(CN) – In its years-long crackdown of EU states giving out sweetheart tax deals to multinational corporations, the European Commission said Monday it has set its sights on the Netherlands’ deal with one of two operators of Swedish home-goods giant IKEA.
The commission said its in-depth investigation, opened Monday, involves Inter IKEA Systems, which operates IKEA’s franchise business.
When IKEA went toward a franchising model in the 1980s, Inter IKEA was created to handle the franchises. According to the commission, the franchises pay 3 percent of their annual turnover to Inter IKEA, which gives them the right to use the IKEA trademark and training on how to operate and exploit the concept.
The revenue from all the IKEA franchises worldwide ends up at Inter IKEA Systems, based in the Netherlands. The commission believes that in 2006, Dutch tax authorities signed off on a plan to shift that revenue to Luxembourg-based I.I. Holding – which controls IKEA’s intellectual property related to the franchise concept – in the form of an “annual license fee.”
The license fee, according to the commission, was actually a large portion of the revenue paid by franchises to Inter IKEA.
“As a result, a significant part of Inter IKEA Systems’ franchise profits were shifted to I.I. Holding in Luxembourg, where they remain untaxed,” the commission said in a statement. “This is because I.I. Holding was part of a special tax scheme, as a result of which it was exempt from corporate taxation in Luxembourg.”
The commission said that same year, it deemed Luxembourg’s special tax scheme illegal and ordered it dismantled by the end of 2010. Because the tax scheme predated the European Union by several decades, the commission didn’t order Luxembourg to claw back taxes but I.I. Holding should have begun paying corporate taxes in 2011.
Instead, Inter IKEA bought the IP rights held by I.I. Holding with financing from an intercompany loan from its parent company based in Liechtenstein. Dutch tax authorities then signed off on a plan to deduct the interest Inter IKEA paid on the intercompany loan from its taxable profits in the Netherlands – thereby shifting the franchise profits to Liechtenstein, the commission said.
The commission said its preliminary look at the two rulings by Dutch tax authorities indicates Inter IKEA may have gotten preferential treatment. Its in-depth investigation will have two prongs: whether the annual license fee it paid to I.I. Holding from 2006 until 2011, and the price it paid for I.I. Holding – and the subsequent interest paid to the parent company – “reflect economic reality.”
“All companies, big or small, multinational or not, should pay their fair share of tax,” competition commissioner Margrethe Vestager said in a statement. “Member states cannot let selected companies pay less tax by allowing them to artificially shift their profits elsewhere. We will now carefully investigate the Netherlands’ tax treatment of Inter IKEA.”
The opening of an in-depth investigation gives the Netherlands and other interested parties the opportunity to comment, and does not prejudge the outcome.
In recent years, the commission’s crackdown has resulted in several clawback orders. In October, the regulatory agency ordered Amazon to pay $295 million in back taxes to Luxembourg. In 2016, Apple was ordered to pay nearly $15 billion to Ireland.