Introduction
On 2 February 2023, the Court of justice, in case C649/20 P, Spain and Others v European Commission, clarified the extent to which public authorities can implement general measures without in practice favouring any undertaking. The exercise of administrative discretion can turn a general measure into selective.
The Court made a distinction between what may be called “related” or inherent and “unrelated” or irrelevant criteria of implementation. The implementation or enforcement of a public measure based on transparent and objective criteria that are closely linked to the purpose of the measure itself such as checking the correctness of information provided by undertakings does not affect the general character of the measure in question. However, acceptance or rejection of an application on unrelated criteria such as, for example, contribution to job creation for measures that are not intended to promote employment can confer a selective character to an otherwise general measure. Selectivity is present when the administrative discretion is exercised on the basis of “vague” criteria.
Background to the dispute
Spain and a number of companies appealed against the judgment of the General Court in case T515/13 RENV, Spain and Others v European Commission, by which the General Court dismissed their actions for annulment of Commission decision 2014/200. That decision concerned State aid in the form of finance lease agreements, also known as the Spanish Tax Lease System [STLS]. The STLS applied to certain lease agreements for the purchase of ships. It enabled shipping companies to purchase ships built by Spanish shipyards at a 20% – 30% discount.
The STLS was complex. It involved, for each ship order, a shipping company, a shipyard, a bank, a leasing company, an economic interest grouping [EIG] set up by that bank and investors who purchased shares in that EIG. The EIG would lease the ship from a leasing company as soon as construction of the ship began and would then charter it to the shipping company under a bareboat charter [i.e. without crew]. The EIG would undertake to acquire the vessel at the end of the leasing contract while the shipping company would undertake to acquire it at the end of the bareboat charter contract. This construction generated tax benefits for investors in a ‘tax transparent’ EIG. Part of those benefits were transferred to the shipping company in the form of a rebate on the price of that vessel.
After receiving a complaint, the Commission initiated the formal investigation procedure and found that the STLS combined five different measures. Those five measures were (i) the accelerated depreciation of leased assets under the relevant tax provision, (ii) the discretionary application of early depreciation under other tax provisions, (iii) the rules relating to EIGs, (iv) a tax scheme linked to ship tonnage, and (v) certain other tax provisions. The Commission decided that all those measures contained incompatible State aid.
Spain appealed against that decision and in December 2015, the General Court annulled the decision [T-515/13, Spain and Others v European Commission]. The Commission in turn appealed and in July 2018, the Court of Justice set aside the judgment of the General Court and referred the case back to it [C-128/16 P, European Commission v Spain and Others]. In September 2020, the General Court dismissed the appeals of Spain and Others [T-515/13 RENV].
The selectivity of the STLS
The main issue in all the proceedings was whether the STLS was selective. In addition, in this particular instance, Spain questioned whether the STLS could be found to be selective without the Commission first performing the three-step selectivity test that is normally applied to tax measures. This test requires the definition of the reference system, identification of differential treatment of undertakings in comparable situations and, lastly, confirmation that any differentiation follows or not from the logic or nature of the system.
In this case the Court of Justice recalled that in its initial judgment in 2015 the General Court erred by not acknowledging that the EIGs were beneficiaries of the tax measures at issue on the ground that those entities were fiscally transparent. The General Court’s assessment was based on the incorrect premise that only the investors, and not the EIGs, could be regarded as the beneficiaries of the advantages arising from the tax measures. [paragraphs 38-39 of the judgment]
The Court of Justice added that “(40) the General Court had not looked into whether the Commission had established whether the tax measures at issue introduced, through their actual effects, differences in the treatment of operators, although the operators who qualified for the tax advantages and those who did not were, in the light of the objective pursued by that tax system, in a comparable factual and legal situation.”
The Court of Justice explained that in its judgment of July 2018 it “(41) requested the General Court to examine whether the procedure for authorising early depreciation conferred on the tax authority a discretionary power such as to favour the activities carried on by the EIGs involved in the STL system or having the effect of favouring such activities.”
The Court of Justice also recalled that “(43) the Commission had stated that the STL system, considered as a whole, was selective because, first, the tax authority had discretionary powers to authorise early depreciation on the basis of imprecise conditions and, secondly, because the tax authority would only authorise STL operations to finance sea-going vessels. […] the fact that the tax authority had discretionary powers to grant authorisation was in itself sufficient to make the entire STL system selective.”
“(46) So far as concerns the condition relating to the selectivity of the advantage, which is a constituent factor in the concept of ‘State aid’ within the meaning of Article 107(1) TFEU, since that provision prohibits aid ‘favouring certain undertakings or the production of certain goods’, it is clear from the Court’s settled case-law that the assessment of that condition requires it to be determined whether, under a particular legal regime, a national measure is such as to favour ‘certain undertakings or the production of certain goods’ over others which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation”.
“(47) Where the measure at issue is conceived as an aid scheme and not as individual aid, it is for the Commission to establish that that measure, although it confers an advantage of general application, confers the benefit of that advantage exclusively on certain undertakings or certain sectors of activity”.
“(48) The three-step method of analysing the selectivity of aid, invoked by the appellants, was designed in order to reveal the concealed selectivity of advantageous tax measures that are apparently available to any undertaking. By contrast, it is not relevant to an examination of the selectivity of an advantageous tax measure, the granting of which depends on the discretionary powers of the tax authority and which, therefore, cannot be considered to be general in nature”.
The discretionary powers of tax authorities
Spain and the other applicants disputed that tax authorities had discretion to select undertakings.
First, the Court of Justice noted that “(57) the General Court correctly pointed out, […], that the mere existence of a system of authorisation does not imply that a measure is selective and that that is the case where the degree of latitude of the competent authorities is limited to verifying the conditions laid down in order to pursue an identifiable tax objective and the criteria to be applied by those authorities are inherent in the nature of the tax regime […] It also rightly pointed out that, on the other hand, where the competent authorities have a broad discretion to determine the beneficiaries of the measure or the conditions under which it is granted, the exercise of that discretion must be regarded as favouring certain undertakings or the production of certain goods in comparison with others apparently in a comparable factual and legal situation in the light of the objective pursued”.
“(58) The authorisation system at issue was based on obtaining prior authorisation – as opposed to merely notifying the authority – on the basis of vague criteria requiring interpretation by the tax authority, which had not published any guidelines and those criteria could therefore not be regarded as objective. […] the tax authority could set the start date for the depreciation having regard to the ‘specific characteristics of the [duration]’ of the contract or the ‘specific nature of [the economic use of the asset]’, which were inherently vague criteria whose interpretation gave the tax authority a significant discretion”.
The Court of Justice also pointed out that the relevant tax law “(59) conferred important discretionary powers on the tax authority, allowing it, first, to request all the information and documents it deemed appropriate, including information on the positive implications of the shipbuilding contracts for the economy and jobs in Spain, which were not obviously relevant to satisfaction of the [tax criteria], and, secondly, to grant or reject the authorisation, but also to set a different start date for the depreciation from that proposed by the taxpayer, without further clarification.”
“(61) The presence of discretionary factors was such as to favour beneficiaries over other taxpayers in a comparable factual and legal situation and that, specifically, it could be seen from those discretionary factors that other EIGs might not have benefited from the early depreciation under the same conditions and, similarly, because of those discretionary factors, other undertakings in a comparable factual and legal situation but engaged in other sectors or having a different form might not necessarily have benefited from it under the same circumstances. […] since the provisions under consideration were discretionary as a matter of law, it was irrelevant whether or not they were actually applied in a discretionary manner.”
“(63) In that regard, it should be noted, in the first place, that, […], the General Court was not required, in order to assess whether the power of the tax authority to authorise the early depreciation was discretionary, to examine whether, in practice, the exercise of that discretion had in fact led to unjustified favourable treatment of certain operators by comparison with others which are in a comparable situation. […] The Commission need only demonstrate that the tax scheme at issue is such as to favour its beneficiaries, by ascertaining that the scheme, taken as a whole, is, given its particular characteristics, capable of resulting, at the time of its adoption, in the tax liability being lower than it would have been if the general tax regime had been applied”.
On the basis of the above reasoning, the Court of Justice rejected the appeals with respect to the selectivity of the STLS.
The full text of the judgment can be accessed at:
