During the course of the investigation, Amazon provided information on the European online retail market, on its business model in general and on its European operations in particular, on the IP licensing agreements it concluded with unrelated entities, and on its new corporate and tax structure in Luxembourg with effect from June 2014. That information complements the information already presented in Sections 2.1 and 2.2.

The ordinary rules of corporate taxation in Luxembourg are to be found in the Luxembourg Corporate Income Tax Code (loi modifiée du 4 décembre 1967 concernant l'impôt sur le revenue, the ‘LIR’).

Article 18(1) LIR provides the method to establish a corporate taxpayer's annual profit: ‘The profit is determined as the difference between net assets as of the end and net assets as of the beginning of the reporting period, increased by the withdrawals of business cash or other assets by the taxpayer for its personal use or any other uses which are not intended in the interests of the company and decreased by additional contributions performed during the reporting period’.

As of 1 January 2017, a new article 56bis LIR explicitly formalises the application of the arm's length principle under Luxembourg tax law. With the effect of the same date, the above mentioned Circulars were replaced by the Circulaire du directeur des contributions LIR n^o 56/1 – 56bis/1 du 27 décembre 2016.

A brief overview of financial indicators and accounting concepts frequently used in this Decision is given below.

A typical profit and loss account first records the income that a company receives from its normal business activities, usually from the sale of goods and services to customers. This accounting item is referred to as ‘Sales’ or ‘Turnover’ or ‘Revenue’.

Cost of goods sold (‘COGS’) represents mainly the value of material used for the production of goods (raw materials) or the purchase price of goods that have been resold if the company does not process the goods sold. COGS is deducted from sales to calculate gross profit.

Performance and profitability is often measured using ratios presented as ‘margins’ or ‘mark-ups’. Margins are also used in peer comparisons in transfer pricing.

In transfer pricing, gross margins can be calculated as gross profit divided by sales (or COGS), and net margins as the operating profit divided by sales (or total costs, i.e. sum of COGS and Operating Expenses), in particular when the transactional net margin method is used. Therefore, when using the ‘net margin’ method the numerator of the profit level indicator would be the operating profit.

Luxembourg alleged that the Opening Decision was adopted in an extremely short period of time and on the basis of insufficient information. Luxembourg considered the Commission not to have exhausted its possibilities to gather the necessary information to assess the measure during the preliminary investigation.

First, Luxembourg argued that the Commission infringed the principles of sincere cooperation and impartiality, in particular by not responding to its offers to meet so as to allow Luxembourg to discuss the information provided before it took the decision to initiate the formal investigation procedure.

Luxembourg also referred to Articles 5(2) and 12(3) of Regulation (EU) 2015/1589. It observed that, in the present case, no reminder or information injunction was sent to Luxembourg.

Luxembourg considered the Opening Decision to be vitiated by a number of legal errors.

First, Luxembourg considered that decision to constitute an interference of its sovereign powers in the area of direct taxation. In particular, it considered the Commission to have exceeded its powers in the field of State aid by developing and imposing its own interpretation of the arm's length principle. In this manner, the Commission is seeking to latently harmonise direct taxation rules in breach of Articles 113 and 115 of the Treaty, since the Union can only harmonise substantive law on taxation through unanimously adopted legislative measures.

Second, Luxembourg argued that the precedents relied upon by the Commission in the Opening Decision differ from the contested tax ruling in that they concerned schemes which contained elements leading to an advantage irrespective of the individual circumstances of taxpayers. The advantages offered under those schemes were accessible only to a certain group of companies, whereas the contested tax ruling does not concern the whole tax system, but its application to the individual case of Amazon.

Third, Luxembourg alleged that the Opening Decision lacks a selectivity analysis and, more specifically, it does not identify the reference tax system or the reference group of taxpayers with regard to which Amazon's tax treatment should be compared. Consequently, no derogation from the reference tax system applied to Amazon and advantage was identified.

Luxembourg also specifically addressed the doubts expressed by the Commission in the Opening Decision regarding the contested tax ruling's compliance with the arm's length principle.

First, in response to the Commission's criticism that the contested tax ruling was approved in only 11 working days, Luxembourg argued that the process took much longer and involved meetings with Amazon representatives on 9 and 11 September 2003 as well as scrupulous examination by the tax authorities of the approach, Amazon's letters of 23 and 31 October 2003, and the transfer pricing report submitted by Amazon's tax adviser.

Second, Luxembourg argued that the Commission's concern that the contested tax ruling was granted in the absence of the required economic analysis is unfounded. A transfer pricing report was prepared to substantiate the transfer pricing arrangement proposed in the ruling request. It contains such standard elements as a functional analysis of both parties to the transaction (LuxOpCo and LuxSCS), the description of the underlying transaction and the relevant intellectual property, as well as selection of the transfer pricing methods and an assessment of the arm's length price.

Luxembourg explained that when the contested tax ruling was approved in 2003, Amazon's activities were new and increasing rapidly, with priority being given to long-term investment over short-term profitability. In 2003, Amazon recorded a loss and it was envisaged that Amazon would continue to invest heavily in technology for the immediate future. Since online retail is an activity with low margins subject to fierce competition, Amazon's strategy was to differentiate itself through technological innovation. As a consequence, the Intangibles were considered to be the essential source of value in Amazon's activities. The technology needed for the processes is highly sophisticated and continually improved through significant investment by LuxSCS.

According to the functional analysis presented in the TP Report, LuxSCS is responsible for maintaining and continually developing the Intangibles; LuxOpCo manages, operates and develops the retail trade and service activities through the EU websites using the Intangibles licensed from LuxSCS. According to Luxembourg, the economic life of the Intangibles was limited and required continual improvement and significant investment. Luxembourg added that LuxOpCo has not held and does not hold any intangible assets on its own. Under the terms of the IP License Agreement, any derived intangible asset developed by LuxOpCo is legally attributed and held by LuxSCS.

Luxembourg submitted that the contested tax ruling endorses a transfer pricing arrangement based on the TNMM to determine the level of the arm's length royalty paid by LuxOpCo to LuxSCS. The TNMM is a transfer pricing method which corresponds to Luxembourg transfer pricing rules and administrative practice. It is commonly used in tax rulings in Luxembourg and accepted by the 1995 OECD TP Guidelines. The acceptance of the TNMM by the Luxembourg tax administration reflected the functional analysis included in the transfer pricing report: LuxSCS holds, maintains and develops the business' most strategic elements, namely the Intangibles, which are hard to value. Luxembourg further argues that according to the License Agreement LuxOpCo only has limited rights and responsibilities with regards to the Intangibles and does not hold any IP itself. As a consequence, LuxSCS has viable alternatives for using the Intangibles to create a prosperous business; LuxOpCo, on the other hand, does not have any such alternatives. Therefore, LuxOpCo is regarded as being the less complex entity in comparison with LuxSCS and has been properly selected as the tested party. Luxembourg further claimed that, since online retail generates low margins, the choice of other methods could have exposed LuxOpCo to a risk of losses. The choice of the TNMM guaranteed that LuxOpCo's future profits would be more stable and in line with its profile. It also guaranteed that LuxOpCo's results would increase in line with the growing dimension of its activities in Luxembourg and in the EU and ensured legitimate predictability with regard to LuxOpCo's remuneration. Other methods would have produced more volatile results. In light of these considerations, Luxembourg claimed that the contested tax ruling cannot be regarded as accepting ‘the lowest possible outcome’ for LuxOpCo.

Third, in response to the Commission's doubt expressed in the Opening Decision that the royalty paid by LuxOpCo to LuxSCS is not related to output, sales, or profit, Luxembourg confirmed that the royalty is calculated as a residual profit. However, Luxembourg considered such an outcome inherent in the application of the TNMM and compliant with the functional and risk analyses.

Fourth, Luxembourg claimed that LuxOpCo's real financial return for each year of the relevant period fully complies with the arm's length principle. The arm's length remuneration for LuxOpCo was considered to lie in the interquartile range between [2-2,5] % and [5-10] % with a median value of [4-4,5] %, as indicated in the comparative analysis of the TP Report.

Fifth, as regards the doubt expressed on the relevance of the floor and cap for LuxOpCo's remuneration, Luxembourg argued that since Amazon made a loss in 2003 and companies in the comparative analysis were also loss-making, the floor guaranteed a positive remuneration increasing in line with expanding business. Furthermore, the cap and the ceiling encouraged LuxOpCo to manage its activities efficiently. Without this cap and this ceiling, LuxOpCo could simply increase its costs to increase its result. Given that the margin obtained by LuxOpCo over the period 2006-2013 was on average [3,5-4] % and was each year within the limits of the interquartile range, Luxembourg concludes that the ceilings and caps did not have any real and practical impact.

