24 September 2019 (*1)

(State aid – Aid implemented by the Netherlands – Decision declaring the aid to be incompatible with the internal market and unlawful and ordering its recovery – Tax ruling – Transfer pricing – Calculation of the tax base – Arm’s length principle – Advantage – Reference system – Fiscal and procedural autonomy of the Member States)

In Cases T‑760/15 and T‑636/16,

Kingdom of the Netherlands, represented initially by M. Bulterman, B. Koopman, M. de Ree and M. Noort, subsequently by M. Bulterman, M. de Ree and M. Noort, acting as Agents,

applicant in Case T‑760/15,

supported by Ireland, represented initially by E. Creedon, G. Hodge, A. Joyce and K. Duggan, subsequently by G. Hodge, A. Joyce, K. Duggan, M. Browne and J. Quaney, acting as Agents, and by M. Collins, P. Gallagher, Senior Counsel, B. Doherty and S. Kingston, Barristers,

intervener,

Starbucks Corp., established in Seattle, Washington (United States),

Starbucks Manufacturing Emea BV, established in Amsterdam (Netherlands),

represented by S. Verschuur, M. Petite and M. Stroungi, lawyers,

applicants in Case T‑636/16,

European Commission, represented, in Case T‑760/15, initially by P.‑J. Loewenthal and B. Stromsky, subsequently by P.‑J. Loewenthal and F. Tomat, acting as Agents, and in Case T‑636/16, by P.‑J. Loewenthal and F. Tomat, acting as Agents,

defendant,

APPLICATIONS based on Article 263 TFEU seeking annulment of Commission Decision (EU) 2017/502 of 21 October 2015 on State aid SA.38374 (2014/C ex 2014/NN) implemented by the Netherlands to Starbucks (OJ 2017 L 83, p. 38),

composed of M. van der Woude, President, V. Tomljenović (Rapporteur), E. Bieliūnas, A. Marcoulli and A. Kornezov, Judges,

Registrar: S. Spyropoulos, Administrator,

having regard to the written procedure and further to the hearing on 2 July 2018,

gives the following

–the costs of the Starbucks cups, paper napkins, etc.;

–the costs of green coffee beans;

–the logistics and distribution cost relating to services provided by third parties and to the remuneration for activities provided by third parties under consignment manufacturing contracts;

–the royalty payment.

(a) Description of the contested measure

First, the Commission noted that, in adopting the APA, the Netherlands tax authorities had accepted that the remuneration for SMBV’s activities in the Netherlands, as determined by the Starbucks group’s tax advisor, constituted an arm’s length remuneration. The Commission then noted that the Netherlands authorities had also accepted that the level of the royalty payment from SMBV to Alki corresponded to the difference between the realised operating profit before royalty payments and SMBV’s remuneration as provided for by the APA. It found that the APA provided that the royalty payment would be deductible from SMBV’s taxable profit and would not be subject to withholding tax in the Netherlands (recitals 40 to 44 of the contested decision).

Second, the Commission set out the content of the transfer pricing report. First of all, the Commission stated that the transfer pricing report presented Starbucks Coffee Emea as the principal establishment of the Starbucks group in the EMEA region. It was described as sublicensing the Starbucks group’s intellectual property rights (trade mark, technology and know-how) – for which it itself was paying a royalty to Alki – to third parties operating Starbucks branches. Those then paid Starbucks Coffee Emea for IP rights corresponding to a percentage of their turnover. In that regard, the Commission noted that the Starbucks group’s tax advisor considered that the CUP method could be used to determine the arm’s length price of payments of intra-group IP rights to Starbucks Coffee Emea.

Next, as regards SMBV, first, the Commission noted that the transfer pricing report was limited to describing it as an entity with the primary function of roasting green coffee beans and selling the roasted coffee on to affiliated and non-affiliated entities. As part of those activities, SMBV was required to observe the specifications provided by the companies of the Starbucks group that were established in the territory of the United States (‘Starbucks US’) and had the responsibility of ensuring that its production was in conformity with the quality standards of Starbucks US. SMBV also acted as distribution intermediary for various products not derived from café and provided ‘support to the supply chain’. Second, the Commission stated that, to carry out that activity, SMBV supplied itself with green coffee beans from a subsidiary of the Starbucks group established in Switzerland, Starbucks Coffee Trading SARL (‘SCTC’). SMBV also paid a royalty to Alki for the use of roasting processes and for the right to provide Starbucks branches with coffee. In that regard, the Commission observed that the transfer pricing report did not list the licensing arrangement under which SMBV paid a royalty to Alki among the most important transactions. The relationships between SMBV and the various entities of the Starbucks group were restated in Figure 1 of the contested decision, reproduced below:

Last, the Commission stated that, as regards the choice of transfer pricing method, the transfer pricing report selected the TNMM, a method whereby account was taken of the net margins that had been received in comparable transactions by non-affiliated companies. According to the transfer pricing report, that method was appropriate in the case at hand, since the differences between the transactions and the functions of the entities to be compared to determine the net margin were less the sources of error than in traditional methods (recital 55 of the contested decision).

The Commission stated that, in order to apply the TNMM, the tax advisor had chosen as profit level indicator the operating costs for the activities where SMBV provided added value. After a comparability search, the tax advisor had considered that the net profit of the entities comparable to SMBV corresponded to a mark-up on total costs. Thereafter, the Starbucks group’s tax advisor had made two adjustments in order to take account of the differences between the compared entities and SMBV, such as the risks assumed or the functions performed. The first adjustment sought to take into account the fact that SMBV’s cost base, to which the mark-up was applied, did not include the cost of green coffee beans. The second adjustment purported to take into account the fact that the comparable undertakings bore the cost of raw materials and that their return was calculated on a cost base including raw materials. Applying those two adjustments, the mark-up had thus been set at [confidential]% of SMBV’s cost base (recitals 56 to 61 of the contested decision).

Third, the Commission set out the content of the OECD Guidelines in their 1995 and 2010 versions. According to the Commission, the OECD Guidelines described five methods to approximate an arm’s length pricing of transactions and profit allocation between companies of the same group. In its view, they classified those five methods either as traditional transaction methods or as transactional profit methods. According to the contested decision, the traditional transaction methods were to be given priority. The CUP method and the TNMM were included among the five methods listed in the OECD Guidelines (recitals 67 to 70 of the contested decision).

The first method, the CUP method, is, as the Commission described, a traditional transaction method, consisting in comparing the price charged for the transfer of property or services in a transaction between two associated undertakings with the price charged for the transfer of property or services in a comparable transaction carried out in comparable circumstances between two independent undertakings (recitals 67 and 71 of the contested decision).

The second method, the TNMM, is, as the Commission describes, a transactional profit method, which involves estimating the potential amount of arm’s length profit for an entire activity, rather than for specific transactions. In that context, a profit level indicator would be selected, such as costs, turnover or fixed investment, to which would be applied a profit ratio reflecting that observed in comparable transactions on the market (recitals 67 and 72 to 74 of the contested decision).

In Section 9 of the contested decision, entitled ‘Assessment of the contested measure’, the Commission concluded that State aid had been granted. It found that the four conditions for the existence of State aid had been satisfied.

After recalling the conditions for the existence of State aid, set out in Article 107(1) TFEU, the Commission found that the first condition for the existence of State aid, the requirement of an intervention by the State or through State resources, had been satisfied. It noted, to that end, first, that the APA contained the acceptance by the Netherlands tax administration of a method for allocating profits to SMBV within the Starbucks group, as proposed by the Starbucks group’s tax advisor. SMBV then calculated on that basis the annual amount of corporate income tax it was required to pay in the Netherlands. According to the Commission, the APA was therefore imputable to the Kingdom of the Netherlands. Second, the Commission found that the APA resulted in a lowering of SMBV’s tax liability in the Netherlands by deviating from the tax that SMBV would otherwise – in the absence of the APA – have been obliged to pay under the general Netherlands corporate income tax system. The Commission thus took the view that the APA had given rise to a reduction of the Kingdom of the Netherlands’ tax revenue (recitals 223 to 226 of the contested decision).

As regards the second and fourth conditions for a finding of State aid, first, the Commission found that the APA was liable to affect intra-Union trade, since SMBV was part of the Starbucks group, a globally active entity operating in all Member States of the European Union. Second, it maintained that, given that the APA reduced the tax burden that SMBV would otherwise have had to bear under the general corporate income tax system, it distorted or threatened to distort competition by strengthening SMBV’s financial position (recital 227 of the contested decision).

As regards the third condition for a finding of State aid, the Commission considered that the APA conferred a selective advantage on SMBV, in so far as it had resulted in a lowering of SMBV’s tax liability in the Netherlands as compared with what it would have had to pay under the general corporate income tax system and as compared with stand-alone undertakings (recital 228 of the contested decision).

As a preliminary point, the Commission observed that the case-law had established a three-step analysis to be used in determining whether a particular tax measure was selective. The first step is to identify the ‘reference system’, namely, the tax regime normally applicable to the beneficiary of the tax measure. In the second step, it is necessary to determine whether the tax measure derogates from that reference system, in so far as it differentiates between economic operators who, in the light of the objectives intrinsic to the reference system, are in a comparable legal and factual situation. In the third and final step, if the measure constitutes a derogation from the reference system, the Member State must establish that the derogation is justified by the nature or the general scheme of the reference system (recital 230 of the contested decision).

As regards the first step, identification of the reference system, the Commission considered the reference system to be the general Netherlands corporate income tax system, the objective of which is to tax the profits of all companies subject to tax in the Netherlands. It stated in that regard that companies established in the Netherlands are resident taxpayers and are subject to corporate income tax on their worldwide income. Companies not established in the Netherlands are non-resident companies and are subject to tax with regard to income from Netherlands sources. According to the Commission, integrated companies and stand-alone companies were in a comparable legal and factual situation in the light of that objective and were therefore subject to corporate income tax without distinction. In that regard, the difference in the modalities of calculating the taxable profits of integrated companies had no bearing on the objective of the reference system, taxation of the profits of all companies subject to tax in the Netherlands (recitals 231 to 244 of the contested decision).

As regards the second step set out in paragraph 34 above, namely, demonstrating a derogation from the reference system, the Commission indicated, first of all, that the question of whether a tax measure constituted a derogation from the reference system would generally coincide with identification of the advantage granted to the beneficiary under that measure. In its view, where a tax measure results in a reduction of the tax liability of a beneficiary compared to what it would otherwise have to pay were it not for that measure, that reduction constitutes both the advantage granted by the tax measure and the derogation from the reference system (recital 253 of the contested decision).

Next, the Commission recalled the case-law according to which, in the case of an individual measure, the identification of the economic advantage is, in principle, sufficient to support the presumption that that measure is selective. It stated that, in the case at hand, the APA granted to SMBV was an individual aid measure (recital 254 of the contested decision).

Last, the Commission asserted that, in the judgment of 22 June 2006, Belgium and Forum 187 v Commission (C-182/03 and C-217/03, EU:C:2006:416), the Court of Justice had found that a tax measure which results in an integrated company charging transfer prices that did not reflect those which would have been charged in conditions of free competition, that is prices negotiated by independent undertakings negotiating under comparable circumstances at arm’s length, conferred an advantage on that group company in so far as it resulted in a reduction of its taxable base and thus its tax liability under the ordinary corporate income tax system. The Commission recalled that the arm’s length principle consisted in the notion that transactions between intra-group companies were to be remunerated as if they had been agreed to by stand-alone companies negotiating under conditions of free competition. Accordingly, the Commission stated that it had to verify whether the methodology accepted by the Netherlands tax administration via the APA for the purposes of determining SMBV’s taxable profits in the Netherlands departed from a methodology that resulted in a reliable approximation of a market-based outcome and, therefore, from the arm’s length principle. In that case, the APA would be regarded as conferring a selective advantage on SMBV within the meaning of Article 107(1) TFEU (recitals 259 to 263 of the contested decision).

Consequently, the Commission found that the arm’s length principle necessarily formed an integral part of its assessment, under Article 107(1) TFEU, of the tax measures granted to integrated companies, independently of whether a Member State had incorporated that principle into its national legal system. The Commission then stated that, in response to the arguments of the Kingdom of the Netherlands raised during the administrative procedure, it had not examined whether the APA observed the arm’s length principle, as defined in Article 8b of the CIT and by the transfer pricing decree, but that it had sought to determine whether the Netherlands tax administration had conferred a selective advantage on SMBV within the meaning of Article 107(1) TFEU (recitals 264 and 265 of the contested decision).

In the light of those elements, the Commission set out a series of lines of reasoning to prove that the APA conferred a selective advantage on SMBV. In a primary reasoning, the Commission elaborated several lines of reasoning, some of which were subsidiary to each other, to demonstrate that the APA derogated from the general Netherlands corporate income tax system. In a subsidiary reasoning, the Commission maintained that the APA derogated from Article 8b(1) of the CIT and from the transfer pricing decree.

In particular, in the first place, in its primary reasoning aimed at demonstrating that the APA derogated from the general Netherlands corporate income tax system, the Commission noted that the Starbucks group’s tax advisor had chosen the TNMM for the purposes of determining SMBV’s taxable profits. It considered that different methodological choices, proposed by the Starbucks group’s tax advisor and endorsed by the Kingdom of the Netherlands, led to a reduction in the corporate income tax paid by SMBV as compared to stand-alone companies whose taxable profits were determined under market conditions (recitals 268 to 274 of the contested decision).

First, the Commission considered that the transfer pricing report had failed to examine whether the intra-group transfer for which the APA had actually been requested and granted – namely, the royalty SMBV paid to Alki for the licence to use the roasting IP – was in conformity with the arm’s length principle. Consequently, the transfer pricing report failed to identify or analyse controlled and uncontrolled transactions, which was a necessary first step in assessing the arm’s length nature of commercial conditions applicable between related parties for transfer pricing purposes (recitals 275 to 285 of the contested decision).

Second, regarding the level of the royalty, the Commission considered that, had the transfer pricing report correctly identified and examined the royalty, it should have resulted in an arm’s length value of zero. It noted inter alia that SMBV generated no profit from the use of the IP rights that were the subject of the royalty, in so far as it did not exploit them on the market. The Commission then considered that the profits paid to Alki by means of the royalty should have been fully taxed in the Netherlands (recitals 286 to 341 of the contested decision).

In examining the arm’s length nature of the royalty, the Commission applied the CUP method and identified a number of manufacturing agreements between the Starbucks group and third entities, or between third entities to the Starbucks group, as being comparable transactions.

In addition, the Commission rejected the arguments raised by the Kingdom of the Netherlands and Starbucks seeking to justify the amount of the royalty. First, it took the view that the consideration for the royalty payment could not be Alki’s taking over of SMBV’s entrepreneurial risks; otherwise, integrated companies could contractually reallocate risk and thereby prevent any application of the arm’s length principle. Second, the Commission added that the royalty payment could not be justified by size of the amounts paid by Alki to Starbucks US.

Third, regarding the level of the purchase price of green coffee beans, the Commission noted that that transaction had not been examined in the transfer pricing report, when that report identified it as one of the main transactions effected by SMBV. Using SCTC’s financial data, the Commission calculated the average gross margin on the costs of green coffee beans for the APA’s validity period. The Commission considered that the gross margin between 2011 and 2014, which resulted in a significant increase in the price of green coffee beans to be borne by SMBV compared to the costs borne by SCTC, did not reflect a reliable approximation of a market-based outcome. It concluded that the price premium paid by SMBV, in lowering the latter’s recorded profits and therefore taxable base, constituted a selective advantage (recitals 342 to 361 of the contested decision).

In the second place, still in its primary line of reasoning to demonstrate that the APA derogated from the general Netherlands corporate income tax system, but subsidiary to the criticisms set out in paragraphs 42 to 46 above, the Commission considered that, in any event and even assuming that the TNMM were appropriate for identifying the profits made by SMBV, the transfer pricing report had incorrectly applied the TNMM. It concluded that, since that method did not result in an arm’s length outcome, the Netherlands tax authorities could not approve it in the APA (recitals 362 to 408 of the contested decision).

First, the Commission considered that the transfer pricing report had erroneously identified SMBV as being the least complex entity, and therefore as being the ‘tested party’, for the purposes of the application of the TNMM. It added that, on the contrary, SMBV should have been identified as the most complex entity, in so far as, first, Alki performed only limited functions and, second, apart from the fact that SMBV performed functions other than roasting, that function was not a routine activity but an essential one (recitals 362 to 377 of the contested decision).

Second, the Commission considered that the profit level indicator used in the transfer pricing report, namely, operating costs, was inappropriate. According to the Commission, the Starbucks group’s tax advisor had erroneously found that roasting was SMBV’s principal function rather than reselling and distribution. The Commission then concluded that the use of the sales recorded by SMBV as profit level indicator was more appropriate and would have led to a higher remuneration of SMBV’s activity. In support of that conclusion, the Commission calculated a profitability ratio from a group of independent entities exercising the same reselling and roasting activities as SMBV. It concluded, after comparison with Starbucks Manufacturing Corporation (‘SMC’) – the only other entity of the group to exercise roasting activities for the group – that SMC was [confidential] times more profitable than SMBV on the basis of the APA (recitals 379 to 400 of the contested decision).

Third, the Commission considered that, in any event and even assuming that operating costs were a profit level indicator appropriate for calculating SMBV’s transfer prices, the two adjustments made by the tax advisor in the transfer pricing report did not enable a reliable approximation of a market-based outcome to be reached. The Commission criticised, first, the use of a ‘working capital adjustment’ and, second, the exclusion of the costs of the undertakings designated in recital 300 of the contested decision as published in the Official Journal of the European Union by the term ‘unaffiliated manufacturing company 1’ (‘unaffiliated manufacturing company 1’) from the cost base used as profit level indicator (recitals 401 to 408 of the contested decision).

The Commission then concluded that the methodology accepted by the Netherlands tax authorities, whereby the profits generated by SMBV in excess of the [confidential]% margin of operating costs had to be paid as a royalty to Alki, was not in line with the arm’s length principle and led to a reduction in SMBV’s tax burden.

It is thus apparent from the foregoing that, in the examination in respect of the general Netherlands corporate income tax system, the Commission raised six errors justifying the conclusion that there was a selective advantage in the case at hand. In that examination, the first three errors come under a principal position, whereas the other three errors come under a subsidiary position and are subsidiary to each other.

Specifically, as regards the principal position, the Commission considered that the method accepted by the APA departed from a methodology that led to a reliable approximation of a market-based outcome in line with the arm’s length principle, in so far as:

–the choice of the TNMM was erroneous and the transfer pricing report did not examine the intra-group transaction for which the APA had effectively been requested and granted (‘the first line of reasoning’);

–first, the APA did not establish a methodology to ensure that the royalty paid by SMBV to Alki was in line with the arm’s length principle; however, the CUP method should have been applied in order to determine the amount of the royalty paid by SMBV to Alki; under that method, the royalty should have been zero (‘the second line of reasoning’);

–second, the APA did not examine whether the level of purchase price of green coffee beans was in line with the arm’s length principle; that level was overvalued (‘the third line of reasoning’).

