Use of OECD guidelines in EU jurisprudence


At the end of last year, the outcome of the Amazon group’s tax dispute was widely reported in the media. The judgment relates to transfer pricing issues and the possibility of invoking the OECD guidelines.

Tax benefits

EU Competition Commissioner Margrethe Vestager pointed out that Luxembourg granted Amazon illegal tax benefits. As a result, almost three quarters of Amazon’s profits were not taxed. The case began in 2014, and it wasn’t until December 14, 2023 that a CJEU ruling was finally issued, following which the Amazon group avoided paying a tax estimated at around €250 million (judgment in case C-457/21 P).

The parties to the proceedings were the European Commission, the Amazon group and the Grand Duchy of Luxembourg. In 2003, a restructuring of Amazon Group’s European operations was planned. This restructuring, which was carried out in 2006, consisted of the creation of two companies based in Luxembourg. This involved the creation, first, of Amazon Europe Holding Technologies SCS (hereafter LuxSCS), a limited partnership under Luxembourg law whose partners were U.S. companies, and second, of Amazon EU Sàrl (hereafter LuxOpCo), which, like LuxSCS, was based in Luxembourg. LuxSCS first entered into a series of agreements with Amazon group entities based in the United States regarding intellectual property rights.

In 2003, the group asked the Luxembourg tax authorities to approve the method for calculating the royalty rate that LuxOpCo was to pay to LuxSCS. Amazon received confirmation that the accounts were correct.

In 2014, the Amazon group underwent a second restructuring, and the agreement between LuxSCS and LuxOpCo ceased.

Later that year, the European Commission called on the Grand Duchy of Luxembourg to provide information on the tax rulings granted to the Amazon group.

The Commission pointed out that the 2003 transfer pricing report included a section on the selection of the most appropriate transfer pricing method for assessing the compatibility of the royalty rate with the arm’s length principle. The report examined two methods: one based on the comparable uncontrolled price method (hereafter referred to as the CUP method) and another based on the residual profit split method.

On the one hand, in accordance with the CUP method, a compliant range for the royalty rate between 10.6% and 13.6% was calculated based on a comparison with a certain contract has with a US retailer.

On the other hand, applying the residual profit split method, the 2003 transfer pricing report estimated the return associated with LuxOpCo’s routine functions in its role as the European operating company based on a mark-up on costs to be incurred by LuxOpCo.

The Commission presented the OECD’s framework on transfer pricing. In its view, transfer prices, as defined by guidelines published by the organization in: 1995, 2010 and 2017, are the prices at which a company transfers physical goods or intangible property or provides services to related companies. According to the arm’s length principle, as applied in corporate taxation, national tax administrations should only accept the transfer prices agreed between associated group companies for intra-group transactions if those prices reflect what would have been agreed in uncontrolled transactions, that is to say, transactions between independent companies negotiating under comparable circumstances on the market.

The Commission found that the functional analysis of the companies adopted by the report’s authors and ultimately by the Luxembourg tax authority was incorrect and could not result in an arm’s length outcome. On the contrary, the Luxembourg tax authority should have concluded that LuxSCS did not perform unique and valuable functions in terms of intangible assets for which it merely held the legal title. The Commission pointed out that LuxSCS’ main activities were limited to owning and developing intangible assets.

The Commission indicated that LuxSCS’s arm’s-length remuneration should have been equal to the sum of the accession and cost-sharing agreement costs incurred by it, without markup, plus all relevant costs incurred directly by LuxSCS, to which a markup of 5% should have been applied. These costs would correspond to the functions actually performed on behalf of LuxSCS. This level of remuneration corresponded to what an independent entity in a situation similar to that of LuxOpCo would be willing to pay for the rights and obligations assumed under the license agreement. Moreover, in the Commission’s view, this level of remuneration would also be sufficient to enable LuxSCS to cover its payment obligations.

Ability to refer to OECD guidelines

The Grand Duchy of Luxembourg and Amazon disputed that the 2017 version of the OECD Guidelines used by the Commission to issue the disputed decision was relevant to the present case.

The Grand Duchy of Luxembourg notably observes in its response that, at the time of the adoption of the tax ruling at issue, as well as when that decision was extended, Luxembourg law made no reference to the OECD Guidelines. They are not binding on countries that are members of that organization, but they do help clarify the relevant provisions of Luxembourg law.

It is only since 1 January 2017, namely after the adoption and extension of the tax ruling at issue, that a new article of the Law on income tax explicitly formalises the application of the arm’s length principle under Luxembourg tax law. It is therefore established that the requirement recalled by the case-law cited in the preceding paragraph was not satisfied at the time of adoption, by the member state concerned, of the measure that the Commission found to be state aid, such that that institution could not apply that principle retroactively in the decision at issue.

The Court of Justice of the European Union has decided in favor of Amazon. The group thus avoided paying a tax estimated at about 250 million euros.

Polish regulations in terms of OECD guidelines

According to Polish regulations, the OECD guidelines are not a source of universally binding law. They are only a set of practical guidelines for both tax authorities and taxpayers on transfer pricing issues. It is worth bearing this in mind when referring to them in cases before the tax authorities.

Magdalena Dymkowska
Partner, MDDP
E: [email protected]