The assessment of the Commission in an “opening decision” is only provisional.
The Commission is not required to prioritise its investigations or to extend them to anyone who may be in a similar situation.
The right of non-discrimination is not violated when the Commission chooses to investigate some instead of all possible cases of State aid.
An individual measure that confers an advantage is presumed to be selective.
Introduction
A company that is singled out to be investigated by the Commission naturally feels unfairly targeted. However, it cannot invoke the principle of non-discrimination to defend itself on the grounds that there are also other companies in a similar situation.
As the General Court ruled on 14 July 2021, in case T‑648/19, Nike Netherlands & Converse Netherlands v European Commission, the fact that others are in a similar situation and may have also received illegal State aid is irrelevant and that the investigation by the Commission does not amount to discriminatory treatment. For this and other reasons, the Court rejected the application of Nike and Converse requesting annulment of a Commission decision to open the formal investigation procedure.[1]
The Commission had decided on 10 January 2019 to initiate a formal investigation of advance tax rulings [ATRs] granted by the Netherlands to the two companies [SA.51284]. The rulings validated, for tax purposes, transfer pricing arrangements, in particular the level of royalties payable by the applicants to their American parent companies. The level of annual royalties was calculated in such a way so as to enable Nike Netherlands to earn 2-5% margin over its costs. Although the margin was low, it was considered to conform with the arm’s length principle [ALP] because the risk borne by Nike Netherlands was deemed to be also low. In the Netherlands, royalties are deductible from taxable revenue. Moreover, royalties are not taxed at the level of the recipient.
The Commission opened the formal investigation procedure because it provisionally concluded that the ATRs contained State aid as they conferred a selective advantage on the applicants by reducing their taxable revenue.
Insufficient reasoning
The applicants claimed that the contested decision lacked sufficient reasoning on how the criteria of Article 107(1) TFEU were satisfied. They were bound to fail on this claim since the purpose of the formal investigation procedure is to gather information before the Commission makes a definitive assessment of the measure under consideration.
Given that the Commission opened the formal investigation procedure in order to obtain more information about the measures, the General Court, first, noted that “(72) the Commission’s assessment of the measures at issue is not definitive and may evolve during the formal procedure for obtaining additional information from the Kingdom of the Netherlands and any interested parties.”
“(73) In accordance with Article 6(1) of Regulation 2015/1589, the contested decision must simply summarise the relevant issues of fact and law, include a preliminary assessment as to the aid character of the proposed measure and set out the doubts as to its compatibility with the internal market.”
Consequently, “(75) the applicants cannot complain that the Commission’s reasoning as regards the individual character of the measures at issue was incomplete. The contested decision contains a clear and unequivocal statement of reasons in that respect.”
Advance pricing agreements
The applicants challenged the Commission’s finding of a selective advantage in their advance pricing agreements [APAs].
The General Court, first, noted that “(115) it is for the Commission to compare the taxable profit of the beneficiary of the APA in question as a result of the application of that APA with the position, as it would be if the normal tax rules under Netherlands law were applied, of an undertaking in a factually comparable situation, carrying on its activities in conditions of free competition. Against that background, although the APA in question accepted a certain level of pricing for intra-group transactions, it is necessary to check whether that pricing corresponds to prices that would have been charged under market conditions”.
In this connection, the applicants put forth an important argument. The Commission should have compared their tax treatment with that of other companies subject to the same rules in order to check whether the applicants received special treatment.
The General Court rejected this argument on the grounds that “(118) the issue in the present case is merely whether the applicants’ corporate income tax burden is reduced as a result of intra-group transactions being priced at a level that does not reflect an arm’s length price. If intra-group transactions are also calculated incorrectly for other companies, that is irrelevant to the conferral of an economic advantage on the applicants.”
In other words the comparison has to be between the actual APA and a hypothetical one under market conditions, not between the APA and those of other companies receiving similar treatment.
The General Court went on to add that “(119) even if the Commission had been obliged, quod non, to open an investigation in respect of other undertakings to whom measures similar to those at issue in the present case apply, it must be borne in mind that the principle of equal treatment must be reconciled with the rule that a person may not rely, in support of his or her claim, on an unlawful act committed in favour of a third party”.
Selectivity
The applicants contended that the Commission made the incorrect principal assumption that the measures at issue were selective.
The General Court, first, reiterated the well-established principle that “(130) in the case of individual aid, the identification of the economic advantage is, in principle, sufficient to support the presumption that it is selective. The presumption of selectivity operates independently of the question whether there are operators on the relevant market or markets which are in a comparable factual and legal situation”.
“(131) By contrast, when examining an aid scheme, it is necessary to identify whether the measure in question, notwithstanding the finding that it confers an advantage of general application, does so to the exclusive benefit of certain undertakings or certain sectors of activity”.
Then the Court explained that in this case “(132) the measures at issue are tax rulings concluded between the Netherlands tax administration and the applicants; those rulings are intended only to cover the applicants’ tax situation, not that of other companies, […] as the Commission provisionally found that an economic advantage is conferred on the applicants, the advantage resulting, in essence, from a lowering of its tax base.”
“(133) Consequently, the conditions giving rise to a presumption as to the selectivity of the measures at issue were satisfied in the present case.” And, given that at the preliminary stage of investigation, the Commission cannot be certain that the criteria of Article 107(1) TFEU are satisfied, the Court also found that “(138) the Commission was entitled, in the contested decision, to presume, provisionally, that the measures at issue were selective.”
Premature formal investigation
The applicants complain that the Commission opened the formal investigation procedure prematurely and before examining all aspects of the measures in issue.
The General Court, first, reiterated the obligations of the Commission in this respect. “(151) The Commission is required to initiate the formal investigation procedure if it experiences serious difficulties, on an initial examination, in determining whether the measure under examination constitutes aid within the meaning of Article 107(1) TFEU. Article 6 of Regulation 2015/1589 states that the decision to initiate the formal investigation procedure must ‘include a preliminary assessment of the Commission as to the aid character of the proposed measure’.”
“(152) It follows that the classification of a measure as State aid in a decision to initiate the formal investigation procedure is merely provisional. The very aim of initiating that procedure is to enable the Commission to obtain all the views it needs in order to be able to adopt a definitive decision on the point”.
“(153) The Commission’s power to adopt a decision under the rules on State aid without initiating the formal investigation procedure is thus restricted by Article 108 TFEU to measures that raise no serious difficulties. The Commission may not decline to initiate the formal investigation procedure in reliance upon third party interests, considerations of economy of procedure or any other ground of administrative convenience. However, the Commission enjoys a certain margin of discretion in identifying and evaluating the circumstances of the case in order to determine whether or not they present serious difficulties”.
In the present case, “(155) the Commission satisfied its obligation to initiate the formal investigation procedure when there were serious difficulties, and it did so without making manifest errors of assessment”.
“(158) It is apparent from part 5 of the contested decision that the information provided by the Kingdom of the Netherlands would not have enabled the Commission to proceed further with its analysis of the measures at issue, and therefore that possible requests to third-party sources of information were permitted in the present case and cannot be properly relied upon to establish that the Commission’s preliminary examination was inadequate.”
“(161) The preliminary examination does not require the Commission to conduct a thoroughgoing examination, this being carried out, with regard to measures whose assessment raises serious difficulties, once the formal investigation procedure is initiated.”
Breach of the principles of good administration and equal treatment
The applicants claimed that the Commission breached the principles of good administration and equal treatment by choosing arbitrarily to investigate whether the measures at issue complied with State aid law and not extending its analysis to the general scheme on which the measures at issue were based and its potential beneficiaries.
The General Court noted that “(168) as regards, in the first place, observance of the principle of good administration, […] the Commission is required, in the interests of good administration of the fundamental rules of the FEU Treaty relating to State aid, to conduct a diligent and impartial examination of the contested measures, so that it has at its disposal, when adopting the final decision, the most complete and reliable information possible”.
“(169) There is no rule under the Treaty or Regulation 2015/1589 that requires the Commission to determine as a priority whether an aid scheme exists when considering an individual measure. The object of its review could indeed, therefore, be limited to the measures at issue.”
“(170) What is more, irrespective of the question of the non-extension of the Commission’s examination to cover the possibility of an aid scheme, it must be noted that, for the purposes of adopting the contested decision, the Commission carried out its provisional assessment of the measures at issue in a diligent and impartial manner. […] the Commission sent numerous information requests to the Kingdom of the Netherlands in order to have sufficient information at its disposal to make a provisional assessment of the existence, in the present case, of State aid. Likewise, the adoption in the present case of the contested decision, which includes a provisional, yet substantive, analysis of the existence of State aid, in particular of the grant of a selective advantage in favour of the applicants, properly enables the applicants to submit their observations in the course of the formal investigation procedure.”
“(173) Compliance with the principle of equal treatment or non-discrimination requires that comparable situations must not be treated differently and that different situations must not be treated in the same way unless such treatment is objectively justified”.
“(174) In the present case, it must be observed that the applicants do not substantiate their argument in relation to breach of the principle of equal treatment and do not precisely identify the companies or multinational groups which they claim are in a situation comparable to their own.”
“(175) However, on the assumption that the applicants are in a situation comparable to other undertakings, the fact that the Commission chose to review, as a priority, only the compliance of the measures at issue with State aid law, without extending its examination to include the possible existence of any aid scheme of which other undertakings might be beneficiaries, does not entail a breach of the principle of equal treatment. The Commission remains free to determine those State measures, whether individual or constituting an aid scheme, which it wishes to examine pursuant to State aid law.”
“(176) The same conclusion must be drawn if it is assumed that the Commission was obliged, quod non, to initiate an investigation in respect of other undertakings benefiting from measures similar to those at issue in the present case. The principle of equal treatment must be reconciled with the rule that a person may not rely, in support of his or her claim, on an unlawful act committed in favour of a third party”.
“(177) In other words, the argument relating to a breach of the principle of equal treatment cannot succeed in respect of an undertaking concerned by a decision finding, whether provisionally or not, that there is State aid, unless, in the case of another undertaking benefiting from a similar measure, which is in a factually and legally comparable situation, the Commission had, correctly, found there to be no State aid.”
“(178) Furthermore, in addition to the fact that incompatible State aid is prohibited, under Article 107 TFEU, a beneficiary of aid cannot have the right to maintain his or her advantage merely because other undertakings are also liable to benefit; that is so in order to preserve the practical effect of State aid law.”
Conclusion
Since all the pleas of Nike and Converse failed, their application for annulment was rejected. Nike and Converse will, of course, get another chance to defend themselves if the Commission finds that they received incompatible State aid.
[1] The full text of the judgment can be accessed at:
Photo by Pablo Hermoso on Unsplash
