On 10 January 2019 the European Commission announced that it has opened an in-depth investigation into tax rulings granted by the Netherlands to companies in the Nike group. The rulings may have given the companies an unfair competitive advantage contrary to EU State aid rules.

The investigation relates to the tax treatment of two Nike group companies based in the Netherlands, Nike European Operations Netherlands BV and Converse Netherlands BV. These companies develop, market and record group sales in Europe, the Middle East and Africa (the EMEA region). These two Netherlands companies obtained licenses to use intellectual property rights relating to Nike and Converse products in the EMEA region. Those licenses were obtained in return for a tax-deductible royalty payment from tax transparent group entities.

From 2006 to 2015, the Dutch tax authorities issued five tax rulings in relation to the  method of calculating the royalty for the use of the intellectual property. As a result of the rulings the two companies holding the licenses to use IP rights were only taxed in the Netherlands on a limited operating margin based on sales.

The European Commission is concerned that the royalty payments endorsed by the rulings may not reflect economic reality as they appear to be higher than payments that independent companies would have agreed between themselves acting at arm’s length.

A preliminary analysis found that the two companies paying the royalties and holding the licenses to use the IP rights have more than a thousand employees involved in managing the IP but the recipients of the royalties are group entities with no employees and those entities are not carrying out any economic activity.

The European Commission investigation will look at whether the Netherlands tax rulings may have unduly reduced the taxable base of the two Netherlands companies since 2006. If so the Netherlands may have granted a selective advantage to the group by permitting it to pay less tax than other companies whose transactions are priced at arm’s length and this would amount to illegal State aid.

The Netherlands and any other interested third parties can at this stage submit comments in relation to the investigation.