Europe's competition regulator has opened an in-depth investigation to determine whether the Netherlands' tax treatment of U.S. footwear company Nike Inc. constituted illegal state aid.
The probe, disclosed Jan. 10, is the latest move by the European Commission in its effort to tackle what it describes as selective advantages to specific companies, which it said can distort competition within the single European market.
If the Dutch tax treatment is found to breach European Union rules on state aid, Nike could be required to repay any benefits that it received. The European Commission has required member states to recover billions of euros from companies since it started its campaign in 2013. Most notably, Ireland has recovered €14.3 billion from Apple Inc., and Luxembourg has been reimbursed €282.7 million by Amazon.com Inc., the commission said.
"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," Margrethe Vestager, the European commissioner in charge of competition policy, said in a statement.
In a statement emailed to S&P Global Market Intelligence, a Nike spokesperson said the company believed that the investigation was without merit. "Nike is subject to and rigorously ensures that it complies with all the same tax laws as other companies operating in the Netherlands," the spokesperson said.
The commission's investigation of Nike focuses on the tax treatment in the Netherlands of two entities, Nike European Operations Netherlands BV and Converse Netherlands BV, operating companies that develop, market and record sales of Nike and Converse products in Europe, the Middle East and Africa.
The Nike entities obtained licenses to use intellectual property rights relating to Nike and Converse goods in the EMEA region in exchange for royalty payments to Nike group companies that were not taxable in the Netherlands. The method to calculate the royalty paid by Nike European Operations Netherlands and Converse Netherlands was endorsed by five rulings by Dutch tax authorities between 2006 and 2015, two of which remain in force.
Nike European Operations Netherlands and Converse Netherlands are taxed in the Netherlands only on a limited operating margin based on sales, according to the commission, which said the royalty payments to the nontaxable Nike group companies "may not reflect economic reality."
The royalty payments "appear to be higher than what independent companies negotiating on market terms would have agreed between themselves in accordance with the arm's length principle," the commission said.
The Nike group companies that receive royalty payments have no employees and "do not carry out any economic activity," the commission added.
Vestager, the competition commissioner, welcomed Dutch plans to reform taxation rules. European competition authorities are also investigating Dutch tax rulings in favor of Inter Ikea Holding BV.