The European Commission recently published its decision to initiate a State aid investigation into Dutch tax rulings relating to Nike. The Nike case focuses on EMEA structures (including well-known CV/BV structures) where Dutch group companies with substance pay significant tax-deductible royalties to non-taxed IP holding entities without substance. 

The Commission challenges the transfer pricing analysis used for the rulings, but does not address certain "technical aspects" of the relevant structures including the hybrid treatment of the IP owners resulting in the double non-taxation of the royalties. It takes the view that, in the absence of employees or activities, the IP owners should be considered as “bare legal owners” – so that royalty payments to them are not justified – and that other functions carried out outside of the Netherlands (such as in the US) are not relevant for these purposes because the relevant US group companies are not party to the “tested” licence agreements. The effect of the latter could be that, in the Commission's view, the Netherlands is required to tax profits that are “undertaxed” by the US based on Dutch transfer pricing standards.

The Commission argues that this amounts to State aid - because the “ruling profits” are below the taxable profits determined based on a normal application of Dutch tax law - and that rulings by their very nature are individual and therefore the aid is deemed selective. Alternatively, the Commission argues that the aid is selective as a factual matter on the basis of a comparison with a reference group comprising all Dutch taxpayers (group companies and "stand-alone" entities), but also if the comparison would be based on a reference group comprising group companies only. 

The Dutch tax authorities have entered into similar Advance Pricing Agreements with many taxpayers that have used similar structures to those in the Nike case. If the Commission’s initial position in the Nike case is confirmed in its final decision (and ultimately upheld by the EU courts) will the Netherlands be under an obligation, and will it actually take action, to recover State aid from those taxpayers as well?  

Please see here for our full explanation of the Commission’s Nike decision and its potential impact.