Member States have discretion to impose taxes that penalise environmentally harmful activities. Exemption of undertakings whose activities do not harm the environment does not constitute State aid whenever the exempted undertakings are not in a comparable situation.
Then it turned its attention to the tax exemption granted to retail establishments which pursued the business of a garden centre or of selling vehicles, construction materials, machinery or industrial supplies whose sales area did not exceed 10000m2.
It noted that that measure derogated from the framework established by the tax in question. Asturias argued that“(53) the activities of the retail establishments concerned require, by their very nature, large sales and warehouse areas. It submits that the adverse effects they have on the environment and on town and country planning are assessed by reference to a distinct but equivalent threshold to that applied, in principle, to retail trade activities of establishments that are subject to that tax.”
The Court inferred from that argument that “(54) that factor may be such as to justify the distinction adopted in the contested legislation in the main proceedings, which, accordingly, would not result in a selective advantage being given to the retail establishments concerned. It is, however, for the referring court to determine whether in fact that is the case.”
It concluded that “(55) a tax such as that at issue in the main proceedings imposed on large distribution establishments according, in essence, to their display and sales area does not constitute State aid within the meaning of Article 107(1) TFEU to the extent that it exempts establishments whose sales area is less than 4000m2. Nor, in so far as that tax exempts establishments which pursue the business of a garden centre or of selling vehicles, construction materials, machinery or industrial supplies and whose sales area does not exceed 10 000m2, does it constitute State aid within the meaning of Article 107(1) TFEU, provided that those establishments do not have as significant an adverse effect on the environment and on town and country planning as the others, which it is for the referring court to ascertain.
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Application of Article 107(1) to the Aragon tax
In this case, the tax measure exempted establishments whose sales area was less than 500m2, those whose sales area exceeded that threshold but whose basis of assessment did not exceed 2000m2 and those engaged in the sale of machinery, vehicles, tools and industrial supplies, construction materials, plumbing materials and doors and windows, for sale only to professionals, fittings for individual, conventional and specialist establishments, and motor vehicles, as well as garden centres and service stations.
As with the other two groups of cases, the Court of Justice outlined the applicable principles from the case law. Then it proceeded to determine whether the retail establishments excluded from the scope of the tax were in a comparable situation to the establishments that came within its scope, bearing in mind that the purpose of the tax was to contribute towards environmental protection and town and country planning.
Again, it accepted that the environmental impact of retail establishments was largely dependent on their size. The larger their sales area, the higher the number of visitors, which resulted in adverse effects on the environment. “(41) Consequently, a condition relating to sales area thresholds, such as that adopted by the national legislation at issue in the main proceedings, in order to distinguish between undertakings with a greater or lesser impact, is consistent with the objectives pursued.”
“(45) In those circumstances, a condition under which the imposition of a tax is based on the sales area of an undertaking, such as that in the main proceedings, differentiates between categories of establishments that are not in a comparable situation in the light of those objectives.”
“(46) Therefore, the tax exemption received by the retail establishments within the territory of the Autonomous Community of Aragon whose sales area is less than 500m2, and those whose sales area exceeds that threshold but whose basis of assessment does not exceed 2000m2 cannot be regarded as conferring a selective advantage on those establishments and, therefore, is not capable of constituting State aid within the meaning of Article 107(1) TFEU.”
As in the other two groups of cases, the Court also examined the total exemption granted to the establishments pursuing the business of selling machinery, vehicles, tools and industrial supplies, construction materials, plumbing materials and doors and windows, for sale only to professionals, fittings for individual, conventional and specialist establishments, and motor vehicles, as well as garden centres and service stations constitutes an advantage for those establishments.
It noted that that measure derogated from the framework established by the tax. Aragon argued that “(49) the activities of the retail establishments concerned, although they require large sales areas, have fewer adverse effects on the environment and on town and country planning than the activities of the establishments that are subject to the tax in question.
The Court acknowledged that “(50) that factor may be such as to justify the distinction adopted in the contested legislation in the main proceedings, which, accordingly, would not result in a selective advantage being given to the retail establishments concerned. It is, however, for the referring court to determine whether in fact that is the case in the proceedings before it.”
It concluded that “(51) a tax such as that at issue in the main proceedings imposed on large distribution establishments according, in essence, to their sales area does not constitute State aid within the meaning of Article 107(1) TFEU to the extent that it exempts establishments whose sales area does not exceed 500m2 and those whose sales area exceeds that threshold but whose basis of assessment does not exceed 2000m2. Nor, in so far as that tax exempts establishments which pursue the business of selling machinery, vehicles, tools and industrial supplies, construction materials, plumbing materials and doors and windows, for sale only to professionals, fittings for individual, conventional and specialist establishments, and motor vehicles, as well as garden centres and service stations, does it constitute State aid within the meaning of Article 107(1) TFEU, provided that those establishments do not have as significant an adverse effect on the environment and on town and country planning as the others, which it is for the referring court to ascertain.”