With regard to the subsidiary position, the Commission considered that, even assuming that the TNMM were the appropriate method for determining the profits made by SMBV, the transfer pricing report had incorrectly applied the TNMM. In that regard, the Commission took the view that:

–the method accepted by the APA derogated from a method that gave a reliable approximation of a market-based outcome in line with the arm’s length principle, in so far as SMBV had been incorrectly identified as the least complex entity and thus as the tested entity for the purposes of the application of the TNMM (‘the fourth line of reasoning’);

–in the alternative, the method accepted by the APA did not give a reliable approximation of a market-based outcome in line with the arm’s length principle, in so far as SMBV’s functions had been incorrectly analysed and the choice of operating costs as profit level indicator was incorrect (‘the fifth line of reasoning’);

–in the alternative, the method accepted by the APA did not give a reliable approximation of a market-based outcome in line with the arm’s length principle, in so far as the adjustments made to the mark-up were inappropriate (‘the sixth line of reasoning’).

In the third place, in its subsidiary reasoning aimed at demonstrating that the APA derogated from Article 8b(1) of the CIT and from the transfer pricing decree, the Commission considered that, even supposing that the relevant reference system were not composed of the general rules on corporate income tax, but, as the Netherlands authorities maintained, only of the provisions enshrining the arm’s length principle in Netherlands law, namely Article 8b(1) of the CIT and the transfer pricing decree, the APA, in approving a method of determining SMBV’s profits that did not result in an arm’s length outcome, also derogated from that reference system. To that end, the Commission referred to its analysis conducted in respect of the general Netherlands corporate income tax system and the six lines of reasoning set out in paragraphs 52 to 54 above (the ‘reasoning in respect of the limited reference system’) (recitals 409 to 412 of the contested decision).

So far as concerns the third step of the analysis of the selectivity of tax measures, as identified in paragraph 34 above, the Commission found that the derogation from the reference system was not justified. In that regard, it noted that neither the Netherlands authorities nor Starbucks had put forward any possible justifications for SMBV’s selective treatment, when the burden of proof in that regard lay with them. The Commission moreover added that it had not been able to identify any possible justification (recitals 413 and 414 of the contested decision).

The Commission concluded that SMBV’s APA conferred on SMBV a selective advantage, within the meaning of Article 107(1) TFEU, in so far as it had validated a method for allocating profits to SMBV which could not be regarded as resulting in a reliable approximation of a market-based outcome in line with the arm’s length principle. According to the Commission, that method had led to a reduction in SMBV’s tax burden, primarily, under the general Netherlands corporate income tax system, by comparison with stand-alone companies, and, in the alternative, under Article 8b(1) of the CIT and the transfer pricing decree, by comparison with other integrated companies (recitals 415 and 416 of the contested decision).

Consequently, the Commission concluded that the APA constituted State aid (recitals 422 and 423 of the contested decision).

The Commission then considered that the aid granted to SMBV was incompatible with the internal market. In its view, the Kingdom of the Netherlands had not invoked any of the grounds for a finding of compatibility provided for in Article 107(2) and (3) TFEU. The aid in question, which was to be considered operating aid, could not normally be considered compatible with the internal market (recitals 431 to 434 of the contested decision).

Moreover, the Commission found that the Kingdom of the Netherlands had not notified it, in accordance with Article 108(3) TFEU, of any plan corresponding to the APA and had not complied with the standstill obligation incumbent on it under that article. It could therefore only be unlawful State aid, put in effect in contravention of that provision (recitals 435 and 436 of the contested decision).

Furthermore, the Commission specified that the information on which it had based its decision was available for the Netherlands tax administration at the time the APA was adopted. It added, in respect of the cost of green coffee beans, that the transfer pricing report did not examine the prices charged by SCTC to SMBV under their green coffee bean sourcing agreement and that, had that transaction been examined in the APA in 2008 in order to determine its arm’s length price, the APA would not have been able to leave room for the price increases observed in 2011 (recitals 424 to 427 of the contested decision).

Last, the Commission identified SMBV and the Starbucks group as a whole as aid beneficiaries, on the ground that they formed a single economic entity (recitals 417 to 419 of the contested decision).

In Section 10 of the contested decision, entitled ‘Recovery’, first, the Commission inter alia considered that it was not required to quantify the exact amount of the aid to be recovered, but rather it was sufficient for its decision to include information enabling the addressee of the decision to work out that amount itself without overmuch difficulty. In the present case, the Commission considered that, since the royalty amount had to be zero, SMBV’s accounting profits should have been used to calculate its taxable profits. Moreover, those profits should have been increased by the difference between the price paid for the green coffee beans and the price that ought to have been paid. In that regard, the Commission considered that a gross margin of [confidential]% for SCTC constituted an arm’s length price for the purchase of the coffee beans. It then specified that the sum to be recovered corresponded to the difference between the tax that should have been paid on the basis of that price and the amount actually paid under the APA (recitals 442 to 448 of the contested decision).

Second, the Commission found that, in the first instance, the Kingdom of the Netherlands was required to recover from SMBV the aid and that, should SMBV not have been in a position to make the repayment, the Kingdom of the Netherlands was to recover the balance from Starbucks Corp., since it was the entity which controlled the Starbucks group (recital 449 of the contested decision).

In conclusion, the Commission found that the Kingdom of the Netherlands, by concluding the APA, had unlawfully granted State aid to SMBV and to the Starbucks group, in breach of Article 108(3) TFEU, that the Kingdom of the Netherlands was required to recover it, by virtue of Article 16 of Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 TFEU (OJ 2015 L 248, p. 9) from SMBV and, if SMBV failed to repay the full amount of the aid, from Starbucks Corp. for the amount of aid outstanding (recital 450 of the contested decision).

The operative part of the contested decision reads as follows:

‘Article 1 The advanced pricing arrangement entered into by the [Kingdom of the] Netherlands on 28 April 2008 with [SMBV], which enables the latter to determine its corporate income tax liability in the Netherlands on a yearly basis for a period of 10 years, constitutes aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union that is incompatible with the internal market and that was unlawfully put into effect by the [Kingdom of the] Netherlands in breach of Article 108(3) of the Treaty.

The [Kingdom of the] Netherlands shall recover the incompatible and unlawful aid referred to in Article 1 from [SMBV].

Any sums that remain unrecoverable from [SMBV], following the recovery described in the preceding paragraph, shall be recovered from Starbucks [Corp.].

The sums to be recovered shall bear interest from the date on which they were put at the disposal of the beneficiaries until their actual recovery.

The interest shall be calculated on a compound basis in accordance with Chapter V of Regulation (EC) No 794/2004.

Recovery of the aid granted referred to in Article 1 shall be immediate and effective.

The [Kingdom of the] Netherlands shall ensure that this Decision is implemented within four months following the date of notification of this Decision.

Within two months following notification of this decision, the [Kingdom of the] Netherlands shall submit information regarding the methodology used to calculate the exact amount of aid.

The [Kingdom of the] Netherlands shall keep the Commission informed of the progress of the national measures taken to implement this Decision until recovery of the aid granted referred to in Article 1 has been completed. It shall immediately submit, on simple request by the Commission, information on the measures already taken and planned to comply with this Decision.

II. Procedure and forms of order sought

By application lodged at the Registry of the General Court on 23 December 2015, the Kingdom of the Netherlands brought the action in Case T‑760/15. The Commission lodged a defence on 30 March 2016. The reply and the rejoinder were lodged on 14 June 2016 and 9 September 2016, respectively.

By document lodged at the Court Registry on 20 June 2016, the Kingdom of the Netherlands requested that Case T‑760/15 be heard and determined by a Chamber sitting in extended composition. The Court took formal note, pursuant to Article 28(5) of its Rules of Procedure, of the fact that Case T‑760/15 had been referred to the Fifth Chamber, Extended Composition.

Following a change in the composition of the Chambers of the Court on 26 September 2016, the Judge-Rapporteur was assigned, pursuant to Article 27(5) of the Rules of Procedure, to the Seventh Chamber, Extended Composition, of the General Court to which Case T‑760/15 was accordingly allocated.

Since a member of the Seventh Chamber, Extended Composition, of the General Court was unable to sit, the President of the General Court, by decision of 26 April 2017, designated the Vice-President of the General Court to complete the chamber.

By decision of 12 December 2017, the President of the Seventh Chamber, Extended Composition, of the General Court approved the proposal of the Judge-Rapporteur that Case T‑760/15 be given priority under Article 67(2) of the Rules of Procedure.

By document lodged at the Court Registry on 6 April 2016, the United Kingdom of Great Britain and Northern Ireland applied for leave to intervene in Case T‑760/15 in support of the form of order sought by the Commission.

By document lodged at the Court Registry on 7 April 2016, Ireland applied for leave to intervene in Case T‑760/15 in support of the form of order sought by the Kingdom of the Netherlands.

By order of 13 June 2016, the President of the Fifth Chamber of the General Court granted the applications for leave to intervene of the United Kingdom and Ireland.

By document lodged at the Court Registry on 9 November 2016, the United Kingdom withdrew its intervention. By order of 12 December 2016, the President of the Seventh Chamber, Extended Composition, of the General Court removed the United Kingdom as intervener from Case T‑760/15.

Applications for confidential treatment

76By document lodged at the Court Registry on 26 February 2016, the Kingdom of the Netherlands applied for confidential treatment, vis-à-vis the public, of part of the application and certain documents annexed to it.

77By document lodged at the Court Registry on 17 May 2016, the Kingdom of the Netherlands applied for confidential treatment, vis-à-vis Ireland, of part of the application and certain documents annexed to it, as well as the contested decision and part of the defence.

78By document lodged at the Court Registry on 17 May 2016, the Commission applied for confidential treatment, vis-à-vis Ireland, of part of the defence.

79By document lodged at the Court Registry on 1 July 2016, the Kingdom of the Netherlands applied for confidential treatment, vis-à-vis Ireland, of part of the reply and certain documents annexed to it.

80By document lodged at the Court Registry on 21 July 2016, the Kingdom of the Netherlands informed the Court that it had reached an agreement with the Commission concerning the non-confidential version of the contested decision for publication and that it was amending the applications for confidential treatment it had made in Case T‑760/15 with regard to the contested decision in accordance with that agreement.

81By document lodged at the Court Registry on 11 October 2016, the Kingdom of the Netherlands applied for confidential treatment, vis-à-vis Ireland, of part of the rejoinder and certain documents annexed to it.

82Following its admission as intervener, Ireland received only non-confidential versions of the procedural documents and raised no objection to the applications for confidential treatment made with regard to it.

83On the proposal of the Judge-Rapporteur, the Seventh Chamber, Extended Composition, of the General Court adopted a measure of organisation of procedure provided for in Article 89 of the Rules of Procedure by which the Kingdom of the Netherlands was invited to revise its applications for confidential treatment of the APA, the roasting agreement between SMBV and Alki, mentioned in recital 142 of the contested decision, and the transfer pricing report, in order to remove certain inconsistencies in those applications. The Kingdom of the Netherlands provided new non-confidential versions of those documents within the prescribed period.

Forms of order sought

84The Kingdom of the Netherlands claims that the Court should:

–annul the contested decision;

–order the Commission to pay the costs in Case T‑760/15.

85The Commission contends that the Court should:

–dismiss the application in Case T‑760/15 as unfounded;

–order the Kingdom of the Netherlands to pay the costs in Case T‑760/15.

86Ireland claims that the Court should annul the contested decision in accordance with the form of order sought by the Kingdom of the Netherlands.

Written part of the procedure in Case T‑636/16

87By application lodged at the Court Registry on 5 September 2016, Starbucks Corp. and Starbucks Manufacturing Emea (together, ‘Starbucks’) brought the action in Case T‑636/16. The Commission lodged a defence on 16 March 2017. The reply and the rejoinder were lodged on 26 June and 20 October 2017, respectively.

Composition of the formation of the Court and priority treatment

88On the proposal of the Seventh Chamber of the General Court, the Court decided, on 12 July 2017, pursuant to Article 28 of the Rules of Procedure, to refer the case to a Chamber sitting in extended composition.

89Since a member of the Seventh Chamber, Extended Composition, of the General Court was unable to sit, the President of the General Court, by decision of 1 August 2017, designated the Vice-President of the General Court to complete the Chamber.

90By decision of 12 December 2017, the President of the Seventh Chamber, Extended Composition, of the General Court approved the proposal of the Judge-Rapporteur that Case T‑636/16 be given priority under Article 67(2) of the Rules of Procedure.

Applications for confidential treatment

91By document lodged at the Court Registry on 7 April 2017 and regularised by documents lodged on 23 April 2018, Starbucks applied for confidential treatment, vis-à-vis Ireland, of certain information in the application, in the defence, in the reply, in the rejoinder as well as in certain of the annexes to those submissions.

Forms of order sought

92Starbucks claims that the Court should:

–annul Articles 1 to 4 of the contested decision;

–in the alternative, annul Article 2(1) of the contested decision;

–order the Commission to pay the costs in Case T‑636/16.

93The Commission contends that the Court should:

–dismiss the action in Case T‑636/16 as unfounded;

–order Starbucks to pay the costs in Case T‑636/16.

Joinder for the purposes of the oral part of the procedure, and the oral part of the procedure

94By document lodged at the Court Registry on 23 February 2017, Starbucks applied for Cases T‑760/15 and T‑636/16 to be joined for the purposes of the oral part of the procedure.

95By decision of 7 June 2017, the President of the Seventh Chamber, Extended Composition, of the General Court decided not to join, at that stage of the procedure, Cases T‑760/15 and T‑636/16.

96By decision of the President of the Seventh Chamber, Extended Composition, of the General Court of 8 May 2018, Cases T‑760/15 and T‑636/16 were joined for the purposes of the oral part of the procedure, in accordance with Article 68 of the Rules of Procedure.

97Acting on a report from the Judge-Rapporteur, the Court decided to open the oral part of the procedure and, by way of the measures of organisation of procedure under Article 89 of the Rules of Procedure, asked the parties to answer questions in writing. The parties responded to that measure of organisation of procedure within the prescribed period.

98By documents lodged at the Court Registry on 7 and 15 June 2018, Starbucks requested confidential treatment of certain information contained in its response to the measure of organisation of procedure and in that of the Commission.

99By document lodged at the Court Registry on 8 June 2018, Starbucks submitted observations on the report for the hearing.

100By document lodged at the Court Registry on 14 June 2018, the Commission requested that Starbucks’ observations on the report for the hearing be withdrawn from the case file.

101After having received the only non-confidential versions of the documents mentioned in paragraphs 91, 98 and 99 above, Ireland raised no objection to the applications for confidential treatment made with regard to it.

102By document lodged at the Court Registry on 26 June 2018, Starbucks requested authorisation to use technical means during the hearing and proposed having recourse, during the hearing, to an expert. At the hearing, the Commission was requested to submit orally its observations on that request and in turn requested authorisation to use technical means during the hearing.

103The parties presented oral argument, with the use of the technical means requested, and answered the questions put by the Court at the hearing on 2 July 2018.

104The parties were heard during the hearing on a possible joinder of Cases T‑760/15 and T‑636/16 for the purposes of the decision closing the proceedings, and the Court took formal note of it in the minutes of the hearing.

105For the purposes of the present actions, it is necessary, at the outset, to address certain procedural questions raised by the parties, before analysing the substantive pleas the parties raise.

Procedural matters

106Regarding the procedural matters that are at issue in the case at hand, first of all, it is necessary to examine the possible joinder of the present case for the purposes of the decision closing the proceedings. Next, it is appropriate to examine the Commission’s request that Starbucks’ observations of 8 June 2018 on the report for the hearing be withdrawn from the case file. Last, it is appropriate to examine the issue of the admissibility of Annex A.7 to the application in Case T‑760/15, which has been disputed by the Commission.

Joinder of the present cases for the purposes of the decision closing the proceedings

107In accordance with Article 19(2) of Rules of Procedure, the President of the Seventh Chamber, Extended Composition, of the General Court referred the decision as to whether Cases T‑760/15 and T‑636/16 should be joined for the purposes of the decision closing the proceedings, which fell within his remit, to the Seventh Chamber, Extended Composition, of the General Court.

108The parties having been heard at the hearing with respect to a possible joinder of the cases, it is appropriate for Cases T‑760/15 and T‑636/16 to be joined for the purposes of the decision which closes the proceedings, on account of the connection between them.

Request that Starbucks’ observations on the report for the hearing be withdrawn from the case file

109By document lodged at the Court Registry on 7 April 2017 and regularised by documents lodged on 23 April 2018, Starbucks applied for confidential treatment, vis-à-vis Ireland, of certain information in the application, in the defence, in the reply, in the rejoinder as well as in certain of the annexes to those submissions.

By letter of 14 June 2018, the Commission requested the General Court to withdraw from the case file of Cases T‑760/15 and T‑636/16 Starbucks’ letter of 8 June 2018 (see paragraph 100 above), to the extent that it contained observations on the report for the hearing, on the ground that such observations are provided for neither in the Rules of Procedure nor in the practice rules for the implementation of the latter.

First, it is appropriate to recall that, by decision of 13 June 2018, the President of the Seventh Chamber, Extended Composition, of the General Court decided to place on the case file Starbucks’ letter of 8 June 2018. Second, it must be recalled that the General Court is the sole judge of whether documents not provided for in the Rules of Procedure need to be placed on the case file. Accordingly, the Commission’s request that the letter of 8 June 2018 be withdrawn from the case file must be rejected.

However, according to Article 84(1) of the Rules of Procedure, no new plea in law may be introduced in the course of proceedings unless it is based on matters of law or fact which have come to light in the course of the procedure.

Given that Starbucks has not provided any justification for the late submission of the arguments raised in its letter of 8 June 2018, it is necessary, as the Commission has argued, to reject them as inadmissible to the extent that they go beyond mere observations on the confidentiality and accuracy of the report for the hearing by amending the pleas raised in the application.

3.Admissibility of Annex A.7 to the application in Case T‑760/15

The Commission disputes the admissibility of Annex A.7 to the application in Case T‑760/15, which contains a schematic comparison of certain aspects of the functioning of the contracts concluded between the Starbucks group and certain third parties. According to the Commission, the essential factual and legal elements on which the action is based must be set out – or otherwise be deemed inadmissible – at least in summary form, but coherently and intelligibly, from the actual text of the application. That condition is not, in its view, satisfied in this case.

