EC opens in-depth investigation into tax treatment of Nike in the Netherlands

On 10 January 2019, the European Commission ("EC") announced that it is to open an in-depth investigation into five tax rulings granted by the Netherlands to Nike between 2006 and 2015. The EC has concerns that these rulings may have granted Nike a selective tax advantage, in breach of EU State aid rules.

The formal investigation focuses on two Nike group entities based in the Netherlands, Nike European Operations Netherlands BV ("Nike Operations BV") and Converse Netherlands BV ("Converse BV"). Both operating companies are engaged in developing, marketing and exploiting Nike and Converse products throughout Europe and the EMEA region.

Nike Operations BV and Converse BV entered into a licence agreement with two Dutch tax-transparent partnerships, providing both operating companies the right to use Nike and Converse intellectual property ("IP") in exchange for a (tax-deductible) royalty payment. The concerns raised by the EC primarily focus on the method endorsed by the Netherlands to calculate the level of royalties to be paid by Nike Operations BV and Converse BV for the use of the IP rights. Both companies report an operating margin on sales in the Netherlands that, according to the Dutch tax authorities, reflects their functions performed, assets employed and risks assumed, while excess profit is paid as a residual royalty to the licence owners.

The EC has concerns that the level of royalty payments may not reflect economic reality. In this regard, the EC indicates that Nike Operations BV and Converse BV have more than 1,000 employees involved in developing, managing and exploiting Nike and Converse IP, while the recipients of the royalties are tax-transparent entities that have no employees and do not carry out any economic activities. Also, the EC refers to the fact that Nike Operations BV is actively advertising and promoting Nike products in the EMEA region. As such, the EC has doubts about the profit allocation within the Nike group, which – in the view of the EC – is not in line with the substance of the respective entities.

Since June 2013, the EC has been investigating various tax rulings granted to taxpayers by Member States. For example, similarly to the Nike investigation, the EC also challenged the level of licence fees paid in the Starbucks, IKEA and Amazon State aid cases. The Amazon case, for example, shows many similarities with the announced Nike investigation, in which the EC argued that Amazon's tax ruling enabled the company to shift the vast majority of its profits from its Luxembourg operating company to a Luxembourg partnership which was not subject to tax, through royalty payments for the use of certain intangibles (technology, software, marketing and customer data).

It is surprising that the EC has again decided to investigate a tax ruling which involves a large US multinational, especially in view of the new anti-hybrid rules (ATAD 2) that will enter into force from 1 January 2020, the new US tax legislation which has affected similar structures since 1 January 2018 and, moreover, the proposed changes to the Dutch ruling practice that will begin on 1 July 2019.

However, the opening of an investigation by the EC does not prejudge the outcome of the investigation. The EC will adopt a final decision at the end of the formal investigation.

Click here to read the press release by the EC.