On July 14, the European Court of Justice (ECJ) dismissed an action by Nike to annul a 2019 tax ruling by the European Commission (Commission) to investigate whether advance pricing agreements (APAs) between the Dutch tax authorities and Nike constituted unlawful state aid. The Nike case was brought as part of the EU’s attempt to rescind the beneficial tax deals that EU countries struck with multinational companies such as Apple, Fiat Chrysler and Amazon.
Fact pattern of the Nike case
In 2019, the Commission launched a formal investigation into the tax treatment granted by the Dutch tax authorities to Nike European Operations Netherlands BV (NEON) and Converse Netherlands BV (CN) in 2006, 2010 and 2015.
In 2006, 2010 and 2015, Nike Inc. (Nike US) structured its European operations through NEON and CN, both Netherlands-based operating subsidiaries, to shift profits to Nike Europe Holding BV (NEH). NEH is a holding company owned by Nike US with no employees, offices or business activities.
NEON and CN, both Netherlands-based operating subsidiaries of NEH, operated as the respective distributors of Nike and Converse products in Europe, the Middle East and the Africa (EMEA) region. Under the 2006, 2010 and 2015 APAs, NEON and CN obtained intellectual property (IP) rights related to Nike and Converse products, respectively, in the EMEA region. Under these APAs, the holding company could grant an exclusive license to both NEON and CN in exchange receive annual tax-deductible royalty payments in return.
Asserting that the payment was calculated based on a lower annual profit than it would have been if their intra-group transactions had been priced at arm's length for tax purposes, the Commission argued that the agreements by the Dutch tax authorities gave NEON and CN a selective tax advantage. Specifically, the EU stated that the royalties owed by each entity did not correspond with the amount that would have been negotiated under market conditions for a comparable transaction between independent companies.
In response, Nike and Converse asked the ECJ to annul the Commission's decision to open the investigation. Nike argued that the investigation is a breach of the obligation to state reasons, contained manifest errors of assessment and was non-compliance with relevant procedural laws.
The European Court of Justice ruling:
In its judgment, the ECJ dismissed the action for annulment brought against the Commission by Nike. The ECJ upheld the arguments of the Commission, which found that NEON and CN have more than 1,000 employees and are involved in the development, management and exploitation of the IP. For example, NEON actively advertises and promotes Nike products in the EMEA region and bears its own costs for the associated marketing and sales activities. The Commission argued that, in contrast, the royalty recipients are Nike group entities that have no employees and do not carry out any economic activity.
The ECJ's ruling indicates that the Commission did not violate procedural rights and that it has the authority to launch a formal investigation into the presence of state aid without conducting a preliminary probe. This ruling will facilitate other investigations by the EU into state aid cases in the future. Taxpayers who have received beneficial tax rulings from EU should consider whether those rulings are well supported by relevant transfer pricing and economic substance principles in preparation for a potential investigation.