The General Court of the European Union, the Commission’s second highest court, has ruled that Starbucks does not have to pay a €30m (£26.5m) tax bill as the Netherlands did not give the multinational favourable tax status or distort competition.

The case centred around use of the arms’ length principle with two prongs to the Commission’s argument. It disputed the level of royalties paid to a Starbucks subsidiary, Alki, which was UK based, for coffee roasting expertise, as well as arguing that Starbucks Manufacturing paid inflated prices for green coffee beans from another subsidiary in Switzerland, further reducing its tax liability.

The Commission argued that a tax ruling issued by the Dutch government in 2008 gave a selective advantage to Starbucks Manufacturing (SMBV) and slashed the company’s tax bill by €30m. This meant that Starbucks’s Dutch subsidiary only paid €600,000 in taxes.

The case was first heard in 2015 and has taken four years to get to the General Court.

The General Court ruling stated: ‘As regards the amount of the royalty paid by SMBV to Alki, according to an analysis of SMBV’s functions in relation to the royalty and an analysis of comparable roasting agreements considered by the Commission in the contested decision, the Court finds that the Commission failed to demonstrate that the level of the royalty should have been zero or that it resulted in an advantage within the meaning of the Treaty.’

The ruling also criticised the way the Commission had interpreted the arm’s length principle, which it said ‘violated the member states’ fiscal autonomy’.

In addition, the Court said that' the price of those beans was an element of SMBV’s costs that was outside the scope of the APA [advance pricing arrangement] and that, in any event, the Commission’s findings did not suffice to demonstrate the existence of an advantage within the meaning of Article 107 TFEU'.

In a statement, Starbucks said: Starbucks welcomes the decision by the European Court that makes clear Starbucks did not receive any special tax treatment from the Netherlands. Starbucks pays all of its taxes wherever they are due.’

Reacting to the Starbucks ruling, Dutch state secretary for finance Menno Snel said: ‘It is good that we now have clarity about the European Commission’s state aid case against the Netherlands concerning Starbucks. This judgment means that the Dutch Tax and Customs Administration did not treat Starbucks any differently or more favourably than other companies.

‘In the case of Starbucks, the Netherlands lodged its action in 2015 because the European Commission based its ruling that state aid had been provided on an arm’s length principle that does not exist in EU law.

‘The Netherlands argued before the General Court that this assessment must be made on the basis of national law. Our national law on this point is based on the OECD guidelines,’ adding that the General Court ‘found that no state aid has been provided because an arm’s length price was agreed in the tax ruling, as a result of which Starbucks was treated no differently than similar companies’.

Fiat Chrysler ruling

However, the court ruled that Fiat Chrysler Finance Europe must pay Luxembourg between €20m and €30m in corporate income tax related to intra-group loans for treasury and financing services to group companies across Europe. The main argument was that the financial services should be treated and taxed in the same way as banking services, and that the arrangement was 'artificial' as it created an internal market to reduce tax liability.

The Commission argued that group subsidiary Fiat Finance and Trade's (FFT) activities were comparable to those of a bank so the taxable profits should be determined in a similar way as for a bank, as a calculation of return on capital deployed by the company for its financing activities. It said that the tax ruling endorsed an artificial and extremely complex methodology that is not appropriate for the calculation of taxable profits reflecting market conditions.

It added that 'the argument of the Grand Duchy of Luxembourg that FFT was obliged, as a financing company, to have minimum capital in accordance with the Circular must be rejected as ineffective'. 

In the Fiat case, the Court upheld the Commission’s view that ‘the arrangements for the application of the transactional net margin method (TNMM) endorsed by the [Luxembourg] tax ruling at issue were incorrect and, specifically, that the whole of FFT’s capital should have been taken into account and a single rate should have been applied’.

Commission reaction

The Commission said the judgments confirm that, while member states have ‘exclusive competence in determining their laws concerning direct taxation, they must do so in respect of EU law, including state aid rules’. It also confirmed the Commission's approach to assess whether a measure is selective and if transactions between group companies give rise to an advantage under EU State aid rules based on the ‘arm's length principle’.

Commissioner Margrethe Vestager said: ‘All companies, big and small, should pay their fair share of tax. If member states give certain multinational companies tax advantages not available to their rivals, this harms fair competition in the EU.’

The General Court is currently hearing the major Apple tax case over disputed state aid relating to the IT giant's tax arrangements with Ireland. The Commission is also conducting ongoing investigations into Ikea and Nike over alleged aggressive tax planning and abuse of EU state aid.

By Sara White

Starbucks judgment, Cases T-760/15 Netherlands v Commission and T-636/16 Starbucks and Starbucks Manufacturing Emea v Commission 
Fiat judgment, Cases T-755/15 Luxembourg v Commission and T-759/15 Fiat Chrysler Finance Europe v Commission