Introduction
Must an entity that acquires an asset but does not exploit it commercially not be regarded as an undertaking? This was one of two questions that the Court of Justice had to answer on 19 October 2023, in case C-325/22, TS & HI. The answer was no. The second question was how to value land. The answer to that question was that the safest way of establishing the market price of land is through a bidding process and in the absence of a bidding process, an alternative was comparison with representative and contemporaneous transactions.
A Bulgarian court had asked the Court of Justice to provide guidance on the concept of economic activity and on how to calculate the amount of State aid embedded in an exchange of land. The Bulgarian court was dealing with dispute between an individual, TS, and a legal entity, HI, on the one hand, and the Ministry for Agriculture, Food and Forestry, on the other hand, concerning repayment of State aid that TS & HI had allegedly received in connection with a swap of forest land.
After the fall of communism, Bulgaria sought to restitute confiscated forest land to its previous owners. To facilitate that restitution, privatised forest land could be exchanged for state forest land. The exchanged plots of land were valued at prices fixed by an administrative process.
In November 2008, TS, a natural person, entered into a forest land swap agreement. Two months later, TS sold the acquired land to HI, a private company, managed and partly owned by TS. HI intended to build a hotel complex on the land it had acquired and for that purpose it applied to the competent authorities for a change of use of the land. However, a subsequent Bulgarian law prohibited changes to the use of land acquired from the state.
The Commission, in decision 2015/456, found that the value that was fixed by that administrative process did not correspond to the then prevailing market price and, therefore, it constituted State aid. For beneficiaries who were undertakings, the State aid was incompatible with the internal market and had to be recovered to the extent that it did not
conform with the conditions of the de minimis regulation. However, for beneficiaries that were not undertakings – e.g. individuals – no recovery was necessary. Hence, the issue at hand was whether TS & HI were undertakings at the time of the land exchange.
In July 2020, pursuant to Commission 2015/456, the Bulgarian authorities estimated that TS & HI were jointly and severally liable to repay aid plus interest of about EUR 224,700. TS & HI lodged an appeal before a local court arguing that they could not be regarded as undertakings in the meaning of Article 107(1) TFEU.
Concept of undertaking
The argument of TS & HI hinged on the claim that the land acquired through the swap was not ultimately used for economic purposes.
First, the Court of Justice recalled that “(29) the concept of ‘undertaking’ within the meaning of Article 107(1) TFEU covers any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed, and that any activity consisting in offering goods or services on a given market constitutes an economic activity”.
Next, the Court clarified that “(30) it does not in any way follow that classification as an ‘undertaking’, within the meaning of that provision, would be made conditional on the economic activity concerned having a link with goods the acquisition of which would constitute State aid, within the meaning of that provision.”
The Court added that the “(32) system of prior authorisation of State aid, which is based on an ex ante assessment of aid projects, precludes classification as an ‘undertaking’, within the meaning of Article 107(1) TFEU, from being made conditional on the occurrence of uncertain circumstances subsequent to the granting of the advantage concerned, such as that consisting in the use of the good acquired for economic purposes.”
In other words, an entity is or is not an undertaking regardless of whether it uses commercially or for economic activities the assets it acquires.
The analysis in the Commission decision
Then the Court turned its attention to how the Commission assessed the status of the aid recipients.
The Court noted that “(33) as regards the definition of the concept of ‘undertaking’ used by the Commission in its decision of 5 September 2014, Article 1 of that decision refers to State aid granted to ‘undertakings’, without specifying that concept.”
The Court also observed that that decision stated that “(34) certain beneficiaries of the contested swap transactions did not carry out economic activities with the swapped forest land […], with the result that ‘those beneficiaries cannot be considered undertakings within the meaning of Article 107(1) [TFEU] so that no State aid is considered to be present in the swap transactions they concluded with the Bulgarian State’.”
It is obvious here that the Commission decision wrongly linked the concept of undertaking to whether the acquired land was subsequently used for economic activities.
For this reason the Court also stressed that “(35) the Commission also referred, on several occasions, to undertakings ‘within the meaning of Article 107(1) TFEU’, without in any way linking such a classification to an economic activity in relation to that forest land.” “(36) Recital 171 of the Commission decision […] states, moreover, that natural and legal persons ‘that do not qualify as “undertakings” within the meaning of Article 107(1) [TFEU]’ should be excluded, without providing any further details.”
Reconciling conflicting statements
Rather importantly, the Court of Justice explained how apparently conflicting statements may be reconciled.
“(37) The Court has consistently held that, if the wording of secondary EU law is open to more than one interpretation, preference should be given to the interpretation which renders the provision consistent with the Treaty rather than to the interpretation which leads to its being incompatible with the Treaty”.
“(38) It must therefore be held that […] the Commission decision […] refers only to a specific situation in which an entity cannot be classified as an ‘undertaking’ within the meaning of Article 107(1) TFEU. Accordingly, that recital cannot form the basis for an interpretation of that decision which would lead to the conclusion that only entities carrying out an economic activity linked to the land acquired in the context of the land swaps referred to in that decision could be regarded as undertakings in receipt of State aid for the purposes of that provision.”
“(39) In the light of the foregoing, […] it cannot be held that only persons who have acquired land in the context of the forest land swap transactions concerned by that decision and who use that land for the purposes of an economic activity are to be regarded as undertakings in receipt of State aid for the purposes of Article 107(1) TFEU.”
On the basis of the above reasoning, the Court of Justice gave a negative reply to the question whether the fact that the entity which obtained the forest land intended to use for its economic activity, but was prevented from doing so by subsequent changes in national law, was relevant for the purposes of assessing whether that entity constituted an undertaking. In a nutshell, “(41) the concept of ‘undertaking’ [is not limited] to entities that have used the forest land thus obtained for economic purposes”.
