EN Official Journal of the European Union L 351/1

COMMISSION DECISION (EU) 2016/2326

of 21 October 2015

on State aid SA.38375 (2014/C ex 2014/NN) which Luxembourg granted to Fiat

(notified under document C(2015) 7152)

(Only the French text is authentic)

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) (1) 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 (2) and having regard to their comments,

Whereas:

1. PROCEDURE

(1) By letter of 19 June 2013, the Commission sent an information request to the Grand Duchy of Luxembourg requesting detailed information on the country's tax ruling practice (3).

(2) By letter of 17 July 2013, the Luxembourg authorities responded in general terms to that letter and provided part of the requested information. In particular, the response contained a description of the legal principles and national rules that bind the Luxembourg tax administration (Administration des contributions directes) when issuing tax rulings (4), the procedure to obtain a tax ruling, the information that needs to be submitted by the taxpayer and whether the rulings issued by the tax administration are published. The Luxembourg authorities did not respond to the Commission's request to provide a list of tax rulings issued in 2010, 2011 and 2012 by its tax administration, including other relevant information such as the name of the companies, the activity of the companies, the date of the rulings, the duration of the rulings and the type of transaction covered by the rulings.

(3) By letter of 30 August 2013, the Commission sent a reminder to the Luxembourg authorities requesting that a list of tax rulings issued in 2010, 2011 and 2012 be provided (5).

(4) By letters of 20 and 23 September 2013, the Luxembourg authorities expressed their regret that certain information regarding the Commission's request for information had appeared in the press. In addition, they questioned the legal basis for the Commission's request for information.

(5) By letter of 2 October 2013, the Commission replied to the Luxembourg authorities, indicating the legal basis for its ex officio investigation into Luxembourg's tax ruling practice and granting a further extension of the deadline to submit the requested list of tax rulings.

(6) On 11 October 2013, a meeting was held between the Luxembourg authorities and the Commission, followed by a letter from the Luxembourg authorities dated 14 October 2013 where those authorities expressed their doubts that the legal basis invoked by the Commission could cover the wide and general nature of the information request. The Commission replied to that letter by letter of 15 October 2013.

(7) A further exchange of letters took place between the Luxembourg authorities (letters dated 11 November and 2 December 2013) and the Commission (letters dated 14 November and 12 December 2013), in which the Luxembourg authorities explained that due to the formation of a new government they could not respond to the Commission's request for information. Accordingly, the Commission granted an extension of the deadline to reply until 15 January 2014, including in both letters a reference to the fact that the Commission could be obliged to adopt an information injunction decision in case of non-compliance with its information request.

(8) By letter of 15 January 2014, the Luxembourg authorities submitted 22 tax rulings relating to the period 2010-2013, but the taxpayers' names had been redacted from those rulings. According to the Luxembourg authorities, those 22 rulings — one of which related to an advance pricing arrangement with a company referred to as ‘FFT’ (hereinafter: the ‘FFT APA’ or the ‘contested tax ruling’) — were representative of the Luxembourg tax ruling practice.

(9) The FFT APA contained the following documents (6): (a) a letter by [the tax advisor] (*1) on behalf of its client FFT dated 14 March 2012, containing a request for the agreement of the Luxembourg tax administration on an advance transfer pricing arrangement; (b) a transfer pricing report containing a transfer pricing analysis, prepared by the tax advisor in support of FFT's APA request (hereinafter: the ‘transfer pricing report’); (c) a letter by the Luxembourg tax administration dated 3 September 2012 by which that administration agreed to the transfer pricing arrangement proposed by the tax advisor.

(10) By letter of 7 March 2014, the Commission requested the Luxembourg authorities to confirm that the taxpayer referred to as ‘FFT’ in the FFT APA was ‘Fiat Finance and Trade Ltd’. The Commission also indicated that, based on the information submitted, it could not exclude that the FFT APA represented incompatible State aid in favour of FFT. The Commission requested the Luxembourg authorities to provide additional information which would be relevant for the assessment of the FFT APA. As the Luxembourg authorities did not reply to that letter, the Commission sent a reminder on 7 April 2014 (7).

(11) On 24 April 2014, the Luxembourg authorities replied to the letter of 7 March 2014 and confirmed that they had no additional relevant information necessary for the assessment of the FFT APA. As regards the question whether FFT referred to Fiat Finance and Trade Ltd, the Luxembourg authorities referred to secrecy provisions under Luxembourg law and argued that those provisions prohibited them from confirming the identity of the taxpayer in question.

(12) On 24 March 2014, the Commission issued an information injunction decision on the basis of Article 10 of Council Regulation (EC) No 659/1999 (8), requesting from the Luxembourg authorities the list of tax rulings referred to in recital 2.

(13) On 11 June 2014, the Commission adopted the decision to initiate the formal investigation procedure under Article 108(2) TFEU on the FFT APA (hereinafter: the ‘Opening Decision’) (9). The Opening Decision was combined with an information injunction decision, enjoining Luxembourg to provide within one month of receipt of the letter all documents, information and data needed for the assessment of the existence and compatibility of the potential aid measure. In particular, the Commission required Luxembourg to confirm the identity of the beneficiary of the measure.

(14) By letter of 14 July 2014, Luxembourg submitted its comments on the Opening Decision. It also indicated that as the Commission could not identify any State aid measure, it did not have to answer the questions of the Opening Decision or the information injunction.

(15) On 14 August 2014, the Commission requested Luxembourg to provide the missing information referred to in the Opening Decision and the information injunction. The Commission also asked Luxembourg to authorise the Commission to address its outstanding questions directly to FFT in accordance with Article 6a of Regulation (EC) No 659/1999.

(16) On 3 September 2014, Luxembourg provided a partial reply to the outstanding questions and indicated that part of the requested information constitutes business secrets of FFT which is not in the possession of the Luxembourg authorities. Luxembourg further confirmed that FFT indeed refers to the company ‘Fiat Finance and Trade Ltd.’ and it authorised the Commission to address its questions to FFT directly.

(17) On 17 October 2014, the Opening Decision was published in the Official Journal of the European Union (10). The Commission invited interested parties to submit their comments on the measure. By letter of 30 October 2014, it received comments from FFT.

(18) On 22 December 2014, Luxembourg submitted a list of beneficiaries of tax rulings to comply with the request for information in the Commission's letter of 19 June 2013. That document lists the rulings issued by the Luxembourg tax administration during the years 2010 to 2012.

(19) By letter of 5 January 2015, Luxembourg submitted its comments on third party comments on the Opening Decision.

(20) On 12 February 2015, the Commission adopted a decision informing Luxembourg that, in accordance with Article 6a of Regulation (EC) No 659/1999, it had identified that the formal investigation procedure on the contested ruling was ineffective to date. On this basis, and with the authorisation of Luxembourg (11), the Commission could address its questions to FFT directly.

(21) By letters of 20 February 2015, the Commission sent an information request to Luxembourg and FFT. The information request sent to FFT was based on Article 6a(6) of Regulation (EC) No 659/1999.

(22) By letter of 24 February 2015, Luxembourg replied to the Commission's decision of 12 February 2015, expressing its surprise as to the development of the procedure in this case and its doubts as to the appropriateness to declare the procedure ineffective given the large amount of information Luxembourg provided to the Commission in the course of the investigation.

(23) By emails of 26 February and 3 March 2015, FFT asked for some clarifications on the request for information and an extension of the deadline to respond, which was granted by the Commission by email of 5 March 2015.

(24) By letter of 5 March 2015, the Commission replied to Luxembourg's letter of 24 February 2015.

(25) On 23 March 2015 (12), the Commission requested Luxembourg, in response to the list of tax rulings provided by its authorities on 22 December 2014, to provide additional information regarding the rulings listed for the years 2010 to 2012. In particular, the Commission requested that Luxembourg specify which of the rulings listed concern a treasury function and which of the rulings listed concern non-integrated or stand-alone companies. The Commission also requested Luxembourg to provide a number of the rulings concerning specific corporate groups.

(26) By letter of 24 March 2015, Luxembourg replied to the Commission's request for information of 20 February 2015 (13).

(27) By letter of 31 March 2015, FFT replied to the Commission's request for information of 20 February 2015. The submission contained, inter alia, the transfer pricing policy guidelines of the Fiat group.

(28) On 23 April 2015, Luxembourg submitted additional information on 1 900 rulings of the rulings listed in its response of 22 December 2014. Luxembourg indicated that three of the rulings listed concern a treasury function, two of which were granted in 2010 and one of which was granted in 2011. On 23 March 2015, the Commission requested two of those rulings because they concerned companies listed in Commission's request of 23 March 2015.

(29) On 27 April 2015, a meeting took place between FFT, the Luxembourg authorities and the Commission.

(30) On 4 June 2015, Luxembourg submitted the additional information requested by the Commission on 23 March 2015 on 5 327 of the rulings listed in its response of 22 December 2014. In particular, Luxembourg indicated that ten more rulings concern treasury functions […]. In addition, a ruling concerning company G was provided to the Commission on 25 June 2015.

(31) On 18 June 2015, Luxembourg provided a ruling concerning company E (ruling of 2011).

(32) By letter of 10 July 2015, Luxembourg advanced a line of argumentation according to which the Commission, in case of a final negative decision, should be prevented from recovering any aid from the beneficiary retroactively, i.e. from the date of the tax ruling.

(33) On 15 July 2015, a meeting took place between the Chief Financial Officer of Fiat Chrysler Automobiles NV, the successor of Fiat SpA, the Luxembourg authorities and the Commission.

2. DESCRIPTION OF THE AID MEASURE

2.1. Description of the beneficiary

(34) FFT is part of the Fiat group. At the time of the contested tax ruling, the Fiat group was composed of Fiat SpA, incorporated in Italy with its head office in Turin, and all companies controlled by Fiat SpA (hereinafter collectively referred to as ‘Fiat’ or ‘Fiat group’). Following a merger of Fiat SpA with and into Fiat Investments NV on 12 October 2014, Fiat Chrysler Automobiles NV became the successor of Fiat SpA (14)

(35) Fiat carries out industrial and financial services activities in the automobile sector. The Commission refers to recitals 20 and 21 of the Opening Decision for a more detailed description of Fiat's activities.

(36) FFT provides treasury services and financing to the Fiat group companies based (mainly) in Europe (excluding Italy) and also manages several cash pool structures for the Fiat group companies based in the United Kingdom, Denmark, Belgium, the Netherlands, Switzerland, Austria, Germany and Spain. FFT operates from Luxembourg, where its head-office is located, and through two branches, one based in London, United Kingdom and one in Madrid, Spain.