Luxembourg submitted its comments on the M.com Agreements, the intragroup license agreements, IP license agreements between Amazon group entities and third parties, and other internal financial and legal information of LuxOpCo, LuxSCS, AMEU and ASE, such as external valuation reports or TP reports regarding IP acquisition transactions, minutes of board meetings and general meetings of LuxOpCo's shareholders.

Luxembourg stated that its transfer pricing rules are indistinctly applicable to all groups of companies, domestic or international, and that Amazon was not treated more favourable than other groups, because Luxembourg applied its transfer pricing rules consistently.

Luxembourg questioned the relevance of the M.com Agreements for the case at hand. Except for the Target Agreement, they were concluded after Luxembourg issued its tax ruling. After reviewing the M.com Agreements, Luxembourg stated that it shares Amazon's view that the M.com Agreements reflect a business model that differs from the model put in place between LuxSCS and LuxOpCo. Therefore those agreements, including the agreements between Amazon and Borders, Circuit City, Target, ToysRUs and Waterstones, cannot be used for the purposes of a CUP analysis.

Luxembourg further claimed that Amazon's intragroup agreements are also not adequate for a CUP analysis, since these intra-group agreements are by definition not uncontrolled.

On 6 July 2017, Luxembourg submitted its comments to Amazon's submissions to the Commission concerning documents used and created for the litigation procedure before the US Tax Court.

In its comments, Luxembourg supports Amazon's comments and conclusions and highlights that the Buy-in of LuxSCS values only the intangible assets themselves, separate from all other assets, functions and risks associated with Amazon's business.

According to Luxembourg, the US Tax Court's analysis established that [4,5-5] % of the gross merchandise sales (‘GMS’) would be an appropriate arm's length royalty rate for the Intangibles used to operate Amazon's European business, which is based on the most relevant benchmarks.

Luxembourg observes that LuxSCS received royalties from LuxOpCo corresponding to [3-3,5] % of the GMS, thus below the arm's length royalty rate as established by the US Tax Court. Consequently, if the US Tax Court's rate were to be applied, LuxOpCo would owe royalty payments to LuxSCS, thereby lowering its taxable income in Luxembourg.

Luxembourg therefore considers that LuxOpCo's taxable base was not unduly reduced as implied by the Commission in its Opening Decision, which is why the contested tax ruling did not confer a selective advantage on LuxOpCo.

Whereas the CCIA advocates for an effective State aid control, it considered the current investigations are focusing on politically convenient targets. The CCIA considered that using State aid rules in the present case will create legal and business uncertainty in Europe. The CCIA expressed its worries on the application of the prudent independent market operator test and requires the strict application of the national transfer pricing rules as the benchmark for assessing selectivity. It also argued that the application of the arm's length principle usually results in an arm's length range instead of a single arm's length price.

ATOZ's main argument relates to the legal basis of the Commission assessment. According to ATOZ, the Luxembourg tax legislation did not include any provision specifying the application of the arm's length principle when the tax ruling was approved. Therefore, ATOZ argued that is not correct to consider the OECD transfer pricing rules incorporated in the Luxembourg legislation at that time. ATOZ thinks that the Commission's approach will create, amongst others, legal uncertainty among multinationals.

According to Fedil, State aid investigations might undermine the legal certainty that tax rulings intend to provide to taxpayers. In Fedil's opinion, the assessment of the measure should be based on the Luxembourg legislation and administrative practice at the time, which did not include a general reference to the OECD TP Guidelines. Fedil argued that the Commission takes the view that there is a single truth in transfer pricing, which makes it impossible for companies to obtain upfront legal certainty.

Oxfam expressed support for the Commission's investigation, encouraging the Commission to increase its investigation capacity also in view of the fact that it may be better placed than national bodies to structurally assess the tax ruling practices of the Member States. It called on the Commission to ensure that adequate sanctions are adopted in cases where selective advantages are confirmed and that harmful tax practices are phased out quickly.

