On Monday 18 December, the European Commission decided to open an in-depth investigation into the Dutch tax schemes applicable to a subsidiary of IKEA between 2006 and 2011 and since 2012, which it believes may run counter to EU state aid rules.
Since the early 1980s, IKEA’s commercial model has been based on a franchising system. The parent company of IKEA does not therefore own the individual shops of the brand throughout the world, but these must pay a franchising licence corresponding to 3% of their annual turnover to Inter IKEA Systems, a subsidiary of Inter IKEA Group, the company responsible for managing the franchises, in the Netherlands.
As the revenue of Inter IKEA Systems is therefore taxed in line with the revenue of the IKEA shops, the Commission is looking into two Dutch tax rulings that may have significantly reduced the taxable profit of Inter IKEA Systems since 2006, in contravention of EU State aid rules, particularly following the publication of a report by the Greens/EFA group on 12 February 2016 (see EUROPE 11489).
2006 tax ruling. Between 2006 and 2011, the Dutch authorities approved a method to calculate an annual licence fee which Inter IKEA SYSTEMS was required to pay to I.I. Holding, a company based in Luxembourg, which sold the required intellectual property rights to the Dutch subsidiary to enable it to apply the franchising system. This fee represented a significant proportion of the profits of Inter IKEA SYSTEMS, which were therefore transferred to I.I. Holding and did not attract corporate taxation in Luxembourg.
This Luxembourg regime was ruled illegal by a Commission decision on 19 July 2006 (see EUROPE 9236) and the authorities of the Grand Duchy were ordered to repeal it fully by 31 December 2010. However, they were not ordered to recover the amounts in question under a Luxembourg law that predated the treaties.
Although the Luxembourg section of the case is closed, the Commission will investigate the Dutch one, specifically the Dutch tax ruling. In particular, it will attempt to assess whether it reflects the economic reality of the IKEA group and whether the level of the annual licence fee actually reflects the contribution of Inter IKEA Systems to the franchising activity. If this were not the case, the tax ruling would have allowed Inter IKEA Systems to benefit from undue tax advantages that were not available to other companies on the single market.
2011 tax ruling. Following the Commission’s 2006 decision, IKEA Systems changed its structure and in 2011, purchased the intellectual property rights previously held by I.I. Holding, through an inter-company loan granted by its parent company in Liechtenstein. The Dutch authorities then adopted a second tax ruling approving the price paid for the acquisition of the intellectual property rights, the interest to be paid to the parent company in Liechtenstein under the inter-company loan and the tax deduction of these interest payments from the taxable profit of IKEA Systems.
Here, the Commission will look at whether the acquisition price of the intellectual property rights faithfully reflects the contribution made by Inter IKEA Systems to the value of the franchising activity and whether this price corresponds to the interest rates deducted from its tax base in the Netherlands. If the price and interest prove to be excessive, this would mean that the tax deduction was also excessive and would automatically constitute an undue advantage with regard to EU state aid rules.
As the investigation has only just been launched, there are no indications concerning the amounts in question.
IKEA prepared to cooperate. The IKEA group reacted to the decision to open this in-depth investigation by stressing that it pays its taxes “in accordance with laws and regulations” in force in the countries in which it operates. The company went on to stress that it is prepared to cooperate and answer the questions of the Dutch authorities and the Commission. (Original version in French by Lucas Tripoteau)