The European Commission decided on Thursday (10 January) to open an in-depth investigation to determine whether the Netherlands had breached EU rules by allowing Nike to cut its tax bill through complex financial schemes.
“Member states should not allow companies to set up complex structures that unduly reduce their taxable profits and give them an unfair advantage over competitors,” the Competition Commissioner Margrethe Vestager said in a statement.
The Commission will investigate whether the Netherlands benefited Nike by approving tax rulings that “unduly” reduced the footwear and sports apparel giant’s taxable base in the country.
If the investigation confirms this concern, the Netherlands would have granted a selective advantage to the Nike group by allowing it to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms.
According to the EU rules, this would represent illegal state aid, similar to the one Ireland granted to Apple.
The Commission will focus on two subsidiaries of Nike group in the Netherlands: Nike European Operations Netherlands BV and Converse Netherlands BV.
These companies develop, market and record the sales of Nike and Converse products in the EMEA region (Europe, Middle East and Africa). They paid a tax-deductible royalty in exchange for using intellectual property rights relating to Nike and Converse products.
Between 2006 and 2015, the Netherlands issued five ‘sweetheart deals’, two of them still valid, approving the method to calculate the royalty.
The result was that Nike paid taxes only based on a limited operating margin based on sales.
The Commission suspects that the royalties validated by the Dutch authorities “may not reflect economic reality”. At this stage, the EU executive believes that they are higher than what independent companies negotiating on market terms would have agreed between themselves.
The Netherlands and Nike now have an opportunity to reply to the Commission’s concerns.
Vestager’s team is also investigating another tax ruling issued by The Hague favouring Ikea.
Nevertheless, the Commissioner welcomed the actions taken by the country to reform its corporate tax rules “to help ensure that companies will operate on a level playing field in the EU.”