in 2014 and booked a taxable profit. The GSTM ZORA and the remainder of the LNG ZORA have not given rise to any conversion to date. No income has been realised and no use of the optional regime of Article 22bis LIR could be made. Therefore, Engie considers that both in their substance and in their implementation, the contested tax rulings do not derogate from the system of reference.

(137) Based on the TP reports, Engie argues that the method used to estimate the taxable margin at the level of the borrowers (i.e. the remuneration of the borrowers) represents a reliable approximation of a market-based outcome in line with the arm's length principle. The functions, risks and assets of the different legal entities were remunerated in line with market comparables. The two TP Reports submitted assess the functions and risks performed by the borrowers (LNG Supply or GSTM) and the ‘Investor’ (which is not precisely identified) and conclude that almost all risks are borne by the ‘Investor’ while the borrower is involved in the day-to-day management of the transferred businesses. The TP Reports identify the Comparable Uncontrolled Price (167) method as the relevant method to assess the arm's length character of the ZORA and the remuneration of exchange traded-funds as a comparable remuneration. Finally, the TP Reports conclude that the remuneration of the borrowers is in line with the remuneration of exchange traded funds and thus must be considered at arm's length.

(138) According to Engie, the confirmation by the contested tax rulings of the combined application of the concerned provisions of Luxembourg law is consistent with the objective of the Luxembourg corporate income tax system to tax the profits of any company subject to tax in Luxembourg after taking into account the remuneration of the debt instruments. Any borrower would be subject to the same tax treatment, i.e. the deductibility of financial expenses. In the same way, any lender, which would conclude a similar loan, would be subject to the same tax treatment, i.e. taxation of an accounting profit at the time of the repayment, except if it opts for tax deferral.

(139) Engie also contests any abuse of law. The entities involved in the transactions are all legal entities. Moreover, the contested transactions have an economic rationale, which is to finance the transfer of activities. Therefore, Engie considers that Luxembourg did not exempt the ZORA Accretions from taxes neither endorsed any tax evasion or abuse of the national law.

(140) Secondly, Engie considers that, since the contested tax rulings merely confirm the applicable national law, they should be assessed as a scheme. In this regard, Engie considers that such schemes, as clarified by the contested tax rulings, are not selective. They are of a general nature since they are applicable, individually or cumulatively, without distinction to all economic operators without any condition. Their applicability is not subject to the issuance of tax rulings which were sought in this case for reasons of legal certainty. Any undertaking in a legal and factual comparable situation in the light of the objective of the tax system, namely the taxation of profits, can benefit from these schemes. Therefore, according to Engie, they do not create by their effects any discrimination or differentiation between undertakings.

(141) Thirdly, Engie supports that the measures at issue result from the guiding principles of the Luxembourg tax system, in particular from the principle of prudence.

(142) Engie contests that the Luxembourg corporate income tax system has for objective to tax profits recorded in the accounts. The reference system is the Luxembourg corporate income tax system, including Article 166 LIR, the application of which was approved in the contested tax rulings.

(143) Engie also indicates that the contested tax rulings do not derogate from Article 166 LIR. In line with the Luxembourg corporate income tax system, any dividend or capital-gain recorded by a taxpayer cannot be taxed if the conditions of Article 166 LIR are met. Engie notes that the conditions of Article 166 LIR were met when LNG Supply reduced its capital by the cancellation of the newly issued shares. Therefore, Engie considers that the contested tax rulings did not deviate from the applicable fiscal rules and did not result in a decrease of the taxes, which would have been due in their absence.

(144) Engie also considers, in line with Articles 99 and 101 of the Luxembourg Constitution that the Luxembourg tax authorities cannot derogate from the strict conditions set up in Article 166 LIR.

(145) Engie notes that the Opening decision refers to a potential individual aid measure and not to Article 166 LIR, which would be a scheme. In case the Commission were not to consider Article 166 LIR as derogation in itself, but only question its application in the contested tax rulings, the Commission failed to demonstrate that the contested tax rulings derogate from Article 166 LIR.

