State Aid & Transfer Pricing

A closer look at the General Court's dismissal of Nike's appeal against the European Commission's decision to open the formal State aid investigation procedure
19 July 2021
19 July 2021

The European Commission can continue its investigation into the alleged State aid granted by the Netherlands to Nike in the form of several tax rulings.

On 14 July 2021, the General Court (the "Court") dismissed the appeal of Nike European Operations Netherlands BV ("NEON") and Converse Netherlands BV ("CN"), part of the Nike Group ("Nike"), against the European Commission's ("Commission") decision to initiate a formal investigation into the alleged State aid granted by the Netherlands to Nike in the form of tax rulings (the "Contested Decision") in Case T-648/19. The Court concluded that the Commission had sufficiently motivated its decision and did not infringe upon Nike's procedural rights nor did it infringe its obligation to state reasons.

The Contested Decision

The Contested Decision concerns the opening of the Commission's formal investigation into alleged State aid provided by the Netherlands to NEON and CN. The Commission's aim is to determine whether the Netherlands provided unlawful State aid to NEON and CN by granting five advance pricing agreements in 2006, 2010, and 2015 (the "APAs" or the "tax rulings"). These tax rulings endorse the transactional net margin method ("TNMM") to determine the royalties NEON and CN must pay in return for the use of intellectual property ("IP") held by two other Dutch Nike group entities. These two entities are classified as transparent for Dutch corporate income tax ("CIT") purposes, meaning that they are not liable to pay CIT in the Netherlands. As a result, the royalties paid by NEON and CN reduce the Nike Group's Dutch taxable base.

As in the previous Starbucks, Apple and Amazon cases, the Commission disputed both (i) the applied transfer pricing method's appropriateness, i.e. the TNMM, and (ii) how the transfer pricing method was applied, as endorsed by the tax rulings. Firstly, the Commission argued that Nike should have assessed whether the comparable uncontrolled price method could have been applied instead of the TNMM. However, with no comparable transactions available, the Commission argued that the profit split method would still have been more appropriate for the case at hand than the TNMM. Secondly, the Commission contested Nike's functional analysis and, subsequently, the tested parties (i.e. NEON and CN) that were chosen for the purpose of applying the TNMM. Thirdly, the Commission also argued that the profit level indicator based on NEON and CN's total revenue resulted in artificially high royalties. Instead, the Commission believes that only the income generated by the licence agreements should have been considered. All in all, the Commission's preliminary view is that all the aforementioned alleged errors led to higher royalties than what could be considered to be in line with the arm's length principle.

Hence, the Commission provisionally concluded that the endorsement of the Dutch transfer pricing arrangements in the contested APAs have reduced Nike's CIT liability in the Netherlands when compared to other corporate taxpayers in a similar position. The Commission thus opened the formal investigation to further determine whether the tax-deductible royalty paid for these licences confers a selective advantage to Nike.

The Court's judgment

In essence, Nike argued to annul the Contested Decision because the Commission had not properly investigated whether the tax rulings form part of an aid scheme, before concluding the serious difficulties in determining the aid. However, the Court concluded that the Commission's preliminary assessment of the alleged aid satisfied the procedural requirements warranting a formal investigation.

The standard of review
The Court refers to settled case law on the basis of which the standard of review must be limited to avoid giving a substantive judgment on issues the Commission has not yet decided upon in the formal investigation. The review of a decision's legality to initiate the formal investigation is limited to verifying whether the Commission has made a manifest error of assessment in forming the view that it was unable to resolve all the difficulties on that point during its initial examination of the measure concerned.

The selectivity of the tax rulings
The Court holds that the Commission did not err in law by preliminary finding that the tax rulings concern an individual measure. With respect to tax rulings, the Court reiterates that the finding of selectivity and an economic advantage are closely interlinked. The fact that tax rulings are inherently individual in nature implicates that the finding of an economic advantage is in itself sufficient to support a presumption of selectivity, irrespective of whether there are operators in the relevant market(s) which are in a comparable factual and legal situation.

NEON and CN ("Applicants") contended that the Commission has not properly assessed the existence of a selective advantage because the tax rulings form part of an aid scheme, requiring the Commission to determine if an advantage to the 'exclusive benefit' of certain undertakings or certain sectors of activity exists. Allegedly, this requirement would not be fulfilled because the contested tax measure (i.e. an APA) is more commonly used in the Netherlands. The Applicants assert that an APA is mainly declaratory in nature and, therefore, cannot change the tax situation of a taxpayer since that situation follows from Dutch tax law, i.e. Article 8b(1) of the Dutch CIT Act (Wet op de vennootschapsbelasting 1969). The Applicants believe this provision cannot be considered to result in a selective tax reduction without first comparing its application to other companies.

The Court holds that the contested decision does not properly motivate whether the tax ruling is based on an aid scheme. However, this does not affect the validity of the Commission's provisional finding of a selective advantage, since Nike or the Netherlands can still put forward the existence of an aid scheme in the formal investigation. Moreover, the Court holds that Commission has neither breached the principles of good administration and equal treatment, nor has it prematurely initiated the formal investigation by not assessing whether the tax ruling is part of an aid scheme at this stage of the investigation.


This is the first time the Court has reviewed a decision to open the formal investigation in a tax ruling case. Such a decision is a challengeable act as it is liable to entail independent legal effects (see Case T‑251/13, points 29-31). Since the APAs continue to influence Nike's annual taxable base, the APAs are considered as a measure during implementation. The legal implications of the provisional qualification as unlawful aid on Nike's position are therefore not contested.

However, the provisional nature of the decision to open the formal investigation makes it difficult to successfully challenge the findings. Considering the Commission's margin of discretion regarding the existence of serious difficulties in the State aid assessment requiring the opening of the formal investigation, the Court's 'manifest error' test will not easily annul the Contested Decision. Moreover, given the procedural rights of interested third parties in the formal investigation, the Court's assessment is more strict in cases where the Commission does not open a formal investigation (see e.g. Case T-47/19).

The Court's judgments in the Starbucks, Apple and Amazon cases show that the bar is much higher for the review of the final Commission decision that will be taken after the formal investigation. Nike's current defeat is therefore also provisional in nature, as the Commission's final decision – should that be negative – could still be overturned by the Court. As the Commission's approach in challenging the tax rulings granted to Nike is highly similar to the aforementioned State aid cases, it will be interesting to see whether it will implement the lessons learned from the Apple and Amazon cases by, for instance, focusing on a robust functional analysis and justifying the profit split method.
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Transfer Pricing | Counsel
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Greetje van Heezik

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