Introduction
On 21 June 2023, the General Court delivered its judgment in case T-131/21, Região Autónoma da Madeira v European Commission.[1] It rejected the action of the Autonomous Region of Madeira [ARM] by which it sought the annulment of Commission decision 2022/1414 on aid scheme implemented by Portugal for the Madeira Free Zone or Zona Franca da Madeira [ZFM].
The ZFM scheme granted various tax advantages in the form of reduced tax rates to undertakings established in the Madeira International Business Centre, the Madeira International Ship Register and the Industrial Free Zone. Financial companies were excluded.
That scheme was initially approved in 1987 by Commission. Its subsequent modifications and extensions were also approved by various decisions of the Commission on the basis of the regional aid guidelines that exceptionally allowed operating for the development of Article 107(3)(a) regions and outermost regions [Article 349 TFEU]. Beneficiary undertakings had to operate in Madeira and create jobs in Madeira.
After a formal investigation, the Commission concluded in decision 2022/1414 that Portugal misapplied the scheme. The tax relief extended to activities outside Madeira and beneficiary undertakings did not create the jobs for which they claimed relief.
Selectivity
The ARM argued that the ZFM scheme was not selective on the grounds that the reference framework for assessing its selectivity ought to be the territory of the ARM and not the whole of the Portuguese territory because the ARM had tax autonomy according to the judgment in case C-88/03, Portugal v European Commission.
The General Court pointed out that that it had already found in September 2022 in case T-95/21, Portugal v European Commission, that the ZFM scheme conferred a selective advantage on its beneficiaries. [paragraph 42 of the judgment]
The scheme provided an advantage in the form of tax reduction for companies registered in the ZFM. Only certain companies were allowed to register in the ZFM and only those companies registered in the ZFM, with the exception of those established in other parts of the ARM or Portuguese territory, could benefit from the tax reductions provided by the scheme. Thus, the General Court already held that the scheme was selective. [paras 43-45]
Moreover, even if the reference framework for examining the selective nature of the scheme could be that of the whole territory of the ARM, the fact that undertakings registered in the territory of the ARM, but outside the ZFM, could not benefit from that scheme was sufficient to establish its selective nature. [para 47]
Lastly, the General Court reiterated that the fact that the purpose of the scheme was to alleviate the permanent handicaps suffered by undertakings operating in the ARM was not sufficient proof that that scheme was justified by the nature or general scheme of the Portuguese tax system, since it did not benefit companies established in the ARM which were not registered in the ZFM. The mere fact that a regional tax system was designed in such a way as to remedy disadvantages linked to insularity did not lead to the conclusion that any tax advantage granted in that context was justified by the nature and general scheme of the national tax system. The same applied to support of regional development or social cohesion. [para 48]
In other words, even though support for regional development or social cohesion is a legitimate public policy objective it is still extraneous to the logic of the tax system which is to tax income. Therefore, the differential treatment of companies registered in the ZFM did not follow from the logic of the system.
New aid
Madeira argued that the Commission was wrong to classify the latest version of the ZFM scheme as new aid instead of existing aid.
First, the General Court recalled that, in accordance with Article 108(1) TFEU, existing aid may be implemented as long as the Commission does not find it incompatible with the internal market. By contrast, Article 108(3) TFEU requires that plans to grant new aid or to alter existing aid must be notified to the Commission and may not be put into effect before a final decision is adopted under the procedure laid down in Article 108(2) TFEU. [para 75]
It follows that an authorised aid scheme, which is existing aid, is no longer covered by the decision authorising it and, therefore, constitutes new aid whenever the Member State concerned implements that aid scheme on the basis of rules that are substantially different from those laid down in the draft aid scheme that was authorised by the Commission. [para 76]
Thus, an existing aid scheme that has been substantially amended after it was authorised by the Commission, loses its classification as existing aid. [para 77]
Then the General Court confirmed that the Commission was right to conclude that the ZFM scheme breached the conditions under which it was approved because, first, it provided tax relief for activities carried out outside of the ARM. [paras 82-88]
The General Court also agreed with the Commission that operating aid could be granted exceptionally in regions benefiting from the derogation under Article 107(3)(a) TFEU, such as the ARM, provided that they contributed to regional development and they were proportional to the handicaps they intended to alleviate. [para 89] That means that only activities affected by handicaps and therefore only the additional costs which are specific to those regions are eligible for operating aid. [para 90] Activities carried out outside those regions which are therefore not affected by those additional costs may be excluded from the aid, even if they are carried out by companies established in those regions. [para 91]
Second, the ZFM breached the conditions of its authorisation because the beneficiary companies did not create or maintain the required number of jobs in the ARM.
