RSS   Newsletter   Contact   Advertise with us

EC finds Luxembourg gave illegal tax benefits to Engie

Share on Twitter Share on LinkedIn
Staff Writer |
Engie
Europe   Luxembourg has to recover around €120 million

The European Commission has found that Luxembourg allowed two Engie group companies to avoid paying taxes on almost all their profits for about a decade.


This is illegal under EU State aid rules because it gives Engie an undue advantage. Luxembourg must now recover about €120 million in unpaid tax.

Following an in-depth investigation launched in September 2016, the Commission concluded that two sets of tax rulings issued by Luxembourg have artificially lowered Engie's tax burden in Luxembourg for about a decade, without any valid justification.

In 2008 and 2010, respectively, Engie implemented two complex intra-group financing structures for two Engie group companies in Luxembourg, Engie LNG Supply and Engie Treasury Management.

These involved a triangular transaction between Engie LNG Supply and Engie Treasury Management, respectively, and two other Engie group companies in Luxembourg.

The Commission concluded that Luxembourg's tax treatment of these financing structures did not reflect economic reality.

Tax rulings issued by Luxembourg endorsed an inconsistent treatment of the same transaction both as debt and as equity.

On this basis, the Commission concluded that the tax rulings granted a selective economic advantage to Engie by allowing the group to pay less tax than other companies subject to the same national tax rules.

In fact, the rulings enabled Engie to avoid paying any tax on 99% of the profits generated by Engie LNG Supply and Engie Treasury Management in Luxembourg.

The Commission decision concerns Luxembourg's tax treatment of the profits made by two companies in the Engie group, namely Engie LNG Supply (whichbuys, sells and trades liquefied natural gas and related products in Luxembourg) and Engie Treasury Management (which manages internal financing within the Engie group).

Both are Luxembourg-incorporated companies that are fully-owned by the Engie group and ultimately controlled by Engie S.A. in France.

In 2008, Engie put in place a complex hybrid convertible loan structure between three Engie group companies. This triangular structure financed Engie LNG Supply's acquisition of Engie's existing gas trading business in Luxembourg.

In particular:

- The financing was provided by Engie LNG Holding to Engie LNG Supply via an intermediary.

- Engie LNG Supply treated this transaction as a debt: it made significant deductions from its taxable profits, as if it owed interest under a loan. These deductions accounted for 99% of Engie LNG Supply's profits.

- However, no payments were actually made to the intermediary or Engie LNG Holding.

- Instead, these profits were parked in Engie LNG Supply until Engie decided to convert the loan.

At that moment, the intermediary received these parked profits in the form of shares, which they would th

n pass on to Engie LNG Holding. Engie LNG Holding then cancelled these shares to receive in cash the profits made by Engie LNG Supply.

This structure enabled the treatment of the same financing both as debt (from the perspective of Engie LNG Supply) and as an investment in return for shares (from the perspective of Engie LNG Holding). As a result, LNG Supply only paid taxes on about 1% of its profits.

The remaining 99% were not taxed neither at the level of LNG Supply nor at the level of Engie LNG Holding, which received these profits in the form of shares.

Income from shares is exempted from taxation under standard Luxembourg tax law (as it is in many other countries).

In other words, for about a decade, Engie's effective tax rate on these profits in Luxembourg was less than 0.3%. This structure was endorsed by Luxembourg under a tax ruling granted in 2008 (which was amended a number of times).

In 2010, Engie put in place the same structure between Engie Treasury Management and Compagnie Européenne de Financement (C.E.F). This was also endorsed by Luxembourg under a separate tax ruling.

The role of EU State aid control is to ensure that Member States do not give selected companies a better tax treatment than others, via tax rulings or otherwise.

The Commission's State aid investigation concluded that the Luxembourg tax rulings gave Engie a significant competitive advantage in Luxembourg. It does not call into question the general tax regime of Luxembourg.

In particular, the Commission found that the tax rulings endorsed an inconsistent tax treatment of the same structure leading to non-taxation at all levels.

Engie LNG Supply and Engie Treasury Management each significantly reduce their taxable profits in Luxembourg by deducting expenses similar to interest payments for a loan.

At the same time, Engie LNG Holding and C.E.F. avoid paying any tax because Luxembourg tax rules exempt income from equity investments from taxation.

This is a more favourable treatment than under the standard Luxembourg tax rules, which exempt from taxation income received by a shareholder from its subsidiary, provided that income is in general taxed at the level of the subsidiary.

On this basis, the Commission concluded that the tax rulings issued by Luxembourg gave a selective advantage to the Engie group which could not be justified.

Therefore, the Commission decision found that Luxembourg's tax treatment of Engie endorsed by the tax rulings is illegal under EU State aid rules.


What to read next
POST Online Media Contact