The General Court of the European Union in Luxembourg has dismissed an appeal by the Nike group against the investigation launched by the European Commission in January 2019 into the favorable tax treatment granted to the group by Dutch tax authorities to the European entities of Nike and Converse, and ordered them to pay the legal costs. This apparently means that the Commission is authorized to go ahead with a formal investigation.
A spokesman for Nike Europe declined to say what the company is now planning to do on the legal front. He only released the following formal statement: “Nike is subject to and rigorously ensures that it complies with all the same tax laws as other companies operating in the Netherlands. We believe the European Commission’s investigation is without merit.”
Nike had objected to the procedure followed by the Commission, arguing that it should have continued with a preliminary probe instead of launching a more formal investigation. Listing 180 arguments, the General Court, which is the second-highest court of law for such matters, issued the following verdict on July 14 (case T-648/19) “The (European) Commission complied with the procedural rules, and neither failed to fulfill its obligation to state reasons nor made manifest errors of assessment.”
The European Commission started to look into the case even before the disclosure in some European media in November 2017 of the so-called “Paradise Papers.” The General Court noted that the Commission had first asked the Dutch government in January 2014 to provide information about the “advance pricing agreements” that it had concluded with Nike group companies and others.
The Dutch authorities replied, but the Commission had to make seven further requests for information that was missing from the documents that it had been given each time. After a bilateral meeting in November 2018 held in the context of a preliminary investigation; the Commission concluded that the Kingdom of the Netherlands had granted “state aid” to two companies of the Nike group that “was unlawful and incompatible with the internal market.” In launching its formal investigation in 2019, the Commission invited interested parties to submit their comments.
The pricing arrangements with Nike group companies were first made by the Dutch administration in November 2006 and then modified in February 2010 and September 2015. It came out that the two Dutch-based entities of Nike Europe Holding - Nike European Operations Netherlands (NEON) and Converse Netherlands (CN) - were calculating their income for tax purposes based on tax-deductible royalties on licenses granted by an offshore company of the Nike group.
The two entities were acting as distributors of Nike and Converse products in the EMEA region, but the Commission noted that those companies were not only carrying out routine distribution activities but were also participating in the development of products under their brands. They were declaring annual, tax-deductible royalties corresponding to the difference between the total revenues and a portion of their operating margin that was deemed sufficient to remunerate their activities. According to the Commission, the royalties were artificially inflated, resulting in lower taxable income and a selective advantage for the Nike group companies.
The Commission considered, among other things, that it would have been more appropriate to take into account the financial situation of the companies that granted the licenses rather than that of the licensees.
