#FactOfTheDay 19/12/2017: The European Commission opens new State aid investigation on Dutch tax regime
On Monday, 18th December, the European Commission opened an in-depth investigation into the Dutch tax regime which has been applied to the company Ikea between 2006 and 2011. There are indeed some suspicions that this might be a new State aid case which allowed Ikea – more precisely Inter Ikea Systems, one of the two main subsidiaries of Inter Ikea group – to pay less taxes in the Netherlands and therefore in the European Union, giving it an unfair advantage compared to other companies. This new case is once again being led by the now famous European Commissioner in charge of competition, Margrethe Vestager, who is at the basis of several other State aid cases involving giant multinational corporations such as Google, Facebook or Amazon.
Since the early 1980s, Ikea’s business model has in fact been based on a franchise system, a strategy which makes each Ikea store its own individual business, independent from the main Ikea headquarters. The Ikea’s parent company is therefore not the owner of the brand’s individual stores worldwide, which must pay a franchise license fee which is equal to 3% of their annual turnovers to Inter Ikea Systems, which is located in the Netherlands. The income of Inter Ikea Systems that are being taxed by the Dutch authorities thus corresponds to the collected incomes from Ikea stores that pay the fee. In this context, the Commission is enquiring about two Dutch tax rulings that could have significantly reduced the taxable profits of Inter Ikea Systems since 2006, in contradiction with the EU rules on state aid.
Indeed, in 2006, a Dutch tax ruling permitted Inter Ikea Systems – Ikea’s Dutch subsidiary – to pay a fee which made up most of its profits to another company owned by Inter Ikea group, called I.I. Holding, which is based in Luxembourg. This has been allowed because I.I. Holding was holding the intellectual property rights for the franchise system used by Inter Ikea Systems. The consequence of this was that Inter Ikea Systems was ‘transferring’ a huge part of its profits by paying the fee to Luxembourg, through the other company I.I. Holding, where the profits remained untaxed. This represents a breach to EU State aid rules, which justifies the Commission’s investigation into this case.
Commissioner Vestager explained this new attempt to break down tax optimisation strategies used by companies by saying that: “ »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. »
For further information:
EU Commission: http://europa.eu/rapid/press-release_IP-17-5343_en.htm
New York Times: https://www.nytimes.com/2017/12/18/business/ikea-tax-eu.html