(146) Engie argues that the extension of the participation exemption regime — initially introduced in Luxembourg in 1940 — was in accordance with the objective of building the internal market. According to Engie, this is precisely the objective of Directive 90/435/EEC. Engie considers that this Directive does not require a taxation of the profits to be distributed.

(147) As regards the reasoning at group level, Engie indicates that the selectivity assessment is only pertinent at the level of an individual legal entity and not at group level. Engie understands that in past decisions (168), the Commission considered that an analysis at group level was not justified.

(148) According to Engie, the Luxembourg corporate income tax system does not entail any principle of symmetric treatment between tax resident companies part of the same transaction nor any ‘linking rules’ as recommended by the OECD (169). Engie reiterates that each entity of the group has been taxed in line with the applicable rules as confirmed by the contested tax rulings.

(149) Engie explains that the transactions whose tax treatment was endorsed by the contested tax rulings pursue an economic objective, i.e. financing the transfer of assets. Therefore, according to Engie, the criteria of the Article 6 StAnpG are not met in the present case.

(150) According to Engie, the beneficiaries of the contested tax rulings have not been treated differently from other companies which would not benefit from such tax rulings, given that the contested tax rulings only confirm the correct application of the applicable tax rules in Luxembourg. Therefore, the contested tax rulings discriminate neither de jure nor de facto other undertakings in a factual and legal situation comparable to Engie in the light of the objectives of the Luxembourg tax system.

5.3. ABSENCE OF RECOVERY

(151) Finally, Engie argues that in case the Commission were to qualify the contested tax rulings as aid incompatible with the internal market, it could not order their recovery without infringing a number of general principles of law, namely the principles of legal certainty, legitimate expectations, good administration and equal treatment.

(152) In particular, according to Engie, the Commission could only demonstrate the existence of a selective advantage by imposing retroactively its own interpretation of the Luxembourg tax law to conclude that it was wrongly applied in the case at hand. The legal uncertainty that would result should be limited by the non-retroactivity of the effects of the decision.

6. ASSESSMENT OF THE AID MEASURES

(153) As described in recital 92, the Opening decision raised three main doubts. In the present Decision, the Commission will focus its assessment on the third doubt, i.e. the combined effect of the deductibility of the ZORA Accretions and the exemption of the corresponding income, and will explain why the doubts expressed in the Opening decision have not been allayed.

6.1. EXISTENCE OF AID

(154) According to Article 107(1) of the Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the provision of certain goods is incompatible with the internal market, in so far as it affects trade between Member States.

(155) For a measure to be categorised as aid within the meaning of Article 107(1) of the Treaty, all the conditions set out in that provision must be fulfilled (170). Therefore, there must, first, be an intervention by the State or through State resources; second, this intervention must be liable to affect trade between Member States; third, it must confer a selective advantage on an undertaking and, fourth, it must distort or threaten to distort competition (171).

(156) As regards the first condition for a finding of aid, the contested tax rulings were issued by the Luxembourg tax administration, which is an organ of the Luxembourg State. Those tax rulings entailed an acceptance by that administration of a certain tax treatment. On the basis of those rulings, the Engie group companies LNG Supply, LNG Luxembourg, LNG Holding, GSTM, EIL and CEF have determined their corporate income tax liability in Luxembourg on an annual basis. Those tax rulings are subsequently used by those Engie group companies for their annual corporate income tax declarations, which were accepted by the Luxembourg tax administration as corresponding to their corporate income tax liability in Luxembourg. The tax advantage granted on the basis of the contested tax rulings is therefore imputable to Luxembourg.

