The European Commission opened an investigation into Nike Inc.’s tax deals with the Netherlands. The probe could potentially lead to Nike having to pay back millions of euros, according to the Wall Street Journal.

In a statement, The European Commission said the investigation  investigation would examine whether tax rulings granted by the Netherlands to Nike may have given the company an unfair advantage over its competitors, in breach of EU State aid rules.

Margrethe Vestager, Commissioner in charge of competition policy, said: “Member States should not allow companies to set up complex structures that unduly reduce their taxable profits and give them an unfair advantage over competitors. The Commission will investigate carefully the tax treatment of Nike in the Netherlands, to assess whether it is in line with EU State aid rules. At the same time, I welcome the actions taken by the Netherlands to reform their corporate taxation rules and to help ensure that companies will operate on a level playing field in the EU.”

The Commission’s formal investigation concerns the tax treatment in the Netherlands of two Nike group companies based in the Netherlands, Nike European Operations Netherlands BV and Converse Netherlands BV. These two operating companies develop, market and record the sales of Nike and Converse products in Europe, the Middle East and Africa (the EMEA region).

According to the European Commission, Nike European Operations Netherlands BV and Converse Netherlands BV obtained licenses to use intellectual property rights relating to, respectively, Nike and Converse products in the EMEA region. The two companies obtained the licenses, in return for a tax-deductible royalty payment, from two Nike group entities, which are currently Dutch entities that are “transparent” for tax purposes (i.e., not taxable in the Netherlands).The Nike group’s corporate structure itself is outside the remit of EU State aid rules.

From 2006 to 2015, the Dutch tax authorities issued five tax rulings, two of which are still in force, endorsing a method to calculate the royalty to be paid by Nike European Operations Netherlands and Converse Netherlands for the use of the intellectual property.

As a result of the rulings, Nike European Operations Netherlands BV and Converse Netherlands BV are only taxed in the Netherlands on a limited operating margin based on sales. At this stage, the Commission said it is concerned that the royalty payments endorsed by the rulings may not reflect economic reality. They appear to be higher than what independent companies negotiating on market terms would have agreed between themselves in accordance with the arm’s length principle.

In particular, a preliminary analysis of the companies’ activities found that:

  • Nike European Operations Netherlands BV and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property. For example, Nike European Operations Netherlands BV actively advertises and promotes Nike products in the EMEA region, and bears its own costs for the associated marketing and sales activities.
  • In contrast, the recipients of the royalty are Nike group entities that have no employees and do not carry out any economic activity.

The Commission investigation will focus on whether the Netherlands’ tax rulings endorsing these royalty payments may have unduly reduced the taxable base in the Netherlands of Nike European Operations Netherlands BV and Converse Netherlands BV since 2006. As a result, the Netherlands may have granted a selective advantage to the Nike group by allowing it to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms. If confirmed, this would amount to illegal State aid.

The opening of an in-depth investigation gives the Netherlands and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.

Nike firmly rejected the allegations, saying it “is subject to and rigorously ensures that it complies with all the same tax laws as other companies operating in the Netherlands.”

“We believe the European Commission?s investigation is without merit,” the statement added.

Such probes have, in the past, led to huge tax takebacks, according to the Associated Press. In August 2016, the commission ruled that Ireland gave “undue tax benefits” to Apple, leading to the recovery of 14.3 billion euros by Irish authorities.

According to the New York Times, the Netherlands’ business-friendly tax laws and accommodating officials lead to the country attracting more foreign investments than nearby Germany or France. Many firms seek to minimize their tax bills by funneling profits to offshore tax havens

Airbus, Fiat Chrysler, Google, IBM and the Renault-Nissan alliance are among the corporations that have headquarters in the Netherlands. Nike’s European headquarters is in Hilversum, just south of Amsterdam.