2003/501/EC: Commission Decision of 16 October 2002 on the State aid scheme C 49/2001 (ex NN 46/2000) — Coordination Centres — implemented by Luxembourg (Text with EEA relevance) (notified under document number C(2002) 3740)
Date: 2002-10-16
Institutions: European Commission
Subjects: Luxembourg, State aid, business management, control of State aid, corporation tax, multinational enterprise, tax system

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COMMISSION

COMMISSION DECISION

of 16 October 2002

on the State aid scheme C 49/2001 (ex NN 46/2000) — Coordination Centres — implemented by
Luxembourg

(notified under document number C(2002) 3740)

(Only the French text is authentic)

(Text with EEA relevance)

(2003/501/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Com-
munity, and in particular the first subparagraph of Article
88(2) thereof,

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

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

Whereas:

I PROCEDURE

(1)

In 1997 the Ecofin Council adopted a code of conduct
on direct business taxation with a view to putting a stop
to unfair practices in this area (2). Further to the under-
taking contained in the code, the Commission in 1998
published a notice on the application of the State aid
rules to measures relating to direct business taxation (3)
(hereinafter referred to as ‘the notice’), in which it reaf-
firmed its determination to apply those rules rigorously
and in accordance with the principle of equality of treat-
ment. This procedure is covered by that notice.

(2)

By letter of 12 February 1999 (D/50716), the Commis-
sion asked Luxembourg for information concerning the
Luxembourg scheme for coordination centres. By letter

(1) OJ C 304, 30.10.2001, p. 10.
(2) OJ C 2, 6.1.1998, p. 1.
(3) OJ C 384, 10.12.1998, p. 3.

of 26 March 1999 (A/32604), the Luxembourg authori-
ties informed the Commission that the scheme had been
withdrawn on 20 February 1996.

(3)

(4)

(5)

By letter of 25 April 2000 (D/51738), the Commission
asked for further information in view of the fact that,
although it had been withdrawn, the scheme might have
produced effects and/or still be producing effects. The
information was supplied to the Commission by letter
from the Luxembourg authorities dated 10 May 2000
(A/34012).

By letter SG (2001) D/289761 of 11 July 2001, the
Commission informed Luxembourg that it had decided
to initiate the formal investigation procedure laid down
in Article 88(2) of the EC Treaty in respect of the tax
scheme for coordination centres. By letter of 14
September 2001 (A/37236), Luxembourg submitted its
comments concerning the Commission's decision.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Commu-
nities (4). The Commission invited interested parties to
submit their comments on the measure. It received no
comments from interested parties.

(6)

By letter of 25 March 2002 (D/51316), the Commission
asked Luxembourg for further information, which was
provided by letter of 17 April 2002 (A/32897).

(4) See footnote 1.

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II DESCRIPTION OF THE MEASURE

(7)

(8)

(9)

(10)

The status of coordination centres
is governed by
Circular LIR No 119 of 12 June 1989 (hereinafter
referred to as ‘Circular 119’ or
‘the Circular’). The
Circular was repealed by Circular LIR No 1119 of 20
February 1996. A total of five companies were approved
as coordination centres, of which four became opera-
tional.

A coordination centre is a resident limited company
which is multinational
in nature and has as its sole
purpose the provision of services exclusively to compa-
nies or enterprises in the same foreign international
group. Within the meaning of the Circular, a foreign
international group refers to companies that are finan-
cially linked and incorporated in at least two countries
other than Luxembourg and whose parent company is
not a resident taxpayer and is subject in another country
to a tax corresponding to Luxembourg corporation tax
(impôt sur le revenu des collectivités).

Coordination-centre status was granted by prior adminis-
trative approval. Approval was, in principle, limited to
four tax years.

The administrative services provided by coordination
centres to other companies within the group are as
follows:

— organisational and secretariat services,

— advertising,

— marketing and market research,

— the supply, gathering and processing of technical or

administrative information,

— relations with national or international authorities,

— centralisation of accounting, administrative/financial,
IT and legal expertise services, and provision of assis-
tance and services directly and indirectly relating to
the activities in question.

(11)

The Circular states that, for corporation tax purposes,
the provision of intra-group services must generate an
appropriate trading profit in line with the normal beha-
viour of a prudent manager in his relations with inde-
pendent third parties. To that end, taxable profit is deter-
mined according to the cost-plus pricing method. This
method involves applying a flat-rate mark-up to all
deductible expenditure linked to the services provided to
other companies within the group.

(12) However,

if expenditure and charges to be taken into
consideration do not exceed LUF 30 000 000 (approxi-
mately EUR 750 000), the trading profit is fixed at a flat
rate of LUF 1 500 000 (approximately EUR 37 500).

