Thu, Aug 8, 2019

European Commission Publishes Additional Background on Investigation into Nike

On January 10, 2019, the European Commission issued a press release in which it announced the opening of an in-depth investigation into whether tax rulings granted by the Dutch tax authorities to Nike may have given the company an unfair advantage over its competitors, in breach of EU State aid rules (Article 107(1) of the Treaty on the Functioning of the European Union). 

The Commission’s formal investigation of the Netherlands’ tax treatment focused on two Nike group companies based in the Netherlands: 1) Nike European Operations Netherlands BV (“NEON”); and 2) Converse Netherlands BV (“CN”). According to the European Commission’s preliminary analysis, these two operating companies developed and recorded the sales of Nike and Converse products in Europe, the Middle East and Africa (“EMEA”).  

Under scrutiny are five tax rulings issued by Dutch tax authorities spanning the period from 2006 to 2015 which endorsed a specific method to calculate the royalty to be paid by NEON and CN for the use of the intellectual property (“IP”). Namely, NEON and CN obtained licenses to use IP rights relating to Nike and Converse products in the EMEA region. These licenses were obtained from two Nike group entities, Dutch partnerships which are conduit entities disregarded for Dutch tax purposes, and which, as a result, do not pay tax there. NEON and CN were assessed income taxes in the Netherlands only on limited distribution profits (i.e. a 2-5 percent operating margin) under the rulings. The press release reveals the European Commission’s concern that “the royalty payments endorsed by the rulings may not reflect economic reality”, as the partnerships “have no employees and do not carry out any economic activity.” According to the European Commission, the royalty payments “appear to be higher than what independent companies negotiating on market terms would have agreed between themselves in accordance with the arm’s-length principle.” On July 5, 2019, the European Commission published a redacted version of the letter (available here) sent to the government of Netherlands and invited interested parties to submit comments on the aid in respect of which the Commission is initiating the procedure. 

The European Commission’s preliminary analysis of the functions performed by the parties suggest that NEON and CN respectively are involved in the development, enhancement, management and exploitation of the IP. Therefore, it considers that the annual royalty payments are “inflated” and thus “unduly reduced” NEON’s and CN’s taxable base in the Netherlands, and that the Netherlands provided a selective advantage to NEON and CN which constitutes illegal State aid.

Read Transfer Pricing Times – July 2019

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