The EU’s most powerful official is under mounting pressure as dozens more multinational corporate names are dragged into the Luxembourg tax scandal following a new leak of confidential documents on Tuesday.

Jean-Claude Juncker, president of the European commission, has been battling to distance himself from the growing furore over the Grand Duchy’s role in facilitating “industrial scale” tax avoidance. Among the new companies exposed in the secret tax documents are Disney, FTSE 100 firm Reckitt Benckiser, the Skype internet-phone arm of Microsoft and Koch Industries. The Koch empire is the second largest privately-owned business in the US and is controlled by siblings who fund rightwing political campaigns.

According to documents obtained by the International Consortium of Investigative Journalists dozens of multinationals implicated in the latest leaks engineered complicated corporate structures that often helped reduce tax bills to a fraction of what they otherwise would have been. Documents analysed by the Guardian show:

• Skype, the voice-over-internet business now owned by Microsoft, used two Luxembourg companies and an Irish subsidiary to circulate royalties and profits in a pattern that helped its Skype Technologies unit in Luxembourg report no corporation tax over a five-year period.

• Invista, an offshoot of Koch Industries that owns the Lycra brand, underwent a 26-step restructuring called “Project Snow”. Invista uses an internal bank that lends cash to other group companies at high rates of interest. The exotic corporate structure neatly allows the company to pick up a lucrative tax break in Switzerland and at the same time keep its Luxembourg tax bill to a minimum.

Facebook Twitter Pinterest Guardian reporter Rupert Neate attempts to track down the staff of Arteva Europe

The new revelations will step up the pressure on Juncker who, in his former role as prime minister of Luxembourg, pointedly praised Luxembourg’s tax policies, something that attracted Skype to the Grand Duchy. In 2005, when Juncker was both prime minister and finance minister of Luxembourg, he said: “Skype will remain based here … this is partly because of the favourable fiscal environment we’ve created here in Luxembourg.”

Since revelations last month about scores of controversial Luxembourg tax deals – some of which are many years old but still in use – Juncker has sought to brush aside suggestions the Grand Duchy, under his leadership, undermined the tax receipts of other nations by enabling large-scale tax avoidance by multinationals.



Skype will remain based here … partly because of the favourable fiscal environment we’ve created in Luxembourg. Jean-Claude Juncker, 2005

“I am not the architect of the Luxembourg model because this model doesn’t exist,” he said last month, insisting that his government did no more than compete hard for inward investment as others did.

Juncker has faced mounting criticism, including a censure vote in the European parliament, in the wake of the first document leak. The Guardian, together with the ICIJ and more than 20 other news organisations worldwide, revealed that about 340 companies – including Fedex, Pepsi, Shire Pharmaceuticals, Icap and Ikea – had secured tax deals with Luxembourg with the assistance of accounting firm PricewaterhouseCoopers.

Last week, the finance ministers of Germany, France and Italy demanded a clampdown on Luxembourg-based tax avoidance in a letter to the EC’s commissioner for economic affairs, Pierre Moscovici. They said: “Our citizens and our companies expect us to cope with tax avoidance and aggressive planning.” The latest batch of documents show that the creation of aggressive tax structures is not limited to PwC alone. The new papers include similar deals secured for big clients by the remaining members of the big four group of accounting firms – EY, Deloitte and KPMG.

I am not the architect of the Luxembourg model because this model doesn’t exist. Jean-Claude Juncker, 2014

On Monday, the chair of the Commons public accounts committee, Margaret Hodge, said last month’s revelations had raised serious questions over Juncker’s suitability as the head of the EU’s executive arm. “Since I have uncovered all this I have questions about if Mr Juncker is fit to be the president of the European commission. I think if this had been around during the period of his appointment it might well be a different decision.”

Widespread use of complex tax structures is believed to cost western countries billions in lost revenues every year. The structures revealed in the Luxembourg documents shelter corporate profits, leaving a hole in tax receipts for nations around the world.

After being shown the Guardian’s investigations into Skype, Stephen Shay, a Harvard Law School professor who last year gave expert testimony on Apple’s tax avoidance structures in a Senate investigation, said: “ What Skype is demonstrating is the extent to which the smaller countries are willing to engage in tax competition - and they’re getting relatively little out of it. The losses to the other countries compared to the gains for the smaller countries are really disproportionate.”