(13)

If the coordination centre pursues activities involving the
payment of invoices in different currencies, the trading
profit
is not determined according to the cost-plus
pricing method but on the basis of an appropriate
consideration generally payable under conditions of full

competition for the exchange risk borne by a third party.
The consideration must be at least equal to 1 % of all
invoices to be taken into account and must be in
proportion to the exchange risk.

(14) Operations covered by the activities authorised by the
Circular and carried out through the intermediary of a
permanent establishment in Luxembourg of a foreign
international group or by a resident company, other
than a coordination centre, forming part of a foreign
international group may also qualify for this method of
calculating taxable profit.

(15)

(16)

(17)

(18)

III GROUNDS FOR INITIATING THE PROCEDURE

In its evaluation of the information supplied by the
Luxembourg authorities,
the Commission examined
whether the method of determining the mark-up rate,
the exclusion of certain expenditure from the calculation
of the tax base and the exercise of possible discretionary
power by the administration might confer an advantage
on coordination centres. It also took the view that such
an advantage might have been granted from State
resources, might affect competition and trade between
Member States, and might be selective. Finally, it felt that
none of the exceptions to the general principle that State
aid is prohibited seemed to be applicable. These doubts
led the Commission to initiate the formal investigation
procedure in this case.

IV COMMENTS FROM LUXEMBOURG

The comments submitted by the Luxembourg authorities
may be summarised as follows.

Since the scheme had been withdrawn, it was no longer
producing any effects other than in respect of enterprises
to which the provisions of Circular 119 applied up to
the end of 2001. The Luxembourg authorities also
pointed to the problems posed by transfer prices (5) and
defended the solution adopted. Finally,
they did not
consider the measure as constituting aid within the
meaning of Article 87 of the Treaty.

Transfer prices

for

The links which exist between two enterprises within a
particular group enable them (at least in theory) to deter-
mine conditions
supplying goods and services
between them which differ from those which would
have applied if the two parties had acted as independent
enterprises operating on free markets. Enterprises may
thus be tempted to allocate their profits within the
group in such a way as to minimise the total tax burden
on the group as a whole. In the case of multinational
groups, allocating profits in this way often results in the
tax base being increased in one country and reduced in
another. This explains the concern of governments to
ensure that transfer prices within a group are as close as
possible to market prices.

(5) Transfer prices are the prices at which a company invoices goods or

services to associated companies.

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(19) Within the OECD, to which the Member States belong,
the principle of full competition was adopted to elimi-
nate the impact of special conditions on the level of
profits. This principle, set out in Article 9 of the OECD
Model Tax Convention, serves a dual objective: to ensure
that tax is correctly assigned to each country and, as far
as possible, to avoid double taxation.
It also enables
multinational enterprises and independent enterprises to
be treated as equally as possible. The methods used to
determine transfer prices include the ‘comparable prices
on the free market’ method and the cost-plus pricing
method.

(20)

(21)

Referring to the need to prevent tax avoidance and to
the principle of full competition, the Luxembourg autho-
rities point out
the Law of 4
that Article 164 of
December 1967 on income tax constitutes the legislative
basis for transfer prices.
that
Circular 119 was adopted to facilitate the taxation of
certain types of activity. The Luxembourg administration
normally tries to compare prices charged within the
same group with prices charged for comparable transac-
tions between independent enterprises. This
is not
always possible, however, because the relevant compara-
tive data are not available.

It was in this context

Consequently, the Luxembourg administration opted in
this case for the cost-plus pricing method with a view to
determining transfer prices for the intra-group services
provided by coordination centres. On the basis of a
uniform method such as that recommended by the
OECD, the minimum threshold of 5 %, a rate compar-
able to that which can be obtained on the free market,
was deemed reasonable for this type of services. Never-
theless, a higher rate could always be applied if the tax
administration received information indicating that a
higher profit margin had been achieved.

Circular 119 did not involve State aid within the meaning of
Article 87 of the Treaty

The measure must give rise to an advantage

(22)

The measure did not set out to lighten the tax burden
normally borne by coordination centres but solely to
determine as accurately as possible a market price for
intra-group services by applying the cost-plus pricing
method. Luxembourg points out that, in paragraph 13
of its notice, the Commission stressed that tax measures
of a purely technical nature, such as provisions to
prevent double taxation or tax avoidance, do not consti-
tute State aid. Given that Circular 119 was a general
measure designed to prevent
tax avoidance and to
produce an appropriate and fair trading profit for coor-
dination centres, it did not constitute State aid.

EUR 37 500) were such as to ensure a sufficient volume
of activity in Luxembourg. Otherwise, profits would
have been so insignificant from a tax point of view that
the application of Circular 119 would not have been
justified.

Circular 119 required the parent company to be subject
abroad to a tax corresponding to Luxembourg corpora-
tion tax. In this way, transferring excessive deductible
tax to a foreign country seems to have been ruled out. If
it considered the Luxembourg tax arrangements to be
too favourable, the foreign country in which the parent
company of the coordination centre originated could
either refuse to apply the provisions of
the ‘parent
company-subsidiary’ Directive (6) in respect of distribu-
tions of dividends by the Luxembourg coordination
centre or apply measures to prevent tax avoidance.

Luxembourg notes that the Commission is merely ques-
tioning the way in which the principle of full competi-
tion is complied with, claiming that this objective is not
being met under the scheme and asserting that, where
the authorities have some margin of discretion, this is
liable to favour certain enterprises or groups.

The Luxembourg authorities consider that the Commis-
sion is criticising two aspects of the advantage enjoyed
by coordination centres: on the one hand, the practical
application of the cost-plus pricing method as compared
with the use of the transfer prices actually paid and, on
the other, the fact that non-deductible expenditure is not
included in the tax base.

(24)

(25)

(26)

(27) As far as the first aspect

is concerned, Luxembourg
it was only where the transfer prices
stresses that
charged by the enterprise were higher
than those
resulting from the application of the cost-plus pricing
method that the use of that method could have led to an
advantage for the enterprise as a result of a smaller tax
base being applied to it. The Luxembourg authorities
admit that Circular 119 did not contain any explicit
reference to the principle of linking the tax balance sheet
to the commercial balance sheet and that they could not
the possibility that a taxpayer might have
rule out
sought to take advantage of this loophole in order to
overcharge in Luxembourg for services performed for
other companies in the group. Nevertheless, Luxem-
bourg considers that third countries had the means to
check whether such overcharging was taking place.
Should the Commission conclude that the application of
Circular 119 in such cases constituted unlawful State aid
and demand its recovery,
the enterprises concerned
would have to be identified and an individual calculation
made for each enterprise on the basis of the real transfer
prices.

(23)

The requirement that coordination centres belong to a
large international group and the imposition of a
minimum profit of LUF 1 500 000 (approximately

(6) Council Directive 90/435/EEC of 23 July 1990 on the common
system of taxation applicable in the case of parent companies and
subsidiaries of different Member States (OJ L 225, 20.8.1990, p. 6).

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(28)

that

the Commission
Luxembourg would point out
accepts the use of methods such as the cost-plus pricing
method and that there would not be any advantage if
using such alternative methods resulted in taxation equal
or at least comparable to that which could have been
arrived at between two independent operators applying
the traditional method whereby taxable profit is calcu-
lated on the basis of the difference between the enter-
prise's income and charges. According to Luxembourg,
the Commission considers that an advantage should be
deemed to exist where the result of applying the cost-
plus pricing method is not sufficiently comparable to
that which would have been obtained by means of the
traditional method. However,
the Commission is not
concerned with the extent of any such advantage, and
Luxembourg considers that the cost-plus pricing method
does not in any case give rise to any advantage to the
point where the taxable income would no longer be
comparable to that which could have been obtained
between two independent operators by means of the
traditional method.

(29) As for the second aspect, Luxembourg considers that the
Commission seems to be claiming that, by not including
in the tax base expenditure which is not deductible
pursuant to Article 168 of the Law on corporation tax,
an advantage might be conferred on coordination
centres. However, the Luxembourg authorities consider
such exclusions to be justified. As regards the exemption
of dividends from corporation tax and wealth tax, they
note that dividends are allocations based on the trading
result and are not genuine expenditure, and so the ques-
tion of their deductibility does not arise. As for bonuses,
attendance fees and donations to cultural, charitable or
general-interest
their exclusion from the
basis for determining cost-plus prices can be explained
by the need to avoid double taxation. Bonuses are an
allocation from reserves formed on the basis of the net
result.

institutions,

(30)

Luxembourg takes the view that all of these non-deduc-
tible expenses are already added to the coordination
centre's tax result. In other words, they form in any case
part of the tax base. If they had been included in the
basis for determining cost-plus prices, they would have
been taxed twice. Luxembourg also points out
that
Circular 119 is applied in its entirety and must therefore
confer an advantage in its entirety without
it being
possible to single out any one of its aspects.

The advantage must be granted from State resources

(31)

if any advantage was
Luxembourg acknowledges that,
conferred by Circular 119, it came from State resources.