It must be noted that, under Article 21 of the Statute of the Court of Justice of the European Union and Article 76(d) of the Rules of Procedure, each application is required to state the subject matter of the proceedings, the pleas in law and arguments on which the application is based and a summary of those pleas. That statement must be sufficiently clear and precise to enable the defendant to prepare his defence and the Court to rule on the application, if necessary, without any further information. It is necessary, for an action to be admissible, that the basic matters of law and fact relied on be indicated, at least in summary form, coherently and intelligibly in the application itself. Whilst the body of the application may be supported and supplemented on specific points by references to extracts from documents annexed thereto, a general reference to other documents, even those annexed to the application, cannot make up for the absence of the essential arguments in law which, in accordance with the abovementioned provisions, must appear in the application. The annexes may be taken into consideration only in so far as they support or supplement pleas or arguments expressly set out by applicants in the body of their pleadings and in so far as it is possible to determine precisely what are the matters they contain that support or supplement those pleas or arguments. Furthermore, it is not for the Court to seek and identify in the annexes the pleas and arguments on which it may consider the action to be based, since the annexes have a purely evidential and instrumental function (see judgment of 14 March 2013, Fresh Del Monte Produce v Commission, T‑587/08, EU:T:2013:129, paragraphs 268 to 271 and the case-law cited).

In the case at hand, it is appropriate to observe that, as regards the contracts concluded between the Starbucks group and external roasters and manufacturers of coffee-derived products, the Kingdom of the Netherlands submits that Annex A.7 contains a ‘schematic overview of the points of comparison of the contracts produced by the Commission ... which includes the three differences cited’ in the application in Case T‑760/15.

In that regard, it must be held that all the arguments contained in Annex A.7 to the application in Case T‑760/15 are set out in a sufficiently clear and precise manner in paragraphs 140 to 155 of the application in Case T‑760/15. Thus, even without Annex A.7 to the application in Case T‑760/15, the Commission would have been capable of preparing its defence and the Court of ruling on the action. The only added value of Annex A.7 to the application in Case T‑760/15 consists, therefore, in indicating which specific contracts are concerned by the respective arguments of the Kingdom of the Netherlands when it refers, in paragraphs 140 to 155 of the application, to the ‘majority’ or ‘most’ of those contracts.

It is therefore appropriate to reject the Commission’s argument that Annex A.7 to the application in Case T‑760/15 should be rejected as inadmissible.

B.Pleas raised and structure of the examination of the present actions

The actions brought in Cases T‑760/15 and T‑636/16 seek the annulment of the contested decision to the extent that it classifies the APA as State aid for the purposes of Article 107(1) TFEU and to the extent that it orders the recovery of sums that were not collected by the Kingdom of the Netherlands from SMBV by way of corporate income tax.

In support of their actions, the Kingdom of the Netherlands and Starbucks put forward five and two pleas, respectively, which overlap for the most part.

By the first plea in Case T‑760/15 as well as by the first part of the first plea in Case T‑636/16, the Kingdom of the Netherlands and Starbucks call into question the Commission’s examination of the selective nature of the APA. Specifically, they argue that the Commission used an erroneous reference system for the examination of the selectivity of the APA.

By the second, third and fourth pleas in Case T‑760/15 as well as by the second part of the first plea and the second plea in Case T‑636/16, the Kingdom of the Netherlands and Starbucks argue that the Commission’s analysis according to which the APA conferred an advantage on SMBV is erroneous.

Specifically, by the second plea in Case T‑760/15 as well as by the second part of the first plea in Case T‑636/16, the Kingdom of the Netherlands and Starbucks invoke, in essence, an infringement of Article 107 TFEU, in that the Commission erroneously examined whether there was an advantage in relation to the arm’s length principle particular to EU law and thereby violated the Member States’ fiscal autonomy.

By the third plea in Case T‑760/15 as well as by the third part of the first plea and the first, second, fourth and fifth parts of the second plea in Case T‑636/16, the Kingdom of the Netherlands and Starbucks claim, in essence, infringement of Article 107 TFEU in that the Commission erroneously considered the choice of the TNMM to set transfer pricing to constitute an advantage. The Kingdom of the Netherlands and Starbucks dispute, in essence, the Commission’s principal line of reasoning regarding the existence of a tax advantage in favour of SMBV, set out in recitals 255 to 361 of the contested decision. Those pleas concern the first to third lines of reasoning mentioned in paragraph 53 above.

By the fourth plea in case T‑760/15 as well as by the third part of the second plea in Case T‑636/16, the Kingdom of the Netherlands and Starbucks claim infringement of Article 107 TFEU to the extent that the Commission erroneously considered the detailed rules for the application of the TNMM as validated in the APA to confer an advantage on SMBV. Those pleas concern the fourth to sixth lines of reasoning mentioned in paragraph 54 above.

By the fifth plea in Case T‑760/15, the Kingdom of the Netherlands claims breach of the principle of due diligence.

With regard to the analysis of the pleas raised by the Kingdom of the Netherlands and Starbucks, first of all, it is necessary to examine, the plea disputing the existence of the arm’s length principle as the Commission describes it in the contested decision. Next, it is appropriate to examine the pleas disputing that, in its first six lines of reasoning set out in paragraphs 53 and 54 above, the Commission demonstrated that the APA derogated from the general Netherlands corporate income tax system and conferred an advantage, within the meaning of Article 107 TFEU, on SMBV. Additionally, it is necessary to examine the plea disputing that, in its reasoning in respect of the limited reference system, set out in paragraph 55 above, the Commission demonstrated that the APA derogated from the limited reference system composed of Article 8b of the CIT and from the transfer pricing decree and conferred an advantage, within the meaning of Article 107 TFEU, on SMBV. Last, should the examination carried out on the existence of an advantage lead to the rejection of those pleas, it will be appropriate to examine the pleas alleging an absence of selectivity of the contested measure and breach of the obligation of due diligence.

In that regard, it must moreover be borne in mind that, according to the case-law, classification as State aid requires all the conditions referred to in Article 107(1) TFEU to be fulfilled. It is thus established that, for a measure to be categorised as State aid within the meaning of that provision, there must, first, be an intervention by the State or through State resources; second, the intervention must be liable to affect trade between Member States; third, it must confer a selective advantage on the recipient; and, fourth, it must distort or threaten to distort competition (see judgment of 21 December 2016, Commission v Hansestadt Lübeck, C‑524/14 P, EU:C:2016:971, paragraph 40 and the case-law cited).

In the case at hand, however, as is apparent from the presentation of the pleas, which is set out in paragraphs 118 to 125 above, the Kingdom of the Netherlands and Starbucks do not dispute the assessment made by the Commission regarding the first two conditions and the fourth condition to be satisfied in order for a measure to be classified as State aid. They do not dispute that, supposing that the Commission demonstrated that the APA conferred a tax advantage, that advantage constituted intervention by the State or through State resources, that it was liable to affect trade between Member States and that it distorted or threatened to distort competition. The four first pleas raised in Case T‑760/15 seek, in essence, to call into question the Commission’s finding that the APA conferred a selective advantage on SMBV.

Moreover, as regards demonstrating the selective advantage, it must be noted that the Commission’s approach of examining the criteria of advantage and selectivity concurrently is not itself incorrect, given that both the advantage and the selective nature of that advantage are examined. Nevertheless, the Court considers it appropriate to consider, first of all, whether the Commission was entitled to conclude that there was an advantage, before going on, if necessary, to examine whether that advantage had to be considered to be selective.

Thereafter, it will be appropriate to analyse the arguments of the Kingdom of the Netherlands and of Starbucks on the absence of an advantage, within the meaning of Article 107 TFEU, conferred on SMBV by the APA.

C.Existence of an arm’s length principle in the field of State aid control and compliance with the principle of Member States’ fiscal autonomy

By its second plea, the Kingdom of the Netherlands argues that the Commission erred in identifying an arm’s length principle particular to EU law and in identifying it as a criterion for assessing the existence of State aid. Starbucks raises, in essence, the same complaints, in the second part of its first plea.

First, the Kingdom of the Netherlands argues that the judgment of 22 June 2006, Belgium and Forum 187 v Commission, on which the Commission relies to identify an arm’s length principle particular to EU law, is not authority for the existence of such a principle. In addition, the Commission neither stated the basis from which it had identified the existence of an arm’s length principle in EU law nor explained the content of that principle. Starbucks adds that, notwithstanding the fact that observance of Article 107 TFEU effectively constitutes a limit on Member States’ fiscal autonomy, the Commission exceeded the powers conferred on it by Article 107 TFEU. Starbucks criticises the Commission for having replaced, purportedly under the principle of equal treatment, Netherlands rules of tax law with a transfer pricing principle developed autonomously and, thus, for having imposed substantive rules of tax law.

Second, the Kingdom of the Netherlands argues that the Commission could not examine the APA under an arm’s length principle particular to EU law, since only the legislation and national rules of the Member State concerned are relevant for the purposes of State aid control. Specifically, the Kingdom of the Netherlands contends that the existence of an advantage can be examined only by reference to the charges which are normally included in the budget of the undertaking under national law and not by reference to an arm’s length principle particular to EU law. Starbucks adds, furthermore, that the Commission did not take Netherlands law into account and that its reasoning deviates from – and indeed conflicts with – Netherlands transfer pricing rules.

First of all, Ireland adds that the Commission, which was required to identify a derogation, did not compare Starbucks’ situation to that of any other taxpayer but merely sought to apply the arm’s length principle. Next, it argues that the Commission cannot impose rules that have never been incorporated into the national system. Accepting a principle of equal treatment in tax matters would then encroach on the sovereignty and the autonomy of the Member States. Last, Ireland submits that the judgment of 22 June 2006, Belgium and Forum 187 v Commission, did not identify an arm’s length principle particular to EU law, in so far as, in that case, first, the arm’s length principle had been incorporated into Belgian national law and, second, the judgment referred to the OECD Guidelines, which had also been incorporated into Belgian national law.

The Commission disputes those arguments. It contends inter alia that it examined the existence of a selective advantage by reference to the reference framework deriving from national law and not by reference to the arm’s length principle. It maintains that it is clear from the contested decision that the existence of an advantage was assessed by comparison with the tax burden that would normally have been borne by SMBV under the general Netherlands system of corporate income tax.

Under the present plea, in essence, the Kingdom of the Netherlands and Starbucks therefore criticise the Commission for having identified an arm’s length principle specific to EU law in breach of the fiscal autonomy of the Member States and for having examined the APA only by reference to that principle without taking Netherlands law into account.

First and foremost, it must be noted that, as is apparent in particular from recitals 252, 267 and 408 of the contested decision, the examination in the light of the arm’s length principle as described by the Commission in the contested decision forms part of its principal analysis of the selective advantage. As has been set out in paragraph 35 above, that analysis entails examining whether the APA derogates from the general Netherlands corporate income tax system. It must be noted in that regard that the Commission had previously indicated, in recitals 232 to 244 of the contested decision, that the objective of the general Netherlands corporate income tax system was to tax the profits of all companies resident in the Netherlands, whether or not integrated, and that both types of company are in a similar factual and legal situation in the light of that objective.

As regards the definition of the arm’s length principle, the Commission asserted, in recitals 258 and 261 of the contested decision, that, according to that principle, intra-group transactions should be remunerated as if they had been agreed to by independent companies. It added, in recital 262 of the contested decision, that the purpose of that principle was to ensure that intra-group transactions were treated for tax purposes by reference to the amount of profit that would have arisen if the same transactions had been executed by independent companies. The Commission moreover argued during the hearing that the arm’s length principle was, in its view, a tool for assessing the price level of intra-group transactions, and the Court took formal note of that in the minutes of the hearing.

With regard to the legal nature of the arm’s length principle, the Commission considered, in recital 264 of the contested decision, that the arm’s length principle necessarily formed part of its assessment, under Article 107 TFEU, of tax measures granted to group companies, irrespective of whether the Member State had incorporated that principle into its national legal system. It stated that the arm’s length principle which it was applying was a general principle of equal treatment in taxation, which fell within the application of Article 107 TFEU. The French-language version of the contested decision mentions in that connection a ‘principe de traitement équitable’ (principle of equitable treatment) which is a translation error of the expression ‘principle of equal treatment’. The Commission based that statement on the judgment of 22 June 2006, Belgium and Forum 187 v Commission, concerning the tax regime for coordination centres in Belgium, in which the Court of Justice had held that the method for determining taxable income under that regime conferred a selective advantage on those centres. Specifically, the Commission referred to paragraph 96 of that judgment, in which the Court of Justice held that the method for determining the taxable income of the centres ‘[meant] that the transfer prices [did] not resemble those which [were] charged in conditions of free competition’.

As regards the application of the arm’s length principle, in recital 263 of the contested decision, the Commission indicated that, to assess whether the Kingdom of the Netherlands had granted a selective advantage to SMBV, it accordingly had to verify whether the methodology accepted by the Netherlands tax administration through the APA for the purposes of determining SMBV’s taxable profits in the Netherlands departed from a methodology that resulted in a reliable approximation of a market-based outcome and, therefore, from the arm’s length principle. It added, in recital 264 of the contested decision, that the arm’s length principle was used to establish whether the taxable profit of a group company for corporate income tax purposes had been determined on the basis of a methodology that approximated market conditions, so that that company was not treated favourably under the general corporate income tax system as compared to non-integrated companies whose taxable profit was determined by the market.

It must therefore be examined whether the Commission was entitled to analyse the measure at issue in the light of the arm’s length principle as described in the contested decision, summarised in recitals 138 to 140 above, which consists in verifying whether intra-group transactions are remunerated as if they had been negotiated under market conditions.

According to settled case-law, while direct taxation, as EU law currently stands, falls within the competence of the Member States, they must nonetheless exercise that competence consistently with EU law (see judgment of 12 July 2012, Commission v Spain, C‑269/09, EU:C:2012:439, paragraph 47 and the case-law cited). Thus, intervention by the Member States in matters of direct taxation, even if it relates to issues that have not been harmonised in the European Union, is not excluded from the scope of the rules on the monitoring of State aid.

It follows that the Commission can classify a tax measure as State aid provided that the conditions for classification are met (see, to that effect, judgments of 2 July 1974, Italy v Commission, C‑173/73, EU:C:1974:71, paragraph 28, and of 22 June 2006, Belgium and Forum 187 v Commission, C‑182/03 and C‑217/03, EU:C:2006:416, paragraph 81). Member States must exercise their competence in respect of taxation in accordance with EU law (judgment of 3 June 2010, Commission v Spain, C‑487/08, EU:C:2010:310, paragraph 37). Consequently, they must refrain from taking, in that context, any measure likely to constitute State aid that is incompatible with the internal market.

As regards the condition that the measure at issue must grant an economic advantage, it should be borne in mind that, according to settled case-law, measures which, whatever their form, are likely directly or indirectly to favour certain undertakings or are to be regarded as an economic advantage which the recipient undertaking would not have obtained under normal market conditions are regarded as State aid (see judgment of 2 September 2010, Commission v Deutsche Post, C‑399/08 P, EU:C:2010:481, paragraph 40 and the case-law cited; judgment of 9 October 2014, Ministerio de Defensa et Navantia, C‑522/13, EU:C:2014:2262, paragraph 21).

Specifically, a measure by which the public authorities grant certain undertakings favourable tax treatment which, although not involving the transfer of State resources, places the recipients in a more favourable financial position than that of other taxpayers amounts to State aid within the meaning of Article 107(1) TFEU (judgment of 15 March 1994, Banco Exterior de España, C‑387/92, EU:C:1994:100, paragraph 14; see, also, judgment of 8 September 2011, Paint Graphos and Others, C‑78/08 to C‑80/08, EU:C:2011:550, paragraph 46 and the case-law cited).

In the case of tax measures, the very existence of an advantage may be established only when compared with ‘normal’ taxation (judgment of 6 September 2006, Portugal v Commission, C‑88/03, EU:C:2006:511, paragraph 56). Accordingly, such a measure confers an economic advantage on its recipient if it mitigates the burdens normally included in the budget of an undertaking and which, accordingly, without being subsidies in the strict meaning of the word, are similar in character and have the same effect (judgment of 9 October 2014, Ministerio de Defensa and Navantia, C‑522/13, EU:C:2014:2262, paragraph 22).

Consequently, in order to determine whether there is a tax advantage, the position of the recipient as a result of the application of the measure at issue must be compared with his position in the absence of the measure at issue (see, to that effect, judgment of 26 April 2018, Cellnex Telecom and Telecom Castilla-La Mancha v Commission, C‑91/17 P and C‑92/17 P, not published, EU:C:2018:284, paragraph 114), and under the normal rules of taxation.

In the context of determining the fiscal position of an integrated company which is part of a group of undertakings, it must be noted at the outset that the pricing of intra-group transactions carried out by that company is not determined under market conditions. That pricing is agreed to by companies belonging to the same group, and is therefore not subject to market forces.

Where national tax law does not make a distinction between integrated undertakings and stand-alone undertakings for the purposes of their liability to corporate income tax, that law is intended to tax the profit arising from the economic activity of such an integrated undertaking as though it had arisen from transactions carried out at market prices. In those circumstances, it must be held that, when examining, pursuant to the power conferred on it by Article 107(1) TFEU, a fiscal measure granted to such an integrated company, the Commission may compare the fiscal burden of such an integrated undertaking resulting from the application of that fiscal measure with the fiscal burden resulting from the application of the normal rules of taxation under national law of an undertaking, placed in a comparable factual situation, carrying on its activities under market conditions.

Furthermore, and as the Commission correctly stated in the contested decision, those findings are supported by the judgment of 22 June 2006, Belgium and Forum 187 v Commission, concerning Belgian tax law, which provided for integrated companies and stand-alone companies to be treated on equal terms. The Court of Justice recognised in paragraph 95 of that judgment the need to compare a regime of derogating aid with the ‘ordinary tax system, based on the difference between profits and outgoings of an undertaking carrying on its activities in conditions of free competition’.

In that context, although, through that fiscal measure granted to an integrated company, national authorities have accepted a certain level of pricing for an intra-group transaction, Article 107(1) TFEU allows the Commission to check whether that pricing corresponds to pricing under market conditions, in order to determine whether there is, as a result, any mitigation of the burdens normally included in the budget of the undertaking concerned, thus conferring on that undertaking an advantage within the meaning of that article. The arm’s length principle, as described by the Commission in the contested decision, is thus a tool for making that determination in the exercise of the Commission’s powers under Article 107(1) TFEU. The Commission also stated, correctly, in recital 261 of the contested decision, that the arm’s length principle was a ‘benchmark’ for establishing whether an integrated company was receiving, pursuant to a tax measure determining its transfer pricing, an advantage within the meaning of Article 107(1) TFEU.

