Introduction
Companies may pay taxes in several Member States of the EU or in third countries. This fact by itself has no bearing in an assessment of whether preferential tax treatment in a Member State may constitute State aid. However, it becomes relevant when incompatible aid is to be recovered and the granting Member State has to determine the amount of aid that was granted through the preferential tax treatment. In this context, the amount of tax payable may be reduced by taxes already paid in other Member States, if rules on avoidance of double taxation are applicable.
Vima World, a company operating on the Madeira Free Zone [MFZ] appealed against Commission decision 2022/1414, contesting recovery of incompatible aid partly on the ground that that the Commission had failed to take into account taxes paid in Member States other than Portugal. On 19 June 2024, the General Court, in case T-671/22, Vima World v Commission, dismissed the appeal.[1]
This judgment came after the judgment in case T-95/21, Portugal v Commission, by which the General Court endorsed Commission decision 2022/1414 that had found that certain parts of the tax regime of the MFZ constituted incompatible State aid which had to be recovered. Portugal appealed and the Court of Justice delivered its judgment on 4 July 2024 in case C-736/22 P, Portugal v Commission. The Court of Justice rejected all pleas of Portugal.
The MFZ tax regime was initially approved in 1987 by the Commission [case SA.21259] and authorised again in 2007 and 2013. However, in 2021 the Commission found that Portugal misapplied the MFZ tax regime. The tax benefits were incorrectly extended to all income of companies resident in the MFZ, regardless of whether that income was generated by eligible activities in the MFZ or ineligible activities outside it. Moreover, companies misreported the number of jobs they created within the MFZ. They counted part-time jobs as full-time jobs and also included the jobs created by their suppliers which were ineligible for the special tax treatment. Consequently, the aid was incompatible with the internal market and had to be recovered.
Who is responsible to calculate the amount of State aid that has to be recovered?
Vima World alleged that the Commission decision infringed the obligation to state reasons in that the decision was imprecise and did not provide sufficient information to enable Portugal to recover the incompatible aid objectively and not in a discretionary manner.
The General Court, first, recalled that there is no provision of EU law requiring the Commission, when ordering the recovery of aid that is incompatible with the internal market, to fix the exact amount of the aid to be repaid. It is sufficient that the Commission’s decision contains information enabling the Member State to whom it is addressed to determine that amount itself, without undue difficulty. [paragraph 39 of the judgment]
Then, the General Court confirmed that the Commission did provide the Portuguese authorities with the necessary and sufficient information, enabling them to identify the beneficiaries and to determine, without undue difficulty, the amount of aid that had to be repaid, provided that the beneficiaries did not satisfy the conditions laid down in a de minimis regulation or a block exemption regulation. [paragraphs 40-41]
It was the task of the Portuguese authorities to determining the part of the income which was linked to an activity actually carried out in the MFZ and also to calculate, on the basis of an objective method, the number of jobs created or maintained in Madeira by each beneficiary. [paragraph 43]
Failure to take into account double taxation provisions
Vima World alleged that the Commission did not take into account the tax paid by companies resident in the MFZ in other Member States.
The General Court, first, explained that when the Commission examines a State aid scheme it may confine itself to examining the general characteristics of the scheme, without being required to carry out an analysis of the aid granted to each individual undertaking. It is only at the stage of recovery of the aid that it is necessary to verify the individual situation of each undertaking concerned. [paragraph 54]
By contrast, the individual situation of each undertaking has to be verified by Member States at the stage of recovery of incompatible aid. [paragraph 55]
In the present case, the Commission examined the general characteristics of the MFZ regime, as was implemented.
The fact that the Commission did not take into account the particular case of undertakings which were also subject to tax in other Member States was not in itself capable of establishing the existence of an error in the general and abstract analysis of that scheme carried out by the Commission. [paragraph 58]
Then the Court stressed that, in order to demonstrate that the MFZ regime, as implemented, conferred an advantage in the meaning of Article 107(1) TFEU, the Commission was not required to examine the impact of any tax paid in another Member State by individual beneficiaries and, in particular, to determine whether that circumstance was such as to neutralise the competitive advantage linked to the receipt of unlawful aid. The possibility of such neutralisation did not mean that the Commission could not find the existence of unlawful aid, or that it could not order the recovery of the individual aid. [paragraph 59]
The Court added that even on the assumption that the profits made in the MFZ could benefit from relief as a result of taxes paid in another Member States, such a circumstance did not constitute a general characteristic of the MFZ regime, as implemented, that was capable of calling into question the finding of the existence of unlawful aid. [paragraph 62]
The Court also clarified that deciding which foreign taxes may offset domestic tax liability and under what conditions that offsetting is possible is a decision of a general nature which falls within the discretion of Member States in determining the constituent characteristics of their tax systems. More specifically, the decision on the extent to which a Member State takes into account the tax liability in another state and thus prevents double taxation falls within the discretion of that state. [paragraph 64]
It should be noted that in September 2022, the Court of Justice, in its judgment in case C-705/20, Fossil (Gibraltar), clarified that rules on avoidance of double taxation are applicable and may reduce or fully offset the amount of aid that is eventually recovered.
It follows that the question whether and under what conditions the tax paid in another Member State may possibly be taken into consideration for the purposes of taxation in Portugal under the MFZ regime, as implemented, does not fall within the competence of the Commission, but is a decision of a general nature which falls within the discretion of the Portuguese authorities in determining the constituent characteristics of the tax. [paragraph 65]
Did the MFZ regime also apply to activities outside Madeira?
Vima World argued that the Portuguese authorities correctly interpreted and implemented the MFZ regime, as authorised by the Commission in the 2007 and 2013 decisions.
The Court rejected that argument for the following reasons. First, the favourable tax treatment authorised by the Commission concerned activities that were actually and materially carried out in Madeira. It could not apply to activities carried out outside Madeira, even by companies registered in the MFZ. [paragraph 80]
Second, the 2007 regional aid guidelines allowed operating aid exceptionally in regions benefiting from the derogation in Article 107(3)(a) TFEU, such as Madeira, provided that it was justified by its contribution to regional development and that it was proportionate to the handicaps which it intended to alleviate. [paragraph 87]
Regional operating aid for the outermost regions was designed to compensate for the additional costs borne by undertakings in those regions due to the handicaps from which they suffered. This meant that only activities affected by those handicaps, and therefore the additional costs specific to those regions, were eligible for operating aid. [paragraph 88]
Activities carried out outside those regions which, as a result, were not affected by those additional costs, had to be excluded from State aid, even if they were carried out by companies established in those regions. [paragraph 89]
Third, the assessment of the compatibility of the MFZ regime had been carried out on the basis of the additional costs incurred by undertakings operating in Madeira, not outside it. [paragraph 90]
How to determine the creation or maintenance of jobs in Madeira?
Vima World claimed that that the Commission wrongly required the Portuguese authorities to use the “full-time-equivalent” methods to verify the creation or maintenance of jobs in Madeira. Instead, it should have allowed them to use a different method that was defined in national labour law.
The Court responded that it was wrong to claim that the compatibility of the MFZ regime should have been assessed in the light of national labour law. [paragraph 108]
All derogations from the general principle that State aid is incompatible with the internal market must be interpreted strictly. That requirement means that the interpretation of the conditions for the implementation of an aid scheme authorised by the Commission cannot remain entirely at the discretion of the Member State concerned, on the pretext, in particular, of compliance with the principle of institutional and procedural autonomy. [paragraph 109]
Then the Court clarified that the Commission decision was not based on the finding that the Portuguese authorities failed to use the FTE method to calculate the number of jobs, but on the fact that the Portuguese authorities did not use any objective method of calculating the actual working time of employees. Thus, those authorities were not in a position to verify the reality and permanence of the jobs declared by the beneficiaries of the scheme. [paragraph 112]
Did the recovery infringe the principle of the protection of legitimate expectations?
Vima World claimed that the recovery decision infringed the principle of the protection of legitimate expectations.
The Court, first, recalled that the right to rely on that principle of protection of legitimate expectations presupposes that precise, unconditional and consistent assurances have been provided to the person concerned by EU authorities. [paragraph 122]
In addition, in the field of State aid, in view of the mandatory nature of the review of aid carried out by the Commission under Article 108 TFEU, first, undertakings in receipt of aid can, in principle, have a legitimate expectation that the aid is lawful only if it has been granted in accordance with the procedure laid down in that article. Second, a diligent economic operator must normally be able to satisfy itself that that procedure has been complied with. [paragraph 123]
In the present case, Vima World did not show that the Commission had provided it with precise, unconditional and consistent assurances that the breaches of the terms of the authorising Commission decisions resulted in compatible State aid. [paragraph 124]
It was irrelevant that the MFZ regime, as notified, was approved twice by the Commission, given that that scheme was implemented with substantially different arrangements from those laid down in the notification and approval. [paragraph 126]
Did the recovery infringe the principle of proportionality?
Vima World submitted that the recovery of the aid infringed the principle of proportionality.
The Court reiterated the established rule that the abolition of unlawful and incompatible aid by means of recovery is the logical consequence of the finding that that aid is incompatible with the internal market. Recovery is intended to restore the previous situation, forcing the beneficiary to lose the advantage it enjoyed over its competitors. [paragraph 155]
In addition, 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. [paragraph 157]
Lastly, the Court rejected the argument that recovery was disproportionate on the ground that it did not take account of the fact that, for some of the beneficiaries their profits were subject to tax in another Member State. Since the recovery of State aid is the sole consequence of its illegality and its incompatibility with the internal market, it cannot depend on the particular situation of some of the beneficiaries. [paragraphs 159-160]
The recovery of incompatible aid cannot constitute a breach of the principle of proportionality, since such recovery constitutes the logical consequence, proportionate and inherent in Articles 107 and 108 TFEU of the finding that that aid is incompatible. [paragraph 161]
Conclusion
It is said that death and taxes are inevitable. Yet, taxes can some times be avoided through shrewd tax management. The saying should be rephrased. It is death and repayment of incompatible State aid that are inescapable.
[1] The full text of the judgment in languages other than English can be accessed at:
