EC publishes non-confidential state aid decision on Amazon

16 March 2018

On February 26, 2018, the European Commission (“EC”) published the non-confidential version of its decision concluding that Luxembourg granted undue tax benefits to Amazon in the amount of approximately EUR 250 million.

Following an in-depth investigation launched by the EC in 2014, the EC concluded in its final decision of October 4, 2017 that a tax ruling issued by Luxembourg in 2003 and prolonged in 2011 lowered the corporate income tax paid by Amazon in Luxembourg without any valid justification.

According to the EC, the tax ruling enabled Amazon to shift the vast majority of its profits from its Luxembourg operating company (“OpCo”) to a Luxembourg partnership (“SCS”) which was not subject to tax, through royalty payments for the use of certain intangibles (technology, software, marketing and customer data). The Luxembourg tax authorities confirmed that the level of royalty payments was at arm’s length and in line with transfer pricing rules.


SCS is the EU holding entity of the Amazon group. It owns certain intellectual property (“IP”) rights for Europe under a cost-sharing agreement (“CSA”) with Amazon in the US. Under this CSA, SCS makes buy-in payments to the US, contributing to the costs of developing the IP. OpCo on the other hand operates Amazon’s retail business throughout Europe. With over 500 employees, it is responsible for selecting, purchasing and delivering goods and managing online sales. In a recent US tax court case, the level of buy-in payments made by SCS to the US was challenged by the IRS, however without success.

According to the EC, SCS did not perform any functions, assume risks or employ assets in relation to Amazon’s EU business and the development of the IP. Although Amazon is of the opinion that the intangibles were in fact developed in the US, the EC allocates the important functions, risks and assets related to the non-US IP to OpCo. On this basis, the EC concludes that the amount of royalty payments from OpCo to SCS were inflated and did not reflect economic reality.


Pursuant to Amazon’s transfer pricing report, both the (residual) profit split and comparable uncontrolled price (“CUP”) were analyzed to determine the arm’s length level of royalty payments under the license agreement between OpCo and SCS.

Remarkably, the EC rejects the transfer pricing methodology applied by Amazon, stating that the transactional net margin method (“TNMM”) should have been applied in determining the amount of royalty payments. Both the OECD and the EC (see for example its decision in the Starbucks state aid case) however typically consider the CUP method as the preferred method. According to the EC, SCS should have been considered the ‘tested party’ whilst applying the TNMM, since SCS performs less functions and makes less complex contributions related to the IP than OpCo.

Based on its own TNMM analysis, the EC asserts that an arm’s length remuneration for SCS should equal the sum of the CSA buy-in payments and costs incurred by SCS, without a mark-up, in relation to the intangibles (i.e., costs to develop and maintain the intangibles), and in addition a small mark-up of 5 percent on its related expenses, “to the extent that those costs may be considered to reflect actual functions performed by SCS”. Such remuneration, according to the EC, fits the economic reality of the controlled transaction.

It is noteworthy in this regard that the EC frequently refers to the updated 2017 OECD transfer pricing guidelines prompted by its BEPS action plan, while reviewing the Amazon transfer pricing methodology. By doing so, the EC is in fact applying the new guidelines with retroactive effect to the Amazon ruling concluded in 2003 and 2011.


Although the approach taken by the EC in the Amazon State aid case is somewhat questionable, its decision once more shows the importance of a robust transfer pricing file to minimize the said risk related to transfer pricing agreements with local tax authorities. Given that the EC explicitly refers to the updated 2017 OECD transfer pricing guidelines, it is key for taxpayers to comply with these new guidelines going forward.

The Amazon decision is the latest in a number of state aid cases initiated by the EC. Since June 2013, the EC has been investigating various tax rulings, in particular relating to transfer pricing agreements, granted to taxpayers by Member States. The EC recently announced that it is to open an in-depth investigation into tax rulings granted by the Netherlands to IKEA in 2006 and 2011. Our news update on the IKEA investigation can be found here.

For the full text of the non-confidential version Amazon decision by the EC, click here.

Written by:
Sylvia Dikmans

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Rob Havenga

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