The new whistleblower revelations follow the leak of 28,000 documents from accountancy group PwC last month. Speaking this week, Hodge described PwC’s work as a “mass-marketed tax avoidance scheme”. PwC has denied mass-marketing tax avoidance.

Skype and Koch Industries were advised by EY. The leaked documents detail confidential tax deals thrashed out by accountancy advisers with Luxembourg tax officials. They are known as “advance tax agreements” or “comfort letters” and give the green light for advantageous structures to be established. They are completely legal but increasingly controversial.

Koch Industries said: “Like all Koch companies, Invista conducts its business lawfully, and pays its taxes in accordance with applicable laws. As the Guardian has previously acknowledged, all of our activities in these matters are legal.”

US parented companies including Koch Industries’ Invista division, Skype and others included in the new cache of papers are taxed on their worldwide income by the American tax authorities. However, US tax rules offer generous loopholes for keeping tax on foreign earnings to a minimum.

Microsoft, Skype’s parent, said: “Microsoft’s acquisition of Skype was finalised in October 2011, so we can only speak to activities after that date.”

The statement added that Microsoft had since changed Skype’s business model: “As a global business, Microsoft adheres carefully to the laws and regulations of every country in which we operate.”

Asked whether Skype’s 2005 tax ruling was still active, Microsoft declined to comment.

Facebook Twitter Pinterest PwC’s new Luxembourg offices. Photograph: NICOLAS BOUVY/EPA

The big four accountants have substantial and growing operations in Luxembourg. According to the ICIJ, EY’s office in the country brought in $153m of revenue in the most recent year with most growth coming from its tax business. It is planning to hire 350 new employees there. Just after last month’s PwC revelations, the accountancy giant held a grand opening for a vast new office complex in Luxembourg attended by the country’s prime minister Xavier Bettel and finance minister Pierre Gramegna. PwC had invited reporters to the event but withdrew the invitations in the wake of the first batch of document leaks.

The EC has pledged to fast-track new legislation to establish greater scrutiny of sweetheart tax avoidance deals for big companies. Last week a spokeswoman for Pierre Moscovici, the European economics commissioner whose brief includes taxation, said draft legislation would be tabled within months obliging EU governments to share information on corporation tax agreements they have struck with multinationals.

The latest revelations are likely to ramp up the pressure even further on Brussels to demand greater tax transparency among EU nations. The commission is already investigating tax deals awarded to several companies and is examining whether they amount to illegal state aid. In the case of Luxembourg it is probing deals handed to Amazon and a subsidiary of Fiat.

Separate investigations are underway into Ireland’s tax relationship with Apple and Starbucks in the Netherlands.

How it works: the ‘Swiss branch of a Luxembourg finance company’

One of the schemes used by multinationals is known to tax planners as “the Swiss branch of a Luxembourg finance company”. Our graphic explains how this works.

Skype: case study

By 2005 Skype was established as one of the great disrupters of the digital age. Its use of the internet to carry voice calls threatened to undermine the world’s biggest telecoms companies, from AT&T to Vodafone, and made it one of the most coveted up-starts in the tech world.

Like Amazon, another tech revolutionary, it used the Grand Duchy of Luxembourg as a European corporate launch pad for its ambitions. So when it was bought by online auctioneer eBay for $2.6bn in September 2005, the country did not want to lose one of its most famous corporate guests. It was with some pride one month later that Jean-Claude Juncker, then prime minister of Luxembourg, declared: “Skype will remain based here … This is partly because of the favourable fiscal environment we’ve created.”

His comments were made in the context of remarks about Luxembourg’s ultra-low rate of VAT, from which Skype also benefited greatly. But they might have applied as easily to the generous – though undisclosed – corporate income tax treatment Skype enjoyed in the Grand Duchy.

The origins of Skype’s Luxembourg scheme lie in the company’s drive to launch paid-for services. By early 2004 Niklas Zennstrom, one of Skype’s Scandinavian co-founders, was hinting at such plans. He was referring to SkypeOut, a service launched in July 2004 that allowed users to dial landlines and mobile phones anywhere in the world but pay local call rates.

This was where Skype’s commercial value lay: not only was it tearing down the business models of established telecoms groups, this time there was a plan to make money with a low-cost alternative service. Zennstrom and co-founder Janus Friis mainly worked from an office in London with much of the coding and software architecture created by developers in Estonia. However, the main company in the group, Skype Technologies SA, had its headquarters in Luxembourg.

On the last day of 2004, nine months before the eBay transaction was announced, Skype Technologies arranged for certain intellectual property rights – including IP connected to SkypeOut – to be transferred to a new subsidiary it had created in Ireland called Skype Limited.

This IP was Skype’s crown jewels, the key to its commercial potential. And what did the Irish company provide in return? Published accounts for neither company are very illuminating. They do show, however, that on the day of the IP transfer the net book value of the new Irish IP-owning company was just €25,000.

Later Skype’s tax advisers would explain to the Luxembourg tax authorities that the transfer had valued the IP “at cost” — that is, it was judged to be worth no more than it had cost to develop it.

Facebook Twitter Pinterest A diagram submitted by Skype’s advisers to the Luxembourg tax authorities, showing the company structure, and the intellectual property arrangements. Photograph: ICIJ

In a 2005 tax agreement, leaked to the International Consortium of Investigative Journalists (ICIJ), Skype’s advisers from accounting firm Ernst & Young justified the valuation in part by explaining that, although some paid-for Skype services had been launched, it was too early to gauge whether they would be successful and profitable.

Moreover, Luxembourg tax authorities were told, large competitors were developing similar services. And Skype believed that, in the absence of profits, no buyer would pay more than cost-price for the brand.

Leaked records show this explanation was accepted by the tax authorities, stamped “read and approved” on 30 June 2005 by the accommodating Marius Kohl, one of Luxembourg’s top tax officials.

And that is not all Kohl rubber stamped for Skype. The group’s tax advisers also wanted assurances that they could expect to enjoy yearly tax breaks on royalties linked to the IP which had been switched to Ireland.

Here is how the structure worked: Irish subsidiary Skype Limited licensed rights to use its IP to its parent, Luxembourg-based Skype Technologies, at no cost. Skype Technologies then licensed on those rights to a third company Skype Communications, also based in Luxembourg, in exchange for a substantial royalty payment from the resulting revenues.

Skype Communications was the company from which users around the world actually bought SkypeOut call credits and other paid-for services. As these proved increasingly popular, revenues began to soar – and so did royalty payments to Skype Technologies. Royalties of €32.6m for 2006 had doubled a year later. By 2009, they were close to €170m, and two years on they had exceeded €260m.

In view of the company’s tax structuring no provisions were made for corporate tax. Footnote to Skype Technologies accounts

For each of these years, however, Skype Technologies recorded no tax in its accounts. A mystifying footnote simply read: “In view of the company’s tax structuring no provisions were made for corporate tax.”

Only through the leaked 2005 tax ruling, stamped by Kohl, does more of the picture become clear. Through its tax advisers, Skype had asked Kohl to treat 95% of the incoming royalties at Skype Technologies as if they had been paid out to its IP-owning subsidiary in Ireland. These notional payments then effectively returned to Skype Technologies in the form of dividends.

The remaining 5% would be treated as the profit margin made by Skype Technologies for its role as middleman in the IP licensing chain that linked Ireland, where the valuable IP lay, with Skype Communications in Luxembourg, where payments were arriving from SkypeOut customers.

The result, Ernst & Young tax advisers suggested, was that Skype Technologies should receive a 95% tax deduction against its royalty income in Luxembourg. And Kohl agreed.

Had royalties of that size actually been paid to Skype Limited in Ireland, they would probably have been subject to tax there. But accounts for the Irish company record no royalty income and little tax paid from 2005 up to 2009. And after the 2009 accounts were published, Skype Limited was changed to Skype (Ireland), an unlimited company no longer required to file accounts. In 2011 Skype was acquired by Microsoft for $8.5bn. It is still based in Luxembourg.

Koch Industries: case study

Luxembourg-based Arteva Europe Sarl is a company that is easily overlooked. It has no paid employees and its registered office in the Grand Duchy is shared by about 670 other companies, according to an analysis of filings.

