The European Commission announced yesterday that it had opened an in-depth investigation into whether the tax rulings granted by the Dutch government to Nike's European operations may have given the group an unfair advantage over its competitors, in breach of the European Union's rules on state aid. Pointing out that it is not prejudging its outcome, the Commission said that the investigation is giving the Netherlands and interested parties an opportunity to submit comments.

A spokesman for the Commission indicated that Nike seems to be still benefiting from those tax rulings, adding that it may take a few years to conclude the investigation. Nike stated that it was fully complying with tax regulations when a group of investigative journalists publicized its European tax arrangements in the so-called “Paradise Papers” at the end of 2017 (see SGI Europe Vol. 28 N° 34+35 of Nov. 15, 2017). 

According to the journalists' findings, Nike had been paying corporate tax of less than 3 percent on annual revenues of nearly €8 billion generated in the EMEA region through a special scheme under which an entity located in Bermuda, called Nike International, had been licensing its trademarks to its Dutch operations via special entities called “commanditaire vennootschap” (CV), because they are not incorporated anywhere.

In announcing its investigation, the Commission said that Dutch tax authorities issued five tax rulings between 2006 and 2015 endorsing a method to calculate the royalty that should be paid by Nike European Operations Netherlands BV and Converse Netherlands BV for the use intellectual property rights. Two of those rulings are still in force, said the Commission.

As a result of the rulings, the European operations of Nike and Converse are only taxed in the Netherlands on a limited margin of their sales based on a preliminary analysis, although they employ more than 1,000 people and bear their own costs for marketing and sales activities, the Commission noted. In contrast, it said that the recipients of the royalties are entities of the Nike group that have no employees and carry out no economic activities.

On the other hand, it seems that Nike will not be able to benefit from these apparent tax loopholes much longer. Under pressure from the EU, Dutch authorities have indicated that CVs may start to be taxed after 2020. Margrethe Vestager, the EU commissioner in charge of competition policies, said she welcomed the actions taken by the Netherlands to reform its corporate taxation rules to help ensure that companies will operate on a level playing field in the EU.

The Commission said that the Dutch government is planning to stop granting special tax rulings if the tax structure involves a tax haven or is intended to avoid Dutch or foreign taxes. It plans to centrally manage and monitor any Dutch tax rulings involving international structures, while publishing an anonymous summary of those rulings. It also plans to introduce a withholding tax on interest and royalty payments made to companies in tax havens – which would probably apply to Nike.

A reform of the U.S. tax system led to a $2 billian liability for Nike last year. It seems likely that the American behemoth will also have to pay some money in the EU, as has been the case after similar tax investigations that have been carried out by the EU Commission since 2015 in the Netherlands, Luxembourg and Ireland against Fiat, Starbucks, Apple, Amazon and Engie.

For example, the Irish government recovered €14.3 billion in unpaid taxes from Apple after a three-year investigation by the European Commission that ended in August 2016. Amazon had to pay €282.7 million to Luxembourg after an investigation that was concluded in October 2017, and it has appealed the case. On the other hand, the Commission ruled last September that McDonald's had not received undue state aid from Luxembourg by virtue of a tax treaty with the U.S.