(157) As regards the financing of the measures through State resources, the Court of Justice has consistently held that a measure by which the public authorities grant certain undertakings a tax exemption which, although not involving a positive transfer of State resources, places the persons to whom it applies in a more favourable financial situation than other taxpayers constitutes State aid (172). In this case, the contested tax rulings confirm that the ZORA Accretions are tax deductible expenses at the level of LNG Supply and GSTM, whereas the corresponding income, once realised at the level of, respectively, LNG Holding and CEF, would be exempt from taxation. As a consequence, the amounts of the ZORA Accretions, which represent a sizeable portion of the profits generated by LNG Supply and GSTM, remain untaxed in Luxembourg. Therefore, the tax treatment granted on the basis of the contested tax rulings can be said to reduce the corporate income tax liability in Luxembourg of the Engie group and therefore gives rise to a loss of State resources. That is because any expenses of Engie group companies declared tax deductible in Luxembourg, as well as any revenues of Engie group companies declared tax-exempt in Luxembourg result in a loss of tax revenue that would have otherwise been available to Luxembourg (173). Therefore, the measures are financed through State resources.

(158) As regards the second condition for a finding of aid, the companies benefitting from the contested tax rulings are part of the Engie group, a multinational group operating on various energy markets in several Member States, so that any aid in their favour is liable to affect intra-Union trade. In the same vein, by providing a favourable tax treatment to Engie, Luxembourg has potentially drawn investment away from Member States that cannot or will not offer a similarly favourable tax treatment. Since the contested tax ruling strengthens the competitive position of its beneficiary as compared with other undertakings competing in intra-EU trade, it must be considered as being liable to affect such trade (174).

(159) Similarly, as regards the fourth condition for a finding of aid, a measure granted by the State is considered to distort or threaten to distort competition when it is liable to improve the competitive position of its recipient as compared to other undertakings with which it competes (175).

(160) In particular, Engie is active in electricity, natural gas and LNG, energy efficiency services and other related markets in several EU Member States. These are all markets in which Engie faces competition from other undertakings. As it will be demonstrated, the tax treatment granted on the basis of the contested tax rulings relieve Engie of a tax liability they would have otherwise been obliged to bear in their day-to-day management of normal activities. Therefore the aid granted on the basis of those tax rulings should be considered to distort or threaten to distort competition by strengthening the financial position of Engie on the markets on which it operates. By relieving Engie of a tax liability it would otherwise have had to bear and which competing undertakings have to carry, the tax treatment granted on the basis of the contested tax rulings frees up resources which Engie could use, for instance, to invest in its business operations, to undertake further investments or to improve the remuneration of shareholders, thereby distorting competition on the markets where it operates. Therefore, the fourth condition for a finding of aid is also fulfilled in this case.

(161) As regards the third condition for a finding of aid, the function of a tax ruling is to confirm in advance the way the ordinary tax system applies to a particular case in view of its specific facts and circumstances. However, like any other tax measure, the tax treatment granted on the basis of a tax ruling must respect State aid rules. Where a tax ruling endorses a tax treatment that does not reflect what would result from a normal application of the ordinary tax system, without justification, the measure will confer a selective advantage on its addressee in so far as that tax treatment results in improving the financial position of that undertaking in the Member State as compared to undertakings in a comparable factual and legal situation in the light of the objective of the tax system.

(162) In line with the doubts expressed in the Opening decision (176), the Commission considers that the tax treatment endorsed by the contested tax rulings constitutes a selective advantage. The existence of that selective advantage can be established analysing the effects of the tax treatment conferred to Engie from different angles. In Section 6.2, the Commission will establish the existence of a selective advantage analysing the effects of the contested tax rulings at the individual level of the holding entities LNG Holding and CEF. In Section 6.3 the Commission will establish the existence of a selective advantage analysing the effects of the contested tax rulings at group level. Finally, in Section 6.4 the Commission will demonstrate that, by not applying its domestic tax anti-abuse rules, Luxembourg has granted a selective advantage to Engie.

6.2. SELECTIVE ADVANTAGE ESTABLISHED ANALYSING THE EFFECTS OF THE TAX TREATMENT AT THE LEVEL OF LNG HOLDING AND CEF

(163) Whenever a measure adopted by the State improves the net financial position of an undertaking, an advantage is present for the purposes of Article 107(1) of the Treaty (177). In establishing the existence of an advantage, reference is to be made to the effect of the measure itself (178). As regards fiscal measures, an advantage may be granted through different types of reduction of an undertaking's tax burden and, in particular, through a reduction in the taxable base or in the amount of tax due (179).

(164) The contested tax rulings endorse a tax treatment on the basis of which GSTM, EIL, CEF, LNG Supply, LNG Luxembourg and LNG Holding have determined their taxable profit for corporate income tax purposes on an annual basis. That tax treatment, in turn, determines their corporate income tax liability in Luxembourg during the period covered by the contested tax rulings and is thus apt to provide a selective advantage.

(165) Consequently, as regards Engie's argument in recital 133 that there cannot be any advantage as the tax treatment did not materialise due to the absence of conversion of the GSTM ZORA, the Commission observes that the existence of the advantage does not depend on the conversion of the ZORAs, even though, as explained in Section 8, for the purposes of determining the amount of recovery, the advantage materialises only at the moment in which the income received by CEF and LNG Holding is exempted (180).

(166) Furthermore, and also to address some observations raised by Luxembourg (181) and Engie (182), the Commission recalls that the present Decision does not concern the participation exemption regime laid down in Article 166 LIR as such, but rather the application of such regime to the specific circumstances of the case, as endorsed by the Luxembourg tax authorities when issuing the contested tax rulings. In fact, the tax treatment under assessment consists in allowing the application of the participation exemption to income received by LNG Holding and CEF stemming from their participation in, respectively, LNG Supply and GSTM, which corresponds economically to amounts deducted as expenses (the ZORA Accretions) at the level of the latter entities. The combined effect of the deductibility of the amount of the ZORA Accretions and the exemption of the corresponding income is that virtually all the profit realised by LNG Supply and GSTM has effectively been left untaxed (183). As explained in Section 6.2.1, this tax treatment derogates from the reference framework, which is the Luxembourg corporate income tax system. Moreover, it constitutes an unjustified discrimination vis-à-vis other undertakings subject to the same reference framework in Luxembourg, which would be taxed on the totality of their profit.

(167) Article 107 of the Treaty prohibits only aid ‘favouring certain undertakings or the production of certain goods’, that is to say, it prohibits measures conferring a selective advantage (184). In order to classify a national tax measure as selective under that analysis, the Court of Justice has devised the so-called three steps test. Under this test, the Commission must begin by identifying the reference system. Thereafter, it must demonstrate that the tax measure at issue is a derogation from that reference system, in so far as it differentiates between operators who, in the light of the objective pursued by that system, are in a comparable factual and legal situation (prima facie selectivity) (185). Finally, a tax measure which constitutes a derogation to the application of the reference system may nevertheless be justified if the Member State concerned can show that that this measure results directly from the basic or guiding principles of that tax system (186). If that is the case, the tax measure is not selective. The burden of proof in that last step lies with the Member State.

(168) Therefore, the analysis of the existence of a selective advantage must begin with the identification of the reference system applicable in the Member State concerned. It is against that reference system that it must be determined whether the measure constitutes a derogation giving rise to a favourable treatment compared to other undertakings in a comparable factual and legal situation in the light of the objectives of the system.

(169) A reference system is composed of a consistent set of rules that apply on the basis of objective criteria to all undertakings falling within its scope as defined by its objective. Those rules define not only the scope of the system, but also the conditions under which the system applies, the rights and obligations of undertakings subject to it and the technicalities of the functioning of the system (187). In the case of taxes, the reference system is based on such elements as the tax base, the taxable persons, the taxable event and the tax rates (188).

(170) In this case, the Commission will establish in Section 6.2.1 that the tax treatment granted on the basis of the contested tax rulings constitutes a derogation from the general Luxembourg corporate income tax system. In Section 6.2.2, it will demonstrate that this tax treatment also derogates from a narrower reference system consisting exclusively of the rules of the general Luxembourg corporate income tax system which govern the participation exemption and the taxation of profit distributions.