(37) The transfer pricing report provided by Luxembourg to the Commission on 15 January 2014 contains the information about FFT, summarised in recitals 38 to 51 (15).

(38) Fiat decided to centralise its financial and treasury functions, where all funding, corporate finance, bank relationship, foreign exchange and interest rate risk management, cash pooling, money market operations, cash balances management, collection and payment initiation are performed by ‘the treasury companies’.

(39) The treasury companies are organised as follows: — Fiat Finance SpA (hereinafter ‘FF’) is the Italian-based treasury company in charge of the coordination of the financing operation for the Fiat group companies based in Italy, — FFT performs treasury functions for the Fiat group companies based in Europe (excluding Italy), — Fiat Finance North America, Inc. (hereinafter ‘FFNA’) performs treasury functions for the US-based Fiat group companies, — Fiat Finance Canada Ltd. (hereinafter ‘FFC’) performs treasury functions for the Canada-based Fiat group companies, — Fiat Finanças Brasil Ltda (hereinafter ‘FFB’) performs treasury functions for the Brazilian-based Fiat group companies.

(40) Cross-border intra-group transactions in which FFT is involved may be grouped into two main categories: — Transactions between treasury companies (Intra-Sector) — T1 — intercompany loans from FFT to FF: FFT sources of funding rely on bonds, banks credit lines and intercompany deposits, — T2 — intercompany loans from FFNA to FFT: FFNA sources of funding mostly rely on bond issued with guarantee, — Transactions between treasury companies and the Fiat group companies (Intra-group) — T3 — transactions (loans/deposits) between FFT and the group companies located in other countries (mostly European), — T4 — guarantees provided by Fiat S.p.A (16) on the bonds issued by FFT and FFNA, bilateral credit lines and ad hoc financing programmes (i.e. Billets de Trésorerie in France for FFT).

(41) The figure below illustrates the financing operations (from T1 to T3) Main cross-border Intra-group transactions

(42) As regards functions performed, FFT is involved in market funding and liquidity investments; relations with financial market actors; financial coordination and consultancy services to the group companies; cash management services to the group companies; short-term (‘S/T’) and medium-term (‘M/T’) inter-company funding; and coordination with the other treasury companies.

(43) As regards market funding and liquidity investments, FFT raises funds to make them available to support the operations and growth of the group companies and invest them accordingly. In relation to the management of financial risks, FFT follows the guidelines established by the relevant internal group policies (foreign exchange risk and interest rate risk). FFT funding comes from instruments such as bond issuance (via a ‘Global Medium-Term Note’ or the ‘GMTN’ programme in which FFT, together with FFNA and FFC, is an issuer), bank term loans, committed and uncommitted credit lines, etc. For liquidity management, FFT invests surplus cash with top-ranked banking institutions or highly-rated liquidity funds.

(44) With regard to the exposure to currency risk, FFT manages foreign exchange exposure mainly by using forward foreign exchange contracts and currency swaps. Interest rate exposure is substantially linked to the different duration of liabilities and assets and management. FFT mainly employs Interest Rate Swaps (hereinafter: ‘IRS’) and Forward Rate Agreements (hereinafter: ‘FRA’).

(45) With regard to relations with financial market actors, FFT, in coordination with FF, deals with the financial markets and institutions to provide them with group information and data which supports the group's creditworthiness and financial position.

(46) Within financial coordination and consultancy services to the group companies, FFT is responsible for providing financial assistance to the group companies, examining their financial needs, identifying the best financial solution, setting up the financial contracts and monitoring the performance of the financial products with respect to the needs of the group companies.

(47) The cash flows, funding requirements and liquidity of the group companies are monitored by FFT to optimise the efficiency and effectiveness of the management of the group's capital resources. FFT manages cash pooling structures in the United Kingdom, Denmark, Belgium, the Netherlands, Switzerland, Austria, Germany, and Spain. On a daily basis, balances by country are centralised into a central FFT master account to manage the whole financial position. More specifically, during the day group companies accounts (held with banks) collect and pay as per normal activity. At the end of the day, account balances of the group companies have a positive or negative position. In both cases, account balances are automatically covered by the FFT master account open in every country. Then, through manual transfers, the amounts of different country master accounts are redirected (in or out) in a single master account. Therefore, on a daily basis, the group companies' current accounts are reset to zero. Depending on the daily current account position, group companies' participants in the cash pooling schemes will be credited or debited for interest calculated following an intercompany pricing grid.

(48) The interest rate on intra-group loans is set as the sum of the group's weighted average cost of capital (‘WACC’) and a margin. The deposit interest rate is set at the risk-free rate increased by a margin on short-term deposits with banks as defined by the group liquidity policy.

(49) Regarding S/T and M/T inter-company funding and coordination with the other treasury companies, FFT proceeds as follows: for the former, FFT makes available to the group companies funds which have been sourced in large volumes at wholesale conditions on regulated markets (bonds market) or through negotiation with financial institutions; for the latter, transfers of funds are recurrent between the treasury companies to meet the financial requests of the group companies without recurring to the market, when the overall financial position of the group is positive.

(50) The main risks generally faced by the treasury companies outlined in the transfer pricing report are as follows: — Market risk: FFT regularly assesses its exposure to interest rate and foreign exchange risk (to be fully hedged) and hedges those risks through the use of derivative financial instruments in accordance with the group risk management policies. The instruments used for those hedges are mainly plain vanilla currency swaps, forward contracts and interest rate swaps. — Credit risk relative to bank deposits or other similar short-term investments: the transfer pricing report asserts that this risk is mitigated as FFT deals only with major financial institutions and diversifies the allocation of cash. Group assets are not exposed to this risk, since the group has interest to financially support all the group companies (17); over time, there would not have been any insolvency cases within the group; group companies do not register allowances for doubtful accounts for group debt. — Counterparty risk relative to the derivative assets held with third parties (banks): this risk is mitigated since FFT deals only with major financial institutions and the derivative business is allocated among many institutions. Group assets are not exposed to this risk for the reasons mentioned above. — Operational risk: FFT performs its financial operations in line with the guidelines and procedures set by Fiat SpA. Financial activities are constantly monitored and subject to risk management control procedures to avoid any failure in the daily process.

(51) FFT manages a significant amount of financial assets, which are mainly related to intercompany loans, account receivables from group companies and, in a smaller portion, to bank deposits. FFT uses IT systems, which are necessary to perform the day-to-day operations and to monitor financial market performance.

2.2. The contested tax ruling

(52) This Decision concerns the FFT APA, a tax ruling on transfer pricing granted by Luxembourg to FFT by letter of 3 September 2012. The contested tax ruling endorses a method for arriving at a profit allocation to FFT within the Fiat group, as proposed by the latter's tax advisor, and enables FFT to determine its corporate income tax liability to Luxembourg on a yearly basis.

2.2.1. The FFT APA

(53) The documents provided by Luxembourg to the Commission as constituting all the essential elements to support the contested tax ruling consist of the two letters and the transfer pricing report referred to in recital 9.

(54) By letter of 3 September 2012, the Luxembourg tax administration confirmed that ‘the transfer pricing analysis hereafter has been realised in accordance with the Circular 164/2 of the 28 January 2011 and respects the arm's length principle’ (sic). In other words, the Luxembourg tax administration accepted that the tax advisor's transfer pricing analysis in the transfer pricing report resulted in an arm's length remuneration for the functions performed and the risk borne by FFT. The ‘arm's length remuneration’ of FFT, as established in the transfer pricing report and accepted by the contested tax ruling, is as follows: ‘the transfer pricing study determines an appropriate remuneration on the capital at risk and the capital aimed at remunerating the functions performed by the company of EUR 2,542 million on which a range of +/– 10 % is envisaged.’ On the net profits earned by FFT on the basis of this remuneration, the standard corporate tax rate in Luxembourg of 28,80 % is applied. The letter further states that the decision of the tax administration is binding for 5 years (i.e. from tax year 2012 to tax year 2016) (18).

2.2.2. The transfer pricing report

(55) According to the transfer pricing report, the method considered as most appropriate to determine the taxable profit of FFT within the Fiat group is the transactional net margin method (hereinafter: ‘TNMM’). According to the tax advisor, the TNMM is particularly adequate when, within the transaction, there is one party not making valuable and unique contributions and since, according to the tax advisor, FFT performs only financial services, this method is the most appropriate to determine arm's length pricing in line with the OECD TP Guidelines. Moreover, since FFT performs its functions to the Fiat group companies only, which do not receive any similar type of services by third parties, an internal comparison is not possible. Consequently, the tax advisor considers an external comparison more appropriate by identifying the net margins that would have been earned in comparable transactions by independent enterprises (19).

(56) In the transfer pricing report, the tax advisor determines the remuneration due to FFT, which constitutes the taxable profit, by reference to the capital needed by FFT to perform its functions and to bear its risks, in relation to the assets in use (20).

(57) That remuneration is determined as follows: (i) estimate of FFT's ‘capital at risk’; (ii) identification of FFT's capital used to perform the functions and to support the financial investments; (iii) estimate of the expected remuneration of FFT's ‘capital at risk’ by using the Capital Asset Pricing Model (hereinafter: ‘CAPM’) (21) and identification of the return to reward the capital used to perform the functions; and (iv) calculate the overall profitability to be left to FFT to remunerate the risks borne and the functions performed by combining the results of steps (i) to (iii).

(58) As regards step (i), on the basis of the functional analysis contained in the transfer pricing report, the tax advisor considers FFT to bear the following risks: operational, credit and counterparty risks, while the tax advisor considers the exchange rate risk FFT bears to be nil. Applying the Basel II framework (22) by analogy (23), the tax advisor estimated the minimum capital required for FFT to cover the following risks: operational, counterparty, exchange rate and credit risk, as follows: — Operational risk: 15 % * (creditor interests accrued on bank deposits – debtor interest accrued on bank loans) — Counterpart risk: 20 % * 6 % * (future exposure + positive fair value of derivatives) — Credit risk: 20 % * 6 % * third party account receivables (year average)

(59) The result of those calculations is what the tax advisor refers to as FFT's ‘capital at risk’, which corresponds to FFT's hypothetical regulatory capital under the Basel II framework as applied by FFT's tax advisor, summarised in Table 1. Table 1 FFT's minimum capital requirement (in EUR thousand) Minimum capital requirement 2011 Operational risk 938 Counterparty risk 2 603 Exchange rate risk 0 Credit risk 24 982 Minimum capital required by Basel II framework 28 523

(60) As regards step (ii), what is referred to in the transfer pricing report as ‘the capital used to perform the functions’ (24) is estimated by deducting the portion of FFT's minimum capital required by the Basel II framework as estimated by the tax advisor and FFT's capital used to support the financial investments in FFNA and FFC from FFT's total equity.

(61) According to FFT's tax advisor, as of the end of 2011, FFT's equity amounted to EUR 287,5 million, of which: — EUR 28,5 million is the minimum capital required by Basel II framework to bear the risks borne by FFT (‘Minimum equity at risk’ (25)), — EUR 165,2 million is used to offset FFT's participation interests in FFNA and FFC (26) (‘Equity supporting the financial investments in FFNA and FFC’), and — EUR 93,7 million is the capital used to perform the functions (‘Equity backing the functions performed’ (27)).

(62) Table 2 provides a breakdown of FFT's total equity as presented by the tax advisor in the transfer pricing report: Table 2 FFT equity breakdown (in EUR thousand) FFT equity breakdown by the tax advisor Equity 2011 Minimum equity at risk 28 523 Equity supporting the financial investments in FFNA and FFC 165 244 Equity backing the functions performed 93 710 Total Equity 287 477

(63) As regards step (iii), first, the tax advisor proposes to remunerate the portion of FFT's equity it designates as ‘Minimum equity at risk’, which corresponds to FFT's hypothetical regulatory capital as determined by the tax advisor in step (i), by estimating a return on equity investors would expect to receive (‘Expected Return Pre-Tax’), using the CAPM, whereby: Expected Return Pre-Tax = (Risk-Free Rate + β × Equity Risk Premium)/(1-tax rate)

(64) In application of the CAPM, FFT's tax advisor used the following variables: — Risk-free rate of 2,85 % (10 years German Government Bond ‘Bund’, 2011 year average), — Beta (β) of 0,29 estimated (28) on the basis of set of 66 comparable companies performing financial services, provided by the Damodaran website (29), — Equity risk premium of 5 % for Luxembourg provided by the Damodaran website (July 2011 update), — Luxembourg tax rate of 28,80 %.

(65) Applying those variables to the formula in recital 63, FFT's tax advisor arrives at a pre-tax ‘expected return on equity, investors would expect to receive for the risks taken’ of 6,05 %.

(66) Table 3 lists the companies FFT's tax advisor selected as comparable companies operating independently in the financial sector and their betas for the calculation of the beta for use in the CAPM. Table 3 List of comparable companies engaged in financial services Company Name Beta ING Groep NV (EXTAM:INGA) 3,00 UBS AG (SWX:UBSN) 1,80 Wüstenrot & Württembergische AG (XTRA:WUW) 0,41 Deutsche Börse AG (XTRA:DB1) 1,28 Oslo Bors VPS Holding ASA (OTCNO:OSLO) 0,13 London Stock Exchange Group (LSE:LSE) 1,24 Fimalac SA (ENXTPA:FIM) 0,68 International Personal FinancePlc (LSE:IPF) 1,92 GrenkeLeasing AG (XTRA:GLJ) 0,55 Mittel SpA (CM:MIT) 0,93 GlobeOp Financial Services SA (LSE:GO) 0,56 KBC Ancora (ENXTBR:KBCA) 3,61 Aktiv Kapital ASA (OB:AIK) 0,25 IG Group Holdings Plc (LSE:IGG) 0,75 IFG Group plc (LSE: IFP) 1,11 Conafi Prestito SpA (CM:CNP) 0,74 NEOVIA Financial Plc (AIM:NEC) 0,60 H&T Group Plc (AIM:HAT) – 0,11 Hesse Newman Capital AG (XTRA:RTM) 0,29 Acta Holding ASA (OB:ACTA) 1,70 Manx Financial Group PLC (AIM:MFX) 0,30 PLUS Markets Group plc (AIM:PMK) – 0,05 Law Debenture Corp. Plc (LSE:LVVDB) 0,95 Hypoport AG (DB:HYQ) 0,70 Perrot Duval Holding SA (SWX:PEDP) 0,16 Albemarie & Bond Holdings plc (AIM:ABM) 0,21 MCB Finance Group plc (AIM:MCRB) NA Brightside Group plc (AIM:BRT) 0,11 DF Deutsche Forfait AG (DB:DE6) 0,83 Autobank AG (DB:AW2) NA Ambrian capital plc (AIM:AMBR) 0,83 Gruppo MutuiOnline S.p.A (CM:MOL) 0,77 Park Group plc (AIM:PKG) 0,09 OVB Holding AG (XTRA:O4B) – 0,19 Albis Leasing AG (DB:ALG) 0,57 Hellenic Exchanges SA (ATSE:EXAE) 1,42 FORIS AG (XTRA:FRS) 0,20 Creon Corporation Plc (AIM:CRO) 2,03 Investeringsselskabet Luxor A/S (CPSE:LUXOR B) 0,50 Univerma AG NA OFL AnlagenLeasing AG (DB:OFL) 0,86 Ideal GroupSA (ATSE:INTEK) NA Nøtterø SpareBank (OB:NTSG) 0,20 Apulia Prontoprestitio SpA (CM:APP) 1,07 Ultimate Finance Group plc (AIM:UFG) 0,54 Dresdner Factoring AG (XTRA:D2F) 0,42 Heidelberger Beteiligungsholding AG (DB:IPO) 0,14 ABC Arbitrage SA (ENXTPA:ABCA) 0,48 Baydonhill plc (AIM:BHL) 0,04 London Capital Group Holdings plc (AIM:LCG) 0,72 Imarex ASA (OB:IMAREX) 0,48 Toscana Finanza SpA (CM:TF) 0,49 Banca Finnat Euramerica SpA (CM:BFE) 0,79 S&U plc (LSE:SUS) 0,27 Bolsas y Mercados Españoles SA(CATS:BME) 0,97 Banca IFIS SpA (CM:IF) 0,69 Paris Orleans SA (ENXTPA:PAOR) 0,60 SNS Reaal NV (ENXTAM:SR) 2,37 Close Brothers Group plc (LSE:CBG) 0,94 Provident Fiancial plc (LSE:PFG) 0,35 Pohola Bank plc (HLSE:POH1S) 1,43 Investec plc (LSE:INVP) 1,73 Banque Nationale de Belgique SA (ENXTBR:BNB) 0,49 Credit Suisse Group (SWX:CSGN) 1,43 Deutsche Bank AG (DB:DBK) 1,98 Schweizerische Nationalbank (SWX:SNBN) 0,22 Source: Damodaran

(67) Table 4 shows the ‘arm's length range’ of betas of the selected comparable companies at which FFT's tax advisor arrives. Table 4 Arm's length range of betas of comparable companies Arm's length range Beta Number of companies 66 MAX 3,61 90 Percentile 1,79 75 Percentile 1,04 Median 0,64 25 Percentile 0,29 10 Percentile 0,13 MIN 0,19

(68) Second, FFT's tax advisor proposes to remunerate the portion of FFT's equity it designates as ‘Equity backing the functions performed’ in Table 2, which corresponds to ‘the capital used to perform the functions’ identified in step (ii), by using the market interest rate applied to short-term deposits (30), which, according to FFT's tax advisor, is equal to 0,87 %.

(69) FFT's tax advisor further proposes not to remunerate the portion of FFT's equity it designated as supporting FFT's financial investments in FFNA and FFC, referred to as ‘Equity supporting the financial investments in FFNA and FFC’ in Table 2, that is, to have a zero remuneration for the purposes of taxation.

(70) Finally, in relation to step (iv), the tax advisor calculates the overall remuneration due to FFT for its financing and treasury activities and the risks it bears. That remuneration consists of the following components derived from steps (i) to (iii) above: — a ‘risk remuneration’, which is calculated by multiplying FFT's hypothetical regulatory capital of EUR 28,5 million, estimated by the tax advisor by applying the Basel II framework by analogy in step (ii), by the pre-tax expected return of 6,05 %, estimated by the tax advisor using the CAPM in step (iii), and — a ‘functions remuneration’, which is calculated by multiplying what the tax advisor designates as FFT's capital used to perform the functions of EUR 93,71 million in step (ii), by the market interest rate applied to short-term deposits, which the tax advisor considers to be 0,87 % in step (iii).

(71) Table 5 provides for the tax advisor's estimate of the overall profitability to be left to FFT for Luxembourg tax purposes, Table 5 Estimate of the taxable base of FFT (in EUR thousand) Capital remuneration EBT 2011 Risk remuneration 1 726 Functions remuneration 816 Remuneration of equity supporting participations in FFNA and FFC (31) 0 Total EBT 2 542

(72) The resulting amount of EUR 2,542 million corresponds to the amount in the contested tax ruling that the Luxembourg tax administration deems to constitute an arm's length remuneration (32).

(73) Table 6 summarises the conclusions of FFT's tax advisor following steps (i) to (iv) above. Table 6 Computation recap of the minimum capital requirement and impact on the result before taxes of FFT Minimum Capital Requirement FFT 2011 (amounts in EUR thousand) Operational Risk 938 a Counterpart Risk 2 603 b Exchange rate Risk 0 c Credit Risk 24 982 d Minimum Capital Requirement 28 523 e = a + b + c + d Capital offset by participation interest 165 244 x Excess Capital 93 710 f = g – e – x Equity 287 477 g Net Profit Indicator Expected return on capital 6,05 % h Short-term interest rate 0,87 % i Capital remuneration Risk remuneration 1 726 k = h * e Functions remuneration 816 j = i * f Total EBT (Earnings before tax) 2 542 l = k + j a = 15 % * (financial revenues on bank deposit – financial charges from bank loans) b = 20 % * 6 % * (future exposure + positive fair value of derivatives with third parties) c = 100 % covered by derivatives d = 20 % * 6 % * account receivables with third parties (year average) h = estimated by using CAPM i = 2011 year average EONIA To be noted: the main assumption is that there is no credit/counterparty risk on operations with Group companies

2.3. Description of the Luxembourg rules on transfer pricing

(74) The tax ruling in favour of FFT was issued on the basis of Article 164(3) of the Luxembourg Income Tax Code (loi modifiée du 4.12.1967 concernant l'impôt sur le revenu, hereinafter ‘L.I.R’) and Circular L.I.R. no 164/2 of 28 January 2010 (hereinafter ‘the Circular’) (33).

2.3.1. Article 164 of the Luxembourg Income Tax Code

(75) Article 164(3) L.I.R. provides: ‘Taxable income comprises hidden profit distributions. A hidden profit distribution arises in particular when a shareholder, a stockholder or an interested party receives either directly or indirectly benefits from a company or an association which he normally would not have received if he had not been a shareholder, a stockholder or an interested party.’ That provision establishes the ‘arm's length principle’ under Luxembourg tax law, according to which transactions between intra-group companies should be remunerated as if they were agreed to by independent companies negotiating under comparable circumstances at arm's length.

2.3.2. Circular L.I.R. No 164/2

(76) Article 164(3) L.I.R. is further clarified by the Circular. The Circular is structured as follows: Section 1 defines the terms ‘group financing companies’ (34), ‘intra-group financing transactions’ (35) and ‘associated enterprises’ (36).

(77) Section 2, titled ‘General Information’, first defines the intra group-services to which the Circular applies, as follows: ‘An intra-group service (including an intra-group financing transaction) has been rendered if, in comparable circumstances, an independent enterprise had been willing to pay another independent enterprise to carry out that activity, or if it had carried out that activity itself.’ Section 2 further contains a description of the arm's length principle as set out in the OECD TP Guidelines and transposed into domestic law. In this regard, the Circular states that ‘[w]here an intra-group service has been rendered, as with other types of intra-group transfers, one should ascertain whether an arm's length price is charged for such service, i.e. a price corresponding to the price which would have been charged and agreed to by independent enterprises in comparable circumstances.’ (37)

(78) As regards the reference to ‘comparable circumstances’, the Circular provides that the comparability analysis should include factors such as ‘the characteristics of the goods or services being transferred, the functions performed by the parties involved, the terms and conditions of the contract, the economic circumstances of the parties and the business strategies pursued by those parties.’ (38)

(79) Section 3 of the Circular contains explanations on how to determine an arm's length remuneration specifically in the case of intra-group financing companies. The function of intra-group financing companies that determine the remuneration of each enterprise should, according to the Circular, be comparable to the functions performed by independent financial institutions subject to the supervision of the Commission de Surveillance du Secteur Financier. Thus, the arm's length remuneration for the functions performed (taking into account assets used and risks assumed) ‘should be based on the remuneration requested by those financial institutions for comparable credit transactions.’ (39)

(80) Furthermore, financial institutions, before granting a loan or advancing money, perform a risk analysis, which includes an analysis of the financial risk related to the transaction, the borrower risk, the business risk and the structural risk. In addition, as regards the expenses relating to granting loans, the additional costs should take into account, among other things, ‘additional expenses generated by solvency requirements, additional expenses related to credit risk, processing fees or additional expenses related to foreign exchange risk.’ (40) The credit risk is determined based on the terms and conditions of the loan agreement and based on the outcome of the risk analysis.

(81) Finally, according to the Circular, independent financial service providers generally set their remuneration based either on the loan amount or on the actual market value of the assets under management. Also, following the example of independent service providers, ‘group financing companies carrying out intra-group transactions should perform a risk analysis before granting a loan to an associated enterprise. They should also take into consideration any other factor which may influence the determination of their transfer prices.’ (41)

(82) Section 4 of the Circular provides that the tax authorities shall only issue binding advice if the company concerned has a real presence in Luxembourg. Section 4 then lists a number of requirements that need to be satisfied for a group financing company to have real presence. It further provides that the company should maintain an adequate level of equity with regard to the functions performed (taking into account assets used and risks assumed). According to the Circular, the equity should amount to at least 1 per cent of the nominal value of the loan(s) granted or EUR 2 million without any further indication.

(83) The Circular also contains rules as to what information and documents need to be submitted to obtain a binding advice from the tax administration. As such, the request for a binding advice needs to include inter alia ‘a transfer pricing report in line with the transfer pricing guidelines issued by the OECD and including a comprehensive description of the proposed methodology, as well as detailed information and analysis in support of this methodology, for instance the identification of comparables and the expected range of results.’ (42) Finally, the Circular specifies that a tax ruling is usually valid for a maximum of 5 years unless the facts and circumstances change or unless the legal provisions on which the ruling was based are modified or if one of the key characteristics of the transaction is altered (43).

2.4. Description of the OECD guidance on transfer pricing

(84) The Organisation for Economic Cooperation and Development (hereinafter ‘OECD’) provides guidance on taxation for its member countries. The OECD's guidance on transfer pricing can be found in its Transfer Pricing Guidelines (hereinafter the ‘OECD TP Guidelines’), which is a non-binding legal instrument providing guidance on transfer prices (44).

(85) Transfer prices refer to prices charged for commercial transactions between various parts of the same corporate group. Multinational companies have a financial incentive to allocate as little profit as possible to jurisdictions where those profits are subject to higher taxation. This could lead to exaggerated transfer prices which should not be accepted as a basis for calculating taxable income. To avoid this problem, tax administrations should only accept transfer prices between intra-group companies that are remunerated as if they were agreed to by independent companies negotiating under comparable circumstances at arm's length (45). This is known as the ‘arm's length principle’.

(86) The authoritative statement of the arm's length principle is found in paragraph 1 of Article 9 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD member countries and an increasing number of non-member countries. Article 9 provides: ‘[Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.’

(87) On 27 June 1995, the OECD's Committee on Fiscal Affairs adopted transfer pricing guidelines in their original version (46), which were substantially updated in July 2010 (47). Given their non-binding nature, the tax administrations of the OECD member countries are simply encouraged to follow the Guidelines. However, in general, the OECD TP Guidelines serve as a focal point and exert a clear influence on the tax practices of OECD member (and even non-member) countries. Moreover, in numerous OECD member countries those guidelines have been given the force of law or serve as a reference for the purpose of interpreting domestic tax law. To the extent the Commission cites the OECD TP Guidelines in the present Decision, it does so because those guidelines are an existing manual in the area of transfer pricing that are the result of expert discussions in the context of the OECD and elaborate on techniques aimed to address common challenges of the application of the arm's length principle to concrete situations. The OECD TP Guidelines therefore provide useful guidance to tax administrations and multinational enterprises on the application of the arm's length principle. They also capture the international consensus on transfer pricing.

(88) The OECD TP Guidelines provide five methods to approximate an arm's length pricing of transactions and profit allocation between companies of the same corporate group: (i) the comparable uncontrolled price method (hereinafter ‘CUP’); (ii) the cost plus method; (iii) the resale minus method; (iv) the TNMM and (v) the transactional profit split method. The OECD TP Guidelines draw a distinction between traditional transaction methods (the first three methods) and transactional profit methods (the last two methods). Multinational corporations retain the freedom to apply methods not described in those guidelines to establish transfer prices provided those prices satisfy the arm's length principle.

(89) The CUP and the TNMM are relevant for the present Decision and, therefore, are described in more detail in recitals 90 to 92.

(90) The CUP method compares the price charged for the transfer of property or services in a controlled transaction (i.e. a transaction between two enterprises that are associated enterprises with respect to each other) to the price charged for the transfer of property or services in a comparable uncontrolled transaction (i.e. a transaction between enterprises that are independent enterprises with respect to each other), conducted under comparable circumstances.

(91) The TNMM is one of the ‘indirect methods’ to approximate an arm's length pricing of transactions and profit allocation between companies of the same corporate group. It approximates what would be an arm's length profit for an entire activity, rather than for identified transactions. It does not seek to establish the price of goods sold, but estimates the profits independent companies could be expected to make on an activity, such as the activity of selling goods. It does this by taking an appropriate base (‘a profit level indicator’), such as costs, turnover or fixed investment, and applying a profit ratio reflecting that observed in comparable uncontrolled transactions to that base.

(92) Because the TNMM does not set a price for individual transactions, the taxable profit of an entity estimated using the TNMM might not have a direct effect on the taxable profit of another entity of the same corporate group. The method is therefore different to using, for example, the CUP, where transfer pricing establishes the price of a specific good or service which is then recorded in the taxable profit for the same amount by the group company selling and the group company buying the particular good or service.

2.5. Additional information submitted after the opening of the formal investigation procedure

2.5.1. Luxembourg's Letter of 3 September 2014

(93) In response to the questions in the Opening Decision, Luxembourg informed the Commission that credit limits are not applied within the Fiat group.

(94) Luxembourg also provided information regarding the average pricing of FFT's intra-group borrowing and lending for the years 2011 to 2013. The interest rate applicable to intra-group loans provided by FFT is […], and was set at Euribor plus [6-9 %] at the end of 2011. The average interest rate received on the current account balances with group companies for the years 2012 and 2013 are [6-9 %] and [6-9 %] respectively. On intra-group deposits, FFT paid on average [0-3 %], [0-3 %] and [0-3 %] in 2011, 2012 and 2013 respectively (these figures are average all-in rates).

(95) Luxembourg additionally expressed views regarding the remuneration of capital agreed in the contested tax ruling. In particular, Luxembourg indicated that the remuneration of the capital invested in participations consists of dividends and that dividends, by their very nature, are not subject to a transfer pricing analysis, as they are received by a company only in its role of shareholder. Dividends are therefore not to be taken into account in the importance of the functions performed and the risks assumed.

(96) Luxembourg further explained that the acquisition of the participations of FFT was financed in its totality through own funds and that this mode of financing automatically means that those funds are no longer available to cover other risks borne by FFT.

(97) Luxembourg also referred to Article 57 of Directive 2006/48/CE of the European Parliament and of the Council (48) relating to the taking up and pursuit of the business of credit institutions, according to which the non-consolidated funds of credit institutions have to exclude participations in other credit institutions, which account for more than 10 % of the capital of those institutions.

(98) Luxembourg further referred to the basic indicator approach under the Basel II framework, which provides the figure of 15 % to be applied to the average of three periods of positive annual gross income.

2.5.2. Luxembourg's Letter of 24 March 2015

(99) In response to the request by the Commission to provide examples of rulings addressed to other taxpayers in a similar situation as FFT, Luxembourg indicated in its letter of 24 March 2015 that the FFT's situation is very specific. The reason for this would be that FFT operates as a financing company raising funds on the market, contrary to most of the financing companies in Luxembourg, which lend on with a margin funds that have been provided to them by other group companies.

(100) Moreover, according to the Luxembourg tax administration the situation of each taxpayer is sufficiently specific to not make possible any comparison with the situation of other taxpayers. That would be the reason why the Luxembourg national law only provides for a general provision to provide a framework for transfer pricing (Article 164 L.I.R.) so as to allow the tax administration to capture in the most precise manner the economic reality of each tax case, be it covered by a ruling or not.

(101) Luxembourg also provided the tax base of FFT for the period 2009 to 2013 based on the tax declarations of FFT (49), as reproduced in Table 7. Table 7 FFT's tax base for years 2009 to 2013 (in EUR) 2009 2 643 424 2010 2 424 869 2011 2 600 416 2012 1 684 103 2013 2 095 969

(102) Luxembourg indicated that it is apparent from FFT's 2013 tax declaration that the doubt expressed in recital 64 of the Opening Decision, that the tax base is set to a fixed range from EUR 2 288 000 to EUR 2 796 000, is not substantiated. It is clear that the contested tax ruling only agreed to the methodology and that the market parameters vary.

(103) Finally, at the request of the Commission, Luxembourg also provided all past rulings of Fiat group companies obtained from the Luxembourg tax administration.

(104) First, a ruling request dated 9 December 2009, which was approved by the Luxembourg tax administration, requested an agreement on the tax base of FFT […].

(105) Second, the Luxembourg tax administration issued two letters on 3 September 2012. The first is the contested tax ruling, based on a ruling request dated 14 March 2012, as indicated in recital 9. That ruling request was provided to the Commission anew and in full with Luxembourg's letter of 24 March 2015, including information that had been previously redacted by Luxembourg in its initial submission of that ruling to the Commission.

(106) A second almost identical letter, was issued in response to a parallel ruling request submitted […] to the Luxembourg tax administration on 18 April 2012 concerning a company named [F], which seems to correspond to FFT in an alternative structure of the group treasury companies. In that second ruling request, the functions of [company F] are described in an identical manner to the functions of FFT in the request of 14 March 2012. In this alternative structure, the only difference would be that the company would only have a branch in the UK and would not have any branch in Spain, and that [company F] would not own [any subsidiaries].

(107) The second ruling request, supported with a transfer pricing report, contains a conclusion presented in the same manner as the FFT ruling request (reproduced in recital 54). However, the outcome of the transfer pricing analysis is significantly different. The arm's length remuneration of [company F], as established in the transfer pricing report, is as follows: ‘The transfer pricing study determines an appropriate remuneration on (i) the capital at risk of EUR 44,6 million and (ii) the capital aimed at remunerating the functions performed by the company of EUR 8,8 million on which a range of +/– 10 % is envisaged.’

(108) Both rulings were reported on the list provided by Luxembourg to the Commission on 4 June 2015 of tax rulings covering a treasury function (see recital 29).

(109) Third, two other ruling requests […] approved by the Luxembourg tax administration were also provided to the Commission. Those ruling requests dated from 2002 and 2012 and cover other aspects of the Fiat group structure in Luxembourg. Those rulings are not assessed in this Decision.

2.5.3. Fiat's Submission of 31 March 2015

2.5.3.1. Information on Fiat group companies in direct relation with FFT

(110) Fiat recalled that FFT is owned approximately 40 % by Fiat SpA and approximately 60 % by FF, which in turn is a wholly-owned subsidiary of Fiat SpA (50). FFT in turn holds 100 % of FFNA and FFC (51). Fiat also recalled that FFT is one of the treasury companies of the Fiat group, as listed in recital 39.

(111) At the request of the Commission, Fiat provided detailed financial data on the group treasury companies. In particular, Fiat provided the annual report for the years 2011 to 2013 of FFT, FF, FFNA, FFC and FFB. Fiat also provided a description of the functions of the group treasury companies. According to that information, FF has 52 employees, out of which [20-30] are working for the treasury department and [10-20] in accounting. FFT has 14 employees, composed of one director, [0-10] front office employees (the front office is based in the United Kingdom), [0-10] back office employees and [0-10] accounting and control employees. FFNA has five employees and FFC has limited activities.

(112) According to the submission of Fiat, the book value of the subsidiaries of FFT (FFNA and FFC) […]. The annual report of FFT states that both FFNA and FFC have been acquired from Fiat SpA and FF in 2011. Starting from 2011, FFT prepared consolidated financial statements in Luxembourg.

(113) FF and FFT are the treasury companies for the euro-area. Financial figures for FF and FFT for the period 2010-2013 based on the provided annual reports are presented in Tables 8 and 9 (52). Table 8 FFT's financial figures for years 2010 to 2013 (in EUR thousand) 2010 2011 2012 2013 Interest and similar income 613 561 650 641 664 707 736 561 Thereof from group companies 605 880 626 806 648 497 731 462 Other income 72 292 76 910 29 185 10 125 TOTAL INCOME 685 853 727 551 693 892 746 686 Operating expense and amortisation 3 419 3 655 2 926 2 499 Interest payable and other financial charges 625 078 640 207 631 854 666 246 Thereof to group companies 59 409 55 520 38 041 20 268 Thereof on bonds and other notes 551 229 574 561 592 099 643 853 Commission on Guarantees on bonds paid to Fiat SpA (53) 3 161 2 851 2 702 3 006 Other expense 51 709 78 211 54 702 72 805 TOTAL EXPENSE (excl. corporate tax) 683 367 724 924 692 185 745 032 Profit before corporate tax 2 485 2 627 1 707 1 652 Tax 748 776 491 508 Net profit 1 737 1 851 1 217 1 146 Shareholders' equity 285 625 287 477 288 693 289 839 Amounts owned to group companies 4 354 692 2 275 578 1 530 146 1 661 930 Debt securities issued 7 716 844 7 746 301 9 116 345 11 030 180 Other liabilities (bank debt, accruals, …) 2 470 513 446 444 144 671 158 865 TOTAL LIABILITIES AND EQUITY 14 827 674 10 755 800 11 079 855 13 140 814 Amounts owned by group companies 11 869 312 7 387 279 7 950 092 9 637 038 Cash and transferrable securities 2 705 622 3 028 255 2 853 245 3 221 203 Participation in affiliated undertakings 0 165 244 164 244 165 244 Other assets (fixed assets, accruals, …) 252 740 175 022 112 274 117 329 TOTAL ASSETS 14 827 674 10 755 800 11 079 855 13 140 814

(114) FFT issued guarantees in favour of group companies to different banks for a total amount of EUR 2 560 802, EUR 10 772 314 and EUR 10 155 339 at the end of 2011, 2012 and 2013 respectively. Table 9 FF's financial figures for years 2010 to 2013 (in EUR thousand) 2010 2011 2012 2013 Financial income 552 090 752 007 676 177 722 610 Thereof from group companies 528 267 672 225 655 576 711 218 Other income (dividends, financial gains on derivatives, exchange rates, …) 29 708 18 962 18 117 8 935 Revenue from services to group 6 410 7 616 2 336 2 027 Operating expense 14 616 13 332 8 594 9 280 Financial expense 550 331 729 851 654 763 706 825 Thereof to group companies 523 123 698 009 625 216 687 712 Profit before corporate tax 23 261 35 402 33 273 17 466 Tax 5 968 10 112 8 822 6 952 Net profit 17 292 25 290 24 450 10 514 Shareholders' equity 271 047 268 610 268 837 256 053 Liabilities 14 878 871 12 567 582 11 277 171 12 758 761 Financial assets 9 267 614 8 201 011 9 164 768 9 905 386 Cash and transferrable securities 5 519 622 4 349 837 2 201 190 2 928 409 Participation in affiliated undertakings 358 362 264 116 160 833 160 833 Other assets (fixed assets, accruals, …) 4 320 21 228 19 217 20 186 TOTAL ASSETS 15 149 918 12 836 192 11 546 008 13 014 814

(115) FF's participation in affiliated undertakings at the end of 2013 (and at the end of 2012) consisted of a participation in FFT for EUR 157 269 000 (representing 60 % of the share capital of FFT), in FFB for EUR 2 013 000 and non-controlling interests in other group companies for EUR 725 000. At the end of 2011, 100 % of the shares of FFT was recorded in the participations of FF for EUR 262 102 000. At the end of 2010, before the sale of FFNA and FFC to FFT in 2011, the participations of FF consisted of EUR 7 213 000 in FFC, EUR 262 077 000 in FFT, EUR 87 055 in FFNA and EUR 2 013 000 in FFB, totalling EUR 358 million of participations in fully-controlled Fiat subsidiaries in 2010, as reported in the Table 8.

2.5.3.2. Detailed information on FFT's assets and liabilities

(116) Fiat provided the names of the 61 group counterparties with which FFT had relationships over the period 2011-2013. It provided average outstanding positions between FFT and its group counterparties for the six largest creditors and debtors for the years 2011, 2012 and 2013. This information for year 2013 is reproduced in Table 10 (the column of interest over average balance has been added by the Commission). Table 10 FFT's counterparties over 2013 (in EUR thousand) Assets Average Outstanding Interest Received Interest divided by average outstanding Fiat group counterparty 1 [10 000 000 ] [500 000 ] […] Fiat group counterparty 2 [150 000 ] [10 000 ] […] Fiat group counterparty 3 [150 000 ] [10 000 ] […] Fiat group counterparty 4 [100 000 ] [5 000 ] […] Fiat group counterparty 5 [50 000 ] [4 000 ] […] Fiat group counterparty 6 [20 000 ] [3 000 ] […] Liabilities Average Outstanding Interest Paid Interest divided by average outstanding Fiat group counterparty 7 [450 000 ] [10 000 ] […] Fiat group counterparty 8 [250 000 ] [400] […] Fiat group counterparty 9 [200 000 ] [1 000 ] […] Fiat group counterparty 10 [50 000 ] [200] […] Fiat group counterparty 11 [50 000 ] [150] […] Fiat group counterparty 12 [50 000 ] [150] […]

(117) Fiat also provided information on issuance of debt by FFT since 2009 under the EMTN (54), which is the main source of funding of FFT, as well as issuance prospectus. FFT proceeded to 14 issues over that period with maturities up to 7 years. FFT issued both euro denominated notes with coupons ranging from 5,75 % to 7,75 % (except for one issuance at 9 %) and Swiss franc denominated notes with coupons ranging from 4 % to 5 %.

(118) The information submitted by Fiat shows the maturity of the intra-group financing transactions. At the end of 2013, EUR 12 613 000 out of the total of EUR 12 858 000 of receivables (presenting the cash and loans to group companies in Table 9) had a contractual maturity shorter than one year.

(119) The information provided on individual intra-group transactions shows that many transactions are overnight. However, FFT also concludes transactions with different maturities […]. FFT provides loans to the group in different forms […]. Almost all deposits had a maturity of […] at the end of 2013. The notes issues had different maturities, […].

(120) Fiat also provided the Group Liquidity Policy document referred to in the transfer pricing report underlying the ruling request. The document sets out internal rules for investments of cash by the group. […]

2.5.3.3. Information on the Fiat group's transfer pricing policy

(121) In its letter of 20 February 2015, the Commission requested Fiat to explain which mechanism was used to achieve a net result equal to a stable proportion of equity over 2009, 2010 and 2011 (as is apparent from Table 4 in recital 51 of the Opening Decision), despite important variation in assets, liabilities and financial charges and revenues.

(122) Fiat provided a document titled ‘Transfer Pricing Policy’ in response to that request to explain the pricing of intra-group loans and deposits. The Transfer Pricing Policy document clarifies that Fiat sets the prices of intra-group loans provided by the group treasury companies in such a way so as to achieve a pre-determined return for the treasury companies.

(123) The functions described as performed by FFT and the risk assumed are identical to the description in the transfer pricing report, as reproduced in recitals 38 to 51, with the exception of some information. […] the Transfer Pricing Policy document relates to the credit risk and counterparty risk, which is described in the ruling request as non-existent concerning group assets, whereas the document qualifies this risk as ‘limited’.

(124) The Transfer Pricing Policy document explains that for estimating the pricing of intra-group transactions the following steps are taken. […] the amount of the intra-group loans to be financed is estimated. […], on that basis a margin is estimated to be applied to intra-group loans by dividing the sum of the target return to which the operating costs are added, by the total loans to be financed. Finally, this margin is added to the costs of funding of the treasury companies to obtain an estimate of the intra-group loan pricing.

(125) The Transfer Pricing Policy document illustrates this method of pricing intra-group loans by using 2012 figures. Regarding the expected return on capital, it is estimated for 2012 at [4-7 %] for FF and FFT on a consolidated basis. The document contains estimates of beta for the European Union for 2012, as well as risk-free rates and risk premiums for Italy and Luxembourg presented separately, and presents the following estimated expected return on capital figures on that basis: Table 11 Information in the internal Transfer Pricing Policy document Arm's length range Beta Number of companies 75 75 Percentile 1,22 Median 0,80 25 Percentile 0,34

(%) Variable and expected RoE (55) Italy Luxembourg Risk-free rate 1,57 1,57 Tax rate 31,4 28,8 Equity risk premium 7,73 6,00 RoE — 75 Percentile 16,09 12,52 RoE — Median 11,27 8,92 RoE — 25 Percentile 6,16 5,10

(126) The document further distinguishes between pre-defined term loans, established in the past, for which it is not possible to change pricing conditions and floating revisable intra-group loans. […]

2.5.4. Luxembourg's Letter of 10 July 2015

(127) In its letter of 10 July 2015, Luxembourg argues that the Commission would violate the principle of legal certainty should it order recovery from the alleged aid beneficiary in its decision closing the formal investigation procedure. It refers to previous Commission decisions on fiscal aid schemes in this respect where the Commission accepted that that principle could prevent recovery (56) and where the Commission allowed a transitory period on the basis of legitimate expectations (57).

(128) In addition, Luxembourg argues that, given that in transfer pricing the exact arm's length price cannot or does not need to be determined under OECD rules, it is not possible to order recovery of an exact aid amount. Moreover, Luxembourg argues that given the novel character of the aid measure and, in line with previous decisions, the Commission should not order recovery pursuant to the principle of legitimate expectations (58).

3. GROUNDS FOR INITIATING THE PROCEDURE

(129) The Commission decided to initiate the formal investigation procedure because it took the preliminary view that the contested tax ruling grants State aid to FFT within the meaning of Article 107(1) of the TFEU that is incompatible with the internal market.

(130) In particular, the Commission expressed doubts that the contested tax ruling complied with the arm's length principle. This was based on the considerations, presented in recitals 131 to 137.

(131) First, the ruling seemed to agree to a fixed tax base of EUR 2,542 million (+/– 10 %) with respect to FFT's activities in Luxembourg that could only vary marginally and remains stable even if FFT, for example, significantly increased its activities underlying the determination of the tax base.

(132) Second, the Commission expressed doubts as to the appropriateness of the method chosen by FFT's tax advisor to estimate the latter's remuneration for the functions performed by it. The tax advisor used the TNMM, an indirect method, in its transfer pricing analysis to calculate that remuneration, but, according to the Commission, the use of direct methods and, in particular, the use of the CUP method should be preferred in cases where comparable transactions can be observed on the market. In that respect, the Commission noted that Chrysler, the US company of the Fiat group, relies directly on capital market funding for its operations and some of those transactions are comparable to those carried out by FFT.

(133) Third, as regards the use of the CAPM to estimate the required equity returns, the Commission expressed doubts that the CAPM had been correctly applied by FFT's tax advisor. It pointed out that the two components which determine FFT's remuneration on the basis of the CAPM, i.e. the amount of capital remunerated and the level of remuneration applied to that capital amount, were set at a too low level.

(134) As regards the amount of capital remunerated, the tax ruling accepted that the CAPM was only applied to a fraction of the capital, labelled ‘equity at risk’, whereas the equity injected into FFNA and FFC was deducted from the equity to be remunerated without any plausible explanation (59). In addition, the calculation of the ‘equity at risk’ seemed to lead to a too low taxable basis, as it did not include intra-group assets, again without any convincing justification. In its Opening Decision, the Commission questioned the assumption that there was no credit risk on transactions with group companies. The Commission also expressed doubts as to the calculation of the minimum capital requirements for counterparty and credit risk. In particular, the choice of a relatively low risk weight factor of 20 % for the counterparty risk was not justified, nor what would happen if the regulatory framework were to change in a meaningful manner. The tax advisor's transfer pricing report does not contain any explanation why the ‘difference between creditor interests accrued on bank deposits and debtor interests accrued on bank loans’ is a good indication of operational risk and it does not explain the risk weighting at 15 %. Similarly, that report does not set out why the counterparty risk is multiplied by 6 % instead of 8 %, given that the minimum capital requirement for counterparty risk under the Basel II framework, to which the transfer pricing report makes explicit reference, is 8 %.

(135) As regards the level of remuneration applied to that capital, the Commission expressed doubts on the determination of the beta as it seemed too low compared to other companies performing financial services. It also expressed doubts on the tax advisor's choice of the 25th percentile and not the median for the calculation of the beta.

(136) Fourth, as regards the expected return on equity on the capital considered as excess capital in the ruling request, the Commission expressed doubts that the contested tax ruling agreed to the use of a very low rate of 0,87 % without any justification.

(137) Given that the transfer pricing analysis accepted by the contested tax ruling did not appear to comply with the arm's length principle, the Commission reached the preliminary conclusion that that ruling conferred an advantage on FFT. That advantage was considered to be obtained every year and on-going, when the annual tax liability calculated on the basis of that ruling was accepted by the Luxembourg tax administration. According to the Commission, that advantage was also granted in a selective manner, as it constituted a deviation from administrative practice specifically favouring FFT as compared to companies in a similar legal and factual situation.

(138) With all other conditions of Article 107(1) of the TFEU being fulfilled and no apparent compatibility ground, the Commission reached the preliminary conclusion that the contested tax ruling constituted incompatible State aid. On those grounds, the Commission decided to initiate the procedure laid down in Article 108(2) of the TFEU with respect to that tax ruling.

(139) In addition, in its Opening Decision the Commission enjoined Luxembourg to provide all documents, information and data needed for the assessment of the existence and compatibility of the contested measure pursuant to Article 10(3) of Regulation (EC) No 659/1999. In the event that Luxembourg did not fully provide all information requested, it invited Luxembourg to agree on the basis of Article 6(a)(2)(b) of Regulation (EC) No 659/1999 that the Commission will request the beneficiary of the contested measure, i.e. FFT, to provide the requested information.

4. COMMENTS FROM LUXEMBOURG

(140) Luxembourg submitted its comments to the Opening Decision on 19 July 2014. Luxembourg argues, first, that the procedure is flawed and, second, that the Commission committed substantive errors in the Opening Decision.

4.1. Comments from Luxembourg on the Commission procedure

(141) As regards the procedure, Luxembourg alleges that the proper procedure for issuing the information injunction has not been followed in the present case, in that Regulation (EC) No 659/1999 does not allow the Commission to issue injunctions in a decision to initiate the formal investigation procedure. Before such an injunction can be issued, the procedure provided for in Article 10 of Regulation (EC) No 659/1999 should have been followed.

(142) Luxembourg further claims that, as regards the information requested under the injunction decision, the Commission did not explain why the disclosure of the name of the beneficiary was necessary to assess the measure under State aid rules. Given the numerous leaks and careless statements by the Commission in public, Luxembourg could not disclose the name at that stage. In addition, the injunction decision did not specify any other specific information to be provided, whereas the Commission's own Manual of Procedure provides that an injunction must explain clearly which information is required for the investigation.

(143) Luxembourg alleges also that, as the Opening Decision does not explain how the contested tax ruling constitutes aid, it is impossible for it to implement the standstill obligation. FFT is required to submit a tax return and given that the Commission has not specified what the right methodology is to calculate FFT's tax liability in the Opening Decision, the Luxembourg tax administration will proceed on the basis of the methodology agreed on in the tax ruling.

(144) Luxembourg argues further that the Commission infringed the principles of sincere cooperation, impartiality and good administration by, for instance, not responding to its offers to meet so as to allow the Luxembourg authorities to explain the methodology used in the contested tax ruling.

(145) Luxembourg contests the decision by the Commission to split the procedure relating to FFT (with a new case number SA.38375) from the general investigation into the tax ruling practices of Luxembourg under case number SA.37267. Given that Luxembourg had appealed the information injunction adopted by the Commission under SA.37267 before the General Court, the Commission could thereby artificially circumvent an annulment of the information injunction under SA.37267 by having opened a new case.

(146) Finally, Luxembourg claims that the Commission misused its powers by confusing the exercise of discretion with the mere interpretation of a rule of ordinary law. In particular, the FFT tax ruling does not constitute an exercise of discretion by the Luxembourg tax administration, but is in line with Article 164(3) L.I.R. and the Circular. According to Luxembourg, when applying those provisions it is inevitable that they will need to be interpreted in the light of the facts of each case to arrive at solutions that are determined by and based on their specific circumstances. The Commission is ignoring that distinction between discretion, on the one hand, and the interpretation of rules that include abstract legal terms and that subsequently need to be applied to the case at issue, on the other. Moreover, by replacing the national authorities in the interpretation of Luxembourg law, the Commission infringes the competence of the Member States in the field of direct taxation.

(147) According to Luxembourg, given that its tax administration did not exercise discretion in the case of FFT, the Commission failed to prove that the contested tax ruling derogated from normal administrative practice. Luxembourg explains that its administrative action is based on the principles of legality and equality, thereby ensuring the same treatment for all taxpayers whose situations are essentially the same. Luxembourg contends that the Opening Decision is only examined in the light of the OECD TP Guidelines and not in the light of Luxembourg's administrative practice.

4.2. Comments from Luxembourg on substantive errors in the Opening Decision

(148) As a general matter, Luxembourg claims that the Commission committed a substantive error by taking as the reference system against which to find a selective advantage the arm's length principle as enshrined in the OECD TP Guidelines and not national law and practice.

(149) In addition, Luxembourg claims the Commission to have misinterpreted the OECD TP Guidelines. At paragraph 65 of the Opening Decision, the Commission seems to establish a hierarchy of transfer pricing methods when it argues that the use of direct methods, namely the CUP, is preferable to the use of indirect methods, such as the TNMM. The Commission thereby disregards the fact that since 2010 the OECD TP Guidelines no longer consider a hierarchy of methods consistent with current requirements and practice. In reference to paragraph 1.13 of the OECD TP Guidelines, Luxembourg indicates that the OECD TP Guidelines acknowledge that ‘transfer pricing is not an exact science’ and ‘that the choice of methodology for establishing arm's length transfer pricing will often not be unambiguously clear’. Given that FFT's tax advisor considered the choice of the TNMM as justified and applied Article 164 L.I.R., the Luxembourg tax administration merely confirmed that that analysis was legally correct.

(150) According to Luxembourg, the Commission recognises that the interpretation and application of the arm's length principle varies from one tax administration to another and between tax administrations and business (60), so it cannot, on the one hand, allow different interpretations and applications of the arm's length principle and, on the other hand, take the view that there is only one correct method that Luxembourg should have applied when using the arm's length principle.

(151) Furthermore, Luxembourg criticises the Commission for not applying the relevant national law provision, namely Article 164(3) L.I.R. and the resulting administrative practice, to the case at hand, but instead taking as a reference only the OECD TP Guidelines. In doing so, it decides on the calculation method it considers most appropriate whereas Luxembourg law precisely does not provide for the use of specific transfer pricing methods. The Commission therefore entirely disregards Luxembourg's legal framework and administrative practice in this area. In addition, for the purposes of the selectivity analysis, the Commission does not provide a comparison between the tax treatment of FFT and that of other companies in a similar legal and factual situation in Luxembourg.

(152) As regards the Commission's doubts expressed in the Opening Decision, Luxembourg criticises the Commission for focusing too much and one-sidedly on the alleged tax strategy of Fiat at group level, without considering that Fiat, being a group, may have had other reasons for setting up its structure in the manner it did.

(153) First, the Luxembourg tax authorities did certainly not agree to a ‘fixed tax base’ as alleged in recital 64 of the Opening Decision. FFT's taxable revenue depends on the amount of loans granted and the transfer pricing report only establishes a bracket in terms of basis points for the margin to be achieved.

(154) Second, with respect to the amount of equity required and the Commission's doubts in that respect, Luxembourg considers the choice of the ‘Basel II’ framework to constitute a reasonable choice, as does the choice to exclude holdings. With respect to the latter choice, Luxembourg claims that it was logical that financial holdings should be excluded from the calculations, since they have no part in an exercise that is restricted to transfer pricing on intra-group loans. Furthermore, according to the transfer pricing report, the amount used to finance the holdings is EUR 165 244 000, which is equivalent to the sale price of the holdings by FFT and hence, according Luxembourg, cannot be open to criticism. In addition, since the revenue for holdings is tax exempt under Luxembourg law, the related costs, such as interest charges, are not deductible. Finally, as holdings are paid through dividends from subsidiaries, the amount of which can vary according to the results of the subsidiaries and their reinvestment requirements, the notion of a margin to be applied to that flow of revenue makes no commercial sense.

(155) Third, Luxembourg claims that the exclusion of intra-group debts from the calculation is also justified given that FFT's debts are backed by an explicit guarantee for FFT lenders. Considering the industrial strategy, the commercial interests and the reputational risk of a possible bankruptcy, the risk of default of FFT is very low and the ‘open’ amount of EUR 93 710 000 more than sufficient to cover that risk.

(156) Fourth, Luxembourg criticises the Commission for calling into question the way in which the beta was calculated for the determination of the risk premium. Firstly, such calculations are not a purely mathematical calculation and different results can be justified, so that the results arrive at in the transfer pricing report are entirely justifiable and sound. Secondly, even assuming that the Commission arrived at different results, it still has to be examined whether that places FFT at an advantage compared with other undertakings established in Luxembourg. Thirdly, even under an alternative assessment, where the risk premium calculated for FFT is compared with the payment made to shareholders of the quoted company giving a percentage of 3,5-4 % which is considerably lower than the 6,05 % risk premium calculated for FFT, the comparison shows that the risk premium of 6,05 % is entirely justifiable and fully complies with the requirements of Article 164 L.I.R.

(157) Finally, Luxembourg claims that given that the tax ruling practice in Luxembourg has been explicitly confirmed by the Code of Conduct Group (Business Taxation) to be consistent with the OECD Code of Conduct and Guidelines, the principle of legitimate expectations means that FFT should be able to rely on the tax ruling of 3 September 2012 for its full period of validity, namely 5 years.

5. COMMENTS FROM INTERESTED PARTIES

(158) FFT sent its comments to the Opening Decision on 30 October 2014. The comments arrived in two separate documents.

5.1. FFT's first set of comments

(159) FFT's first set of comments is divided in two parts. Part one sets out why FFT believes that the Commission misapplied the OECD transfer pricing principles to the FFT APA. Part two describes why the Opening Decision fails to meet the required legal standard to establish selectivity under Article 107(1) of the TFEU.

5.1.1. Misapplication of the OECD principles

(160) First, contrary to the assertion of the Commission in the Opening Decision, FFT submits that there was no agreement with the Luxembourg tax administration on a fixed taxable income. The agreement related only to a method to remunerate the treasury functions performed by FFT and, each year following 2011, FFT has updated all of the parameters used to estimate its capital at risk and return on equity to calculate its target profit. Moreover, the FFT APA is only valid for a period of 5 years, provided the facts and circumstances on which the APA is based do not change, which is a period of validity consistent with the ruling practice in other Member States.

(161) Second, there is nothing objectionable to the fact that FFT's tax advisor chose the TNMM, given that no internal comparables to the transactions carried out by FFT exist that could be used for applying a CUP method. That is because (i) FFT does not grant loans to third parties; and (ii) Fiat group companies do not receive similar loans from third parties. FFT refers to paragraph 2.2 of the OECD TP Guidelines according to which the method selection should always aim at finding the most appropriate method. FFT further refers to paragraph 2.4 of the OECD TP Guidelines, according to which there are situations where transactional profit methods are found to be more appropriate than traditional transaction methods.

(162) According to FFT, if the tax advisor had used the pricing of its bonds in the application of the CUP method to set the transfer prices applied to the loans to the group companies, FFT would have incurred losses, because it would not have recovered the cost of the liquidity to cover any financial needs of the group. FFT constitutes a less complex entity with respect to the other group companies whose margins may be tested with the TNMM. This method is used with increasing frequency in transfer pricing analyses and the 2010 OECD TP Guidelines do not provide for a hierarchy between methods.

(163) Additionally, according to FFT, equity often may be the result of historical decisions linked to the operations of a company and may not have a direct link with the level of equity necessary to sustain the risks of the company's activity.

(164) Finally, FFT notes that the OECD TP Guidelines acknowledge that transfer pricing is not an exact science. It refers to paragraph 1.13 of the OECD TP Guidelines in this respect, more precisely, to the following consideration: ‘It is important not to lose sight of the objective to find a reasonable estimate of an arm's length outcome based on reliable information. It should also be recalled at this point that transfer pricing is not an exact science but does require the exercise of judgment on the part of both the tax administration and taxpayer’. FFT indicates that they have nevertheless used their best efforts to estimate an arm's length remuneration for their activities.

(165) Third, as regards the adequacy of FFT's equity, FFT has to evidence that its equity is sufficient to support the risks it assumes in respect of its financing activity. No specific guidance is given by the Circular to determine the appropriate level of equity at risk and, therefore, FFT decided to analyse its equity to ascertain what proportion of capital was necessary to perform its activities and to bear its risks by making reference to the Basel II framework. Also the Circular compares companies performing intermediary financing activities with independent financial institutions. The Circular also requires taxpayers performing intra-group financing transactions to have sufficient equity to support their financing risks from such transactions. To the contrary, holding activities are not considered for the purpose of the FFT APA which is why it was justified to exclude FFT's shareholdings from its equity at risk. Besides, the amount of equity equivalent to the investment in FFT's subsidiaries has been excluded since it reflects non-portfolio investments in affiliates that are remunerated through dividends. However, dividends are not subject to transfer pricing analyses as they do not entail any consideration of the significance of the functions performed or of the risks borne. Such deduction is also consistent with the Basel II framework (61) and Article 57 of Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions (the Capital Requirement Directive, hereinafter: ‘CRD III’) (62).

(166) Fourth, with respect to the Commission's analysis of the treatment of intra-group receivables and the fact that the FFT APA disregards all assets other than third party assets, FFT submits that the group credit rating is already incorporated in the group cost of funding sourced by FFT. As FFT and all associated group companies have a credit rating equivalent to Fiat SpA (63), there is no additional credit risk to FFT from lending to its associated group companies. Therefore, the interest rate charged by FFT to its associated group companies is set as the sum of the (i) group cost of funding; plus: (ii) the guarantee fees which it pays to Fiat SpA; (iii) the operational costs it incurs to be able to provide its own services to its affiliates; (iv) the ‘negative carry’ which arises because significant sums borrowed by FFT have to be kept on short-term deposit, at lower rates of interest, to meet group liquidity needs at short notice; and (v) the capital remuneration for risks incurred, which are consistent with the functions assumed by FFT in the management of the group treasury.