Existing aid?
In the case of the Catalonian tax, the referring Spanish court also asked whether, if the tax measure contained State aid, it could be considered as existing aid.
The Court of Justice recalled that “(71) the validity of measures giving effect to aid is affected if national authorities act in breach of the last sentence of Article 108(3) TFEU and that national courts must offer to individuals in a position to rely on such breach the certain prospect that all the necessary inferences will be drawn, in accordance with their national law, as regards the validity of measures giving effect to the aid, the recovery of financial support granted in disregard of that provision and possible interim measures”.
“(72) Existing aid may, in accordance with Article 108(1) TFEU, be lawfully implemented so long as the Commission has made no finding of incompatibility, so that Article 108(3) TFEU does not give national courts the power to prohibit that aid being put into effect”. Therefore, the question was whether the Catalonian measure could be classified as existing aid, given that, according to the information in the judgment, the Commission had been aware of the existence of that measure.
“(74) As for the question whether the aid received by the establishments concerned […] could be regarded as having been authorised by the Commission within the meaning of […] Article 1(b)(ii) of Regulation 2015/1589, it must be borne in mind that, in matters of State aid, an act, whatever its kind, constitutes such a decision when, taking account of its substance and the Commission’s intention, that institution has, at the end of the preliminary examination stage, definitively established its position — by way of that act — on the measure in question and, therefore, once it has decided whether or not that measure constituted aid and that it has no doubts as regards its compatibility with the internal market”.
“(77) Consequently, in the case in the main proceedings, such authorisation cannot be inferred from the wording of the Commission’s letter of 2 October 2003, […], if only because the information before the Court shows that the Commission adopted a position in that letter only on whether the detailed rules for applying IGEC revenue are compatible with the law on State aid.”
Indeed, if Member States would submit to the Commission only parts of a measure and then infer that the Commission’s response was tantamount to authorisation also of parts not examined by the Commission, then the system of ex ante State aid control would be worthless.
The Court of Justice also considered the issue of recovery of incompatible aid.“(79) The powers of the Commission to recover unlawful aid are to be subject to a limitation period of 10 years. […] The limitation period begins on the day on which the unlawful aid is awarded to the beneficiary, either as individual aid or as aid under an aid scheme, and any action taken by the Commission or by a Member State, acting at the request of the Commission, with regard to the unlawful aid interrupts the limitation period. Moreover, […] any aid with regard to which the limitation period has expired is to be deemed to be existing aid.”
On the basis of those principles the Court found that “(83) the Commission informed the Spanish authorities that the [measure in question] was likely to constitute State aid and that tax had to be amended or withdrawn. Such a document therefore constitutes action taken by the Commission … which interrupts the limitation period, so that the aid awarded during the 10-year period preceding that letter cannot be regarded as existing aid.”
Conclusions: What standard of proof?
The three judgments concerning the environmental taxes of Catalonia, Asturias and Aragon are not revolutionary. They acknowledge that Member States have discretion to impose taxes to penalise environmentally harmful activities. They also highlight that exemption of undertakings whose activities do not harm the environment does not constitute State aid whenever the exempted undertakings are not in a comparable situation to those whose activities have a harmful impact on the environment. This implication follows directly from the fact that the selectivity of a tax exemption has to be determined in relation to the objective of the tax itself. The objective of the tax establishes who falls within its scope and, necessarily, who falls outside its scope. If the exempted activities or undertakings are those that genuinely fall outside its scope, then they do not receive a selective advantage.
However, the important question that arises from these judgments concerns the standard of proof that Member States must meet in order to demonstrate that the exempted undertakings are indeed not comparable to those which are taxed. The judgments reveal inconsistencies with respect to the standard of proof both within each case and across the three groups of cases. Admittedly, the Court of Justice did not have at its disposal sufficient information to decide whether the various thresholds and exemptions were objectively justified. However, the mere fact that in three similar regions, the structure of the taxes varied so significantly should have prompted the Court of Justice to instruct the national court to establish on objective grounds the link between the tax rates and tax base, on the one hand, and the harm to the environment, on the other. If a Member State claims that an exemption is justified by the logic or structure of the reference system, that Member State should be required to prove it rather than assert it.