6.2.1. DEROGATION FROM THE LUXEMBOURG CORPORATE INCOME TAX SYSTEM GIVING RISE TO DISCRIMINATION

6.2.1.1. Reference framework: Luxembourg corporate income tax system

(171) The contested tax rulings were issued in favour of several Engie companies resident in Luxembourg in order to determine their corporate income tax liability under the ordinary rules of taxation of corporate income in Luxembourg. In view of this, the Commission considers that the reference system in the present case is composed of those rules, i.e. the general Luxembourg corporate income tax system.

(172) In this case, the main provisions of the law (189) indicate that the corporate income tax system applies to all companies resident in Luxembourg in order to determine their corporate income tax liability.

(173) According to Article 159(1) LIR, all companies with head office or central management in the territory of Luxembourg are considered resident for tax purposes in Luxembourg and are subject to corporate income tax. Pursuant to Article 159(2) LIR, resident companies are subject to tax on the totality of their profit (sur l'ensemble des revenus du contribuable). Consistently with this provision, Article 163 LIR provides that corporate income tax is applicable on the taxable profit realised by the taxpayer in a given calendar year.

(174) The taxable profit (revenu imposable) of corporate taxpayers is determined on the basis of its accounting profit. Article 18 LIR (190) explains how the taxpayer's annual profit is determined. According to this provision, the profit is the difference between net invested assets at the end of the tax year period and net invested assets at the beginning of the tax year period, plus withdrawals for personal use, minus additional contributions performed during the year.

(175) Therefore, in order to determine the profit which will be subject to tax it is first necessary to determine the values of the net invested assets of the company to be used for tax purposes. To this end, Article 23 LIR (191) explains that the value of the net assets should be determined following accounting rules and principles and Article 40 (192) establishes the principle of linking the tax balance sheet and the commercial balance sheet, according to which the values of the tax balance sheet should correspond to the values of the commercial balance sheet unless a specific tax rule requires the use of a different value (193). This means that, according to the Luxembourg general corporate income tax system, the accounting profit of a company is included in its tax base, unless a specific provision of the law indicates otherwise.

(176) In conclusion, the Luxembourg corporate income tax system applies to all companies with head office or central management located in the territory of Luxembourg, and the basis for the calculation of the taxable profit is the accounting profit. Therefore, the objective of the Luxembourg corporate income tax system is the taxation of the profit of all companies subject to tax in Luxembourg, as determined in their accounts.

(177) This is in principle neither disputed by Luxembourg nor by Engie (194). According to Luxembourg (195), the system of reference consists, first, of Articles 18, 40 and 23 LIR, which concerns the determination of the tax base, the linking of the commercial balance sheet with the tax balance sheet and the prudence principle (196), and second, of Article 22bis LIR. According to Engie (197), the reference system is constituted of Articles 18 to 45 LIR, which enshrine the fundamental principles of Luxembourg tax law for determining the tax base of a company, e.g. the principle of prudence, the linking of the tax balance sheet to the commercial balance sheet and the deductibility of business expenses (198). Engie expressly agrees that the objective of the Luxembourg corporate income tax system is the taxation of the profits of all companies subject to tax in Luxembourg (199).

(178) The definition of the general Luxembourg corporate income tax system as the reference framework is in line with the Court's case law, which has consistently held that in the case of measures concerning the determination of the corporate income tax liability, the reference system to be considered is the corporate income tax system of the Member State in question which applies to all undertakings, and not the specific provisions of that system applicable only to certain taxpayers or to certain transactions. For instance, in World Duty Free, a case concerning the rules governing investments in shareholdings, the Court endorsed the Commission's position that the reference system was the Spanish corporate income tax system and not the specific rules governing the tax treatment of those investments (200).

(179) The Commission considers that limiting the reference framework to specific provisions of the general income tax law that target certain transactions or certain undertakings would mean that the identification of the reference system in a given case would be wholly dependent on whether the Member State in question has adopted specific tax rules, rather than looking at the objective of the tax system. By adopting specific rules applicable only to certain undertakin