Derogations that result in different tax treatment are selective measures.
Introduction
On 21 December 2016, the Commission achieved an important legal victory when the Court of Justice found in its favour in the judgment in joint cases C‑20/15 P and C‑21/15 P, Commission v World Duty Free Group [formerly Autogrill España] and Commission v Banco Santander, respectively.[1]
The Commission appealed against the judgments of the General Court in cases T‑219/10 [Autogrill Espana] and T‑399/11 [Banco Santander]. The two companies had applied for annulment of Commission decision 2011/282 on the tax amortisation of financial goodwill arising from foreign shareholding acquisitions.
The measure at the heart of these cases allowed undertakings taxable in Spain to acquire a shareholding in a foreign company of at least 5% of the latter’s capital and deduct from their corporate tax base the goodwill resulting from that shareholding. However, the goodwill resulting from acquisition of companies in Spain was not deductible.
The Commission found the measure to be selective in the meaning of Article 107(1) TFEU. By contrast, the General Court concluded that the Commission had failed to demonstrate that the measure benefitted any particular category of companies, despite the fact that it was an exception from the rule that goodwill was not tax deductible. In the eyes of the General Court, the exception was open to any Spanish company that wished to acquire a foreign company.
The judgment of the Court of Justice
The Commission’s appeal relied on a single plea with two parts. The first part contended that the General Court misunderstood the concept of selectivity, while the second part focused on the General Court’s interpretation of export aid.
The Court of Justice began its analysis by recalling the relevant case law in paragraphs 53-60 of the judgment. It reiterated that “56 […] a tax advantage resulting from a general measure applicable without distinction to all economic operators does not constitute […] aid”. “(57) In order to classify a national tax measure as ‘selective’, the Commission must begin by identifying the ordinary or ‘normal’ tax system applicable in the Member State concerned, and thereafter demonstrate that the tax measure at issue is a derogation from that ordinary system, in so far as it differentiates between operators who, in the light of the objective pursued by that ordinary tax system, are in a comparable factual and legal situation”. “59 Further, it must be recalled that the fact that only taxpayers satisfying the conditions for the application of a measure can benefit from the measure cannot, in itself, make it into a selective measure”. The Court concluded that “(60) [i]t follows from all the foregoing that the appropriate criterion for establishing the selectivity of the measure at issue consists in determining whether that measure introduces, between operators that are, in the light of the objective pursued by the general tax system concerned, in a comparable factual and legal situation, a distinction that is not justified by the nature and general structure of that system”.
Then it turned its attention to the substance of the judgment of the General Court. It summarised the gist of that judgment as follows. “(65) […] [T]he General Court held that the existence, were it to be established, of a derogation or an exception to the reference system identified by the Commission was not sufficient, in itself, to establish that the measure at issue favoured ‘certain undertakings or the production of certain goods’, within the meaning of Article 107(1) TFEU, since that measure was accessible, a priori, to any undertaking and it was directed not to a particular category of undertakings, which would have been the only undertakings favoured by that measure, but to a category of economic transactions.” “(66) It is, however, clear that that reasoning is based on a misapplication of the selectivity condition laid down in Article 107(1) TFEU”.
The Court of Justice explained why the General Court misapplied the condition of selectivity. “(67) That condition is satisfied where the Commission is able to demonstrate that that measure is a derogation from the ordinary or ‘normal’ tax system applicable in the Member State concerned, thereby introducing, through its actual effects, differences in the treatment of operators, although the operators who qualify for the tax advantage and those who do not are, in the light of the objective pursued by that Member State’s tax system, in a comparable factual and legal situation.” “(68) […] the Commission relied, […], in order to establish that the measure at issue was selective, on the fact that the consequence of that measure was that resident undertakings were not treated equally.”
Paragraphs 66 – 68 reveal the fundamental difference between the General Court and the Court of Justice. The General Court referred to what may be called ex ante criteria of eligibility. In its view, any company could qualify and benefit from the goodwill measure. By contrast, the Court of Justice referred to “actual effects” and “consequences” which can only be the ex post outcomes of either the acquisition of a domestic company or a foreign company. Naturally, the outcome was different depending on whether the acquired company was domestic or foreign.
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The Court of Justice went on to stress that “(69) the General Court considered that the measure at issue, on the grounds that it did not affect any particular category of undertakings or the production of any particular category of goods, that it was applicable regardless of the nature of an undertaking’s activity and that it was accessible, a priori or potentially, to all undertakings that wanted to acquire shareholdings of at least 5% in foreign companies and that held those shareholdings without interruption for at least one year, had to be regarded not as a selective measure but as a general measure within the meaning of the case-law cited in paragraph 56 of this judgment. In so doing, the General Court erred in law.” [Emphasis added]. “(70) Thus, […], the General Court held that, if the condition relating to the selectivity of a national measure relevant to the recognition of State aid, in respect of a measure that is a priori accessible to any undertaking, is to be satisfied, it is always necessary that a particular category of undertakings, who are exclusively favoured by the measure concerned and who can be distinguished by reason of specific properties, common to them and characteristic of them, be identified.” “(71) However, the imposition of such a supplementary requirement to identify a particular category of undertakings, additional to the analytical method applicable to selectivity in tax matters that may be deduced from the Court’s settled case-law, which essentially involves ascertaining whether the exclusion of certain operators from the benefit of a tax advantage that arises from a measure derogating from an ordinary tax system constitutes discrimination with respect to those operators, cannot be inferred from the Court’s case-law and, in particular, from the 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).”
The Court of Justice itself examined at considerable length the substance of the Gibraltar ruling. It paid particular attention to the fact that the tax advantage for offshore companies was not a derogation or exception. “(74) […] the measure at issue in that judgment did not take the form of a tax advantage that derogated from an ordinary tax system, but rather involved the application of a ‘general’ tax scheme based on criteria that were, in themselves, also general. The Court held that the nature of that scheme did not preclude a finding that the measure concerned was selective, contrary to the ruling of the General Court, since the condition relating to selectivity has a broader scope that extends to measures which, by their effects, favour certain undertakings, in that case ‘offshore’ companies, on account of the specific features characteristic of those undertakings. That measure accordingly operated de facto discrimination against undertakings that were in a comparable situation in the light of the objective pursued by that regime, in that case the objective of putting in place generalised taxation of all resident companies.”
“(75) By contrast, […], in the contested decisions, the Commission, in order to establish the selectivity of the measure at issue, relied primarily on the ground that the consequence of that measure is discrimination, in that it confers a tax advantage on certain resident undertakings and not on others who are subject to the same ordinary tax system from which the measure at issue is a derogation.” “(76) While it therefore follows from the 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), that the selectivity of a tax measure can be established even if that measure does not constitute a derogation from an ordinary tax system, but is an integral part of that system, the fact remains that that judgment is consistent with the Court’s settled case-law, cited in paragraph 57 of this judgment, to the effect that it is sufficient, in order to establish the selectivity of a measure that derogates from an ordinary tax system, to demonstrate that that measure benefits certain operators and not others, although all those operators are in an objectively comparable situation in the light of the objective pursued by the ordinary tax system.”
Hence, a derogation is a sufficient but not necessary condition for selectivity. And derogation occurs when the benefits of a measure are limited to certain operators. The Court of Justice went on to stress that “(79) all that matters […] is the fact that the measure, irrespective of its form or the legislative means used, should have the effect of placing the recipient undertakings in a position that is more favourable than that of other undertakings, although all those undertakings are in a comparable factual and legal situation in the light of the objective pursued by the tax system concerned.” What is missing from this sentence is the word “certain”.
The Court of Justice also examined whether the Spanish goodwill measure was not selective on the grounds that it applied to certain transactions. In this regard it explained that “(88) […] the Court has previously ruled that a tax measure from which solely undertakings that carried out specified transactions benefited, and not undertakings in the same sector that did not carry out those transactions, could be classified as selective, there being no need to assess whether that measure was of greater benefit to large undertakings”.
On the basis of the above considerations, the Court of Justice concluded its assessment of the first part of the appeal by finding that “(93) […] the General Court erred in law, in annulling the contested decisions, in part, on the ground that the Commission had failed to define a particular category of undertakings favoured by the tax measure at issue, while omitting to determine whether the Commission, in applying the method of examination, […], which must be used in order to examine the condition relating to the selectivity of the measure at issue, had in fact analysed the question and had established that that measure was discriminatory.” According to the Court of Justice, the General Court should have asked “(94) […] whether the situation of operators benefiting from the measure is comparable with that of operators excluded from it” and not whether the Commission had failed to “define a particular category of undertakings which were exclusively favoured by the tax measure at issue”.
Export aid
The second part of the Commission’s appeal disputed the General Court’s interpretation of export aid.
The General Court had referred to the case law concerning export aid and, in particular, cases 6/69, Commission v France, 57/86, Greece v Commission and C-501/00, Spain v Commission. The Court of Justice declared that “(115) […] the General Court erred in law, in holding, […], that that case-law did not concern the condition relating to the selectivity of a national measure, but only the condition relating to the question whether competition and trade were affected.” “(116) […], the Court, referring, inter alia, to the two abovementioned judgments, expressly stated its position on the selectivity of the national measure under examination, holding that, in that case, selectivity followed from the fact that only undertakings engaged in export activities and carrying out certain investment transactions abroad qualified for the tax advantage conferred by that measure.”
The Court of Justice went on to find again that the “(117) […] General Court also erred in law in holding, […], that the case-law relating to aid for exports relied on in the contested decisions had to be understood as meaning that the category of recipient undertakings with respect to whom the selectivity of export aid schemes must be examined was that constituted by ‘export undertakings’, which had to be defined as a category, which, while admittedly extremely broad, is nevertheless defined, comprising undertakings that could be distinguished by reason of specific, shared characteristics linked to their exporting activity.” “(118) […] [T]hat case-law cannot be understood as meaning that a national measure must necessarily be classified as selective where that measure benefits exclusively undertakings that export goods or services, even if, in fact, that may have been the case with respect to the particular tax measures at issue in the judgments concerned.” “(119) On the contrary, […], a measure such as the measure at issue, designed to facilitate exports, may be regarded as selective if it benefits undertakings carrying out cross-border transactions, in particular investment transactions, and is to the disadvantage of other undertakings which, while in a comparable factual and legal situation, in the light of the objective pursued by the tax system concerned, carry out other transactions of the same kind within the national territory.”
Concluding remarks
This is a very important judgment. It stretches widely the concept of selectivity. In the Gibraltar case, the Court of Justice declared that an apparently general measure is selective if it excludes a priori certain undertakings [i.e. offshore companies]. In this case, the Court declared that anything that is a derogation and results in different treatment is selective, regardless of whether the derogation is available to all undertakings. The Court focused on the ex post effects rather than on the ex ante option for any undertaking to take advantage of the derogation.
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[1] The full text of the judgment can be accessed at:
