First, according to Luxembourg, Article 109 LIR applies only to individuals and is not applicable to companies.

Third, regarding the arm's length character of ZORAs, Luxembourg considers that the Commission ignored the different categories of investors. ZORAs are not standard loan agreements but atypical instruments that cover the borrower against any operational risk and allow the investor to benefit from a better return on investment. Given the volatility of the market and the dependence on financing, the use of a ZORA is logical for the lender and similar instruments can be observed on the financial market like securities replicating the performance of a given underlying. Therefore the terms of the ZORA are at arm's length and Article 164(3) LIR is, according to Luxembourg, not applicable.

According to Luxembourg, the system of reference consists, first, of Articles 18, 40 and 23 LIR, which stipulate the determination of the tax base, the linking of the commercial balance sheet with the tax balance sheet and the prudence principle; and second, of Article 22bis LIR.

Luxembourg argues that the determination of the taxable profit, as defined in Article 18 LIR, follows two main concepts: first, the linking of the commercial balance sheet with the tax balance sheet (Article 40 LIR), and second, the prudence concept, according to which a profit cannot be taxed as long as it has not been realised.

Luxembourg contests that Article 163 LIR enshrines any objective, or principle, of the Luxembourg corporate income tax system according to which all profits recorded by companies resident in Luxembourg should be taxed. Luxembourg considers that this objective is neither consecrated nor reflected in any provision of the law. According to Luxembourg, the definition of a system of reference should be based on laws and not on a hypothetical principle or objective, the interpretation of which would risk deviating from the precise terms of the law.

Luxembourg argues that, by accepting the deductibility of expenses related to the ZORAs, the tax treatment endorsed by the contested tax rulings was fully in line with Articles 14 to 60 LIR and thus with Articles 18, 40 and 23 LIR. Luxembourg considers that the Commission ignored that the deductible expenses at the level of GSTM and LNG Supply are neither interests nor dividends. The reimbursement of the ZORA can be at a higher price than the nominal of the instrument. In line with the prudence concept, the borrower has to recognise an expense reflecting this risk. According to Articles 18, 40 and 23 LIR, this expense is tax deductible.

Luxembourg considers that the tax treatment endorsed by the contested tax rulings was fully in line with Articles 97 and 22bis LIR. Luxembourg argues that the Commission was wrong to consider that any capitalised interest should be taxable. More generally, Luxembourg supports that the Commission did not take into account that, as explained in recital 110, the deductible expenses are neither interest nor dividends. The concept of prudence supposes that an expense, which is tax deductible for one party, does not necessarily lead to a taxable profit for the other party. ZORAs should be valued at the level of the lender at the acquisition price and not at market price. Therefore, Luxembourg considers that ZORAs do not lead to any taxable income at the level of the lender until the conversion date.

From a tax perspective, at the date of the conversion, a profit, equal to the difference between the acquisition price and the market value of shares, is recognised. However, Luxembourg argues that EIL and LNG Luxembourg can opt for the mechanism of Article 22bis LIR. The shares received by the lender can be considered as substituting the ZORAs. In such a case, the shares can be valued in the accounts at the nominal amount of the ZORAs.

However, Luxembourg clarifies that following the partial reimbursement of the ZORA by LNG Supply that took place in 2014, LNG Luxembourg did not opt for the optional regime of Article 22bis LIR and recognised a taxable profit.

Luxembourg considers that the contested tax rulings do not depart from the arm's length principle by accepting a method of determination of profits of GSTM and LNG Supply based on the risks, functions and assets involved by each entity.

Luxembourg contests any misapplication of Article 166 LIR, as the contested tax rulings only confirm a strict and correct reading of the different tax provisions applicable to any undertaking subject to corporate income tax.

Luxembourg contests that the objective of Article 166 LIR is to prevent economic double taxation. Luxembourg considers that according to Article 166 LIR, profits do not need to have been previously taxed to benefit from the participation exemption. The only conditions to benefit from the participation exemption are the nature of the instrument, the percentage held in the capital of the participated entity or the acquisition price, and the holding period of the participations. In the present case, Article 166 LIR has been applied in line with all these conditions. On this basis, Luxembourg considers not only that the Luxembourg corporate income tax system does not require that all profits should be taxed but also that according to Article 166 LIR, profits eligible to participation exemption should not necessarily result from taxed profits.

As regards the reasoning at group level (see recital 100), Luxembourg reiterates its position that the Commission's reasoning cannot be based on an inadequate and non-existent reference system. Luxembourg highlights that the Luxembourg law does not specify that intra-group financing transactions between entities tax resident in Luxembourg cannot increase or decrease the sum of the tax bases of those entities in Luxembourg, or in other words the combined tax base of the group in Luxembourg. Moreover, Luxembourg explains that in order to determine if a measure is selective, the Commission needs to demonstrate that it derogates from the reference system itself and not from the objective of the reference system.

Luxembourg also contests the statement made by the Commission that any tax deductible expense recorded by the issuer of a ZORA in relation with the ZORA Accretions would have been included in the tax base of the holder, therefore with no impact on the tax base of the group in Luxembourg. Luxembourg reminds that Article 22bis LIR allows the lender of a convertible loan not to book any capital gain at the moment of the conversion. Therefore, according to Luxembourg, the intervention of EIL and LNG Luxembourg did not decrease the tax base of the Engie group compared to a situation in which it would have used a direct ZORA.

Luxembourg also contests any abuse of rights. In particular, Luxembourg denounces the insinuation by the Commission that it approved a simulated transaction within the meaning of Article 5 of the StAnpG and reminds that all parties have a real legal existence and performed their contractual obligations. Luxembourg also rejects the argument that the legal structure of the transaction is not in line with the substance, the transactions being set up to finance the transfer of assets within the group in the meaning of Article 6 of the StAnpG.

Finally, in case the Commission were to adopt a negative decision, Luxembourg considers that it should apply only for the future and that the Commission should not request a recovery of the alleged State aid, in line with the principles of legal certainty and legitimate expectations.

Engie argues that the concerned companies do not benefit from any advantage as they do not benefit from any unjustified tax reduction. Engie states that the deduction of ZORA Accretions does not constitute a competitive advantage. Furthermore, Engie considers that there cannot be any competitive advantage from the combination of the regime applied to the borrowers of the ZORAs and the regime applied to the lenders, as this advantage did not materialise due to the absence of conversion for the GSTM ZORA and the decision not to opt for Article 22bis LIR for the LNG ZORA.

Firstly, Engie considers that the contested tax rulings do not entail any individual aid measure.

Engie contests the system of reference used by the Commission in the Opening decision. Engie considers that Articles 109(1) and 164 LIR are not applicable, the first one because it concerns only individuals and the second one because it does not concern loans. The correct system of reference is constituted of Articles 18 to 45 LIR, which enshrine the fundamental principles of Luxembourg tax law for determining the taxable basis of a company, e.g. the principle of prudence (Article 23 LIR), the linking of the tax balance sheet to the commercial balance sheet (Article 40 LIR) and the deductibility of business expenses (Article 45 LIR).

According to Engie, the contested tax rulings do not depart from the applicable system of reference. The increase of the debt is a financial expense for the borrowers. This financial expense is booked in the annual accounts and is deductible in line with the principle of linking the tax balance sheet with the commercial balance sheet and the deduction of operating expenses. Conversely, in case of negative ZORA Accretions, the decrease of the debt leads to the booking of a taxable income. The subsequent conversion of the loan into shares does not call into question the initial qualification of the instrument as debt. Regarding EIL and LNG Luxembourg, Article 22bis LIR gives them the possibility to opt, at the time of the conversion, for a tax deferral. LNG Luxembourg did not opt for this regime following the partial conversion of the LNG ZORA in 2014 and booked a taxable profit. The GSTM ZORA and the remainder of the LNG ZORA have not given rise to any conversion to date. No income has been realised and no use of the optional regime of Article 22bis LIR could be made. Therefore, Engie considers that both in their substance and in their implementation, the contested tax rulings do not derogate from the system of reference.

According to Engie, the confirmation by the contested tax rulings of the combined application of the concerned provisions of Luxembourg law is consistent with the objective of the Luxembourg corporate income tax system to tax the profits of any company subject to tax in Luxembourg after taking into account the remuneration of the debt instruments. Any borrower would be subject to the same tax treatment, i.e. the deductibility of financial expenses. In the same way, any lender, which would conclude a similar loan, would be subject to the same tax treatment, i.e. taxation of an accounting profit at the time of the repayment, except if it opts for tax deferral.

Engie also contests any abuse of law. The entities involved in the transactions are all legal entities. Moreover, the contested transactions have an economic rationale, which is to finance the transfer of activities. Therefore, Engie considers that Luxembourg did not exempt the ZORA Accretions from taxes neither endorsed any tax evasion or abuse of the national law.

Secondly, Engie considers that, since the contested tax rulings merely confirm the applicable national law, they should be assessed as a scheme. In this regard, Engie considers that such schemes, as clarified by the contested tax rulings, are not selective. They are of a general nature since they are applicable, individually or cumulatively, without distinction to all economic operators without any condition. Their applicability is not subject to the issuance of tax rulings which were sought in this case for reasons of legal certainty. Any undertaking in a legal and factual comparable situation in the light of the objective of the tax system, namely the taxation of profits, can benefit from these schemes. Therefore, according to Engie, they do not create by their effects any discrimination or differentiation between undertakings.

Thirdly, Engie supports that the measures at issue result from the guiding principles of the Luxembourg tax system, in particular from the principle of prudence.

Engie contests that the Luxembourg corporate income tax system has for objective to tax profits recorded in the accounts. The reference system is the Luxembourg corporate income tax system, including Article 166 LIR, the application of which was approved in the contested tax rulings.

Engie also indicates that the contested tax rulings do not derogate from Article 166 LIR. In line with the Luxembourg corporate income tax system, any dividend or capital-gain recorded by a taxpayer cannot be taxed if the conditions of Article 166 LIR are met. Engie notes that the conditions of Article 166 LIR were met when LNG Supply reduced its capital by the cancellation of the newly issued shares. Therefore, Engie considers that the contested tax rulings did not deviate from the applicable fiscal rules and did not result in a decrease of the taxes, which would have been due in their absence.

Engie also considers, in line with Articles 99 and 101 of the Luxembourg Constitution that the Luxembourg tax authorities cannot derogate from the strict conditions set up in Article 166 LIR.

Engie notes that the Opening decision refers to a potential individual aid measure and not to Article 166 LIR, which would be a scheme. In case the Commission were not to consider Article 166 LIR as derogation in itself, but only question its application in the contested tax rulings, the Commission failed to demonstrate that the contested tax rulings derogate from Article 166 LIR.

Engie argues that the extension of the participation exemption regime — initially introduced in Luxembourg in 1940 — was in accordance with the objective of building the internal market. According to Engie, this is precisely the objective of Directive 90/435/EEC. Engie considers that this Directive does not require a taxation of the profits to be distributed.

Engie explains that the transactions whose tax treatment was endorsed by the contested tax rulings pursue an economic objective, i.e. financing the transfer of assets. Therefore, according to Engie, the criteria of the Article 6 StAnpG are not met in the present case.

According to Engie, the beneficiaries of the contested tax rulings have not been treated differently from other companies which would not benefit from such tax rulings, given that the contested tax rulings only confirm the correct application of the applicable tax rules in Luxembourg. Therefore, the contested tax rulings discriminate neither de jure nor de facto other undertakings in a factual and legal situation comparable to Engie in the light of the objectives of the Luxembourg tax system.

Finally, Engie argues that in case the Commission were to qualify the contested tax rulings as aid incompatible with the internal market, it could not order their recovery without infringing a number of general principles of law, namely the principles of legal certainty, legitimate expectations, good administration and equal treatment.

In particular, according to Engie, the Commission could only demonstrate the existence of a selective advantage by imposing retroactively its own interpretation of the Luxembourg tax law to conclude that it was wrongly applied in the case at hand. The legal uncertainty that would result should be limited by the non-retroactivity of the effects of the decision.

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 is incompatible with the internal market, in so far as it affects trade between Member States.

As regards the first condition for a finding of aid, the contested tax rulings were issued by the Luxembourg tax administration, which is an organ of the Luxembourg State. Those tax rulings entailed an acceptance by that administration of a certain tax treatment. On the basis of those rulings, the Engie group companies LNG Supply, LNG Luxembourg, LNG Holding, GSTM, EIL and CEF have determined their corporate income tax liability in Luxembourg on an annual basis. Those tax rulings are subsequently used by those Engie group companies for their annual corporate income tax declarations, which were accepted by the Luxembourg tax administration as corresponding to their corporate income tax liability in Luxembourg. The tax advantage granted on the basis of the contested tax rulings is therefore imputable to Luxembourg.

In particular, Engie is active in electricity, natural gas and LNG, energy efficiency services and other related markets in several EU Member States. These are all markets in which Engie faces competition from other undertakings. As it will be demonstrated, the tax treatment granted on the basis of the contested tax rulings relieve Engie of a tax liability they would have otherwise been obliged to bear in their day-to-day management of normal activities. Therefore the aid granted on the basis of those tax rulings should be considered to distort or threaten to distort competition by strengthening the financial position of Engie on the markets on which it operates. By relieving Engie of a tax liability it would otherwise have had to bear and which competing undertakings have to carry, the tax treatment granted on the basis of the contested tax rulings frees up resources which Engie could use, for instance, to invest in its business operations, to undertake further investments or to improve the remuneration of shareholders, thereby distorting competition on the markets where it operates. Therefore, the fourth condition for a finding of aid is also fulfilled in this case.

As regards the third condition for a finding of aid, the function of a tax ruling is to confirm in advance the way the ordinary tax system applies to a particular case in view of its specific facts and circumstances. However, like any other tax measure, the tax treatment granted on the basis of a tax ruling must respect State aid rules. Where a tax ruling endorses a tax treatment that does not reflect what would result from a normal application of the ordinary tax system, without justification, the measure will confer a selective advantage on its addressee in so far as that tax treatment results in improving the financial position of that undertaking in the Member State as compared to undertakings in a comparable factual and legal situation in the light of the objective of the tax system.

The contested tax rulings endorse a tax treatment on the basis of which GSTM, EIL, CEF, LNG Supply, LNG Luxembourg and LNG Holding have determined their taxable profit for corporate income tax purposes on an annual basis. That tax treatment, in turn, determines their corporate income tax liability in Luxembourg during the period covered by the contested tax rulings and is thus apt to provide a selective advantage.

Therefore, the analysis of the existence of a selective advantage must begin with the identification of the reference system applicable in the Member State concerned. It is against that reference system that it must be determined whether the measure constitutes a derogation giving rise to a favourable treatment compared to other undertakings in a comparable factual and legal situation in the light of the objectives of the system.

In this case, the Commission will establish in Section 6.2.1 that the tax treatment granted on the basis of the contested tax rulings constitutes a derogation from the general Luxembourg corporate income tax system. In Section 6.2.2, it will demonstrate that this tax treatment also derogates from a narrower reference system consisting exclusively of the rules of the general Luxembourg corporate income tax system which govern the participation exemption and the taxation of profit distributions.

Without prejudice to the conclusion in recital 236, an analysis of the effects of the contested tax rulings at the level of the group and not just of the individual legal entities leads to the same conclusion: the tax treatment granted on the basis of the contested tax rulings confers a selective advantage to Engie.

In addition, the advantage granted on the basis of the contested tax rulings consists in the application of the participation exemption, at the level of the Holdings, to an income which corresponds economically to amounts deducted as expenses (the ZORA Accretions) by the Subsidiaries. Therefore, in order to determine the existence of an advantage it is logical to assess also the combined effects of the tax measures at both levels. The fact that Luxembourg income tax law concerns individual entities does not undermine this conclusion. In fact, the Commission notes that the tax rulings requests submitted by the tax advisor concern the tax treatment of all the legal entities of the Engie group involved in the transactions and that these entities are all subject to tax in Luxembourg.

On the contrary, in this case the effect of the measure (non-taxation of part of the profit realised by some entities in Luxembourg) derives from the combined application of an exemption and a deduction at the level of different group entities, all of which are resident for tax purposes in Luxembourg. An assessment of the combined effect of the tax rulings at the level of Engie group in Luxembourg is thus adequate to fully appreciate the result of the tax treatment.

As an alternative line of reasoning, the Commission considers also that its doubts expressed in recital 158 of the Opening Decision i.e. whether with the non-taxation of the group Luxembourg derogated from its domestic rules on abuse of law in the field of taxation have not been allayed.

