All IKEA shops worldwide pay a franchise fee of 3% of their turnover to Inter IKEA Systems, a subsidiary of Inter IKEA group in the Netherlands. The investigation will focus on the relationship between the Luxembourg-based Inter Ikea Holding, owned by the Netherlands-based Inter Ikea Systems, which collects royalties from other parts of Ikea yet pays little tax on the proceeds.
From 2006 to 2011 Systems paid an annual licence fee to another group company (Holding), based in Luxembourg which held some of the intellectual property (IP).
As a result, a significant part of Inter IKEA Systems' franchise profits were shifted from Inter IKEA Systems to I.I. Holding in Luxembourg, where they remained untaxed. However, the Swedish company claims that several points of the report are mistaken, but this will not stop the European Commission from clarifying whether Ikea may have received illegal state aid in the Netherlands. As a result, the 2006 tax ruling was no longer applicable.
I.I. Holding paid no corporate tax in Luxembourg because of Luxembourg tax rules in place at the time.
Under scrutiny are two Dutch tax rulings that may have given Inter Ikea, one of the Swedish corporate giant's divisions, unfair tax advantages that "have significantly reduced" the firm's taxable profits, BBC reported.
The European Commission is not so much anxious about different countries in the European Union having different tax policies, in fact considering it is supposed to be one, seamless market, there are a whole range of company tax rates and policies across the EU. Instead, in 2011, Inter IKEA changed the way it was structured.
Assess whether the price Inter IKEA Systems agreed for the acquisition of the intellectual property rights and consequently the interest paid for the intercompany loan, endorsed in the 2011 tax ruling, reflects economic reality.
Under EU state aid rules, member states are prohibited from granting corporations tax benefits that are not available to all companies within the bloc.
"As a result of the interest payments, a significant part of Inter IKEA Systems' franchise profits after 2011 was shifted to its parent in Liechtenstein". The US had argued that it should also be allowed to intervene because US tax revenues would be affected and because the decision could harm bilateral tax treaty negotiations with European Union member states as well as efforts to develop transfer pricing rules within the OECD framework. The commission said it would scrutinize whether those payments reflect economic reality. Regulators will assess "if the level of the annual license fee reflects" the company's contribution to the franchise business. "Ikea has been using a series of tax loopholes for years to avoid paying taxes", said German Green MEP Sven Giegold.
The opening of an in-depth investigation gives the Netherlands and interested third parties an opportunity to submit comments.