The measure must be selective

(32) As for the alleged selectivity stemming from the applica-
tion of a discretionary practice, the Luxembourg authori-
ties confirm that the administration does not have any

discretion to grant or refuse application of the scheme
for coordination centres. On the contrary, although such
selectivity results from a legislative or administrative
exception to the tax provisions, they assert that the State
aid rules have never been applied to a situation compar-
able to this case. The Commission has not cited any
precedent.

(33)

Luxembourg points out that, in point 20 of the notice,
the Commission explains that some tax benefits are on
occasion restricted to certain types of undertaking, to
some of their functions or to the production of certain
goods and may therefore constitute State aid. However,
Luxembourg indicates that there is no example of a deci-
sion or judgment of the Court of Justice of the European
Communities in which a measure has been deemed to
be selective because it applied only to some types of
undertaking or to some of their functions.

(34) According to Luxembourg, the specificity criterion is not
met because Circular 119 stems from the normal appli-
cation of the Luxembourg tax rules. The Circular applies
to all international groups of a sufficient size and forms
part of efforts to combat abnormally low transfer prices.
The only conditions imposed relate to the size of the
group and to its establishments in several countries.
Such limitations are necessary in order to guarantee that
serious operations are managed from Luxembourg in a
volume which is sufficient to give rise to difficulties in
enterprises
transfer prices of
determining the
concerned. The principles to be applied in determining
the taxable result of a coordination centre, as proposed
in the Circular, are based on the rules for transfer prices
set out by the OECD, which are general in scope and
applicable to all
taxpayers encountering intra-group
invoicing. The Circular does not involve the application
of a lower tax rate to coordination centres but, at most,
lays down how the tax base is to be calculated, taking
account of the specific characteristics of multinational
companies. It is therefore a tax measure of a purely tech-
nical nature, which, according to the Commission, does
not constitute State aid.

the

(35)

If, because of a loophole in the wording, the Circular
had been used to obtain lower taxation, it would be an
abusive extension of the concept of State aid to consider
the exploitation of a loophole by a taxpayer as aid.

(36) As an ancillary argument, Luxembourg takes the view
that, even if the arrangements for coordination centres
were considered by the Commission to be a derogation
from the normal arrangements, they are justified by the
nature and general scheme of the system. The Luxem-
bourg authorities wanted to reconcile the principle of
legal certainty with that of full competition. For the
reasons outlined above, they chose the cost-plus pricing
method in order to give the taxpayers concerned a point
of reference by laying down a minimum threshold for
declaring profits earned on internal operations.

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The measure distorts competition and affects trade
between Member States

(37)

Since the rules on transfer prices are designed to prevent
disguised transfers of profits abroad by means of inap-
propriate invoicing methods, Circular 119 was addressed
to international groups. The aim was not to permit an
overall reduction of taxable profits within international
groups but
tax avoidance. Therefore,
the Circular cannot be
according to Luxembourg,
considered to confer an advantage which improves the
competitive position of the enterprises making up such
groups within the common market.

to prevent

The principle of legitimate expectations

(38)

In Luxembourg's view, the taxpayers to which Circular
119 was applicable had legitimate expectations which
militate against the repayment of any State aid resulting
from application of the Circular. There is no precedent
for applying the State aid rules to the choice of methods
for calculating the tax base. Applying them in this way
would involve a radical and unforeseeable extension of
the current scope of Article 88 of the Treaty.

(39) Moreover, the Commission considered at the time that
rules governing the taxation of European headquarters
of multinational groups did not fall within the scope of
the Treaty's provisions on State aid (7). Likewise,
the
Commission had not raised any objection concerning
the taxation of coordination centres in Belgium. Conse-
quently,
for
believing that the Circular was legal.

Luxembourg had legitimate

grounds

(40) Moreover, until publication of

the notice in 1998,
Community policy on State aid was unclear. Recovery
could at most extend to the advantages obtained after
the date on which the notice was published.

finds itself in this case. A figure cannot be put on the
amount of the aid because it would not be possible to
establish the real transfer prices which should have been
charged by coordination centres or to envisage using
any other of the methods described by the OECD.

V ASSESSMENT OF THE MEASURE

(43) After considering the comments

initiating the formal

submitted by the
Luxembourg authorities, the Commission would confirm
its initial position as set out in its letter to Luxembourg
of 11 July 2001 (8)
investigation
procedure laid down in Article 88(2) of the Treaty. It
takes the view that the comments submitted by Luxem-
bourg have not enabled the doubts it expressed in that
letter to be dispelled and, consequently, that the tax
scheme under review constitutes State aid within the
it
meaning of Article 87(1) of the Treaty. Moreover,
deems the aid in question to be illegal and to constitute
operating aid which cannot be declared compatible with
the common market. Nevertheless, it considers that, in
this case, Luxembourg and the recipient enterprises were
justified in having legitimate expectations and that the
aid need not therefore be recovered.