According to the BA, Amazon's tax arrangements with Luxembourg allow an unfair advantage that is not available to independent booksellers in the UK. The BA stressed that, by routing all of its European sales through its Luxembourg headquarters, Amazon benefits from a significantly lower tax burden, regarding both VAT and corporate taxation. Therefore, the BA urges the Commission to challenge those tax deals which distort fair competition.

The EIBF advocates for a level playing field for all book retailers and therefore welcomes the investigation by the Commission concerning Amazon's tax practices. The EIBF reiterated that it stands for a free and open market space which benefits the consumers.

The SLF, the FEP and the SDLC expressed their agreement with the EIBF's comments on the Opening Decision.

The Austrian Bundesarbeitskammer supports the Commissions arguments from the Opening Decision and argues that, in general, those sorts of agreements and legal structures lower the worldwide taxes paid.

By letter dated 20 April 2015, Luxembourg expressed its agreement to the comments submitted by Amazon, FEDIL, CCIA, ATOZ and EPICENTER, whereas it considered that the other comments submitted in response to the Opening Decision were not relevant to the case.

In particular, Luxembourg indicated that Oxfam's observations did not refer to the Amazon case in particular, but were formulated in a general manner. Luxembourg considered the BA not to have commented on the information included in the Opening Decision, but on issues that are outside the scope of the present investigation. Luxembourg does not consider the comments of the EIBF and its members to provide new relevant information to the case. Finally, Luxembourg considered Bundesarbeitskammer's comments to be unfounded and inaccurate.

On 2 May 2016, Luxembourg submitted its comments to Company X's submission. Luxembourg stated that Amazon, being a market operator, is better placed to provide comments to Company X's submission. Therefore Luxembourg has shared a non-confidential version of Company X's submission with Amazon and understands that Amazon will provide its own comments.

In its submission of 18 January 2016, Amazon provided supplementary information to justify that the remuneration for LuxSCS and LuxOpCo endorsed by the contested tax ruling was at arm's length.

First, on the transfer pricing method used to determine the remuneration of LuxSCS and LuxOpCo, Amazon explained that the residual profit split method was chosen, since no sufficiently reliable comparable uncontrolled transaction was found to apply the CUP method. If the less reliable CUP method had been applied, it would have led to higher yearly royalty payments. Amazon further explained that, at the first stage of the residual profit split method, the TP Report applied the TNMM to determine LuxOpCo's arm's length remuneration as the tested party. The reason why LuxOpCo was chosen as the tested party is because LuxOpCo performs non-unique functions relative to LuxSCS, which owns the unique key value drivers of the European business. At the second stage of the residual profit split method, any residual profit or loss is allocated among the parties consistently with their functions and risks. Logically, the more unique a party's functions and risks, the greater the remuneration that it is justified to receive under the residual profit split method. The TP Report allocated the residual profit to LuxSCS in the view of its unique functions and significant risks relative to those of LuxOpCo.

Second, on the economic rationale underlying the transfer pricing methodology, Amazon explained that LuxSCS wants to incentivise its contractors to act in such a manner that contributes to the success of Amazon's global strategy. Thus, if Amazon had entered into a license agreement with a third party, it would have been rational and necessary to provide the licensee with the ability and incentives to undertake all the necessary investments and also to ensure that the correct incentives existed for the licensee to follow Amazon's strategy of maximising selection and price leadership.

According to Amazon, the royalty methodology ensures that LuxOpCo is profitable and does not have a risk of becoming loss-making. This was a real risk since, at the time the contested tax ruling was requested, the online retail market was not yet developed, online retailers were loss-making and LuxOpCo operated in a market with intense competition and low margins. In this respect, a return to the licensee on its cost base incentivises growth rather than a focus on short-term profit.

Amazon questions whether Company X is actually comparable to LuxOpCo. Moreover, Amazon argues that the information provided by Company X should not be considered for the purposes of assessing the contested tax ruling, since neither Amazon nor the Luxembourg authorities had that information at the time the 2003 tax ruling request was made or when it was renewed in 2011.

In any event, Amazon considers that the information submitted by Company X does not support the finding that the contested tax ruling resulted in the grant of State aid to LuxOpCo. In particular, LuxOpCo agrees with Company X that e-commerce is a thin margin business. Indeed, LuxOpCo could not survive or grow on the market without the Intangibles it licensed from LuxSCS.

Amazon states that its business model revolves around technological innovation, such as search and browse tools, order processing and fulfilment, catalogue functions, customer service support and data management and analysis tools.

Amazon considers that the customer data that LuxSCS licenses to LuxOpCo is a key component of marketing and the scope of Amazon's Prime programme goes far beyond free shipping as it includes a variety of services and requires a complex underlying technology.

For Amazon, customer satisfaction is primarily driven by technology and by customer information, both made available to LuxOpCo as part of the Intangibles.

Consolidating and developing the customer base and the brand rests crucially on the Intangibles. Amazon considers that Company X confirmed that the Intangibles, constantly developed and improved, are key for a successful e-commerce operation such as LuxOpCo's, which supports that LuxOpCo is the tested party, because LuxSCS' contribution is more important.

Amazon considers that the royalty calculation method as endorsed by the contested tax ruling preserves LuxOpCo's long term viability, because the royalty rate is not excessively high and allows LuxOpCo to earn a return on its costs. Furthermore, the method incentivises LuxOpCo to create value from the use of the Intangibles by growing the business as much as possible, maximising selection and keeping price leadership, and the royalty rate calculation method incentivises LuxSCS to continue its investment into the Intangibles long-term.

Finally, Amazon concludes that Company X' statements about the shares of turnover which should be invested into technology for an e-commerce company amounting to 4 % to 8 % of sales confirm that LuxOpCo's royalty rate paid to LuxSCS, which amounts to an average of [5-10] % of LuxOpCo's turnover between 2006 and 2014 or [3-3,5] % of GMS and which includes a comprehensive bundle of Intangibles demonstrates that the royalty rate paid by LuxOpCo can be considered an arm's length rate and does not constitute a manifest departure from a reliable approximation of a market-based outcome.

Amazon states that its e-commerce business must be available at all time with high speed response time to avoid customer dissatisfaction. Given its constant expansion, its technology infrastructure must be scalable and flexible. Therefore Amazon's software has a service-oriented architecture. The functions that Amazon's business operations require are developed as componentized pieces that can be combined for interaction and cooperation. Such an architecture has many advantages, such as individual optimisation, and maintenance of certain software being possible. This architecture also facilitates the launch of new services and improvements. If Amazon were to refrain from maintaining and updating its underlying technology, customers would notice as the e-tail experience that carries Amazon's commercial success would change and Amazon's business operations would fail.

The Amazon websites and mobile applications encompass several functionalities, such as obtaining and maintaining customer identity information, creating and maintaining a catalogue, creating and displaying web and mobile app pages, searching and browsing, constructing and placing orders, payment processing, interaction with fulfilment centres, customer reviews, personalisation and community features.

Other technology tools are website administration tools, the configuration repository, tools for the operation and analytics of the website, vendor and seller management software, inventory management software, catalogue software and pricing software. As regards the latter, Amazon states that 99 % of prices are set by an automated process, while there are also cases of manual price setting, albeit exceptional. All manual price changes in Europe have to be approved by the European Price Manager of LuxOpCo.

Amazon also has marketing software, aimed at generating traffic to its websites, internal and external marketing techniques, such as search marketing (through cooperation with search engines such as Google), search engine optimisation tools, paid search advertising tools, and email marketing tools.

Further technology includes order fulfilment software, such as for the European Fulfilment Network (‘EFN’), picking and packaging software and customer service software.

Amazon develops the key software for its e-tailing business in-house. Amazon states that technology development activities are overseen by teams in the US. Testing and bug-fixing of the websites and the software tools is entirely done in the US. Over [60-65] % of its [30 000-40 000] R & D employees are located in the US. Of the [1 000-10 000] R & D employees active in Europe, [100-200] are based in Luxembourg.

Finally, Amazon states that every aspect of the traditional retailing has been rethought to make it more efficient, less costly and more serving customer needs. Surrounded by a wide e-commerce environment, Amazon's customer experience created by its technology is setting Amazon apart from its competitors and strengthens its brands. Even brief time lags in ordering or minor hiccups in fulfilment undermine the customer experience, harm Amazon's brand and lead to a loss of sales because customers turn away.

Amazon states that its trademark-related intangibles had a useful life of 10-15 years as of 1 January 2005. The customer database had an estimated useful life of 6-10 years, and the Technology had a useful life of two to five years as of 1 January 2005.

In its submission of 27 February 2017, Amazon submitted to consider the following three critical threats for its European businesses:

Competition: the loss of business to competition is Amazon's main business threat, since e-commerce is highly competitive. Competition is largely driven by innovation and competitors that did not innovate left the market. Amazon faces different pressure and competitors in various markets and there are local specificities in relation to risks from competition.

Customer adoption of new products, services and technologies: Amazon's growth and its expansion into new categories and geographic regions entails the risk that customers do not adopt the new offerings or products. In the same vein, Amazon bears the risk of website outages, which can have significant costs for its business.

Finally, local economic and political conditions and changes to the legal framework constitute a risk or could be a threat for Amazon's European business. Low degrees of internet use and credit card use pose significant challenges to Amazon, making it impossible to create a growing business. Government regulation may render Amazon's business model impracticable.

On 29 May 2017, Amazon submitted a statement to the US Tax Court procedure and a newly commissioned transfer pricing report.

Amazon stated that LuxSCS' acquisition of the rights to the technology, brand and customer information was recognized by all parties to the US litigation procedure. Therefore, Amazon refers to the [4,5-5] % royalty rate of GMS as a benchmark for the appropriate arm's length royalty to be received by LuxSCS. Moreover, according to Amazon, the benchmark should be seen as minimum, taking into account that this royalty rate does not consider goodwill and the enhancements to the intangibles made under the CSA after 2005/2006, which LuxOpCo received.

Amazon therefore claims that the aggregate royalty rate that LuxSCS received over the relevant period 2006 to 2014 was in fact lower than the royalty rate as determined by the US Tax Court, namely [3-3,5] % of GMS. Based on Amazon's comments on the US Tax Court judgement, LuxSCS therefore received a too low royalty rate from LuxOpCo and thus Amazon considers that the 2003 tax ruling could not entail any advantage for LuxOpCo.

Amazon considered that an exhaustive evaluation of trial-tested facts was carried out during the US litigation procedure including expert records. The decision of the US Tax Court confirmed previous submissions of Amazon, in particular that technology is a key value driver for Amazon's business, which required investment and continuous innovation and that the integration of Amazon's European operations responded to business needs and finally that the European e-commerce environment was subject to intense competition and characterised by low margins during the relevant period.

The conclusion of the CUP analysis in the 2017 ex post TP Report is that the aggregate royalty paid by LuxOpCo to LuxSCS during the relevant was ‘reasonable and in line with economic reality’.

The functional analysis of LuxOpCo was performed on the basis of its role within the European value chain as of June 2014, since it was considered that following the gradual increase of LuxOpCo's staff over the whole period under review, its functional profile as of June 2014 would reflect the maximum contribution to value creation by LuxOpCo during that period. According to the 2017 ex post TP Report, LuxOpCo heavily relied on tools and technology to manage related business risks and did not autonomously manage or assume any significant risks. It also did not create a working capital need beyond those falling within its functional scope as a management company. LuxOpCo's main activities were managerial oversight over the procurement, sale, marketing, and distribution of products to third party customers via the European Web Sites. Those activities were heavily dependent on the Intangibles which related, inter alia, to the pricing of goods, inventory management, support for fulfilment centre activities, online payment processing, fraud detection, customer service operations, logistics, and advertising licensed to LuxOpCo. LuxOpCo did not own, nor develop or invest in the development of any of the Intangibles during the period under review. Instead, LuxOpCo only held standard business equipment assets and inventory related to Amazon's European retail business. Over the relevant period, LuxOpCo was confronted with various strategic, financial, operational, etc. risks in its day-to-day operations. Most of the risks relate directly or indirectly to the technology underpinning Amazon's offering or its global strategy of expanding into new product categories and services. To manage and control these risks effectively, Amazon implemented strict management policies at group level. Finally, in a business driven by technology, LuxOpCo did not independently assume or manage any significant business risks and instead relied on the technology to manage or assume the related business risks.

As regards LuxSCS, the 2017 ex post TP Report only points to the fact that it holds the Intangibles as a result of its participation in the CSA.

The report then proceeds to update the economic analyses made in 2003 and in 2014, determining benchmark returns for activities comparable to those of LuxOpCo and carrying out a new analysis to determine benchmark returns. Based on these analysis, it was found that in all years from 2006 to June 2014, LuxOpCo's remuneration was within the interquartile range resulting from benchmark returns earned for activities comparable to those of LuxOpCo. Therefore, the 2017 ex post TP Report concludes that LuxOpCo's remuneration was at arm's length.

According to Article 107(1) of the Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the provision of certain goods shall be incompatible with the internal market, in so far as it affects trade between Member States.

As regards the first condition, the contested tax ruling was issued by the Luxembourg tax administration, which is an organ of the Luxembourg State. That ruling entailed an acceptance by that administration of a transfer pricing arrangement which enabled LuxOpCo to assess its corporate income tax liability in Luxembourg on an annual basis during the relevant period. LuxOpCo subsequently filed its annual corporate income tax declaration on the basis of that arrangement, which was in turn accepted by the Luxembourg tax administration as corresponding to its corporate income tax liability in Luxembourg. The contested measure is therefore imputable to Luxembourg.

As regards the third condition for a finding of aid, the function of a tax ruling is to establish in advance the application of the ordinary tax system to a particular case in view of its specific facts and circumstances. However, like any other fiscal measure, the grant of a tax ruling must respect the State aid rules. Where a tax ruling endorses a result that does not reflect in a reliable manner what would result from a normal application of the ordinary tax system, without justification, that ruling will confer a selective advantage on its addressee in so far as that selective treatment results in a lowering of that taxpayer's tax liability in the Member State as compared to companies in a similar factual and legal situation. As the Commission will demonstrate in Sections 9.2 and 9.3, the contested tax ruling confers a selective advantage on Amazon in the form of a lowering of its corporate income tax liability in Luxembourg as compared to corporate taxpayers in a comparable factual and legal situation.

Nevertheless, for the sake of completeness, the Commission will also examine the contested tax ruling against that three-step selectivity analysis to demonstrate that it is also selective under that analysis. In Section 9.3.2.1 it will demonstrate that the advantage granted by the contested tax ruling is selective in nature because it favours Amazon as compared to other corporate taxpayers subject to corporate income tax in Luxembourg whose taxable profit reflects prices negotiated at arm's length on the market. In Section 9.3.2.2 it will further demonstrate that the advantage granted by the contested tax ruling is selective in nature because it favours Amazon as compared to other corporate taxpayers belonging to a multinational corporate group that engage in intra-group transactions and that, by virtue of Article 164(3) LIR, must estimate the prices for their intra-group transactions in a manner that reflects prices negotiated by independent parties at arm's length on the market.

Consequently, to establish that the contested tax ruling confers an economic advantage, the Commission must demonstrate that the transfer pricing arrangement it endorses produces an outcome that departs from a reliable approximation of a market-based outcome resulting in a reduction of LuxOpCo's taxable basis for corporate income tax purposes. The Commission considers the contested tax ruling to produce such an outcome.

In addition, by a subsidiary line of reasoning and without prejudice to the conclusion in the previous Recital, the Commission concludes that even if the Luxembourg tax administration were right to have accepted the inaccurate and unsubstantiated claim that LuxSCS would perform unique and valuable functions in relation to the Intangibles, which the Commission contests, the transfer pricing arrangement endorsed by the contested tax ruling is nevertheless based on improper methodological choices that produce an outcome departing from a reliable approximation of a market-based outcome, which also confer an economic advantage on LuxOpCo in the form of a reduction of its taxable base for corporate income tax purposes. The subsidiary line of reasoning is developed in Section 9.2.2.

Since the contested tax ruling fulfils all the conditions of Article 107(1) of the Treaty, it must be considered to constitute State aid within the meaning of that provision. That aid results in a reduction of charges that should normally be borne by LuxOpCo in the course of its business operations and should therefore be considered as granting operating aid to LuxOpCo.

The Commission considers the contested tax ruling to grant a selective advantage to LuxOpCo within the meaning of Article 107(1) of the Treaty, since it leads to a lowering of that entity's taxable profit and thus its corporate income tax liability in Luxembourg. However, the Commission notes that LuxOpCo forms part of a multinational corporate group, i.e. the Amazon group.

Luxembourg has not invoked any of the grounds for a finding of compatibility under either of those provisions for the State aid it has granted through the contested tax ruling.

Moreover, as explained in Recital 606, the aid granted by the contested tax ruling constitutes operating aid. As a general rule, such aid can normally not be considered compatible with the internal market under Article 107(3) of the Treaty in that it does not facilitate the development of certain activities or of certain economic areas, nor are the tax advantages in question limited in time, declining or proportionate to what is necessary to remedy to a specific market failure in the areas concerned.

