The ruling follows an investigation launched in September 2016 into Luxembourg’s treatment of two complex intra-group financing structures set up by the French company Engie, formerly known as GDF Suez. These involved a triangular transaction between Engie LNG Supply and Engie Treasury Management, respectively, and two other Engie group companies in Luxembourg.

In 2008, Engie put in place a complex hybrid convertible loan structure between three Engie group companies. The financing was provided by Engie LNG Holding to Engie LNG Supply via an intermediary.

Engie LNG Supply treated this transaction as a debt and made significant deductions from its taxable profits, as if it owed interest under a loan. These deductions accounted for 99% of Engie LNG Supply's profits.

However, no payments were actually made to the intermediary or Engie LNG Holding. Instead, these profits were parked in Engie LNG Supply until Engie decided to convert the loan.

At that moment, the intermediary received these parked profits in the form of shares, which they would then pass on to Engie LNG Holding. Engie LNG Holding then cancelled these shares to receive in cash the profits made by Engie LNG Supply.

This structure enabled the treatment of the same financing both as debt (from the perspective of Engie LNG Supply) and as an investment in return for shares (from the perspective of Engie LNG Holding).

Luxembourg granted a tax ruling for this arrangement in 2008, and for a second similar arrangement with other third parties set up in 2010.

The Commission concluded that Luxembourg's tax treatment of these financing structures did not reflect economic reality and that they granted a selective economic advantage to Engie by allowing the group to pay less tax than other companies subject to the same national tax rules. It found the rulings enabled Engie to avoid paying any tax on 99% of the profits generated by Engie LNG Supply and Engie Treasury Management in Luxembourg.

Commissioner Margrethe Vestager, in charge of competition policy, said: ‘Luxembourg gave illegal tax benefits to Engie. Its tax rulings have endorsed two complex financing structures put in place by Engie that treat the same transaction in an inconsistent way, both as debt and as equity. This artificially reduced the company's tax burden.

‘As a result, Engie paid an effective corporate tax rate of 0.3% on certain profits in Luxembourg for about a decade. This selective tax treatment is illegal.’

The Commission says that in the case of LNG Supply, all income that has been transferred to Engie LNG Holding should have been taxed either as profits of Engie LNG Supply or profits of Engie LNG Holding at the standard Luxembourg corporate tax rate of around 29%. This means that Luxembourg must now recover about €120m in unpaid tax from Engie, plus interest. It is for the Luxembourg tax authorities to determine the exact amount, based on the method set out in its decision.

In the case of the second company, Engie Treasury Management, its profits have not been channelled to the third party yet. The Commission says the company will have to be taxed in line with standard Luxembourg tax rules, as soon as the loan is converted and they are paid to the holding company. This will be closely monitored by the Luxembourg authorities and the Commission.

Report by Pat Sweet