(44)

To begin with, the Commission is able to accept Luxem-
bourg's comments concerning the problems posed by
transfer prices in an international context. There is
nothing to prevent
tax administrations from using a
cost-plus pricing method to determine the tax base for
intra-group services provided by coordination centres.
This system can be likened to a tax measure of a tech-
nical nature, as referred to in the second indent of para-
graph 13 of the notice. Nevertheless, some of the rules
for applying the method in this case suggest that the
possible granting of aid cannot be ruled out.

(45)

In order to be regarded as aid within the meaning of
Article 87(1) of the Treaty, a measure must meet all of
the four criteria set out below.

(41)

(42)

The principle of non-retroactivity of tax laws

(46)

Luxembourg takes the view that a request for recovery
of the alleged aid would be tantamount to a retroactive
amendment of the ordinary tax rules that would run
counter to the basic constitutional principle of non-
retroactivity of tax laws. The Commission cannot reason-
ably impose recovery where aid results from a general
tax scheme contested after the event by the Commission.

Impossibility of recovering the alleged aid

Luxembourg considers that there is consistent case law
to the effect
impossible to
recover illegal aid, a Member State may not be required
to recover it. This is the situation in which Luxembourg

that, where it

is in fact

Advantage

Firstly, the measure must confer on recipients an advan-
tage which relieves them of charges that are normally
borne from their budgets. The objective of using alterna-
tive methods of determining taxable income in order to
prevent certain transactions from hiding undue advan-
tages or donations with the sole purpose of avoiding
taxation must normally be to achieve taxation compar-
able to that which could have been arrived at between
independent operators on the basis of the traditional
method, whereby the taxable profit is calculated on the
basis of the difference between the enterprise's income
and charges. This complies with the principle of full
competition. In the area of transfer prices, this interna-
tional principle is set out in Article 9 of the OECD
Model Tax Convention (and, in more detail, in the 1995
OECD Transfer Pricing Guidelines). Since an analysis
requires individual facts and circumstances to be taken
into account, the OECD Guidelines do not recommend
the use of ‘safe harbours’ (such as fixed margins).

(7) Written question No 1735/90 (OJ C 63, 11.3.1991, p. 37).

(8) See footnote 1.

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(47)

(48)

The Luxembourg authorities have not provided any
information on how the mark-ups used to establish the
tax base for coordination centres under the cost-plus
pricing method are determined in practice. While the
Commission can accept the argument that the adminis-
tration did not have any discretionary power to grant or
refuse the application of the scheme for coordination
centres,
it is clear from the answers given by Luxem-
bourg that the administration did have such power when
it came to determining the mark-ups to be applied.
Circular 119 fixed a minimum mark-up of 5 %. Never-
theless, it did not lay down any rules or guidelines on
how to determine mark-ups in practice.
the
Luxembourg authorities expressly indicated that only the
5 % mark-up recommended in the Circular was applied.
The Commission thus concludes
coordination
centres and the groups to which they belong were able
to derive an advantage by dint of the fact that, in prac-
tice, Luxembourg systematically granted the minimum
rate of 5 % without checking whether it corresponded to
the economic reality of the underlying services. It tran-
spires that the Luxembourg authorities failed, at least in
some cases, to ensure that coordination centres were
subject to taxation comparable to that which generally
applied to enterprises liable for tax in Luxembourg.

Indeed,

that

It is irrelevant that Circular 119 required the parent
company to be subject abroad to a tax corresponding to
Luxembourg corporation tax or that the foreign country
in which the parent company originated could apply
measures to prevent tax avoidance because these aspects
do not demonstrate that the Luxembourg scheme for
coordination centres did not confer any advantage or
that any advantage which might have been conferred
would have been justified. The conduct of other Member
States, and in particular the possibility that they might
take account of the advantage conferred by a Member
States in an attempt to reduce or cancel its effects, does
not in any way detract from the reality of that advan-
tage. In any case, the method applied by Luxembourg in
taxing cross-border intra-group services, which is based
on cost-plus pricing, might not tally with the method
used in other Member States whereby the taxable profit
is calculated on the basis of the difference between the
enterprise's income and charges. If this is the case, there
is a risk that overcharging might give rise to a reduction
in the tax burden in another Member State which would
not be offset by an increase in the tax burden in Luxem-
bourg. In this case, the advantage obtained in Luxem-
bourg would come on top of the advantage obtained in
another Member State and would not be in any way
offset.