The company has a Swiss branch office too, but there is little sign of large-scale business activity in Zurich, where the registered branch address is in the same building as a firm of advisers, Tax Partner AG, two of whom are listed as “deputy branch managers” for Arteva Europe.

The branch manager, Raymond Keereweer is an experienced Dutch tax professional who gives his job title on LinkedIn as “tax director, Europe” for Koch International Shared Services. As well as listing his role overseeing the Zurich branch of Arteva Europe, he also works at other Koch offices in Geneva.

Despite modest outward appearances, accounts show Arteva Europe functions as a huge internal bank buried within the labyrinthine financial plumbing of Koch Industries, a $115bn-a-year (£73bn) global conglomerate said to be America’s second-largest private business empire.

Facebook Twitter Pinterest David Koch addresses an event organised by the Americans for Prosperity Foundation, of which he is chairman. Photograph: Phelan M. Ebenhack/AP

This sprawling global enterprise is ultimately controlled from Wichita, Kansas, by the super-rich Koch brothers, Charles and David, fervent libertarians and among the most active financial supporters of anti-Obama campaign messages at election time.

The brothers are leading funders of Washington thinktank the Cato Institute, advocates of radical free market ideas, including expounding the virtues of tax havens and warning against G20-led efforts to curb aggressive tax avoidance by multinationals — a “global tax cartel” plot, they say.

Among America’s most politically influential billionaires — “the Kochtopus” as they are known to their detractors — Charles and David are also leading backers of Americans for Prosperity, a campaign group described as “America’s third largest party” by the Washington Post on account of the resources deployed at election time.

At the end of 2013 loans and other sums due to Arteva Europe from other Koch Industries companies around the world – specifically firms within Invista division, a global chemical fibres operation best known for its Lycra clothing and Stainmaster carpeting brands – were $1.67bn.

Despite lending to affiliated companies, Arteva Europe frequently charges very high interest rates, as high as 9.77%, generating considerable income – much of it for the company’s Swiss finance branch.

In fact, in the last four years, Arteva Europe has earned interest income from fellow Invista companies of $208m. That accounted for the lion’s share of profits for the company, which totalled $269m. Over the same four-year period, however, Arteva Europe reports paying only slightly more than $10m in tax. Company accounts offer no explanation for why this tax bill is so low.

Facebook Twitter Pinterest Zurich, Switzerland: perhaps surprisingly an important location in Luxembourg tax affairs. Photograph: Oliver Benn/Getty Images

The answer, however, lies in Switzerland, four-and-a-half hours’ drive away from the company’s head office in Luxembourg. Leaked tax rulings from the Grand Duchy tax office – rulings secured for Koch Industries’ by advisers at Ernst & Young – show the group wanted to make sure Luxembourg did not have taxing rights over profits Arteva Europe could demonstrate had been generated from its Swiss branch, registered to the office at no 80 Talstrasse, in Zurich, Switzerland.

In Switzerland, meanwhile, finance branches of overseas companies qualify for generous tax breaks. The Swiss authorities tax these lending units as if they were required to pay large, tax-deductible interest bills – even if they have no such cost.

So attractive are these arrangements, that dozens of multinationals have set up intra-group lending operations through the Swiss branch of a Luxembourg subsidiary.

So controversial is the structure, however, that it has been criticised by the European Union and is seen as unlikely to survive G20-led efforts to stamp out the most egregious tax avoidance schemes deployed by multinationals.

Aware that its tax regime for foreign finance branches is facing international condemnation, the Swiss government has already published proposals to water down the benefits available – though it still wants to remain the go-to location for internal banks within multinationals.

Levels of income and tax reported in accounts for Arteva Europe suggest the group has carefully ensured much of its most profitable lending is routed through the branch in Zurich, with very little income arising at head office in Luxembourg.

That way, it picks up a huge tax break in Switzerland and minimises its tax bill in Luxembourg.

Koch Industries declined to respond to specific questions put by the Guardian. In a statement it said: “Like all Koch companies, Invista [of which Arteva Europe is a part] conducts its business lawfully, and pays its taxes in accordance with applicable laws. As the Guardian has previously acknowledged, all of our activities in these matters are legal.”