It should also be stated that when the Commission uses that tool to check whether the taxable profit of an integrated undertaking pursuant to a tax measure corresponds to a reliable approximation of a taxable profit generated under market conditions, the Commission can identify an advantage within the meaning of Article 107(1) TFEU only if the variation between the two comparables goes beyond the inaccuracies inherent in the methodology used to obtain that approximation.

In the present case, the APA concerns the determination of SMBV’s taxable profits under the CIT the objective of which, irrespective of whether the normal rules of taxation are to be broadly or narrowly defined, is to tax integrated and stand-alone undertakings in the Netherlands in the same way with regard to corporate income tax. The Commission was therefore in a position to verify whether SMBV’s taxable profit pursuant to the APA was lower than its tax burden in the absence of the APA and under the normal rules of taxation in Netherlands law. Given that SMBV is an integrated undertaking and that the CIT is intended to tax the profit resulting from the economic activity of such an integrated undertaking as if it had resulted from transactions carried out at market prices, it is necessary, in examining the APA, to compare SMBV’s taxable profit as a result of the application of the APA with the position, as it would be if the normal tax rules under Netherlands law were applied, of an undertaking in a factually comparable situation, carrying on its activities in conditions of free competition. Against that background, although the APA accepted a certain level of pricing for intra-group transactions, it is necessary to check whether that pricing corresponds to prices that would have been charged under market conditions.

In that context, it must be stated that, with regard to the examination as to whether an integrated undertaking has obtained an advantage within the meaning of Article 107(1) TFEU, the Commission cannot be criticised for having used a methodology for determining transfer pricing that it considers appropriate in this instance in order to examine the level of transfer pricing for a transaction or for several closely connected transactions that is part of the contested measure. The Commission is nevertheless required to justify its choice of methodology.

Even though the Commission correctly observed that it cannot be formally bound by the OECD Guidelines, the fact remains that those guidelines are based on important work carried out by groups of renowned experts, that they reflect the international consensus achieved with regard to transfer pricing and that they thus have a certain practical significance in the interpretation of issues relating to transfer pricing, as the Commission acknowledged in recital 66 of the contested decision.

Consequently, the Commission correctly concluded that it was entitled to examine, in the context of its analysis under Article 107(1) TFEU, whether intra-group transactions were remunerated as though they had been negotiated under market conditions. That finding is not called into question by the other arguments of the Kingdom of the Netherlands and of Starbucks.

First, as regards the argument of the Kingdom of the Netherlands that the Commission failed to explain the content of the arm’s length principle as defined in the contested decision, it is sufficient to recall that the contested decision highlights it as a useful tool that can be used to verify that intra-group transactions are remunerated as if they had been negotiated between stand-alone undertakings (see paragraph 138 above). That argument must therefore be rejected.

Second, to the extent that the Kingdom of the Netherlands and Starbucks maintain that the arm’s length principle as described by the Commission in the contested decision would permit it alone to prescribe the taxable profit of an undertaking and that it would have the effect of disguised direct tax harmonisation in contravention with Member States’ fiscal autonomy, that argument must be rejected.

While, in the absence of EU rules governing the matter, it falls within the competence of the Member States to designate bases of assessment and to spread the tax burden across the different factors of production and economic sectors (see, to that effect, judgment of 15 November 2011, Commission and Spain v Government of Gibraltar and United Kingdom, C‑106/09 P and C‑107/09 P, EU:C:2011:732, paragraph 97), it does not mean that every tax measure, which affects, inter alia, the basis of assessment taken into account by the tax authorities, will escape the application of Article 107 TFEU (see, to that effect, judgment of 15 November 2011, Commission and Spain v Government of Gibraltar and United Kingdom, C‑106/09 P and C‑107/09 P, EU:C:2011:732, paragraph 104). It follows that the Commission does not have, at this stage of the development of EU law, competence to allow it to define in an autonomous manner the ‘normal’ taxation of an integrated undertaking, by disregarding national tax rules. However, although ‘normal’ taxation is defined by national tax rules and although the very existence of an advantage must be established by reference to them, the fact remains that, if those national rules provide that stand-alone companies and integrated companies must be dealt with under the same conditions, Article 107(1) TFEU allows the Commission to verify whether the price level of intra-group transactions, accepted by the national authorities for determining the tax base of an integrated undertaking, corresponds to a price level of a transaction which has been negotiated in market conditions.

Consequently, when the Commission examines whether the method validated in a national tax measure leads to an outcome established in conformity with the arm’s length principle as has been defined in paragraph 137 above, it is not exceeding its competences.

Third, as regards the argument of the Kingdom of the Netherlands that the Commission has failed to provide any legal basis for its arm’s length principle, it must be pointed out that, in recitals 264 and 265 of the contested decision, the Commission stated that the arm’s length principle as described in the contested decision existed independently of the incorporation of that principle into the national legal system. It also made clear that it had not examined whether the APA complied with the arm’s length principle laid down in Article 8b of the CIT or in the transfer pricing decree, which incorporate the arm’s length principle into Netherlands law. The Commission also asserted that the arm’s length principle which it applied was distinct from that enshrined in Article 9 of the OECD Model Tax Convention on Income and on Capital.

However, the Commission also made clear, in recital 264 of the contested decision, that the arm’s length principle necessarily formed an integral part of the examination, under Article 107(1) TFEU, of tax measures granted to group companies and that the arm’s length principle was a general principle of equal treatment in taxation, which fell within the application of Article 107 TFEU.

It is therefore apparent from the contested decision that the arm’s length principle, as described by the Commission, is a tool which it used, correctly, in the context of the examination carried out under Article 107(1) TFEU.

It is true that, at the hearing, the Commission inter alia stated that the arm’s length principle as described in the contested decision did not fall within EU law or international law, but that it was inherent in the ordinary system of taxation as provided for by national law. Thus, according to the Commission, if a Member State chooses, in the context of its national tax system, the approach of the separate legal entity, according to which tax law is concerned with legal entities, and not with economic entities, the arm’s length principle is necessarily a corollary of that approach, which is binding in the Member State concerned, independently of whether the arm’s length principle has, expressly or impliedly, been incorporated into national law.

In that regard, the Kingdom of the Netherlands and Starbucks indicated at the hearing that, by those assertions, the Commission seemed to be changing its stance on the arm’s length principle as described in the contested decision. However, on the assumption that the interpretation put forward by the Kingdom of the Netherlands and Starbucks is found to be correct, it must be stated, in any event, that the Commission cannot change the legal basis of the arm’s length principle, as set out in the contested decision, at the hearing stage (see, to that effect, judgment of 25 June 1998, British Airways and Others v Commission, T‑371/94 and T‑394/94, EU:T:1998:140, paragraph 116).

In all events, it must be noted that the clarification provided at the hearing does not call into question the finding in paragraph 156 above that it is apparent from the contested decision that the arm’s length principle is being applied in the context of the examination under Article 107(1) TFEU. It is, moreover, apparent from all of the written submissions of the Kingdom of the Netherlands and Starbucks that they understood the contested decision to mean that the arm’s length principle as described by the Commission in the contested decision was being applied in the context of the examination of a national tax measure under Article 107(1) TFEU.

Fourth, the Kingdom of the Netherlands and Ireland submit, in essence, that the Commission wrongly asserted, in the contested decision, that there was a general principle of equal treatment in taxation on the profits of integrated and non-integrated undertakings.

It is true that the Commission indicated, in recital 264 of the contested decision, that the arm’s length principle was a general principle of equal treatment in taxation, which fell within the scope of Article 107(1) TFEU. However, that wording must not be taken out of context and cannot be interpreted as meaning that the Commission asserted that there was a general principle of equal treatment in relation to tax inherent in Article 107(1) TFEU, which would give that article too broad a scope.

In any event, it is implicitly but necessarily evident from recitals 258 to 267 of the contested decision, and in particular from recitals 262 and 265 of that decision, that the arm’s length principle as described by the Commission in the contested decision was perceived by the Commission only as a tool enabling it to check that intra-group transactions are remunerated as though they had been negotiated between independent companies. The argument of the Kingdom of the Netherlands and of Ireland does not alter the finding in paragraphs 147 to 156 above that the Commission was entitled to examine, in its analysis under Article 107(1) TFEU, whether intra-group transactions were remunerated as though they had been negotiated under market conditions.

Accordingly, the Court must reject the argument of the Kingdom of the Netherlands and of Ireland in that respect.

Fifth, the Kingdom of the Netherlands and Starbucks argue that the Commission made an assessment in the light of the arm’s length principle, but that it did not examine whether there was an advantage by reference to national tax law. In that regard, it must be noted that it is clear from recitals 267, 341, 415 and 416 of the contested decision that the Commission carried out its examination of whether there was an advantage by reference to the general Netherlands corporate income tax system. It will be necessary to verify whether that examination was vitiated by error in respect of the specific examination of the six lines of reasoning and, if necessary, in respect of the limited reference system.

On the basis of the foregoing, it is necessary to reject the second plea in Case T‑760/15 and the second part of the first plea in Case T‑636/16, according to which the Commission committed an error in identifying an arm’s length principle as a criterion for assessing the existence of State aid. It is therefore in the light of the considerations set out in paragraphs 137 to 170 above that the merits of each line of reasoning set out in the contested decision should be analysed (see paragraphs 53 and 54 above).

The first part of the third plea in Case T‑760/15 as well as the third part of the first plea and the first and second parts of the second plea in Case T‑636/16 concern the Commission’s analysis, conducted in the contested decision, according to which, first, the transfer pricing report had not identified or analysed the transaction for which a price was effectively determined in the APA, namely, the royalty, and, second, the CUP method should have been given priority, in order to determine the level of the royalty, over the TNMM, in order to determine the net profit of SMBV’s production and distribution activities. Those two complaints made against the APA, as a question of principle, precede the Commission’s concrete analysis, according to which the level of the royalty paid by SMBV to Alki should have been zero and the level of the prices of green coffee beans from 2011 onwards was too high, questions which will be examined in paragraphs 217 to 404 below.

By the first part of the third plea in Case T‑760/15, the Kingdom of the Netherlands disputes the Commission’s argument that the TNMM does not allow the conformity of the royalty with the arm’s length principal to be examined and assessed distinctly. It maintains that that argument is erroneous and is not such as to cast into doubt the relevance of the choice of the TNMM in the case at hand.

First, the Kingdom of the Netherlands submits that it is apparent from the contested decision that the Commission made the transfer pricing method an end in itself, when it was merely a means of determining the conformity of the conditions of intra-group transactions with the arm’s length principle. If the method chosen led to an arm’s length outcome, the Commission cannot cast it into doubt on the ground that the royalty and the mark-up applied to the resale price of green coffee beans were not examined individually. In addition, according to the Kingdom of the Netherlands, the Commission could not take the view that the OECD Guidelines prioritised the use of traditional methods, such as the CUP method, over transactional methods, such as the TNMM. However, it is apparent from point 2 of the transfer pricing decree and from paragraph 4.9 of the 1995 version of the OECD Guidelines that the taxpayer is free to choose a transfer pricing method, provided that the method chosen leads to an arm’s length outcome.

Second, the Kingdom of the Netherlands considers that, unlike what the Commission maintains in the contested decision, the only transactions concerned by the APA are the roasting of coffee beans and the provision of logistics and administrative services on behalf of Alki. The purpose of the APA is not to determine whether the royalty is in conformity with the arm’s length principle. Moreover, the Kingdom of the Netherlands observes that, in the contested decision, the Commission did not explain the reasons which led it to assume that the APA had been requested and concluded for a licensing arrangement and for the royalty.

Third, the Kingdom of the Netherlands submits that the TNMM was the method the best suited to the case at hand. According to the Kingdom of the Netherlands, the main reason for choosing that method was the lack of similar unrelated external or internal transactions, necessary for the purposes of applying the CUP method, with which it would be possible to compare the transactions between Alki and SMBV and, therefore, the remuneration that was associated with them. However, according to the Kingdom of the Netherlands, the TNMM could be applied in SMBV’s case since information was indeed available on the operational profit of the undertakings that were comparable to it in terms of function, namely, coffee bean roasting.

By the third part of the first plea and by the second part of the second plea in Case T‑636/16, Starbucks claims that the TNMM was the most appropriate method for calculating transfer pricing in the case at hand and that the Commission could not reject that method for the reasons it provided in the contested decision. According to Starbucks, as the TNMM was correctly applied to calculate an arm’s length remuneration for SMBV, there is no need to assess separately the royalty payments by SMBV, given that those payments could not have impacted SMBV’s remuneration, as calculated on the basis of the TNMM.

More specifically, first, Starbucks argues that Commission’s assertion that there is a strict rule favouring use of the CUP method has no basis in Netherlands tax law or in the OECD Guidelines. In addition, Starbucks is of the view that the use of a different transfer pricing method does not in itself result in a lower tax liability, as all methods attempt to achieve a profit allocation reflecting arm’s length transfer prices. Merely alleging a methodological error does not equate to proving that an advantage exists.

180Second, according to Starbucks, the Commission compared the price of green coffee beans and the royalty with ‘controlled’ transactions (intra-group) in disregard of Netherlands tax law. Starbucks chose the TNMM since the roasting contract combined various intra-group transactions by which routine, low-risk activities were entrusted to SMBV, namely, coffee roasting and conditioning activities as well as administrative and logistical support activities.

181Third, Starbucks submits that the contested decision contains no argument asserting that the mere absence of identification and analysis of SMBV’s intra-group transactions is sufficient to prove the existence of an advantage and that that argument was raised for the first time in the defence in Case T‑636/16 and is thus inadmissible.

182The Commission disputes those arguments.

183First, the Commission explains that nowhere in the contested decision does it impose a strict rule concerning the application of the CUP method rather than another method for determining transfer pricing, but that the most reliable method should be chosen based on the circumstances of the case. It first of all established that the APA had been requested and granted for setting the price of the IP licensing arrangement between SMBV and Alki and then concluded that, since a comparable price for the price of that transaction could be determined, the use of the CUP method was preferable, in the case at hand, to the TNMM. The Commission contends that, in doing so, it relied on the guidance set out in the OECD Guidelines.

184Second, the Commission maintains that the method approved in the APA for determining the royalty amount, by which SMBV pays Alki the residual profit of the sale of roasted beans and of non-coffee products, cannot result in an arm’s length outcome. According to the Commission, as there were comparable transactions allowing the value of the royalty to be assessed, the tax advisor should have used the CUP method to define the royalty price owed by SMBV to Alki, which was the transaction for which the APA was actually requested and granted. In addition, the prices invoiced by SCTC to SMBV for green coffee beans should also have been subject to a transfer pricing analysis. The Commission argues that, contrary to what the Kingdom of the Netherlands and Starbucks maintain, setting the price of individual transactions is the very essence of that principle. Thus, the establishment and analysis of controlled and uncontrolled transactions is a necessary first step of the evaluation of the arm’s length nature of transfer pricing.

185Third, the Commission contends that the Kingdom of the Netherlands has not proved that the TNMM was more appropriate, in the case at hand, than the CUP method. The Commission contends, first of all, that the 1995 version of the OECD Guidelines, which was in force at the time the APA was concluded, and the 2010 version, give preference to traditional transaction methods, such as the CUP method, over transactional profit methods. According to the Commission, the particular circumstances justifying the preference of the TNMM over the CUP method are not present in the case at hand.

(a) Preliminary observations

186As a preliminary point, it must be noted that the APA, as set out in paragraphs 12 to 16 above, calls for two important clarifications.

187First, it is undisputed among the parties that the method applied in the APA is indeed the TNMM. In that regard, the Kingdom of the Netherlands has specified in the application in Case T‑760/15 and stated at the hearing that the reference to the cost plus method in the APA constituted a non-technical use of that expression.

188Second, in their answers to measures of organisation of procedure and during the hearing, the parties specified that, in reality and contrary to what is set out in the APA, the royalty to be paid to Alki was not set on the basis of the difference between the operating profit made in connection with the production and distribution function, before royalty-related expenses, and SMBV’s remuneration, but on the basis of the difference between SMBV’s total revenue, on the one hand, and SMBV’s cost base, increased by SMBV’s remuneration, on the other.

189In addition, it should be recalled that the Commission set out its first line of reasoning regarding the existence of a selective advantage in recitals 272 and 275 to 285 of the contested decision, primarily in Section 9.2.3.2, entitled ‘The transfer pricing report fails to examine the intra-group transaction for which the … APA was effectively requested and granted’.

190First, in recitals 272, 276 to 279 and 285 of the contested decision, the Commission considered, in essence, that the transfer pricing report, accepted by the Netherlands tax authorities upon the conclusion of the APA with SMBV, failed to identify or analyse SMBV’s controlled and uncontrolled transactions, which was a necessary first step of the evaluation of the arm’s length nature of transfer pricing. More specifically, it considered that the royalty payment for the roasting IP licence between Alki and SMBV was the transaction for which the APA had effectively been requested.

191Second, in recitals 280 to 284 of the contested decision, the Commission asserted, in essence, that an approach consisting in determining transfer prices for each transaction taken individually was to be prioritised over an approach consisting in determining transfer prices for a function as a whole. In other words, the Commission took the view that the CUP method was to be given priority over transactional profit methods, such as the TNMM. In recital 285 of the contested decision, the Commission maintained that, since the analysis of an arm’s length remuneration for SMBV had been conducted in the transfer pricing report starting from an incorrect point of departure, that remuneration was, by necessity, improperly estimated by using the TNMM. Moreover, it took the view that the transfer pricing report, in order to establish transfer pricing in the case at hand, should have made use of reliable comparisons with available information on transactions between unrelated parties which owned Starbucks at the time the request for the APA was made.

192The Commission moreover confirmed in its submissions that its first line of reasoning consisted in criticising the use of the TNMM to determine the net profit of SMBV’s production and distribution activities rather than the CUP method to determine the level of the royalty. It maintained that the validity of its first line of reasoning was not dependent on the conclusion that the arm’s length value of the royalty was zero. The fact that the transfer pricing report failed to identify or analyse SMBV’s controlled and uncontrolled transactions means that a necessary first step in assessing the arm’s length nature of commercial conditions applicable between related parties for transfer pricing purposes was not taken.

193Without it being necessary, at this stage, to analyse Starbucks’ complaint that the contested decision contains no argument asserting that the mere absence of identification and analysis of SMBV’s intra-group transactions is sufficient to prove the existence of an advantage, an argument raised for the first time in the defence in Case T‑636/16 and thus inadmissible, it is appropriate to examine whether the criticisms formulated by the Commission as part of its first line of reasoning justified the finding that the APA conferred an advantage on SMBV on the ground that the very choice of the transfer pricing method, proposed in transfer pricing report, did not result in a reliable approximation of a market-based outcome, in line with the arm’s length principle.

(b) Burden of proof

194It must be borne in mind that, in its review of State aid, the Commission must, in principle, provide proof in the contested decision of the existence of the aid (see, to that effect, judgments of 12 September 2007, Olympiaki Aeroporia Ypiresies v Commission, T‑68/03, EU:T:2007:253, paragraph 34, and of 25 June 2015, SACE and Sace BT v Commission, T‑305/13, EU:T:2015:435, paragraph 95). In that context, the Commission is required to conduct a diligent and impartial examination of the measures at issue, so that it has at its disposal, when adopting a final decision establishing the existence and, as the case may be, the incompatibility or unlawfulness of the aid, the most complete and reliable information possible (see, to that effect, judgments of 2 September 2010, Commission v Scott, C‑290/07 P, EU:C:2010:480, paragraph 90, and of 3 April 2014, France v Commission, C‑559/12 P, EU:C:2014:217, paragraph 63).

195By contrast, it is for the Member State which has made a distinction between undertakings to show that it is actually justified by the nature and the general scheme of the system in question. The concept of State aid does not refer to State measures which differentiate between undertakings and which are, therefore, prima facie selective where that differentiation arises from the nature or the general scheme of the system of which they form part (see, to that effect, judgment of 21 June 2012, BNP Paribas and BNL v Commission, C‑452/10 P, EU:C:2012:366, paragraphs 120 and 121 and the case-law cited).

196It follows that it was for the Commission to show, in the contested decision, that the requirements for a finding of State aid, within the meaning of Article 107(1) TFEU, were met. In that regard, it must be held that, while it is common ground that the Member State has a margin of appreciation in the approval of transfer pricing, that margin of appreciation cannot lead to the Commission being deprived of its power to check that the transfer pricing in question does not lead to the grant of a selective advantage within the meaning of Article 107(1) TFEU. In that context, the Commission must take into account the fact that the arm’s length principle allows it to verify whether the transfer pricing accepted by a Member State corresponds to a reliable approximation of a market-based outcome and whether any variation that may be identified in the course of that examination does not go beyond the inaccuracies inherent in the methodology used to obtain that approximation.

(c) Intensity of review to be conducted by the Court

197With regard to the intensity of the review to be conducted by the Court in the present case, it should be noted that, as is clear from Article 263 TFEU, the object of an action for annulment is to review the legality of the acts adopted by the EU institutions named therein. Consequently, the analysis of the pleas in law raised in such an action has neither the object nor the effect of replacing a full investigation of the case in the context of an administrative procedure (see, to that effect, judgment of 2 September 2010, Commission v Deutsche Post, C‑399/08 P, EU:C:2010:481, paragraph 84).

198In the field of State aid, it must be recalled that State aid, as defined in the FEU Treaty, is a legal concept which must be interpreted on the basis of objective factors. For that reason, the Courts of the European Union must, in principle, having regard both to the specific features of the case before them and to the technical or complex nature of the Commission’s assessments, carry out a comprehensive review as to whether a measure falls within the scope of Article 107(1) TFEU (judgments of 4 September 2014, SNCM and France v Corsica Ferries France, C‑533/12 P and C‑536/12 P, EU:C:2014:2142, paragraph 15, and of 30 November 2016, Commission v France and Orange, C‑486/15 P, EU:C:2016:912, paragraph 87).

199As to whether a method for determining transfer pricing of an integrated company complies with the arm’s length principle, it should be borne in mind that, as has already been indicated above, when using that tool in carrying out its assessment under Article 107(1) TFEU, the Commission must take into account its approximate nature. The purpose of the Court’s review is therefore to verify whether the errors identified in the contested decision, and on the basis of which the Commission found there to be an advantage, go beyond the inaccuracies inherent in the application of a method designed to obtain a reliable approximation of a market-based outcome.

(d) Failure to identify and analyse the royalty paid by SMBV to Alki in the APA

200It is necessary to reject the second plea in Case T‑760/15 and the second part of the first plea in Case T‑636/16, according to which the Commission committed an error in identifying an arm’s length principle as a criterion for assessing the existence of State aid. It is therefore in the light of the considerations set out in paragraphs 137 to 170 above that the merits of each line of reasoning set out in the contested decision should be analysed (see paragraphs 53 and 54 above).

200With regard to the finding made by the Commission, according to which the transfer pricing report did not identify or analyse the transaction for which a price was actually determined in the APA, it must be noted that, in recital 276 of the contested decision, the Commission explained that SMBV’s taxable profit was lower than that actually recorded on account of the acceptance by the Netherlands tax authorities because the actual level of profits generated by SMBV in the Netherlands was to be reduced, for corporate tax purposes, by the amount of the royalty for the roasting IP. In recitals 277 and 278 of the contested decision, the Commission inferred that the royalty for the roasting IP was the transaction for which the APA had effectively been requested and that the methodology for determining the level of that royalty as an adjustment variable was the transaction effectively being transfer priced by the APA. It also considered that the price of coffee beans should have undergone an analysis.

201In that regard, first, it is sufficient to hold that mere non-compliance with methodological requirements does not necessarily lead to a reduction of the tax burden. It is further necessary for the Commission to demonstrate that the methodological errors that it identified in the APA do not allow a reliable approximation of an arm’s length outcome to be reached and that they led to a reduction in the taxable profit compared with the tax burden resulting from the application of normal taxation rules under national law on an undertaking placed in a comparable factual situation to SMBV and carrying out its activities under market conditions. Thus, the mere finding of a methodological error does not in itself suffice, in principle, to demonstrate that the APA conferred an advantage on SMBV and, thus, to establish that there is State aid within the meaning of Article 107 TFEU.

202Second, it should be recalled that the various methods for setting transfer prices – whether it be the CUP method or the TNMM – endeavour to attain profit levels reflecting arm’s length transfer prices and that it cannot be concluded, as a rule, that one method does not allow a reliable approximation of an arm’s length outcome to be reached.

203It follows that the mere fact that, according to the Commission, neither the transfer pricing report nor the APA identified the royalty as the transaction for which a transfer price was in reality determined in the APA and that they did not analyse whether the royalty was in conformity with the arm’s length principle does not suffice to demonstrate that that royalty was not actually in conformity with the arm’s length principle. That finding alone therefore did not prove that the APA conferred an advantage on SMBV.

204In addition, it must be pointed out that the Commission’s argument that the transfer pricing report did not identify or analyse the royalty as the transaction for which a price was actually determined in the APA is based on the assertion that, in the transfer pricing report, the payment of a royalty is not regarded as the adjustment variable of the structure of that suggested remuneration. In that regard, it should be noted that the transfer pricing report in no way disregards the licensing arrangement concluded between SMBV and Alki. That arrangement is mentioned both in the description of the Starbucks group’s activities in the EMEA region and the Netherlands and in the graphic representation of the EMEA region’s transactions. Therefore, the Starbucks group’s tax advisor did indeed take into account those transactions when he proposed SMBV’s remuneration.

205Accordingly, it is necessary to uphold the complaint of the Kingdom of the Netherlands and of Starbucks according to which the Commission wrongly found that the absence of separate analysis of the royalty in transfer pricing report and in the APA conferred an advantage on SMBV.

206So far as concerns the Commission’s position that the CUP method should have been given priority over the TNMM, since that first method was applicable in the case at hand, first, it should be noted that, in the present case, the APA accepted the use of the TNMM in order to determine the operating margin for SMBV’s production and distribution activities. The APA, however, accepted that the royalty was determined as, in essence, the difference between the operating profit generated in connection with the production and distribution function and the operating margin. It follows that the APA does not directly provide for the use of a transfer pricing method to calculate the level of the royalty, which is defined as a purely residual value.

207It is true that it follows from the considerations set out in paragraphs 148 to 156 above that, since the royalty was an intra-group transaction the level of which was determined in the APA, the Commission was entitled to examine as part of its analysis under Article 107(1) TFEU, using a transfer pricing method which it regarded as appropriate in the case at hand, whether the royalty amount was determined as if it had been negotiated in market conditions.

208However, with regard to the contested decision, while the Commission contends that the CUP method should have been given priority over the TNMM in order to be able to determine the arm’s length level of the royalty, it fails to consider that, actually, in the APA, the level of the royalty was not calculated using a transfer pricing method, in particular the TNMM. On the contrary, the TNMM was used in the APA to determine SMBV’s remuneration for the production and distribution activities. Thus, the Commission’s position essentially amounts to criticising the fact that the TNMM was used to determine SMBV’s remuneration for the production and distribution activities instead of the CUP method, which should in the Commission’s view have been used to calculate the level of the royalty.

209In that connection, it must be held that the two methods are applied to calculate the price level of different intra-group transactions. However, while the Commission argues that the OECD Guidelines expressed a certain preference towards using traditional methods, such as the CUP method, it cannot mandate the examination of another transaction than that for which the APA determined a transfer price on the basis of the TNMM solely because, for that other transaction, a transfer price should have been determined on the basis of the CUP method. The rule invoked by the Commission merely allows for a choice of the transfer pricing method appropriate for the same type of transaction or closely linked transactions. Choosing the transfer pricing method is not an end in itself, but is done with a view to the intra-group transaction for which the arm’s length level must be determined and not the other way around.

210Second, it must be recalled that, as has been set out in paragraphs 146 and 147 above, a tax measure confers an economic advantage where it leads to a reduction of the tax burden compared to what it would normally have had to bear in the absence of that measure.

211As has been held in paragraph 201 above, mere non-compliance with methodological requirements does not necessarily lead to a reduction of the tax burden. It follows that the mere finding by the Commission of errors in the choice or application of the transfer pricing method does not, in principle, suffice to demonstrate the existence of an advantage.

212However, in recitals 275 to 285 of the contested decision, the Commission invokes no element grounding the conclusion – without a comparison being carried out with the result that would have been obtained using the CUP method – that the choice of the TNMM necessarily leads to a result that is too low. In that context, the Commission merely contends, in recital 284 of the contested decision, that the taxpayer was under an obligation to verify whether the transfer pricing method chosen by the latter led to a reliable approximation of an arm’s length price, before the tax authorities can accept an APA request based on that method.

213In addition, it must be held that the obligation stated by the Commission falls within the area of tax law and, while breach of it may have consequences in terms of taxation, in the field of State aid, such a breach does not necessarily mean that the method chosen by the taxpayer does not produce a reliable approximation of a market-based outcome, in accordance with the arm’s length principle.

214For the sake of completeness, it should be recalled (see paragraph 10 above) that point 2 of the transfer pricing decree provides that the Netherlands tax administration must always conduct a transfer pricing audit from the perspective of the method adopted by the taxpayer at the date of the transaction. That rule complies with paragraph 1.68 of the 1995 OECD Guidelines. It follows that the taxpayer is in principle free to choose a transfer pricing method as long as the method selected leads to an arm’s length outcome for the transaction in question. Even though the taxpayer is expected to take into account, when choosing a transfer pricing method, the reliability of that method in the situation in question, that step does not specifically seek to incentivise the taxpayer to assess all methods and then justify how the method he has chosen produces the best result under the conditions present.

215It follows that, in the case at hand, the Commission was not entitled to find that the CUP method had to be given priority, in principle, over the TNMM.

216It is therefore necessary to uphold the complaint of the Kingdom of the Netherlands and of Starbucks according to which the Commission wrongly found that the mere choice of the TNMM in the case at hand conferred an advantage on SMBV, without it being necessary to examine Starbucks’ argument disputing the admissibility of certain arguments put forward by the Commission.

Whether the royalty paid by SMBV to Alki should have been zero (second line of reasoning)

217Under the second part of the third plea in Case T‑760/15, the Kingdom of the Netherlands claims that the Commission is wrong to argue that the remuneration paid by SMBV to Alki should have been zero and that it resulted in an advantage within the meaning of Article 107(1) TFEU. The contracts concluded between the Starbucks group and external roasters and manufacturers of coffee-derived products on which the comparison conducted by the Commission is based cannot be used for a comparison of the contractual arrangements between Alki and SMBV, based on the CUP method. The Kingdom of the Netherlands is of the view that the Commission did not demonstrate that the TNMM had not led to an arm’s length outcome.

218Under the fourth part of the second plea in Case T‑636/16, Starbucks maintains, in essence, that the Commission’s analysis of the royalty relies almost exclusively on evidence that was not available in April 2008. In addition, contrary to Netherlands law and to the OECD Guidelines, the Commission did not establish an arm’s length range for the royalty, but concluded that it should equal zero. Like the Kingdom of the Netherlands, Starbucks is of the view that all third-party manufacturers, mentioned in the contested decision, which, similar to SMBV, supply Starbucks-branded coffee products to stores or retailers, pay substantial royalties for the use of Starbucks’ roasting IP. No royalties are paid by subcontractors which, unlike SMBV, do not supply such products to customers, but merely provide a roasting service to the Starbucks group. Contrary to what is stated in the contested decision, the value of the roasting IP is generated when Starbucks-branded coffee products are sold to stores and retailers, which are willing to pay premium prices for those products. Additionally, Starbucks contends that, contrary to what the contested decision finds, for the period examined, SMBV’s roasting activities have always been profitable.

219The Commission disputes those arguments.

220First, the Commission argues, in essence, that it compared the amount of the royalties under the seven contracts mentioned in recital 300 of the contested decision with that of the royalty in connection with the relationship between SMBV and Alki. In addition, the Commission explains, in Case T‑760/15, that it also relied on the contracts mentioned in recital 303 of the contested decision and, in Case T‑636/16, that that was not, in principle, the case. The Commission adds that it also relied on the agreements between competitors of the Starbucks group and third coffee roasting companies, mentioned in recitals 305 to 308 of the contested decision, to arrive at the conclusion that the arm’s length value of the royalty paid in the context of the relationship between SMBV and Alki had to be zero. It adds that, in recitals 292 to 298 of the contested decision, it explained the reasons why it had taken the view that those transactions constituted a direct point of comparison enabling the amount of the royalty owed by SMBV to Alki in exchange for the roasting IP to be determined.

221Second, the Commission argues that it does not deny that the roasting IP may represent a value. However, the value of that IP is not captured before the Starbucks-branded coffee products are sold by Starbucks stores to final consumers. According to the Commission, the roasting IP therefore cannot be considered to represent a benefit for SMBV for which a royalty should be paid.

Preliminary observations

222It must be recalled that the Commission set out its second line of reasoning in recitals 286 to 341 of the contested decision, under Section 9.2.3.3, entitled ‘The royalty payment to Alki ... resulting from the ... APA is not priced at arm’s length’.

223As a preliminary point, two observations should be made.

224First, it must be recalled that it is settled between the parties that the royalty constituted, in principle, a deductible charge under Netherlands tax law. It is moreover undisputed that, since it is a transaction within the Starbucks group, the royalty is an intra-group transaction. It is apparent from paragraphs 147 to 156 above that the level of such a transaction must, for the purposes of the determining SMBV’s corporate income tax, be assessed as if it had been determined in market conditions.

225Second, it must be noted that, although the Commission considered that the level of the royalty paid by SMBV to Alki should have been zero, it acknowledged in recital 310 of the contested decision that coffee roasting know-how and coffee roasting curves could represent a value. Similarly, in paragraph 126 of its defence in Case T‑636/16, the Commission explains that it does not deny that the roasting IP might represent a value.

226It follows that the only matter on which the parties are in disagreement is the level the royalty transfer price would have been if it had been set in market conditions.

227In that regard, it should be recalled that, in recitals 286 to 341 of the contested decision, the Commission maintains that the royalty paid by SMBV to Alki should have been zero. According to the wording of the contested decision, the Commission does not contend that the level of that royalty should have been lower than the level of the royalty accepted by the APA, but that no royalty should have been paid. The Commission itself asserts that it did not estimate a range for the level of the royalty on the ground that it should have been exactly zero (recital 340 of the contested decision).

228In the contested decision, the Commission based its demonstration according to which the royalty paid by SMBV should have been zero (recital 318 of the contested decision), in essence, on three elements.

229So far as concerns the first element, the Commission stated that the variable nature of the royalty payment during the period from 2006 to 2014 gave a ‘first indication’ that the level of that payment bore no relation to the value of the roasting IP (recital 289 of the contested decision). As far as the second element is concerned, the Commission maintained that SMBV did not capture the value of the roasting IP in its relationship with Alki (recitals 310 to 313 of the contested decision). With regard to the third element, the Commission explained that the manufacturing agreements concluded by Starbucks with third parties did not require any royalty for the use of the roasting IP (recitals 291 to 309 of the contested decision).

230In addition, in the contested decision, the Commission rejected the arguments raised by the Kingdom of the Netherlands and Starbucks during the administrative procedure. More specifically, the Commission took the view that the royalty did not represent remuneration for the transfer of business risks (recitals 319 to 332 of the contested decision) and that the amount of the royalty was not justified by the amounts paid by Alki to Starbucks US for the technology under the cost sharing agreement (recitals 333 to 338 of the contested decision).

Next, first of all, it is necessary briefly to set out the theory advanced by the Commission in the contested decision concerning SMBV’s royalty-related functions and concerning the relevant normal taxation rules. Those elements are the basis underpinning the analysis of the level of the royalty, conducted by the Commission in the contested decision. Second, it is appropriate to examine Starbucks’ argument that the Commission’s analysis of the royalties could not rely on evidence that was not available in April 2008. Third, it is appropriate to analyse the arguments of the Kingdom of the Netherlands and of Starbucks on the question of who exploited the roasting IP. Fourth, it is necessary to examine whether the Commission was justified in finding, based on a comparison with the royalties provided for in contracts with third parties, that the royalty should have been zero. Fifth, it is appropriate to examine the Commission’s argument, raised at the hearing, according to which, in reality, it maintained in the contested decision that the royalty should have been lower than the level endorsed by the APA.

(b) SMBV’s royalty-related functions

232With regard to the functions of SMBV that are relevant for the analysis of the royalty, first of all, it is settled that it roasts green coffee beans which it purchases from SCTC.

233Next, the Commission maintains in the contested decision, in particular in recitals 49, 96, 137, 313 and 330, as well as in its submissions, that Starbucks stores, both affiliated and unaffiliated, are required to purchase roasted coffee from SMBV and that SMBV is therefore also the vendor of the roasted coffee.

234In addition, in the contested decision, the Commission takes the view that, in line with accounting standards, the stocks that SMBV purchases and sells need to appear on its balance sheet, since it is the entity responsible for contracting and invoicing with stores.

235Last, it is apparent from the contested decision, read as a whole, that the Commission considers it incorrect that SMBV is presented in the transfer pricing report as a low-risk coffee producer. In that regard, in recitals 319 to 332 of the contested decision, the Commission inter alia rejected the arguments of the Kingdom of the Netherlands and of the Starbucks correspondents according to which the contractual arrangements between SMBV and Alki, on which the tax advisor’s report was based, effectively cause a transfer of business risks from SMBV to Alki. In addition, the Commission explained that SMBV assumed commercial risks in its relations with SCTC and Starbucks stores.

(c) Normal taxation rules under Netherlands law

237As has been found in paragraph 146 above, the examination under Article 107(1) TFEU of a tax measure granted to an integrated undertaking means determining, first, the normal taxation rules applicable to the beneficiary of that measure.

238In recital 232 of the contested decision, the Commission asserted that the Netherlands rules against which the APA must be examined are the rules of the general Netherlands corporate income tax system. Those rules are summarised in paragraphs 3 to 11 and 35 above.

239In the case at hand, it is settled that the APA was concluded in order to enable SMBV to anticipate the application of corporate income tax rules by determining its taxable profit. It follows that the APA forms part of the general Netherlands corporate income tax system, with the objective of taxing undertakings – integrated or stand-alone – subject to corporate income tax.

240Therefore, it is in the light of SMBV’s functions as identified in paragraphs 232 to 236 above and the normal taxation rules as identified above that it is appropriate to analyse the question of whether the level of the royalty corresponded to a level that would have been practised under market conditions.

(d) Use of evidence by the Commission that was not available when the APA was concluded

241Starbucks claims that, in the contested decision, the Commission relied predominantly on information that was not available in April 2008, when the APA was concluded. More specifically, Starbucks cites the case-law of the EU Courts on the private investor criterion according to which, in order to assess the economic rationality of a certain measure, it is necessary to place oneself in the context of the time at which the financial support measures were adopted, and thus to refrain from any assessment based on events that happened at a later date. According to Starbucks, the same principle is well established under Netherlands tax law and in the OECD Guidelines.

242The Commission does not dispute that that principle is applicable in the case at hand and merely argues that a considerable number of arguments in support of its conclusion that the APA did not comply with the arm’s length principle relied on information and data available to the Netherlands tax administration at the time the APA was concluded.

243At the outset, it must be stated that the fact that Netherlands tax law and the OECD Guidelines provide, according to Starbucks, that it is necessary to refrain from any assessment based on events that happened after the adoption of an advance pricing agreement to examine whether it complies with the arm’s length principle has no bearing on the examination in this case of the APA in the light of the conditions of Article 107 TFEU.

244Starbucks bases its argument on an analogous application of the case-law of the EU Courts according to which, in order to examine whether or not the Member State or the public body concerned has adopted the conduct of a prudent private operator operating in a market economy, it is necessary to place oneself in the context of the period during which the measures at issue were taken in order to assess the economic rationality of the conduct of the Member State or of the public body, and thus to refrain from any assessment based on a later situation (judgment of 25 June 2015, SACE and Sace BT v Commission, T‑305/13, EU:T:2015:435, paragraph 93; see also, to that effect, judgments of 16 May 2002, France v Commission, C‑482/99, EU:C:2002:294, paragraphs 69 and 71, and of 5 June 2012, Commission v EDF, C‑124/10 P, EU:C:2012:318, paragraph 105).

245In that regard, it is sufficient to note that the determination of a transfer price in line with market conditions does not find its basis in the principle of equal treatment between public and private undertakings, but, as the Commission recognises, in the legitimate objective of a prior tax agreement, such as the APA, which is to establish, for reasons of legal certainty, in advance, the application of a tax provision.

246It must be held that, to the extent that the Commission considers that the adoption of a prior tax agreement, such as the APA, gave rise to new aid, it should have been notified of that aid before its implementation, in accordance with Article 108(3) TFEU. Had the Commission stated a position on such a notification, however, it could not have taken into consideration information that was not known or reasonably foreseeable at the time of its decision. It therefore cannot criticise the Member State concerned for not having taken into account information that was not known or reasonably foreseeable at the time of the adoption of the agreement in question.

247It must be recalled, that it is apparent from Article 1 and recital 40 of the contested decision that the measure contested by the Commission is the APA alone.

248Second, while it is true that the APA could be revoked or amended during its validity period, from 2007 to 2017, it is important to note that, in the contested decision, the Commission did not consider that the fact that the Netherlands authorities had not revoked or modified the APA during its validity had conferred an advantage on SMBV. Point 6, second indent, of the APA, read in conjunction with point 4, first indent, stipulates that it comes to an end when a significant change of the facts and circumstances approved by the APA occurs, unless the parties have amicably agreed a revision arrangement. There was therefore nothing to prevent the Commission from finding that a substantial change of the facts and circumstances approved by the APA had taken place and that, consequently, a continued application of the APA conferred a selective advantage on SMBV.

249Third, regarding the Commission’s argument that the APA was subject to a half-term check after the sixth accounting year, ending on 31 December 2013, and that the APA was not modified on that occasion, it is sufficient to point out that nowhere in the contested decision did the Commission argue that the absence of modification or revocation of the APA, following that half-term check, had conferred an advantage on SMBV under Article 107(1) TFEU.

250It follows that, in those circumstances, the examination of the existence of an advantage conferred by a prior agreement, such as the APA, should be determined in view of the context of the time at which that agreement was concluded. The implication of that finding is that the Commission is required to refrain from assessments based on a situation subsequent to the adoption of the APA.

251Accordingly, it is necessary to uphold Starbucks’ argument that, in the circumstances of the case at hand, the Commission could not base its analysis on information that was not available or reasonably foreseeable in April 2008, when the APA was concluded.

(e) Whether the roasting IP represented a value for SMBV

252By the second argument set out in recitals 310 to 332 of the contested decision (see paragraph 230 above), the Commission sought, in essence, to demonstrate that the payment of a royalty by SMBV to Alki was not justified, in principle, since SMBV did not, according to the Commission, benefit from the value of the roasting IP. That argument is divided into two parts. In essence, first, the Commission took the view that SMBV did not exploit the roasting IP directly on the market. Second, it found that the coffee roasting activity did not generate sufficient profit to allow for royalty payments.

(1) Whether SMBV exploited the roasting IP directly on the market

253As regards the argument that SMBV did not exploit the roasting IP directly on the market, the Commission explained, in recitals 310 to 313 of the contested decision that, first of all, in the specific relationship between Alki and SMBV, the value of the roasting IP was not ‘captured’ by the roaster, namely, SMBV. According to the Commission, the importance of the roasting know-how and curves lay in ensuring a consistent taste associated with the brand and its individual products. It inferred that the value of Starbucks’ roasting know-how and curves was ‘exploited’ only when Starbucks products were sold by stores under the Starbucks brand. In addition, the Commission maintained that, on their own, the roasting know-how and curves did not generate value for the roaster on an ongoing basis if they could not be exploited on the market. As far as it was concerned, in the case of SMBV, the roasting know-how and curves ‘appear[ed]’ to constitute a technical specification according to which the roasting ought to proceed due to a preference or a choice of the purchasing company. The fact that the specifications laid down by Alki regarding the roasting process and, in particular, the roasting curves allowed SMBV to roast coffee sold under the Starbucks brand did not, according to the Commission, bring any benefit to SMBV in terms of increased sales or sales price, given that SMBV did not, in principle, sell its production to final customers who valued the Starbucks brand. Last, the Commission added that SMBV sold virtually all its production to Starbucks-franchised stores and that it therefore did not exploit the roasting IP directly on the market.

254In its submissions, the Commission adds that the value of the roasting IP is exploited only where the products are sold to final customers who valued the consistent taste associated with the brand in question. Economically, it would be irrational for the roaster/coffee producer to pay a royalty to use the roasting IP when it does not market the finished product directly. That lies in the fact that, in such a scenario, the roaster/coffee producer uses that IP to roast coffee beans at the request of the contractor.

255As a preliminary point, first, [confidential]. It follows that, under the roasting agreement, SMBV was obliged to pay the royalty in return for the use of the roasting IP.

256Second, it must be pointed out that the Commission did not argue, in the contested decision, that its thesis according to which the roasting IP is exploited with end consumers constituted a test prescribed by Netherlands tax law. On the contrary, it is apparent from recitals 310 to 313 of the contested decision, read in combination with the introductory recitals setting out the Commission’s position upon the adoption of the opening decision, that the Commission conducted a purely economic examination that it based on the 1995 and 2010 versions of the OECD Guidelines.

257In the light of those considerations, it is necessary to examine the merits of the proposition of the Commission, set out in recitals 298, 300 and 310 to 313 of the contested decision, according to which SMBV did not directly exploit the IP on the market on the ground that it did not sell products to final consumers.

258In that regard, it must be held that the explanations given in recitals 310 to 313 of the contested decision lack plausibility. The reasoning followed by the Commission in recitals 310 to 313 of the contested decision as well as in its submissions before the Court is, in essence, based on the premiss that the value of the roasting IP is exploited only where the products are sold to final consumers who value the consistent taste associated with the mark in question and where, economically, it would not be rational for the roaster/coffee producer to pay a royalty to use the roasting IP when it does not market the finished product directly. However, that premiss is not borne out by the facts established in the contested decision.

First, it is settled between the parties that the roasting IP was, in principle, capable of representing an economic value. Second, it is also settled between the parties that SMBV is a roaster that was obliged to use the roasting IP to roast its coffee. Third, the Commission maintains that Starbucks stores, both affiliated and unaffiliated, are required to purchase roasted coffee from SMBV and that SMBV is thus also the vendor of the roasted coffee.

260In that context, it must be held that the Commission was wrong to focus its analysis on the premiss that the value of the roasting IP is exploited only where the products are sold to final consumers. The question of who ultimately bears the costs corresponding to the compensation of the value of the IP used for coffee production is clearly separate from the question of whether the roasting IP was necessary to allow SMBV to produce roasted coffee according to the criteria stipulated by Starbucks stores, to which it sells, on its own behalf, the coffee.

261In the event that SMBV sells the coffee it has roasted to Starbucks stores which require coffee to have been roasted according to Starbucks’ specifications, it is plausible that, in the absence of the right to use, or – to use the terminology of the contested decision – exploit the roasting IP, SMBV would not have been in a position to produce and supply roasted coffee according to Starbucks’ specifications in stores of the same name.

262From this it must be concluded that, contrary to what the Commission argues, SMBV’s payment of a royalty to use the roasting IP is not devoid of all economic rationality. The IP was, after all, necessary for exercising SMBV’s economic activity, namely, the production of roasted coffee according to Starbucks’ specifications. It follows that SMBV does indeed derive added value from the use of the roasting IP, without which it could not then resell the roasted coffee to Starbucks stores.

263Furthermore, it is necessary to reject the Commission’s argument that it is Starbucks stores which pay royalties to Starbucks Coffee Emea which also include a remuneration [confidential]. First, the submissions under the present line of reasoning in the contested decision do not contain any element such as to substantiate that proposition. Second, the circumstance that Starbucks stores pay a royalty to Starbucks Coffee Emea does not preclude SMBV from being able to pass on [confidential] in the prices invoiced to stores. In addition, the fact that, according to the Commission, Starbucks stores pay a second royalty [confidential] to Starbucks Coffee Emea, [confidential], is capable of conferring an advantage, at most, on the latter, but not on SMBV.

264It follows from the foregoing that the Commission was wrong to consider, in recitals 298 and 300 of the contested decision, that an unaffiliated manufacturing company exploits a roasting IP only if it sells its products to end customers. The exploitation of roasting IP is not limited to situations in which a roaster sells its coffee on the retail market to end consumers, but also includes situations such as that of SMBV, in which a roaster is active as a seller on the wholesale market. On the contrary, merely processing coffee on behalf of a contractor that procures the technical specifications for manufacture does not suffice to demonstrate that such an IP is being exploited.

265Accordingly, it must be held that the Commission erred in finding that SMBV, as described in the contested decision, did not have to pay a royalty since it did not exploit the roasting IP directly on the market.

(2) Whether SMBV has been loss-making on its roasting activities

266The Kingdom of the Netherlands and Starbucks dispute the argument of the Commission, set out in recitals 314 to 317 of the contested decision, that SMBV has generated a loss on its roasting activities since 2010, a situation which did not permit the payment of a royalty for the roasting IP. According to the Kingdom of the Netherlands, the Commission inter alia did not take sufficient account of the fact that the beans purchased by SMBV were also used for the production of coffee by third parties. The Commission accordingly took the view that this demonstrated that the method used to determine the royalty as an adjustment variable, as approved by the APA, was not in conformity with the arm’s length principle.

267The Commission retorts that, according to the information it received from Starbucks during the administrative procedure, only a limited portion of roasted coffee was processed by external manufacturers. It was thus right to find that virtually all the beans purchased by SMBV were processed as part of its own coffee-production activities.

268In the contested decision, the Commission found, in essence, that SMBV has generated a loss on its roasting activities since 2010 and that the royalty paid by SMBV to Alki was financed in part by SMBV’s other activities, without it having had any prospects of future profits resulting from the roasting. According to the Commission, the coffee roasting activity did not generate sufficient profits to enable the payment of the royalty. Moreover, the Commission contends that the royalty paid by SMBV to Alki for the roasting IP in an intra-group context ‘appear[ed]’ to serve structurally the sole purpose of shifting profits derived from SMBV’s reselling function to Alki.

269At the outset, it must be pointed out that the Commission’s reasoning is based on the premiss according to which it is necessary to achieve profits on the roasting activities in order to be in a position to pay a royalty for the roasting IP. The Commission does not, however, demonstrate that the Netherlands tax rules provide that the obligation to pay a royalty is dependent on the profitability of the activity in question. In addition, the question of whether SMBV’s roasting activities were profitable is unrelated to whether an obligation to pay a royalty such as that at issue in the present case could be economically justified.

270In that regard, first of all, it must be pointed out that the Commission argues that the roasting activity did not generate sufficient profit for the period commencing in 2010. That finding therefore does not concern the entirety of the validity period of the APA (commencing in 2007).

271Next, it must be stated that, as has been indicated in paragraphs 243 to 251 above, in the circumstances of the case at hand, the Commission was required to refrain from any assessment based on a situation subsequent to the APA’s conclusion. The Commission does not explain, in the contested decision, however, how the losses it mentions in recitals 314 to 317 thereof would have been foreseeable when the APA was adopted, when they pertained to SMBV’s situation only from 2010. The Commission has therefore not demonstrated that it was entitled to rely on the fact that SMBV had sustained a loss on its roasting activities since 2010.

272Last, in any event, to the extent that Starbucks claims that SMBV’s roasting activities have always been profitable, it is worth recalling that the Commission conducted its analysis based on a comparison of the revenue received from Starbucks stores with the value of SMBV’s purchase of green coffee beans from SCTC. However, under the third line of reasoning, the Commission specifically maintains that the increase of the price of green coffee beans, from 2010 onwards, was too high. It is thus already apparent from the Commission’s arguments in the contested decision that the costs of green coffee were considerably overvalued and that, accordingly, the losses it mentions in the contested decision did not exist, at least in the proportions found in recitals 314 to 317 of the contested decision.

273Those findings are sufficient to reject the Commission’s argument that SMBV was not in a position to pay a royalty for the roasting IP due to its having been loss-making on its roasting activities.

274In any event, Starbucks claims that the Commission’s calculation is erroneous since no account was taken of the fact that a considerable volume of the total purchased green coffee had not been roasted by SMBV. The Commission contends that that argument is inadmissible, on the ground that that information is new and moreover contradicts the information provided during the administrative procedure.

275In that regard, it must be pointed out that the Commission acknowledges, both in footnote 155 of the contested decision and in its submissions, that the information provided by Starbucks during the administrative procedure led to the conclusion that practically all the green coffee purchased by SMBV, apart from ‘limited volumes’ that had been provided to third parties, had also been roasted by SMBV. In that context, the Commission makes reference to the letter of the Starbucks correspondents that it was sent on 23 September 2015. However, it is apparent from that letter that the third party in question had a custom production contract with the Starbucks group which ‘predominantly’ concerned the production of products other than roasted coffee, ‘but also the roasting of green coffee as such (be it in limited volumes)’. The reference to ‘limited volumes’ indicates that the third party in question produced a limited quantity of roasted coffee compared to its production of products other than coffee powder, but not that it produced negligible quantities of roasted coffee. The Commission was thus informed during the administrative procedure that a portion of the green coffee purchased by SMBV had not been roasted by SMBV. The objection made by the Commission as to the admissibility of Starbucks’ argument, based on the notion that that argument is based on information not brought to its attention during the administrative procedure, therefore has no basis in fact and must be rejected.

276So far as concerns the merits of Starbucks’ argument that the Commission took into account the entirety of the sums corresponding to SMBV’s purchases of green coffee as costs for its calculation when a considerable volume of the total purchased green coffee had not been roasted by SMBV, it must be noted that the Commission contends that Starbucks did not indicate, in the documents communicated on 29 May 2015, that a meaningful portion of green coffee beans had been roasted by third parties. However, as Starbucks rightly argues, the response to question 2 in the letter of the Starbucks correspondents of 29 May 2015 that the Commission cites in its submissions pertained to the allocation of SMBV’s profits to its various functions, and not to the allocation of its costs to those functions. It follows that the responses of the Starbucks correspondents on which the Commission, according to its submissions, based its finding that SMBV’s roasting function had been loss-making from 2010 did not suffice to enable the Commission to arrive at that conclusion.

277Furthermore, as has been set out in paragraph 275 above, when the contested decision was adopted, the Commission already had indication that its calculation, set out in recital 314 of the contested decision, consisting in subtracting the price paid by SMBV to SCTC for green coffee beans from the revenue generated from coffee roasting, was erroneous.

278If follows that the Commission has not demonstrated that SMBV has generated a loss on its roasting activities since 2010, a situation which did not permit the payment of a royalty for the roasting IP.

(f) Comparison with coffee roasting agreements concluded by Starbucks with third parties and against similar licensing arrangements ‘on the market’

279By the third argument set out in the contested decision (see paragraph 229 above), the Commission sought to explain, in essence, that the manufacturing agreements concluded by Starbucks with third parties and certain agreements between Starbucks’ competitors and third roasters did not provide for any royalty for the use of the roasting IP (recitals 291 to 309 of the contested decision).

280In that context, the Commission explained, in recital 309 of the contested decision, that a transfer pricing analysis of the arm’s length value of the royalty paid to Alki by SMBV for the roasting IP led to the conclusion that no royalty ought to be due for that IP in that specific relationship. It based that finding, first, on an analysis of the manufacturing agreements concluded by Starbucks with third parties and, second, on a comparison with agreements concluded between Starbucks’ competitors and third roasters. It is apparent inter alia from recitals 291 and 299 of the contested decision that the Commission sought to determine the level of an arm’s length royalty between SMBV and Alki.