(49) As for Luxembourg's claim that Circular 119 did not
contain any explicit reference to the principle of linking
the tax balance sheet to the commercial balance sheet,
the Commission has no criticism to make. It should be
noted that,
intra-group
in the case of cross-border
services,
it is not necessary to compare the cost-plus
pricing system with real transfer prices but to ensure
that the system results in taxation which is comparable
to what would have been obtained by means of the

traditional method. The extent of the advantage derived
from the system need not be determined at this stage of
the analysis but only for the purposes of recovering the
aid, if this proves necessary: the Commission notes that
the 5 % minimum mark-up was systematically applied in
this case. Luxembourg has not provided any indication
of the existence of checks to ensure that the application
of the minimum rate tallied with the level of taxation
which would have resulted from the application of the
traditional method. Consequently, the Commission takes
the view that the conduct of the tax administration had
the effect of conferring an advantage.

(50) With regard to the claim that non-deductible expendi-
ture is not included in the base to which the mark-up
rate is applied under the cost-plus pricing method, the
Commission is able to accept some of the arguments put
forward by Luxembourg. The logic behind this clearly
stems from a comparison with the traditional method of
taxation. Tax does not form part of genuine business
expenditure but is a payment based on its trading result.
The exclusion of donations seems to follow the same
logic in that they do not represent genuine business
costs. In other words, such non-deductible expenditure is
not likely to contribute to the realisation of a taxable
result. Since the existence of an advantage has been
established as a result of the systematic application of a
5 % rate, it is not necessary to determine whether the
same considerations apply to bonuses and attendance
fees since they represent distributions of net profits.

(51)

(52)

Competition and trade between Member States are
affected

This criterion is met in that coordination centres were
supposed to provide services predominantly to compa-
nies situated outside Luxembourg. Moreover,
in accor-
dance with the case law of the Court of Justice (9) and as
stressed in paragraph 11 of the notice, the mere fact that
a measure strengthens a firm's position compared with
firms competing in intra-Community trade is
other
enough for it
trade has been
to be concluded that
affected. In this particular case, coordination centres or
enterprises in the groups to which they belong might
have found their position to have been strengthened as a
result of
their centre in
Luxembourg. Assuming this to be the case, and taking
account of the possibility that the groups in question are
active in sectors characterised by the existence of trade
between Member States, the Commission takes the view
that the measure is liable to affect such trade.

the reduced tax burden of

Even if, as the Luxembourg authorities claim, the main
objective of Circular 119 was not to allow an overall
to prevent
reduction in taxable profit but
disguised transfers,
assessed
according to its effects and not according to its objec-
tives. As consistently confirmed by case law (10),
the
objective pursued by the scheme in question cannot
prevent it from being classified as State aid within the
meaning of Article 87(1) of the Treaty.

a measure must be

rather

(9) Case 730/79 Philip Morris v Commission [1980] ECR 2671.
(10) Case C-75/97 Belgium v Commission [1999] ECR I-3671, paragraph

25.

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Selectivity

(53) Given that the tax provisions in question concerned only
coordination centres belonging to multinational groups
present in at least two countries other than Luxembourg
and having their headquarters outside Luxembourg, only
some enterprises had access to the advantages described
above. Moreover, as stated in point 20 of the notice,
some tax advantages are on occasion restricted to certain
functions, such as intra-group services. This also holds
for the Luxembourg scheme for coordination centres.
The criterion of selectivity is thus met.

a

is

flat

rate

trading profit

(54) Another aspect of selectivity stems from the fact that, if
the coordination centre's total expenditure does not
exceed LUF 30 000 000 (approximately EUR 750 000),
at
the
of
fixed
LUF 1 500 000 (approximately
EUR 37 500). This
implies selectivity in favour of large groups in so far as
groups which had been unable to achieve the minimum
expenditure threshold would have been excluded from
equal treatment under the cost-plus pricing method. The
the
Luxembourg authorities
requirement that coordination centres belong to a large
international group and the imposition of a minimum
profit were such as to ensure a sufficient volume of
activity in Luxembourg.

themselves admit

that

(55)

the

transfer

In particular,

The Commission considers these aspects of selectivity to
be unjustified by the nature or general scheme of the
Luxembourg tax system.
it does not
consider such limitations to be necessary to ensure that
serious operations are managed from Luxembourg in a
volume sufficient to give rise to difficulties in deter-
enterprises
prices
mining
concerned (11). The difficulties linked to the determina-
tion of transfer prices apply in principle to all services or
goods supplied between associated companies. While the
international nature of such supplies is likely to increase
those difficulties, they are faced not only by companies
belonging to a large-scale multinational group with its
headquarters outside Luxembourg. In any case, the diffi-
culties in question are not relevant since the Luxem-
bourg authorities systematically applied a 5 % rate to
calculate cost-plus prices.

the

of

(56) As regards Luxembourg's comment to the effect that
there is no precedent in the form of a Court decision or
judgment, the Commission would merely point out that
such precedents are not necessary. Classification of the
scheme for coordination centres as State aid stems
directly from Article 87(1) of the Treaty. However,
it
should be noted that, according to recent case-law, tax
measures are selective and constitute State aid where

they apply solely to undertakings which carry out invest-
ments exceeding a certain amount or create a certain
number of jobs (12). The Commission takes the view that
the same reasoning must be applied in this case.