The Commission had found that the Portuguese authorities considered any jobs, regardless of whether they were full-time or part-time, whether they were created by the aid beneficiaries or their suppliers or clients and whether they were in or outside the ARM, to constitute a job for the purposes of the application of the scheme. The General Court agreed with the findings of the Commission in paras 118-122.
Legitimate expectations and recovery of incompatible aid
The ARM claimed that the aid did not have to be recovered because the Commission infringed the principle of protection of legitimate expectations.
The Genera Court, first, recalled that the abolition of unlawful aid that is incompatible with the internal market, by means of recovery, is the logical consequence of the finding that that aid is incompatible. The obligation on the Member State concerned to abolish aid considered by the Commission to be incompatible with the internal market is intended to restore the previous situation, causing the beneficiary to lose the advantage it actually enjoyed over its competitors. [para 142]
Moreover, in accordance with Article 16(1) of Regulation 2015/1589, the Commission is always required to order the recovery of aid which it declares incompatible with the internal market, unless such recovery would be contrary to a general principle of EU law. [para 143]
As regards the principle of the protection of legitimate expectations, a Member State that has granted aid in breach of Article 108(3) TFEU, cannot, in principle, rely on the legitimate expectations of the beneficiaries in order to avoid the obligation to repay the aid. To accept such a possibility would be tantamount to depriving the provisions of Articles 107 and 108 TFEU of all practical effect because national authorities could rely on their own unlawful conduct in order to frustrate the effectiveness of decisions taken by the Commission under those provisions.[para 144]
In addition, the General Court stressed that where aid is put into effect without prior notification to the Commission, with the result that it is unlawful under Article 108(3) TFEU, the beneficiary of the aid cannot have a legitimate expectation that the grant of the aid is lawful. [para 145]
In the present case, the ARM failed to show that the Commission provided it with precise, unconditional and consistent assurances, such as to give rise to a legitimate expectations. [para 146].
Impossibility of recovery
The ARM claimed that it was impossible for it to comply with the decision ordering recovery of the aid, on the grounds that the contested decision did not enable it to determine the amounts to be recovered without undue difficulty.
First, the General Court clarified that, even though the ARM was not an addressee of the contested decision, under Portuguese law it was responsible for recovering the aid which it granted in the context of the ZFM scheme. [para 169] Therefore, the ARM could raise the plae concerning the impossibility of recovering the incompatible aid.
Then the General Court noted that the Commission could not adopt a recovery order the enforcement of which was objectively and absolutely impossible to enforce. [para 171]
However, the public authority concerned may not claim the existence of absolute impossibility when it merely relies on legal, political or practical difficulties attributable to the act or omissions of the national authorities themselves, without proposing to the Commission other arrangements for implementing that decision which would make it possible to overcome those difficulties, in particular by partially recovering that aid. [para 172]
The Court stressed that the administrative and practical difficulties entailed by the large number of beneficiaries of the aid did not allow recovery to be regarded as technically impossible to achieve. [para 173]
In the present case, the ARM merely relied on the complexity of the procedure for recovering the aid concerned and on the political, legal and practical difficulties, without establishing to the requisite legal standard that it was objectively and absolutely impossible to recover it. [para 174]
In particular, the ARM did not demonstrate either the reality of the difficulties on which it relied or the absence of any other method of recovery. [para 175]
Furthermore, the Commission was not required, when ordering the recovery of incompatible aid, to fix the exact amount of aid to be repaid. The obligation on a Member State to calculate the precise amount of aid to be recovered forms part of their broader obligation of sincere cooperation with the Commission. [para 176]
The principle of proportionality
The ARM claimed that the order of recovery was disproportional as it would have a serious impact on the companies in the ZFM.
The General Court reiterated the established principle that the abolition of aid by means of recovery was the logical consequence of a finding that it was incompatible. The restoration of the previous situation could not be regarded as a disproportionate measure. [para 186]
Moreover, the fact that the recovery of incompatible aid is liable to lead to the bankruptcy of the companies which have benefited from it cannot affect the compulsory nature of that recovery. [para 188]
It is also interesting that the General Court pointed out that the aid that complied retroactively with the conditions of the GBER or the de minimis regulation did not have to be recovered. [para 187]
Since the General Court rejected all pleas, it dismissed the action in its entirety.
[1] The full text of the judgment, in languages other than English, can be accessed at:
