The EU Commission has adopted a decision that Amazon’s tax benefits in Luxembourg are illegal under EU State aid rules. A tax ruling granted by Luxembourg has reduced Amazon’s tax bill for more than eight years, between 2006 and 2014. Amazon now has to repay tax benefits worth around 250 million euros, plus interest.
Two companies were involved
The decision concerns the tax treatment of two Amazon group companies in Luxembourg, under a Luxembourg tax ruling.
The first one is an operating company called “Amazon EU”. It had over 500 employees and ran Amazon’s European retail business. Its staff selected the goods for sale, bought them from manufacturers, and managed the online sale and the delivery of products to the customer.
The second company is its direct parent “Amazon Europe Holding Technologies”. This company is a holding company with no employees, no offices, and no business activities.
There is an important difference between the two companies – the operating company pays taxes in Luxembourg, the holding company doesn’t because of its legal form – a limited partnership. Profits recorded by the limited partnership are only taxed at the level of the partners and not at the level of the partnership itself. The holding company’s partners were located in the US and have so far deferred their tax liability. This is allowed under Luxembourg’s general tax laws.
Under the structure set up by Amazon, the operating company recorded profits from all Amazon sales in the EU. If you buy something online on any of the websites Amazon operates in Europe, you buy it from this company in Luxembourg. The operating company used certain intellectual property – or IP – to run Amazon’s European retail business. This included software, trademark and brand names.
This IP was developed by Amazon in the US. It was licensed to the operating company, for its exclusive use in Europe, via the holding company. The holding company essentially served as an intermediary between Amazon in the US, which developed the IP, and the operating company, which used the IP. The holding company did not make any active use of the IP itself.
As an intermediary, the holding company received a royalty from the operating company. It passed on part of this money to Amazon in the US, as an annual contribution to the development costs of the IP under a cost-sharing agreement.
Investigation conducted by European Commission
EU State Aid investigated the method to determine the royalty paid by the operating company to the holding company. The royalty was endorsed by a tax ruling that Luxembourg issued in 2003 and prolonged in 2011.
The royalty exceeded, on average, 90% of the operating company’s profits. This was significantly (1.5 times) more than what the holding company needed to pay to Amazon in the US. It reduced the operating company’s taxable profits to a quarter of what they were in reality.
European Commission stated that Luxembourg’s selective tax treatment of Amazon is illegal under EU State aid rules. It gave Amazon a significant competitive advantage compared to other businesses.
Luxembourg must now recover about €250 million euros in unpaid tax from Amazon, plus interest. This amount covers the eight-year period during which Amazon had this structure in place. It is for the Luxembourg tax authorities to now determine the exact amount.
To be clear, the Commission investigation did not question that the holding company owned the intellectual property rights that it licensed to the operating company, nor the regular payments the holding company made to Amazon in the US to develop this intellectual property. It also did not question Luxembourg’s general tax system as such.
Who is the injured party in the case? Probably the budgets of the EU source states where Amazon made its sales. Luxembourg is just interchange station of the profits on their journey from source countries to Amazon shareholders. All profits have been declared and almost zero taxed in Luxembourg because Amazon has not created permanent establishments in source countries and thus have paid no taxes there.
EU and the member states’ tax administrations have overslept for at least 10 years because they were not able to follow the trends of the global economy and adjust the taxation systems to the new conditions. States have no taxation instruments at their disposal to reach fair taxation in the source countries. The recent Amazon case (and others such as Apple or Google) is just an attempt to reduce giant losses.