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EU Announces Challenge To IKEA's Tax Arrangements

by Ulrika Lomas, Tax-News.com, Brussels

18 December 2017


The European Commission announced on December 18 that it had decided to launch an in-depth investigation in the Netherlands' tax treatment of Inter IKEA, one of the two groups operating the IKEA business.

The Commission says it has concerns that two Dutch tax rulings may have allowed Inter IKEA to pay less tax and given the group an unfair advantage over other companies, which would be in breach of EU state aid rules.

EU Competition Commissioner Margrethe Vestager said: "All companies, big or small, multinational or not, should pay their fair share of tax. Member states cannot let selected companies pay less tax by allowing them to artificially shift their profits elsewhere. We will now carefully investigate the Netherlands' tax treatment of Inter IKEA."

In the early 1980s, the IKEA business model changed into a franchising model. Since then, it has been the Inter IKEA group that operates the franchise business of IKEA, using the "IKEA franchise concept." According to the Commission, what this means more concretely is that Inter IKEA does not own the IKEA shops; all IKEA shops worldwide pay a franchise fee of three percent of their turnover to Inter IKEA Systems, a subsidiary of Inter IKEA group in the Netherlands. In return, the IKEA shops are entitled to use inter alia the IKEA trademark, and receive know-how to operate and exploit the IKEA franchise concept.

Under such arrangements, Inter IKEA Systems in the Netherlands records all revenue from IKEA franchise fees worldwide collected from the IKEA shops. The Commission's investigation concerns the tax treatment of Inter IKEA Systems in the Netherlands since 2006. The Commission said that its preliminary inquiries indicate that two tax rulings, granted by the Dutch tax authorities in 2006 and 2011, have significantly reduced Inter IKEA Systems' taxable profits in the Netherlands.

In relation to the 2006 ruling, the Commission noted that an annual license fee was paid by Inter IKEA Systems to I.I. Holding in Luxembourg. This arrangement was endorsed by the 2006 tax ruling, and as a result, a significant part of Inter IKEA Systems' franchise profits were shifted from Inter IKEA Systems to I.I. Holding in Luxembourg, where they were untaxed, because I.I. Holding was part of a special tax scheme and consequently exempt from corporate tax in Luxembourg.

In July 2006, the Commission concluded that the Luxembourg special tax scheme was illegal under EU state aid rules, and required the scheme to be fully repealed by December 31, 2010. No illegal aid needed to be recovered from I.I. Holding because the scheme was granted under a Luxembourg law from 1929, predating the EC Treaty.

As such, this is a historical element of the case and not part of the investigation, the Commission said.

However, as a result of the Commission decision, I.I. Holding should have started paying corporate taxes in Luxembourg from 2011, the Commission noted. Instead, in 2011, Inter IKEA changed the way it was structured. As a result, the 2006 tax ruling was no longer applicable. Inter IKEA Systems bought the intellectual property rights formerly held by I.I. Holding, and, to finance this acquisition, Inter IKEA Systems received an intercompany loan from its parent company in Liechtenstein.

The Dutch authorities then issued a second tax ruling in 2011, which endorsed the price paid by Inter IKEA Systems for the acquisition of the intellectual property. It also endorsed the interest to be paid under the intercompany loan to the parent company in Liechtenstein, and the deduction of these interest payments from Inter IKEA Systems' taxable profits in the Netherlands.

As a result of the interest payments, a significant part of Inter IKEA Systems' franchise profits after 2011 was shifted to its parent in Liechtenstein.

The Commission said that it considers at this stage that the treatment endorsed in the two tax rulings may have resulted in tax benefits in favor of Inter IKEA Systems, which are not available to other companies subject to the same national taxation rules in the Netherlands.

The Commission will now investigate Inter IKEA Systems' tax treatment under both tax rulings, specifically to:

  • Assess whether the annual license fee paid by Inter IKEA Systems to I.I. Holding, endorsed in the 2006 tax ruling, reflects economic reality. In particular, it will assess if the level of the annual license fee reflects Inter IKEA Systems' contribution to the franchise business.
  • Assess whether the price Inter IKEA Systems agreed for the acquisition of the intellectual property rights and consequently the interest paid for the intercompany loan, endorsed in the 2011 tax ruling, reflects economic reality. In particular, the Commission will assess if the acquisition price adequately reflects the contribution made by Inter IKEA Systems to the value of the franchise business, and the level of interest deducted from Inter IKEA Systems' tax base in the Netherlands.

TAGS: tax | business | European Commission | Netherlands | interest | law | intellectual property | Liechtenstein | Luxembourg | fees | transfer pricing | trade | Europe | BEPS

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