(57) When it comes to reconciling the principle of

legal
certainty with that of full competition and providing
taxpayers with a point of reference, there is nothing to
prevent tax administrations from opting for the cost-plus
pricing formula. The Commission is not criticising the
use of that system as a means of facilitating the determi-
nation of transfer prices for transactions between asso-
ciated entities. Nevertheless,
in the case at issue, the
systematic application of the 5 % minimum rate must be
regarded as a derogation from the correct use of the
cost-plus pricing method which is
liable to have
conferred an advantage on some enterprises without
being justified by the nature or general scheme of the
system.

State resources

(58)

In this case, the reduction in the amount of tax resulting
from the application of Circular 119 involves a reduc-
tion in tax revenues, which constitute State resources.

Compatibility

(59)

(60)

(61)

(62)

The Luxembourg authorities have not challenged the
preliminary assessment of
the
scheme for coordination centres, which is set out in the
decision to initiate the formal investigation procedure (13)
and which the Commission hereby confirms. That
assessment may be summarised as follows:

the compatibility of

The derogations provided for in Article 87(2) of the
Treaty regarding aid having a social character granted to
individual consumers, aid to make good the damage
caused by natural disasters or exceptional occurrences,
and aid granted to certain regions of
the Federal
Republic of Germany are not applicable in this case.

The derogation provided for in Article 87(3)(a) regarding
aid to promote the economic development of areas
where the standard of living is abnormally low or where
there is serious underemployment is also not applicable.

Likewise, the scheme for coordination centres does not
important projects of
fall within the category of
common European interest eligible for the derogation
provided for in Article 87(3)(b) and, given that it is not
designed to promote culture and heritage conservation,
cannot qualify for the derogation provided for in Article
87(3)(d).

(12) Joined Cases T-127/99, T-129/99 and T-148/99 Territorio Histórico
de Álava - Diputación Foral de Álava and others v Commission, para-
graph 157, and Joined Cases T-92/00 and T-103/00, paragraphs
39 and 40 and 49 and 50, not yet published.

(11) See paragraph (32): argument put forward by Luxembourg.

(13) See footnote 1.

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Official Journal of the European Union

L 170/27

(63)

(64)

It should also be examined whether the scheme is
eligible for
in Article
the derogation provided for
87(3)(c), which authorises aid to facilitate the develop-
ment of certain economic activities or of certain
economic areas in cases where such aid does not
adversely affect trading conditions to an extent contrary
to the common interest. The tax advantages granted
under the scheme are not linked to investment, job crea-
tion or specific projects. They merely constitute ongoing
tax relief and must consequently be classified as oper-
ating aid. The Commission thus takes the view that the
aid in question is liable to adversely affect trading condi-
tions to an extent contrary to the common interest.

Recovery

The measures in question may not be regarded as
existing aid within the meaning of Article 88(1) of the
Treaty and Article 1(b) of Council Regulation (EC) No
659/99 of 22 March 1999 laying down detailed rules
for the application of Article 93 of the EC Treaty (14)
(now Article 88 of the EC Treaty). This is because they
were implemented after the entry into force of
the
Treaty, have never been notified to the Commission as
required by Article 88(3) of the Treaty, are not covered
by a limitation period and constituted aid from the
moment they were put into effect. They therefore consti-
tute new aid. Where State aid granted illegally is found
to be incompatible with the common market,
the
natural consequence is that the aid must be recovered
from the recipients in accordance with Article 14 of
Regulation (EC) No 659/99. The purpose of recovery is
to restore as far as possible the competitive situation
which existed before the aid was granted. Neither the
absence of precedent for applying the State aid rules to
choices concerning methods of calculating the tax base
nor the alleged lack of clarity of Community State aid
policy would justify an exemption from this basic prin-
ciple.

the relevant case law indicates

(65) As for the claim that it would be impossible to recover
the aid and the principle of the non-retroactivity of tax
laws,
that, even if
recovery of a tax credit presents difficulties from an
administrative point of view, that fact is not such as to
enable recovery to be deemed to be technically impos-
sible (15). Moreover, as consistently confirmed by case
law, a Member State may not plead provisions, practices
or circumstances existing in its internal legal system in
order to justify a failure to comply with its obligations
under Community law. In particular, a provision laying
down a time limit for the revocation of an administrative
act must, like all the relevant provisions of national law,
be applied in such a way that the recovery required by

(14) OJ L 83, 27.3.1999, p. 1.
(15) Case C-280/95 Commission v Italy [1998] ECR I-259, paragraph 23,
and Case 378/98 Commission v Belgium [2001] ECR I-5107, para-
graph 42.

Community law is not rendered practically impossible
and the interests of the Community are taken fully into
consideration (16).
the case, Member
this were not
States could escape effective monitoring of State aid by
not complying with their obligation under Article 88(3)
of the Treaty to notify in advance plans to grant aid.

If

Legitimate expectations

(66) Nevertheless, Article 14(1) of Regulation (EC) No 659/
1999 lays down that ‘the Commission shall not require
recovery of the aid if this would be contrary to a general
principle of Community law’. The case-law of the Court
in
Justice and the Commission's own practice
of
previous decisions have established that recovery would
be contrary to a general principle of Community law if,
following the Commission's action,
the recipient had
legitimate expectations that the aid was granted in accor-
dance with Community law.

(67)

In Van den Bergh and Jurgens (17), the Court stated that:

‘The Court has consistently held that any trader in
regard to whom an institution has given rise to justi-
fied hopes may rely on the principle of the protec-
tion of legitimate expectation. On the other hand, if
a prudent and discriminating trader could have fore-
seen the adoption of a Community measure likely to
affect his interests, he cannot plead that principle if
the measure is adopted.’

(68)

In Commission Decision 2001/168/ECSC of 31 October
2000 on Spain's corporation tax laws (18), the Commis-
sion noted the similarities between the Spanish system
and a French system it had approved on the basis that it
did not constitute aid within the meaning of Article
92(1) of the EEC Treaty (now Article 87(1) of the EC
Treaty). In the present case,
it notes that the Luxem-
bourg scheme for coordination centres closely resembles
the scheme introduced in Belgium by Royal Decree No
187 of 30 December 1982 on the taxation of coordina-
tion centres. Both schemes relate to intra-group activities
and use the cost-plus pricing method to determine the
tax base. In its decision of 2 May 1984, the Commission
took the view that the scheme did not involve State aid
within the meaning of Article 92(1) of the EEC Treaty.
Even though that decision was not published, the fact
that the Commission did not raise any objection to the
Belgian scheme was made public at the time in the
XIVth Report on Competition Policy and in an answer
to a Parliamentary question (19).

(16) Case C-5/89 Commission v Germany [1990] ECR I-3437, paragraphs

18 and 19.

(17) Case C-265/85 Van de Bergh and Jurgens and others v Commission

[1987] ECR 1155, paragraph 44.

(18) OJ L 60, 1.3.2001, p. 57.
(19) See footnote 7.

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Official Journal of the European Union

9.7.2003

(69)

In this connection, the Commission notes that its deci-
sion on the Belgian scheme was adopted before the entry
into force of the Luxembourg scheme. It also notes that
all the beneficiaries of the scheme were approved as
coordination centres before the Commission's decision
investigation
of 11 July 2001 to initiate the formal
procedure. It would further point out that Circular 119
was repealed on 20 February 1996 and that it has not
applied to the beneficiaries since 31 December 2001.
Consequently, the Commission accepts the arguments
put forward by Luxembourg concerning the benefici-
aries' legitimate expectations and waives recovery of the
aid granted.

the State aid found to be incompatible with the common
market. Consequently,
the aid be
recovered,

is not requiring that

it

HAS ADOPTED THIS DECISION:

Article 1

The tax scheme for coordination centres implemented by the
Grand Duchy of Luxembourg by means of Circular LIR No 119
of 12 June 1989 constitutes State aid which is incompatible
with the common market.

VI CONCLUSION

Article 2

The Community finds that the Luxembourg scheme for coordi-
nation centres constitutes State aid within the meaning of
Article 87(1) of the Treaty and that none of the derogations
provided for in Article 87(2) or (3) are applicable. It also finds
that Luxembourg unlawfully implemented the system in ques-
tion in breach of Article 88(3) of the Treaty. Nevertheless, it
notes that the system was withdrawn on 20 February 1996
and that the tax advantages granted to beneficiaries ceased on
31 December 2001. Lastly, it acknowledges that the benefici-
aries had legitimate expectations such as to rule out recovery of

This Decision is addressed to the Grand Duchy of Luxembourg.

Done at Brussels, 16 October 2002.

For the Commission

Mario MONTI

Member of the Commission