281The Kingdom of the Netherlands and Starbucks are at odds with the Commission, in essence, on whether the contracts concluded by Starbucks with external roasters and with manufacturers of coffee-derived products, on which the comparison conducted by the Commission is based, were relevant to carrying out a comparison with the contractual arrangements between Alki and SMBV, under the CUP method.

282In essence, in respect of the question of whether the manufacturing agreements concluded by Starbucks with third parties imply that the royalty should have been zero, the Kingdom of the Netherlands and Starbucks claim that:

– the contracts concluded between Starbucks and external roasters and manufacturers of coffee-derived products, on which the contested decision is based, could not be used for a comparison with the contractual arrangements between Alki and SMBV, based on the CUP method;

– the Commission’s analysis of the royalties relies almost exclusively on evidence that was not available in April 2008;

– the majority of the contracts used by the Commission for comparing transactions pertained to specific coffee-derived products other than roasted coffee beans;

– Alki’s remuneration was inextricably linked to the purchase of green coffee beans from SCTC, but none of the transactions derived from the contracts used by the Commission for the comparison was inextricably linked to another transaction in that way;

– all third-party manufacturers, mentioned in the contested decision, which – similar to SMBV – supplied Starbucks-branded coffee products to stores or retailers, paid substantial royalties for the use of the IP for the roasting of Starbucks’ coffee.

283As for the manufacturing agreements concluded by Starbucks with third parties, the Commission examined, as a first step, in recitals 291 to 298 of the contested decision, whether the coffee roasting contracts concluded by the Starbucks group with 10 third companies offered a direct point of comparison enabling the amount of the royalty owed by SMBV to Alki to be determined. In that regard, the Commission based its examination on paragraph 1.36 of the 2010 version of the OECD Guidelines, which, for the purposes of the comparability analysis of the controlled transactions of the corporate taxpayer and the comparable transactions on the free market, lists five comparability factors, including the characteristics of the property or services transferred, the functions performed by the parties, the contractual terms, the economic circumstances of the parties and the business strategies pursued by the parties. The Commission also referred, in footnote 147 of the contested decision, to paragraph 1.17 of the 1995 version of the OECD Guidelines. According to the latter, for the purposes of the comparability analysis, the characteristics that may be important are those of the property or services transferred, the functions performed by the parties, the contractual terms, the respective economic circumstances of the parties and the business strategies that they pursue.

284As a second step, in recitals 299 to 304 of the contested decision, the Commission found that, on the basis of those 10 uncontrolled transactions, the level of an arm’s length royalty between SMBV and Alki could be determined by using the CUP method.

285More specifically, first, in order to determine the level of the royalty using the CUP method, it compared the payment of the royalty from SMBV to Alki with the payments due from third parties to other Starbucks group undertakings, in comparable transactions concluded under similar uncontrolled conditions. Second, the Commission analysed contracts concluded by the Starbucks group with unaffiliated manufacturing company 1 and with the companies designated, in recital 300 of the version of the contested decision published in the Official Journal of the European Union, by the terms ‘unaffiliated manufacturing companies 2, 3, 4, 8, 9 and 10’ (respectively, ‘unaffiliated manufacturing company 2’, ‘unaffiliated manufacturing company 3’, ‘unaffiliated manufacturing company 4’, ‘unaffiliated manufacturing company 8’, ‘unaffiliated manufacturing company 9’ and ‘unaffiliated manufacturing company 10’). It then found that those third parties did not pay royalties under their licensing agreements with the Starbucks group if they did not exploit the roasting IP directly on the market. Third, the Commission found, in respect of the relationships between the Starbucks group and the companies designated, in recital 303 of the version of the contested decision published in the Official Journal of the European Union, by the terms ‘unaffiliated manufacturing companies 5, 6 and 7’ (respectively, ‘unaffiliated manufacturing company 5’, ‘unaffiliated manufacturing company 6’ and ‘unaffiliated manufacturing company 7’), that only the trade mark and technology licence agreements concluded with those third parties by Starbucks contained a royalty payment.

287As a third step, the Commission found, in recital 309 of the contested decision, that the coffee roasting contracts concluded by the Starbucks group with ten third companies did not require any royalty for the use of the roasting IP. The Commission thus concluded that no royalty ought to be due for that IP in the specific relationship between SMBV and Alki.

Without it being necessary, at this stage, to examine whether the choice by the Commission of the elements relevant to the comparability analysis, namely, the characteristics of the property or services transferred, the functions performed by the parties, the contractual terms, the respective economic circumstances of the parties and the business strategies that they pursued, was vitiated by error, it must be stated that there exist a number of elements in the context of that analysis that are at odds with the comparability between, on the one hand, the relationships between the Starbucks group and third parties and, on the other hand, the relationships between SMBV and Alki. Those elements are set out in paragraphs 288 to 345 below.

(1) Contracts concluded subsequent to the APA

288It must be noted that 7 of the 10 contracts examined by the Commission, namely, those concluded with unaffiliated manufacturing companies 1, 3, 4, 7, 8, 9 and 10, were examined after the APA’s conclusion. Given that the Commission does not explain how those contracts were available or reasonably foreseeable at the time of the APA’s conclusion, it was not in a position, for the reasons set out in paragraphs 243 to 251 above, to base its analysis of the APA on elements subsequent to its conclusion. It is therefore necessary to exclude those seven contracts from the comparison exercise.

(2) Contracts concluded with undertakings which do not roast coffee

289As has been set out in paragraphs 232 to 236 above, SMBV is a roaster of green coffee that pays Alki a royalty to use the roasting IP.

290In recital 295 of the contested decision, the Commission acknowledged that, of the 10 third companies that concluded a contract with the Starbucks group, certain of them did not roast coffee. It is commonly known, however, that a company which does not roast coffee will not pay a royalty to the Starbucks group for the use of the roasting IP in order to produce roasted coffee.

291In addition, in the contested decision, the Commission did not provide elements indicating that the contracts under which the third party did not produce roasted coffee would be comparable with the contract concluded between SMBV and Alki. It is true that that finding does not rule out that the Commission could have based its analysis on the transactions of an undertaking which did not exercise exactly the same functions as SMBV or which was in a different factual situation. In that case, the onus would have been on it to justify such a choice and to explain the adjustments that it would have made in its analysis so as to take into consideration the differences between the undertakings.

292Therefore, a contract concluded with an undertaking that was not a roaster could not be used, in the case at hand, without adjustments or amendments, for the purposes of the comparison exercise to demonstrate that the level of the royalty paid by SMBV to Alki should have been zero.

293In that regard, the contracts concluded with unaffiliated manufacturing companies 5, 6 and 7 did not concern, according to their description in the contested decision, the roasting of green coffee. Given that, under the contracts at issue, unaffiliated manufacturing companies 5, 6 and 7 did not exercise the function of coffee roaster, it must be concluded that the contracts concluded with the said undertakings could not be used, in the case at hand, for the purposes of the comparison exercise.

(3) Contracts with undertakings that did not engage in the sale of roasted coffee to stores or to consumers

294As has been set out in paragraph 235 above, the stock that SMBV purchased from SCTC and sold to stores appears on SMBV’s balance sheet because SMBV is the entity responsible for contracting and invoicing with stores. It follows that SMBV became the owner of the stock of green coffee that it roasted and sold to stores. It must be stated, however, that, if SMBV was a stand-alone company, it would not have been in a position to produce its coffee according to the Starbucks group’s specifications without having obtained the right to use the roasting IP. Therefore, it would not have been able to produce its roasted coffee without paying a royalty.

295On the contrary, as has been set out in paragraph 236 above, a toll manufacturer or a supplier processes raw materials or semi-finished products on behalf of the contractor. Consequently, the roasting IP does not represent for it a technical specification for which it will not pay a royalty to the contractor.

296In that regard, first, it must be noted that, in the defence in Case T‑636/16, the Commission maintains that, as regards their contractual relationship with the Starbucks group, unaffiliated manufacturing companies 1, 8 and 9 operated under toll-manufacturer agreements and that they mainly produced coffee products such as flavoured coffee, powder for a coffee-based product protected by a registered trade mark or soluble coffee. According to the Commission, unaffiliated manufacturing companies 1, 8 and 9 did not acquire title to the Starbucks components. In addition, the Commission recognised that the agreements with unaffiliated manufacturing companies 1, 8 and 9 differ from the coffee roasting agreement between SMBV and Alki.

297Second, in terms of the contract concluded between the Starbucks group and unaffiliated manufacturing company 4, the Commission specified, in recital 148, third indent, of the contested decision, that that manufacturing company subcontracted coffee roasting. In that regard, Starbucks claims that unaffiliated manufacturing company 4 purchases green coffee from the Starbucks group and then roasts it in accordance with the brand curves and recipes for mixing beans provided. It then sells all of its roasted coffee to a subsidiary wholly owned by the Starbucks group, which sells the roasted coffee on to stores.

298It follows from that description that unaffiliated manufacturing company 4 did not sell the coffee it roasted to stores. It merely provided roasted coffee, as a subcontractor, to a Starbucks group company engaged in the sale of coffee. In those conditions, the roasting IP constituted a mere technical specification for manufacture. Therefore, the fact that unaffiliated manufacturing company 4 did not pay a royalty to use the roasting IP to the Starbucks group does not mean that SMBV did not have to pay a royalty to Alki.

299Third, with regard to unaffiliated manufacturing company 10, the Commission explains in its submissions in Case T‑636/16 that that company manufactured and roasted green coffee beans, purchased directly from green coffee suppliers, and sold all Starbucks-branded coffee products to a single entity of the Starbucks group engaged in their sale.

300It follows from that description that unaffiliated manufacturing company 10 did not, therefore, sell its roasted coffee to stores, but to a Starbucks group company engaged in its sale. In those conditions, the roasting IP constituted a mere technical specification for manufacture. It is therefore unsurprising that that company did not pay a royalty to the Starbucks group to use the roasting IP.

301The Commission retorts that both unaffiliated manufacturing companies 4 and 10 and SMBV manufacture coffee products of which they are not the independent supplier on the market and that, therefore, they are in comparable situations. However, that argument is unconvincing. It must be recalled that, in order to determine whether SMBV has benefited from an advantage within the meaning of Article 107(1) TFEU, it is appropriate to compare SMBV’s situation, under the measure in question, with the situation of a comparable undertaking exercising its activities autonomously in conditions of free competition (see paragraphs 148 and 149 above). The object of comparison in such an analysis is thus a stand-alone company in SMBV’s situation, namely, a company that roasts coffee and sells it to stores, on the market.

302In view of those differences between the situation of SMBV and that of unaffiliated manufacturing companies 1, 4, 8, 9 and 10 and in the absence of additional elements indicating that there was nevertheless comparability between the contracts at issue, it was thus necessary to reject the analysis of the comparability of the contracts concluded between the Starbucks group and those companies.

(4) Contracts concerning products other than roasted coffee

303In recital 295 of the contested decision, the Commission recognised that, of the 10 third companies that concluded a contract with the Starbucks group, certain of them produced ready-to-drink beverages or other products and ingredients for drink preparation and that, therefore, not all of the 10 third companies produced roasted coffee. According to the same recital, the contracts which concerned the roasting of green coffee were those concluded with unaffiliated manufacturing companies 2, 3, 4 and 10.

304As has been set out in paragraph 296 above, the Commission recognised that, as regards their contractual relationship with the Starbucks group, unaffiliated manufacturing companies 1, 8 and 9 mainly produced coffee products such as flavoured coffee, powder for a coffee-based product protected by a registered trade mark or soluble coffee. Moreover, the Commission recognised that the agreements with unaffiliated manufacturing companies 1, 8 and 9 differ, in that regard, from the coffee roasting agreement between SMBV and Alki.

305In addition, it should be recalled that the Commission maintains, in the defence in Case T‑636/16, that its assessment of the third-party agreements does not, in principle, rely on the agreements concluded with unaffiliated manufacturing companies 5, 6 and 7, due to the differences in the licensed know-how – the roasting IP as opposed to the ready-to-drink production know-how – and the place of those companies in the supply chain – the fact that SMBV roasts coffee beans and them sells them on to distributors or third-party manufacturers, whereas unaffiliated manufacturing companies 5, 6 and 7 produce coffee-related products that they sell directly to their customers, in this case mainly supermarkets.

318In summary, it follows from the foregoing that, contrary to what the Commission asserted in the contested decision, unaffiliated manufacturing company 3 was a roaster that paid a royalty to the Starbucks group for the use of a roasting IP.

319Accordingly, for the reasons set out in paragraphs 289 to 318 above, it must be held that the Commission has not managed to demonstrate that a comparison between, on the one hand, the contractual relationships between Alki and SMBV and, on the other hand, the contractual relationships between the Starbucks group and unaffiliated manufacturing companies 1 and 3 to 10 permit the conclusion that the level of the royalty paid by SMBV to Alki should have been zero.

(6) Contract concluded with unaffiliated manufacturing company 2

320It is apparent from recital 148, first indent, of the contested decision that, in order to subcontract the roasting of coffee, the Starbucks group entered into two types of agreements with unaffiliated manufacturing company 2, which were amended at several instances. First, pursuant to a technology licence agreement, concluded before 2008, an affiliate of the Starbucks group granted a non-exclusive licence to unaffiliated manufacturing company 2 to use, inter alia, Starbucks’ technology and know-how to produce and sell roasted coffee to selected third parties with which Starbucks entered into supply agreements, namely, in essence, unaffiliated manufacturing company 5. In return, unaffiliated manufacturing company 2 was to perform services to ensure that the roasted coffee was of high quality. To that end, unaffiliated manufacturing company 2 was to comply, inter alia, with certain quality assurance standards established by Starbucks. The technology licence agreement stipulated that unaffiliated manufacturing company 2 did not have to pay any fees for the licence. Second, a green coffee supply agreement stipulated that unaffiliated manufacturing company 2 had the obligation to buy green coffee exclusively from the Starbucks group for a fixed fee per a certain quantity. The technology licence agreement and the supply agreement were concluded with two different entities within the Starbucks group.

321In recitals 300 and 302 of the contested decision, the Commission added that unaffiliated manufacturing company 2 did not pay a royalty under its licensing agreement concluded with the Starbucks group if it did not exploit directly on the market the roasting IP by selling products to end consumers. However, it must be stated that it is apparent from the description in recital 148 of the contested decision that unaffiliated manufacturing company 2 did not sell its roasted coffee to end consumers.

322As regards the question of whether unaffiliated manufacturing company 2 was in a situation comparable to that of SMBV, it must be held that the contractual arrangement between unaffiliated manufacturing company 2 and the Starbucks group is closely linked to that concluded between unaffiliated manufacturing company 5 and the Starbucks group. Several years before the APA’s conclusion, unaffiliated manufacturing company 5 and SMBV concluded a supply agreement in which the Starbucks group undertook to supply roasted coffee beans, concentrate and other coffee ingredients to unaffiliated manufacturing company 5.

323At a later stage, but before the APA’s conclusion, unaffiliated manufacturing company 5 and SMBV concluded a [confidential] delegation agreement [confidential] to which unaffiliated manufacturing company 2 acceded on the same day. [confidential]

324[confidential]

325[confidential]

326It follows from those provisions that the role of unaffiliated manufacturing company 2 was different from that of SMBV, which, according to the Commission, was a roaster that engaged also in the sale of roasted coffee to Starbucks stores. According to the delegation agreement, unaffiliated manufacturing company 2 supplied unaffiliated manufacturing company 5, for the purposes of enabling the Starbucks group to meet its contractual obligations towards the latter, as followed from the supply agreement.

327In that context, it must be recalled that, in the contested decision, the Commission categorised the contractual arrangement between the Starbucks group and unaffiliated manufacturing company 2 as a subcontract (see paragraph 320 above). However, as has been set out in paragraph 236 above, such a subcontractor is limited to carrying out roasting in accordance with the instructions of the contractor in order to meet its contractual obligation to provide roasted coffee. In those conditions, the roaster is merely following the ordering party’s technical requirements.

328It must be pointed out that the Commission does not provide, in the contested decision, sufficient evidence indicating that such a subcontract would be comparable to that concluded between SMBV and Alki for the purposes of determining the level of the royalty.

329In any event, even supposing that, for the purposes of the determination of the level of the royalty, the contractual arrangements between the Starbucks group and unaffiliated manufacturing company 2 were comparable to those concluded between SMBV and Alki, the Commission is limited, in recital 302 of the contested decision, to rejecting Starbucks’ argument that the higher mark-up on green coffee beans that unaffiliated manufacturing company 2 paid to the Starbucks group represented a ‘disguised’ remuneration for the roasting IP. In that context, first, it asserted that the mark-up ‘appears’ to have been passed on entirely to unaffiliated manufacturing company 5. Second, it maintained that there ‘[we]re no indications that any mark-up to a purchase price would not be passed on directly to [unaffiliated manufacturing company 5] or otherwise affect the commercial conditions between [unaffiliated manufacturing company 5] and [unaffiliated manufacturing company 2], as this contractual arrangement was not concluded independently of the contractual arrangement between [the Starbucks group] and [unaffiliated manufacturing company 5]’.

330However, the considerations set out in paragraph 302 of the contested decision have no bearing on the finding according to which the position of unaffiliated manufacturing company 2 as ‘subcontractor’ is not sufficient to conclude that SMBV, as a seller of its roasted coffee, should not have paid any royalty for the use of the roasting IP.

331In addition, regarding the question of whether the higher mark-up on green coffee beans paid by unaffiliated manufacturing company 2 to the Starbucks group represented the remuneration for a coffee roasting IP, it must be noted that the Commission’s argument that the higher mark-up on coffee beans paid by unaffiliated manufacturing company 2 ‘appears’ to be transferred to unaffiliated manufacturing company 5 is speculative and does not rule out, as such, the possibility that a remuneration for the use of the roasting IP was actually paid to the Starbucks group by unaffiliated manufacturing company 2.

332On the contrary, a number of elements raise doubts about the Commission’s argument that, in the case at hand, unaffiliated manufacturing company 2 paid no remuneration to the Starbucks group for the use of the roasting IP.

333First, it must be stated that, at first sight, the level of the price of the green coffee beans provided by SMBV and paid by unaffiliated manufacturing company 2 to the Starbucks group appears to be high in the light of the figures Starbucks cites in footnote 189 of the application in Case T‑636/16. The Commission does not dispute those figures. Moreover, in recital 302 of the contested decision, the Commission did not dispute the Starbucks correspondents’ assertion that that price was high.

334Second, the Commission submits that it found in the contested decision that the technology licence agreement stipulated that unaffiliated manufacturing company 2 ought not to pay any royalty for the use of the roasting IP. It considers that, consequently, it was for the Kingdom of the Netherlands and Starbucks to prove that the difference in the prices of green coffee represented a ‘disguised’ remuneration for the roasting IP, which they have not managed to do.