(167) Fifth, according to FFT, it was justified to use the 6 % coefficient applied to its risk-weighted assets (hereinafter ‘RWAs’) as it corresponds to FFT's understanding of the Basel II framework transposed to non-bank financial institutions in certain EU jurisdictions (for instance, Italy) by local regulatory authorities in accordance with the CRD. Moreover, since the asset exposure of FFT to third parties consists mainly of bank deposits, the 20 % risk weighting was applied consistently with the Standardised Approach of the Basel II framework (64). Similarly, as regards the 15 % risk weighting applied for operational risk, FFTs refers the Commission to the Basic Indicator Approach, where, according to Paragraph 649 of the Basel II framework, such a coefficient should be applied. Similarly, under the same Basic Indicator Approach, the gross income is to be computed as the net interest income plus net non-interest income gross of any provision, or operating expenses, but excluding exceptional profits. Given that FFT has no non-interest income, the reference to creditor interest accrued on bank deposits, net of the debtor interest accrued on bank loans, is justified as the best approximation of the operational risk of FFT. As regards any possible change of the regulatory framework, FFT submits that also under the Basel III framework (65) and Directive 2013/36/EU (66) of the European Parliament and of the Council (‘CRD IV’) on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, the relevant criteria are still valid.

(168) Sixth, as regards the Commission's doubt on the beta used, FFT submits that even when excluding certain comparables (such as national banks), the arm's length range stays almost exactly the same. Since FFT acts as a treasury company and cannot be assimilated to a bank, betas of financing companies are considered by FFT and [the tax advisor] to be the most appropriate comparable. Moreover, the Circular makes a clear reference to financial service providers. On that basis, it is reasonable to consider a set of companies active in the financial services industry to determine an appropriate beta. With respect to the adoption of the 25th percentile of the arm's length range, this is in line with the OECD TP Guidelines that consider that all points within the arm's length range provide for arm's length prices/profits. In addition, FFT is considered to bear limited risks as it works exclusively for group companies, group activities are very integrated and the parent company has every interest to support the activities of its affiliates.

(169) Seventh, FFT does not concur with the Commission's doubt that the 0,87 % return on equity is too low. The excess capital, i.e. the capital that is not necessary to cover the risks assumed by FFT on its financing activity, is either on-lent in case another group company needs additional funding or used to fund operating expenses incurred by FFT while rendering financial services. As such, it should be remunerated in line with short-term liquidity investments.

5.1.2. The Commission's selectivity analysis

(170) FFT submits that even if the Commission's analysis of the compliance with the arm's length principle was correct, the Opening Decision provides no evidence of FFT being treated more advantageously than any other Luxembourg taxpayer in a comparable legal and factual situation to FFT. The Opening Decision does not contain any comparison of the position of FFT with other Luxembourg taxpayers, such as the 21 other taxpayers whose APAs have been reviewed by the Commission.

(171) FFT was entitled to an APA from the Luxembourg tax administration, like any other Luxembourg taxpayer having a real presence in Luxembourg.

(172) Moreover, given that the aggregate Luxembourg corporate income tax rate for FFT was 28,8 % (for the financial year 2011), while in Italy the headline corporate tax rate is approximately 33 %, a higher profit earned by FFT would have resulted in higher deductible costs in Italy, since the majority of the FFT loans are to Fiat Finance SpA. Hence, it is not clear what kind of ‘aid’ the group as a whole therefore obtained if FFT reported a lower profit in Luxembourg and hence was entitled to lower interest deductions in Italy.

5.2. FFT's second set of comments

5.2.1. The APA does not confer an ‘advantage’

(173) FFT's second set comments start off by explaining the importance of APAs in general and their acceptance both as a part of the general tax system, as well as their endorsement by the Luxembourg tax system. The FFT APA follows the guidance contained in the Circular and does not depart from the Luxembourg general tax system. The 5-year duration of the FFT APA is in line with the standard length of APAs concluded in other Member States.

(174) Luxembourg transfer pricing rules, which are the basis on which the Circular has been issued, are part of the general tax system, as they apply between related group companies engaged in the carrying out of intercompany transactions. Luxembourg transfer pricing rules do not derogate from the general tax system, as they respect in practice the OECD TP Guidelines and are aimed at identifying an arm's length profit.

(175) As regards the doubt of the Commission expressed in the Opening Decision on the choice of the transfer pricing methodology, FFT submits that the TNMM is a generally accepted OECD approved methodology that is consistent with the general tax system in Luxembourg. The wide use of the TNMM has been acknowledged by the Commission, as well as the fact that its application can raise complexities (67). There is a lack of guidance on certain detailed aspects, but the Commission claims the right to resolve controversial transfer pricing issues based on its own view as to how the TNMM should be applied in this case. In addition, FFT's tax profit is aligned with the statutory profit which further confirms that the use of the TNMM did not provide any economic advantage to FFT.

(176) According to FFT, tax authorities should be allowed a certain margin of appreciation when applying the TNMM, which, as far as the determination of the taxable profit is concerned, never leads to one single outcome, but to the identification of a range of valid results. Accordingly, the difference between the taxable income obtained by FFT (and accepted by the Luxembourg tax authorities) and the alleged taxable income according to the Commission should not be considered an advantage for State aid purposes. Such an advantage only arises where the measure amounts to a flagrant departure from standard transfer pricing rules and goes beyond the margin of appreciation of the tax administration (68). Otherwise, the Commission would interfere with the taxing powers of a Member State.

(177) Finally, when assessing whether an advantage exists, FFT alleges that the Commission should have considered the overall ‘group’ effect. To that effect, no advantage exists for the Fiat group because any increase of the taxable base in Luxembourg is offset in full by an increased tax deduction in other European countries (in the latest years mainly in Italy). According to FFT, this effect has been recognised in a number of Commission decisions (69).

5.2.2. Lack of selectivity

(178) According to FFT, the reference system to assess selectivity can only include companies being subject to transfer pricing rules, i.e. dealing exclusively with related parties. This is recognised in the Commission decision on Groepsrentebox, (70) which states with respect to debt financing activities that related companies are not in a legal and factual situation comparable to that of unrelated companies. Thus, to demonstrate selectivity, the Commission would have to prove that FFT obtained an APA under conditions which are different from those of other Luxembourg group entities engaged in financing activities. However, the Circular explains that APAs are available to all finance group companies. Therefore, there is no selectivity.

(179) The Commission generally accepts tax rulings as a means to provide taxpayers with legal certainty and predictability vis-à-vis their tax position. Tax rulings issued by the Luxembourg tax administration are not discretionary, since they follow the principles of the Circular, which specifically refers to the arm's length principle as defined in Article 9 of the OECD Model Tax Convention and provides guidance and clarifications with regard to the minimum equity requirements and transfer pricing analysis that a Luxembourg company performing an intra-group financing activity has to meet. Thus, the margin of appreciation of the Luxembourg tax administration, if any, is limited by the guidance offered in the Circular. In addition, this limited margin of appreciation left to the tax administration is inherent to the application of the OECD TP Guidelines. This, in itself, cannot trigger the presence of State aid. Furthermore, FFT submits that the FFT APA is subject to periodical review with a maximum period of validity of 5 years.

(180) FFT further argues that the Commission has not demonstrated that the application of the TNMM method in the FFT APA diverges from other rulings concluded by companies in situations comparable to FFT. According to FFT, there is no doubt that a comparable undertaking in a similar situation to FFT would have been able to request a ruling and to determine its taxable profits on the basis of the TNMM. Since FFT and comparable undertakings are subject to the same tax regime, it also becomes immaterial to establish whether the transfer pricing methodology applied to FFT was compliant with the OECD TP Guidelines (which it was in any event).

5.2.3. FFT's factual situation differs substantially from the decisions on Coordination Centres

(181) According to FFT, the Opening Decision illustrates a number of noteworthy differences vis-à-vis previous decisions in which the Commission challenged the application of a transfer pricing methodology (namely cost-plus) as being the tax measure that gave rise to the selective advantage (71). In those decisions, the regime was available only to those taxpayers that met certain requirements, whereas in the Opening Decision the Commission challenges solely the application of the TNMM, i.e. the specific determination of the taxable profits, in the context of an APA procedure available to all Luxembourg taxpayers engaged in related party financing.

(182) Moreover, in those decisions the income determined under the cost-plus method could depart substantially from the statutory profit, which is not the case for FFT, whose income determined under the TNMM methodology is in line with the accounting result of the company itself. Similarly, the application of the transfer pricing methodology in the earlier decisions was manifestly not in line with OECD TP Guidelines. In the present case, there is no breach of the OECD TP Guidelines. However, unlike the decisions on coordination centres, there is also no clear transfer pricing guidance in the OECD TP Guidelines about some of the activities performed by FFT (such as the performance of financial and treasury activities).

(183) FFT further alleges that the Commission also did not consider that the FFT APA was based on an economic study in line with the OECD TP Guidelines which shows that the profit determination was not arbitrary and that the Luxembourg tax authorities did not exercise any discretion.

6. COMMENTS FROM LUXEMBOURG ON THIRD PARTY COMMENTS

(184) By letter of 5 January 2015, Luxembourg expressed its complete agreement to the observations of Fiat.

7. ASSESSMENT OF THE CONTESTED MEASURE

7.1. Existence of aid

(185) According to Article 107(1) of the TFEU, 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 shall be incompatible with the internal market, in so far as it affects trade between Member States.

(186) According to settled case-law, for a measure to be categorised as aid within the meaning of Article 107(1) of the TFEU, all the conditions set out in that provision must be fulfilled (72). It is thus well-established that, for a measure to be categorised as State aid within the meaning of that provision, there must, first, be an intervention by the State or through State resources; second, the 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 (73).

(187) As regards the first condition for a finding of aid, the contested ruling was issued by the ‘Administration des contributions directes’, which is part of the tax administration of the Grand Duchy of Luxembourg. That ruling entails an acceptance by the Luxembourg tax administration of a method of profit allocation to FFT within the Fiat group, proposed by the latter's tax advisor, which binds that tax administration for a period of 5 years, on the basis of which FFT determines its corporate income tax liability to Lux