Calculation of land value
The referring court asked whether the amount of State aid to be recovered could be calculated on the basis of the average prices of registered property transactions relating to land with similar characteristics to that being valued and located close to it and which were concluded within a period of 12 months prior to the valuation.
The Court of Justice preceded its answer to the question of the referring court by recalling the three fundamental principles concerning recovery of incompatible State aid.
First, purpose of recovery: “(47) The main purpose of the repayment of unlawfully paid State aid is to eliminate the distortion of competition caused by the competitive advantage afforded by that aid and that restoring the situation prior to the payment of aid which was unlawful or incompatible with the internal market is a necessary requirement for preserving the effectiveness of the provisions of the Treaties concerning State aid”.
Second, immediate recovery: “(46) Article 16(3) of Regulation 2015/1589 provides that, […], recovery of State aid is to be effected without delay and in accordance with the procedures under the national law of the Member State concerned, provided that they allow the immediate and effective execution of the Commission’s decision. To that effect and in the event of a procedure before national courts, the Member States concerned are to take all necessary steps which are available in their respective legal systems, including provisional measures, without prejudice to EU law.”
Third, calculation method: “(48) Where the Member State concerned has to quantify the aid to be recovered, it must do so on the basis of the method indicated in the recovery decision”.
Next, the Court applied those principles to the present case. “(49) It follows from the foregoing that the application of a valuation method, such as that referred to by the referring court […], must, first of all, comply with the Commission decision of 5 September 2014, which it is for the referring court to ascertain.”
“(50) In particular, it must assess whether such a method complies with Article 6(1)(b), (c) and (d) of that decision, which provides for three different methods of recovery of the aid, namely recovery of the aid on the basis of the market prices in effect at the time of the swap transactions specified in submission 2014/032997 of the Republic of Bulgaria, the undoing of the swap transaction or the amounts determined by an independent expert evaluator and documents demonstrating that such an independent expert, selected by public tender and agreed to by the Commission, has been appointed.”
“(51) Next, as regards the conformity with Article 107(1) TFEU and Article 16(3) of Regulation 2015/1589 of a valuation method such as that referred to by the referring court […], it is important to recall that the sale of land by a public authority may involve State aid elements for the purpose of Article 107(1) TFEU, in particular where it is not made at market value, that is to say, where it is not sold at the price which a private investor, operating in normal competitive conditions, would have been able to fix”.
So, the appropriate benchmark is always the market price which corresponds to what is acceptable to a private investor under normal competition. The question that arises is how to establish that benchmark in the absence of a competitive sale through an open process such as auction or bidding, which is the process that reveals the maximum price private investors are willing to pay.
The Court of Justice went on to add that “(52) where such a valuation takes place, as in the present case, ex post, the Member State is to assess the market value of the land concerned at the time of the disputed swap transaction”.
“(53) As for the method which may be applied for that purpose, it should be borne in mind that several methods are capable of providing prices corresponding to market value and that, while those methods include sale to the highest bidder and an expert report, it cannot be ruled out that other methods may also achieve the same result”.
“(54) Where the national law establishes rules for calculating the market value of land for its sale by public authorities, their application must, in order to comply with Article 107 TFEU, lead in all cases to a price as close as possible to that value. As that market value is theoretical, except in the case of sales accepting the highest bid, a margin for variation on the price obtained as compared with the theoretical price must be tolerated”.
The statement by the Court in paragraph 54 above is both important and confusing. It is important because it makes clear that if a Member State wants to be absolutely certain that the value corresponds to the market price it should organise a bidding process. Whatever results from that process is the market price. Any other method would involve a certain degree of guessing. It is because of this guessing that that statement is also confusing. How much of a margin can be tolerated if the market value remains theoretical?
The Court did not elaborate on the extent of the margin, but went on to confuse further by warning that “(55) even if a valuation method were to comply with Article 107 TFEU, it cannot be ruled out that, in certain instances, that method may lead to a result far removed from market value. In such circumstances, the national court would be required to disapply it pursuant to the obligation on all the organs of the State, including the national courts, to set aside a rule of national law which is contrary to EU law”.
It is not clear how a valuation method could comply with Article 107 TFEU and at the same time be far removed from market value.
Nonetheless, the Court provided more tangible guidance when it turned its attention to the case at hand. “(56) In the present case, […], it must be observed that it follows from the case-law referred to in paragraphs 53 to 55 of this judgment that Article 107(1) TFEU does not preclude, a priori, or require the application of, a valuation method based on a comparison with similar property transactions, provided that the criteria it lays down make it possible to calculate the market value of the forest land concerned.”
“(57) As to the assessment of whether such valuation criteria would make it possible to establish that market value at the time of the disputed swap, that is essentially a matter for the referring court, in the light of the matters of fact and of law of which it is aware.”
“(58) In that context, it is for that court in particular to verify the truth of the fact, referred to by it, that the prices of property transactions are, in practice, undervalued in order to reduce the amount of tax and notarial costs, and of the fact, referred to by the Bulgarian Government
in its written observations, that the sales which may be taken into account by analogy are insufficient to enable a reliable comparison.”
“(59) It is also for the referring court to ascertain whether the property transactions that may be taken into account in that context were carried out at a date too far removed from that of the disputed swap.”
The practical usefulness that can be derived from the above is that the sample of transactions must be large enough, that the sample must not be skewed [i.e. transactions must be representative] and that transactions must be contemporaneous.
