National regulations are superior in defining the concept of the arm’s length principle

On 8 November 2022[1], the Court of Justice of the European Union (‘the CJEU’) annulled the decision of the European Commission and the judgment of the EU Court, which recognized the individual ruling issued by the authorities in Luxembourg as providing a ‘selective advantage’ to Fiat Chrysler Finance Europe, which – according to the Commission – qualified as state aid under Article 107(1) TFEU.

In 2012, the Luxembourg tax authorities, as part of approving a transfer pricing agreement, issued an individual ruling to a company belonging to the Fiat group (FFT) – a Luxembourg resident – confirming the adopted method of determining transfer pricing as regards the remuneration that FFT was to receive for the financial services provided to other companies in the group. 

Position of the EU Court and the European Commission

While conducting activities to verify the practices of the Member States’ authorities in terms of state aid, the European Commission concluded that the tax ruling issued by the Luxembourg tax administration enabled the FFT to obtain selective tax advantages. This is because in the opinion of the Commission, a number of selected methods and parameters as well as adjustments approved by Luxembourg – underlying the transfer pricing analysis in the interpretation under consideration – lead to a reduction in corporate income tax compared to what third parties would have to pay in a similar situation.

In addition, according to the Commission, the beneficiary of these advantages was the entire group of related entities since the reduction of the tax due from the taxpayer had to result in a reduction in the price conditions of the intra-group loans granted by it.

The Commission considered this action by the Luxembourg authorities to be a state aid and therefore asked the Luxembourg authorities to recover approximately €30 million from the taxpayer.

FFT and Luxembourg disagreed with the Commission’s request and appealed to the EU General Court. However, the EU court dismissed all the allegations in their entirety, confirming the approach of the European Commission. Therefore, the case was referred to the CJEU.

Judgment of the CJEU

The CJEU annulled the contested decision because the European Commission infringed law when assessing the existence of a selective advantage in the analyzed case.

This infringement concerned, among other, transfer pricing matters, because as part of the activities, the Commission applied the arm’s length principle defined differently from the one in Luxembourg law. It confined itself to identifying an abstract expression of that principle in the context of the objective pursued by the general income tax system in Luxembourg and to examining the tax ruling at issue, without taking into account the manner in which that principle was enshrined in that law.

The CJEU stated that, despite the detailed rules laid down in Luxembourg law for determining remuneration in line with the arm’s length principle, in relation to group financial companies, such as FFT, they were not taken into account by the Commission as part of its analysis.

In its justification, the CJEU also emphasized that it is the national provisions that govern whether certain transactions in that country should be examined in the light of the arm’s length principle and indicate the methods and criteria to determine the result in accordance with this principle. It also disagreed with the statement that the ‘general’ arm’s length principle applies where national tax law aims to tax affiliates and stand-alone companies in the same way, irrespective of whether and how that principle has been incorporated to that law.


In the present case, the European Commission based its decision on its own interpretation of the arm’s length principle and did not take into account the definition of this concept under Luxembourg law. This approach was not accepted by the CJEU, which emphasized the supremacy of national provisions in defining the arm’s length principle within a given country.

When analyzing the judgment of the CJEU, it should be emphasized that despite the OECD Guidelines providing guidance for taxpayers and Member State authorities in the field of transfer pricing, for taxpayers – also Polish – it is the local tax regulations, which they are obliged to comply with, that are prevailing.


[1] InfoCuria