Consequently, the State aid granted to LuxOpCo and the Amazon group by Luxembourg is incompatible with the internal market.

According to Article 108(3) of the Treaty, Member States are obliged to inform the Commission of any plan to grant aid (notification obligation) and they may not put into effect any proposed aid measures until the Commission has taken a final position decision on the aid in question (standstill obligation).

The Commission notes that Luxembourg did not notify the Commission of any plan to grant the contested aid measure, nor did it respect the standstill obligation laid down in Article 108(3) of the Treaty. Therefore, in accordance with Article 1(f) of Regulation (EU) 2015/1589, the contested tax ruling constitutes unlawful aid, put into effect in contravention of Article 108(3) of the Treaty.

In accordance with Article 17 of Regulation (EU) 2015/1589, the power of the Commission to recover aid is subject to a limitation period of 10 years. The limitation period begins on the day on which the unlawful aid is awarded to the beneficiary either as individual aid or as aid under an aid scheme. Any action taken by the Commission or by a Member State, acting at the request of the Commission, with regard to the unlawful aid interrupts the limitation period. Each interruption starts time running afresh. The limitation period is suspended for as long as the decision of the Commission is the subject of proceedings pending before the Court of Justice. Finally, any aid with regard to which the limitation period has expired is deemed to be existing aid.

Amazon argues that any aid granted under the contested tax ruling is existing aid, because the contested tax ruling is an individual measure granted to it more than 10 years before the Commission started its State aid investigation into that ruling. The contested tax ruling was indeed issued more than 10 years before the Commission started its investigation, namely on 6 November 2003. However, contrary to what Amazon claims, that does not mean that all and any aid granted under it constitutes existing aid that cannot be recovered.

All aid granted to LuxOpCo and the Amazon group by way of the contested tax ruling therefore constitutes new aid.

Article 16(1) of Regulation (EU) 2015/1589 provides that the Commission shall not require recovery of the aid if this would be contrary to a general principle of Union law.

Luxembourg's subsequent claim that the Commission adopted a novel approach for a finding of State aid to the present case cannot be accepted.

First, the Code of Conduct and the State aid rules pursue different objectives: while the Code of Conduct aims at tackling harmful tax competition between Member States, the State aid rules seek to address distortions of competition that result from favourable treatment by Member States, also in the form of tax reductions, of certain undertakings.

Second, the Code of Conduct is not a legally binding instrument. It is a forum of discussion for Member States on measures which have, or may have, a significant impact on the location of businesses within the Union. While the Code of Conduct group enjoys a certain margin of discretion, the Commission enjoys no discretion in determining whether a tax measure falls to be considered State aid, since that notion is an objective one.

Fourth, the Code of Conduct considered the Circulars on intra-group financing in general, whereas this Decision examines a specific tax ruling granted in favour of a specific company not related to intra-group financing. Even if those Circulars could be said not to give rise to harmful tax competition that does not mean that an individual transfer pricing ruling granted to Amazon does not.

In conclusion, no general principle of law prevents recovery in the present case.

The obligation on a State to abolish unlawful aid regarded by the Commission as being incompatible with the internal market is designed to re-establish the previously existing competitive situation on the market. In this context, the Court of Justice has stated that that objective is attained once the recipient has repaid the amounts granted by way of unlawful aid, thus forfeiting the advantage which it has enjoyed over its competitors on the market, and the situation prior to the payment of the aid is restored.

The remuneration of LuxSCS should reflect the fact that it performs an intermediary function in relation to the Intangibles, in that it merely holds the legal ownership and the licenses to the Intangibles owned by ATI and A9 but passes on the rights to develop, enhance, manage and exploit the Intangbles to LuxOpCo for the purpose of LuxOpCo's operation of Amazon's European retail business. It should also reflect the fact that LuxSCS itself at most performs solely limited functions in the form of general administrative services necessary to maintain its legal ownership of the Intangibles, which appear to be provided by external providers on LuxSCS's behalf (see Recital 429).

It is the difference between (iii) and (iv) that constitutes the amount of aid to be recovered to eliminate the selective advantage granted by Luxembourg as a result of the contested tax ruling.