335It must be recalled that the 1995 and 2010 versions of the OECD Guidelines, on which the Commission bases its comparability analysis, expressly provide, in paragraph 6.17 thereof, that the compensation for the use of intangible property may be included in the price charged for the sale of goods when, for example, one enterprise sells unfinished products to another and, at the same time, makes available its experience for further processing of those products. In that context, it must be noted that the Commission maintains – rightly – that a price difference is, in principle, different from a royalty, which potentially has different tax consequences, which is moreover restated, in essence, in paragraph 6.19 of the 2010 version of the OECD Guidelines.

336In the case at hand, it is clear from the contested decision that Starbucks had argued during the administrative procedure that the higher mark-up on the costs of green coffee beans that unaffiliated manufacturing company 2 paid to the Starbucks group represented a remuneration for the roasting IP.

337In those circumstances, the Starbucks correspondents’ arguments, raised during the administrative procedure, could not be rejected on the basis of the mere finding that the technology licence agreement stipulated that unaffiliated manufacturing company 2 ought not to pay any royalty for the use of the roasting IP.

338Third, while the Commission is right to argue that the supply of green coffee beans and the sublicensing of IP are separate transactions on the basis of two contracts concluded with two different counterparties within the Starbucks group, the fact remains that the technology licence agreement between the Starbucks group and unaffiliated manufacturing company 2 indicates, [confidential].

339Fourth, the Commission adds, in essence, that the difference in price between the green coffee beans unaffiliated manufacturing company 2 buys and those that SMBV buys can have various explanations, such as, first of all, the strong bargaining power of Starbucks [confidential]; then, the fact that unaffiliated manufacturing company 2 does not buy its green coffee beans directly from SCTC but from Starbucks [confidential] – which buys them from SCTC and sells them on to it – which could also lead to an extra mark-up on the cost to cover the value added by Starbucks [confidential], or, last, the differences in delivery terms.

340First of all, it must be noted that the Commission’s argument that Starbucks [confidential] had a bargaining power that was so strong compared to unaffiliated manufacturing company 2 that it could demand a far higher price than that which it was capable of obtaining from [confidential] SMBV is unconvincing.

341Next, while the Commission contends that the fact that unaffiliated manufacturing company 2 does not buy its green coffee beans directly from SCTC but from Starbucks [confidential] – which buys them from SCTC and sells them on to it – could also lead to an additional mark-up on the cost to cover [confidential], it does not explain [confidential]. Starbucks retorts, in that respect, that SCTC takes care of the entire procurement process, including transportation from the port of origin to the port of destination, whereby the coffee beans are delivered to unaffiliated manufacturing company 2 without any processing whatsoever. Moreover, according to Starbucks, for reasons of administrative efficiency, [confidential]. That argument of the Commission should therefore also be rejected.

342Last, the Commission argues that there is a difference in the delivery terms of green coffee beans enjoyed by unaffiliated manufacturing company 2 and SMBV. It contends that Starbucks [confidential] sells green coffee beans to unaffiliated manufacturing company 2 CIF (cost, insurance and freight) at the port of entry in the territory in which that manufacturing company carries out its economic activity, while the green coffee beans that SMBV obtains from SCTC are delivered FOB (free on board) at the port of Amsterdam (Netherlands). However, it must be pointed out, first, that the Commission does not quantify its contention that the difference in costs for an FOB delivery as opposed to a CIF delivery may be considerable. Second, Starbucks, for its part, claims that the difference in costs between an FOB delivery and a CIF delivery is too low to explain the ‘higher mark-up’. The Commission has therefore not managed to substantiate its contention that the ‘higher mark-up’ could not represent, even in part, a remuneration for the use of the roasting IP, since it was due entirely to the difference in delivery terms between the contracts in question.

343In those circumstances, neither the succinct reasoning set out in recital 302 of the contested decision nor the other explanations provided by the Commission – which Starbucks disputes – allowed the Commission to conclude that the contracts between the Starbucks group and unaffiliated manufacturing company 2 demonstrated, to a requisite legal standard, that that undertaking paid no remuneration to the Starbucks group for the use of the roasting IP.

344It follows that, on the basis of what has been set out in the contested decision, the Commission has not managed to demonstrate to a requisite legal standard that the contract between the Starbucks group and unaffiliated manufacturing company 2 indicates that the royalty paid by SMBV to Alki should have been zero.

345Accordingly, it is apparent from the considerations set out in paragraphs 288 to 345 above that the Commission has not demonstrated that applying the CUP method on the basis of a comparison with the contracts concluded between the Starbucks group and the 10 unaffiliated manufacturing companies would have led to the conclusion that the royalty paid by SMBV to Alki for the roasting IP, had it been set in market conditions, ought to have been zero.

(g) Arrangements between Starbucks’ competitors and third-party roasters

347The Commission also compared the royalty paid by SMBV to Alki with what was provided for in a number of arrangements between Starbucks and third-party roasters. The Commission found that it was apparent from that comparability analysis that no royalty for the use of the roasting IP ought to have been paid by SMBV to Alki.

348It is apparent from recital 309 of the contested decision that, for the purposes of assessing whether SMBV paid an arm’s length royalty to Alki for the roasting IP, the Commission compared the arrangement between Alki and SMBV to a number of arrangements between Starbucks’ competitors and third-party roasters. In that context, the Commission made reference to the responses of Melitta, Dalmayr and Company Y.

349Starbucks disputes the analysis conducted by the Commission. It is of the view that the arrangements concerning Melitta and Company X are ‘toll or contract manufacturer agreements, which – unlike SMBV – supply the finished products back to their principal and not directly to the principal’s customers’. That, in its view, makes those arrangements inherently different from the roasting agreement and, therefore, examining them is irrelevant to the present case. It is thus appropriate to examine whether those three contractual relationships were comparable to the roasting agreement between SMBV and Alki.

350It is apparent from recital 309 of the contested decision that, for the purposes of assessing whether SMBV paid an arm’s length royalty to Alki for the roasting IP, the Commission compared the arrangement between Alki and SMBV to a number of arrangements between Starbucks’ competitors and third-party roasters. In that context, the Commission made reference to the responses of Melitta, Dalmayr and Company Y.

351First, so far as concerns Melitta, the Commission indicated, in recital 306 of the contested decision, that that competitor company of Starbucks explained to the Commission that when outsourcing the roasting of coffee it did not perceive royalties from third parties, even though it put its roasting curves at their disposal.

352In that regard, it must be noted that it is apparent from recitals 207 and 208 of the contested decision that, in certain conditions where roasting capacities were exhausted, Melitta outsourced the roasting of coffee. However, it does not follow from that description that the third party roaster did in fact sell roasted coffee to stores or to other customers.

353It must thus be held that, according to the findings set out in the contested decision, Melitta’s situation is not comparable to that of SMBV.

354Second, regarding Company Y, which belongs to a group of companies, the Commission indicated, in recitals 211 and 307 of the contested decision, that that company’s roasting was ensured by a group company designated as a toll manufacturer and that that company did not pay any royalty to the group.

355It must be stated that it is apparent from that description that the roaster of the group to which Company Y belonged operated as a toll manufacturer. The roaster processed green coffee on behalf of another company within the group to which Company Y belonged. This means that the roaster did not sell roasted coffee to stores or to other customers.

356It thus follows from the findings made in the contested decision that Company Y’s situation is not comparable to that of SMBV.

357Third, as regards Dallmayr, it is indicated in recital 308 of the contested decision that that competitor considered the payment of a royalty by a company providing roasting to be unusual, as it would have expected the customers to pay the roaster, not the other way around. It is apparent from recitals 204 and 205 of the contested decision that Dallmayr stated that coffee roasting was performed either as a stand-alone business or vertically integrated within a company. It stated that the sourcing function was ‘typically’ integrated with the roasting function. Dallmayr thus considered the payment of a royalty by a third party that provided the roasting services to be rather unusual. In fact, Dallmayr would have expected the customer to pay the roaster, not the other way around.

358In that regard, it must be noted that Dallmayr merely states that it considers the payment of a royalty in the area of roasting to be ‘rather unusual’. At the same time, that statement does not preclude such a royalty from being provided for. Dallmayr’s declarations therefore do not rule out the existence of a royalty such as that paid by SMBV.

359It is thus apparent from the considerations set out in paragraphs 347 to 357 above that the Commission has not demonstrated that the arrangements between Starbucks’ competitors and third-party roasters, identified in the contested decision, were relevant for the purposes of the analysis of SMBV’s situation. After all, the findings made in the contested decision in that regard do not support the conclusion that those arrangements were comparable to the roasting agreement. Accordingly, even supposing it were proved that no royalty was paid under the arrangements between Starbucks’ competitors and third-party roasters, that circumstance would not suffice to demonstrate that no royalty for the roasting IP ought to have been paid by SMBV to Alki.

360For the reasons set out in paragraphs 279 to 358 above, it is therefore appropriate to hold that the Commission has not demonstrated, to the standard required by the case-law cited in paragraphs 194 to 196 above, that the royalty ought to have been zero. Therefore, it is necessary to uphold, on that basis, the actions of the Kingdom of the Netherlands and of Starbucks to the extent that they concern the second line of reasoning of the contested decision. Accordingly, it is not necessary to examine the arguments of the Kingdom of the Netherlands and of Starbucks by which they dispute the rejection of their arguments raised, during the administrative procedure, to justify the royalty’s existence (see paragraph 230 above).

(h) Argument that the level of the royalty should have been lower than the level endorsed by the APA

361As has been set out in paragraph 229 above, the Commission indicated, in the contested decision, that the variable nature of the royalty payment during the period from 2006 to 2014 gave a ‘first indication’ that the level of that payment bore no relation to the value of the roasting IP. In that regard, the Commission explained, during the hearing, that it was apparent from recitals 287 to 289 and from footnote 146 of the contested decision that the royalty should have been set at a lower level than that endorsed by the APA.

362First of all, it must be noted that, in recital 287 of the contested decision, the Commission merely reproduced certain findings made in the opening decision, but without drawing any consequence whatsoever for the contested decision. Next, in recital 288 of the contested decision, the Commission explained that, for the period from 2006 to 2014, it calculated the annual amount of the royalty paid by SMBV to Alki as a percentage of the annual sales of roasted coffee by SMBV to stores, which, in its view, confirmed its doubts about the fluctuation of the royalty. Last, in recital 289 of the contested decision, the Commission added that the variable nature of the royalty payment gave a ‘first indication’ that the level of that payment bore no relation to the value of the IP for which it was being paid. Footnote 146 of the contested decision mentions, in essence, that, ‘for illustration ... no contract [examined by the Commission] was identified whereby remuneration was paid for coffee roasting technology licen[sed] on the market’.

363It must therefore be pointed out that neither recitals 287 to 289 of the contested decision nor footnote 146 of that decision contains any argument according to which the level of the royalty ought to have been lower than the level endorsed by the APA. Those recitals merely state, first, that the variability of the royalty indicate that it was not linked to the value of the roasting IP, and, second, that that royalty in no way had to be paid.

364On the contrary, it should be held that it apparent, inter alia, from recitals 290, 318, 339 and 445 of the contested decision that the Commission found that the royalty should have been precisely zero. A fortiori, in recital 340 of the contested decision, the Commission stated that the level of the royalty did not need to be estimated and that, in other words, the profits paid by SMBV to Alki as a royalty for the roasting IP should have been fully taxable in the Netherlands.

365It follows from those considerations that the contested decision does not contain any consideration that would have been identifiable by the Kingdom of the Netherlands and Starbucks whereby the royalty should have been set at a lower level than that endorsed by the APA.

366In any event, even assuming that it followed reasonably clearly from the contested decision that the royalty should have been set at a lower level than the level endorsed by the APA, the Kingdom of the Netherlands and Starbucks dispute, in essence, the Commission’s argument that the level of the royalty is dissociated from its economic value.

367In that context, it should be noted that, indeed, it cannot be denied that the variable nature of the royalty raises questions regarding the economic rationality of the royalty. In the case at hand, the Kingdom of the Netherlands and Starbucks have not provided any convincing explanation justifying the choice of an unusual method to determine the level of the royalty.

368However, the residual nature of that royalty simply means that it was calculated, in principle, from the determination of the level of other relevant charges and incomes as well as from an estimate of the level of SMBV’s taxable profit. If those parameters were correctly identified, the mere residual nature of the royalty would not preclude the level of the residual royalty from corresponding to its economic value.

369It must be held that the findings made in recitals 287 to 289 of the contested decision were not sufficient to demonstrate that the royalty should have been set at a lower level than that endorsed by the APA for the entire period between 2006 and 2014, inter alia on the ground that the contested decision does not specify what is the level of royalty that the Commission would have regarded as appropriate.

370In addition, it must be noted that, in the context of the finding made in recital 289 of the contested decision, the Commission made reference to footnote 146 of the contested decision, which indicated the following:

371‘[A]n analysis using RoyaltyStat, at 2Q 2015, shows that out of the 168 agreements available through the database across sector whereby only technology was licen[sed], the median value of the royalty was 5 % of sales (based on 143 of these agreements where the licence fee was determined as a percentage of the value of sales rather than amount paid per unit sold). Among all the contracts available through the RoyaltyStat database, no contract was identified whereby remuneration was paid for coffee roasting technology licen[sed] on the market. Such technology was only licen[sed] out in certain instances in combination with trademarks.’

372In that regard, it must be stated, first, that those considerations were made only ‘for illustration’, second, that while the Commission argues that a royalty was paid ‘across sector whereby only technology was licen[sed]’ and that there were examples of a ‘licen[sing] out in certain instances in combination with trademarks’, it nevertheless does not explain what the appropriate level of such a royalty would be and, third, that the Commission has not explained the reasons why it is of the view that the data relating to 2015 were reasonably foreseeable at the time of the APA’s conclusion in 2008.

373The Commission has thus not substantiated to a requisite legal standard its assertion that, for the entire period between 2006 and 2014, the level of the royalty was not linked to the value of the IP for which it had been paid and that, as a result, an economic advantage had been conferred on SMBV.

374It follows that it is necessary to reject the Commission’s argument that it demonstrated in the contested decision that the royalty should have been set at a lower level than that endorsed by the APA.

375Accordingly, it is appropriate to uphold the second part of the third plea in Case T‑760/15 and the fourth part of the second plea in Case T‑636/16, to the extent that the Kingdom of the Netherlands and Starbucks dispute that the Commission demonstrated, under the second line of reasoning, that the royalty paid by SMBV to Alki should have been zero and that it resulted in an advantage within the meaning of Article 107(1) TFEU, without it being necessary to examine Starbucks’ argument that the Commission was obliged to determine an arm’s length range for the royalty.

376The Kingdom of the Netherlands and Starbucks raise, in essence, two complaints against the analysis conducted by the Commission under the third line of reasoning of the contested decision, according to which the level of the price of green coffee beans was overvalued when the question of whether their price was in conformity with the arm’s length principle had not been examined in the APA. By the first complaint, Starbucks claims that the third line of reasoning concerns an element of SMBV’s costs that was outside the scope of the contested measure as defined in the contested decision. By the second complaint, the Kingdom of the Netherlands and Starbucks dispute the finding that the level of the mark-up applied to the costs of green coffee beans sold by SCTC to SMBV was not in conformity with an arm’s length level.

(a) Whether the price of green coffee beans was outside the scope of the contested measure

377With regard to the first complaint, Starbucks claims, in essence, that the Commission’s third line of reasoning, relating to the price of green coffee beans, concerns an element of SMBV’s costs that was outside the scope of the contested measure as defined in the contested decision. Starbucks notes that the Commission did not examine the matter of the price of green coffee from the perspective of the time of the APA’s conclusion, that is to say, in April 2008. It adds, in the reply, that certain arguments raised in the defence in Case T‑636/16 indicate that the tax advantages identified by the Commission resulting from the price of green coffee beans for the years 2011 to 2014 cannot be attributed to the APA. The alleged tax advantages resulting from the price of green coffee beans cannot be attributed to the APA, but only to the annual assessments endorsing those prices, and thus fall outside the scope of the ‘contested decision’.

378The Commission argues that it is clear from the contested decision as well as from the defence in Case T‑636/16 that the price for green coffee beans should have been examined in order to establish whether the level of that price was too high and led to a reduction in SMBV’s taxable profit.

379As regards the scope of the contested measure as established by the contested decision, it must be stated that, according to the wording of Article 1 of the contested decision, the measure which constitutes aid within the meaning of Article 107(1) TFEU and which was implemented by the Kingdom of the Netherlands in infringement of Article 108(3) TFEU is the APA, ‘entered into by the Netherlands on 28 April 2008 with [SMBV]’. It is apparent from that provision and from the definition set out in recital 40 of the contested decision that the contested measure is therefore made up solely of the APA.

380In that regard, it must be noted that it follows from the provisions of the APA (see paragraphs 12 to 16 above) that that agreement determines the method for calculating SMBV’s remuneration for its production and distribution activities, which serves to establish the taxable base for SMBV’s payment of Netherlands corporate income tax. In that context, although the APA makes reference to the price of green coffee beans paid by SMBV to SCTC by noting that those costs are excluded from SMBV’s cost base, it does not resolve the question of what level of transfer pricing should be set for the purchase of green coffee beans. It is necessary to distinguish the question of whether the cost of green coffee beans is part of the cost base for the calculation of the taxable base from the question of what is the amount of the transfer price of those transactions which was actually determined for a given year. The APA does not contain any element, however, enabling that amount to be determined, meaning that the Netherlands authorities did not validate, in the framework of the APA, any transfer pricing method or price level in respect of green coffee beans.

381It must be specified that, in the absence of determination of price level for the purchase of green coffee beans in the APA, the annual setting of the price of coffee beans, in particular for the years from 2011 to 2014, should have been carried out, if necessary, in the context of annual tax assessments.

382It follows that the APA did not make provision for determining annually the level of the costs of green coffee beans and that was, consequently, outside the scope of the contested measure. That finding is not called into question by the Commission’s arguments.

383First, the Commission is of the view that the APA, which constitutes the contested measure, should have predetermined transfer pricing for green coffee beans from the 2011 fiscal year onwards. According to recital 447 of the contested decision, SMBV’s taxable profits resulting from the costs of green coffee beans for the fiscal years from 2011 onwards should have been set at a higher level. It is apparent from recitals 360 and 361 of the contested decision that, according to the Commission, the transfer pricing report failed to examine whether the price of green coffee beans, paid by SMBV to SCTC, was at arm’s length. According to the Commission, that ‘means’ that the method proposed in that report for determining SMBV’s taxable profits confers a selective advantage on it. In addition, the Commission maintained, in recital 348 of the contested decision, that the APA should have prescribed an arm’s length price in 2008 from which no deviation would have been possible in 2011, including an increase in the mark-up, unless those prices were replaced or amended in the APA.