As established in Section 6.2.1.1, the reference framework is the Luxembourg corporate income tax system, which aims at the taxation of the profit of all companies subject to tax in Luxembourg. The basis for the calculation of the taxable profit is the profit determined in their accounts. This objective applies to all corporate taxpayers resident in Luxembourg.

Anti-abuse tax rules are the set of rules devised to avoid that taxpayers circumvent the main objective of the reference system, i.e. the taxation of corporate profit. Therefore, these rules must be understood as an inherent part of the reference system, as they ensure the internal consistency of the system and aim at achieving its fundamental objectives.

Since the tax treatment granted on the basis of the contested tax rulings 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 Engie in the course of its business operations and should therefore be considered as granting operating aid to Engie.

In Section 6.2, the Commission has concluded that the tax treatment granted on the basis of the contested tax rulings confers a selective advantage to LNG Holding and CEF within the meaning of Article 107(1) of the Treaty, since they lead to a lowering of those entities' taxable profit and thus their corporate income tax liability in Luxembourg. LNG Holding and CEF form part of the Engie group.

The rules on participation exemption concern profit distributed by one group company to another. In the present case, the ruling endorses the exemption of an income at the level of LNG Holding and CEF which corresponds economically to amounts deducted as expenses at the level of, respectively, LNG Supply and GSTM, thereby giving rise to the effective non-taxation of virtually all the profit realised by LNG Supply and GSTM, apart from a limited margin. There is therefore a situation of deduction and exemption which, as indicated in recital 243, has a positive impact on the tax liability of Engie in Luxembourg.

Additionally, the conclusion of recital 317 is reinforced by the findings of Sections 6.3 and 6.4, where the Commission has established that the tax treatment granted on the basis of the contested tax rulings confers a selective advantage within the meaning of Article 107(1) of the Treaty to the Engie group in Luxembourg, since they lead to a reduction of the combined tax base of the group in this Member State.

State aid shall be deemed compatible with the internal market if it falls within any of the categories listed in Article 107(2) of the Treaty and it may be deemed compatible with the internal market if it is found by the Commission to fall within any of the categories listed in Article 107(3) of the Treaty. However, it is the Member State granting the aid which bears the burden of proving that State aid granted by it is compatible with the internal market pursuant to Articles 107(2) or 107(3) of the Treaty.

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 on the basis of the contested tax rulings. Engie has not invoked any such grounds either.

Moreover, since the tax treatment granted on the basis of the contested tax rulings relieves Engie of a tax liability it would otherwise have been obliged to bear in their day-to-day management of normal activities, the aid granted on the basis of those tax rulings 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. Furthermore, the tax advantages in question are not limited in time, declining or proportionate to what is necessary to remedy to a specific market failure or to fulfil any objective of general interest in the areas concerned. Therefore, they could not be considered compatible.

Consequently, the State aid granted to the Engie 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 adopted a final decision on the aid in question (standstill obligation).

According to Article 1(c) of Regulation (EU) 2015/1589 ‘new aid’ means all aid, that is to say, aid schemes and individual aid, which is not existing aid, including alterations to existing aid.

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.

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.

The obligation on a Member 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.

In relation to unlawful State aid in the form of tax measures, the amount to be recovered should be calculated on the basis of a comparison between the tax actually paid and the amount which should have been paid in the absence of the contested tax rulings. The difference between the two values represents the aid granted to the beneficiary, which must be entirely recovered.

By contrast, the LNG ZORA was partially converted in 2014 and the LNG Supply Shares received by LNG Holding at conversion were cancelled on the same year, giving rise to an income of USD 506,2 million for LNG Holding. This income remained untaxed pursuant to the application of the participation exemption. This amount corresponds to the expense deducted, as ZORA Accretions, at the level of LNG Supply.

The methodology described in recital 363 should apply to CEF, in case any amount of aid had materialised via a (total or partial) conversion of the GSTM ZORA into GSTM Shares, their cancellation or sale, and the subsequent application of the participation exemption in the tax returns of CEF at the date of adoption of this Decision. The same applies to any additional aid awarded to LNG Holding at the date of adoption of the present Decision as a result of any further conversions of the LNG ZORA, the cancellation or sale of the corresponding LNG Supply Shares, and the application of the participation exemption in the tax returns of LNG Holding.