The assignment of public service tasks to an infrastructure operator is not sufficient to prevent the application of State aid rules.
Introduction
The characterisation of an entity as an undertaking is activity based, not status based. If it carries out activities for which there is a market, it becomes an undertaking, regardless of providing services which are in the general interest or even carrying out tasks which are reserved by the state.
It is also largely impossible for a Member State to escape from State aid rules by claiming that the operator of infrastructure is in a special position which makes it different from any other undertaking on the market.
In its judgment of 20 September 2019, in case T-696/17, Havenbedrijf Antwerpen and Maatschappij van de Brugse Zeeven v European Commission, the General Court had to address a series of arguments on the supposed non-existence of economic activities, the special features of Belgian ports and the alleged absence of selectivity in their tax treatment.[1] The applicants were operators of the ports in Antwerp and Bruges. They appealed against Commission decision 2017/2115, which had found that Belgian ports benefitted from incompatible State aid in the form of exemption from corporate taxation.
On the same day, the General Court ruled on similar appeals lodged by the ports of Brussels, Liege, Namur and Charleroi. All these cases began with a sector inquiry. In July 2013, the European Commission sent a questionnaire to all Member States requesting information on the operation and taxation of their ports. In 2016 and 2017, the Commission concluded some of its investigations with negative decisions which were subsequently challenged before the General Court. Cases involving French ports were examined on the StateAidHub on 21 May 2019
http://stateaidhub.eu/blogs/stateaiduncovered/post/9502
and cases involving Dutch ports were reviewed on the StateAidHub on 19 June 2018
http://stateaidhub.eu/blogs/stateaiduncovered/post/9254.
In the case of Belgium, the Commission concluded, first, that the activities of Belgian ports were – at least in part – economic activities. Second, since they were subject to the tax on legal persons and not to the normal corporation tax. Therefore, ports enjoyed an advantage which corresponded to the difference between the corporation tax and the tax on legal persons. Third, the aid was incompatible with the internal market and as a consequence, Belgium was ordered to abolish it.
Alleged absence of economic activity
The two ports, first, argued that they did not carry out economic activities because their tasks consisted mainly of services of general interest, such as port management and environmental inspection services, and because they exercised public powers and privileges.
The General Court began its analysis by recalling that the concept of undertaking covers any entity engaged in an economic activity, irrespective of its legal status and the way by which it is financed. The concept of economic activity includes any activity consisting of the supply of goods and services on a particular market. In addition, the case-law has recognised that the commercial exploitation of ports and the construction of port infrastructure are economic activities. [paragraphs 46-47 of the judgment]
Consequently, according to the Court, the Commission did not err in finding that the activities carried out by the ports were, at least in part, economic activities. [paragraph 50]
The Court added that it was not disputed that it was possible that ports had been granted certain non-economic powers of public authority, such as the control and safety of maritime traffic or surveillance to prevent pollution. [paragraph 53]
But the fact that services of general interest had been assigned to the ports was not sufficient to prevent their categorisation as undertakings as long as they also carried out economic activities. [paragraph 55] The concept of economic activity derives from factual evidence, notably the existence of a market for the services concerned, and is not dependent on national choices or considerations. [paragraph 56]
Infrastructure v services
The ports then argued that it was necessary to distinguish between the management of port infrastructure and the commercial activities of users of the port.
The General Court compared ports and airports and pointed out that for airports it had long been held that both the management of the infrastructure and the provision of services at airports were economic in nature. It then concluded that there was no fundamental difference between granting access to airport infrastructure against a fee and providing access to port infrastructure against a fee. It also pointed out that ports themselves exploited port infrastructure when providing access to the infrastructure or when renting out facilities. [paragraphs 70-72]
Pricing practices
Next, the ports contended that they did not carry out economic activities because of their pricing practices. They did not seek to make profit.
The General Court, first, recalled the principle in the case law that services normally provided for remuneration have to be classified as economic activities. The essential characteristic of remuneration is the fact that it constitutes consideration for the service in question. Therefore, the existence of remuneration is a critical element in establishing the existence of economic activity. [paragraphs 75-76]
Then the General Court explained that the fact that port charges had been designated as a “fee” by the Belgian Constitutional Court did not undermine the Commission’s position that those fees were the financial consideration for those services. [paragraph 77]
The General Court admitted, however, that when a public body provides products or services linked to its exercise of public-law prerogatives at a fee fixed by law and not by itself cannot by itself justify the classification of the activity as economic or that body as an undertaking. At the same time, that fact alone is not sufficient to preclude the characterisation of the activity as economic. [paragraph 78]
In addition, the Court pointed out that the characteristics of the prices applied by ports in the present case (publicity, non-discrimination, etc.) are similar to those which apply in the context of services of general economic interest, which are economic activities and are subject to State aid rules. [paragraph 79]
In response to the argument that ports did not follow a commercial logic in setting their fees but sought to fulfil their public service tasks, the Court observed that the fact that the supply of goods and services was not for profit did not mean that the operator carrying out such activities on the market could not be regarded as an undertaking as long as it competed with other undertakings pursuing profit. [paragraph 80]
Indeed, regardless of the status and objectives of an entity, as long as it competes with profit-seeking entities, it becomes an undertaking.
In addition, the Court noted that it was a common practice that port and concession fees levied by ports covered at least the majority of the costs incurred in offering their services on the market. In the case of the Port of Antwerp in particular, those revenues exceeded its total expenditure in 2015. The fact that such revenues could also finance some non-economic activities did not in any way undermine the fact that those revenues were collected in return for economic activities, such as the provision of port infrastructure or the provision of access to port infrastructure. [paragraph 82]
It is not unusual for Member States to lump together economic and non-economic activities when imposing public service obligations. They do so in order to reduce the amount of compensation they provide because in reality the undertaking which carries out the public service tasks cross-subsidises the cost of the non-economic activities with the profits from the economic activities.
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“Accessory” economic activities?
The ports argued that even if they carried out some economic activities, those activities were of a purely accessory or incidental nature and therefore were not covered by Article 107(1) TFEU.
The General Court responded that the fact that an entity carried out certain public tasks did not preclude it from being classified as an undertaking in respect of its economic activities. [paragraph 85] However, the Court admitted that, where a public body carries out an economic activity which can be separated from the exercise of its public powers, that entity, in respect of that activity, acts as an undertaking. But, if the economic activity is inextricably linked to the exercise of public authority, all the activities carried out by that entity remain activities related to the exercise of those powers. [paragraph 86]
In practice it is difficult to prove that economic activities are inextricably linked or inseparable from the non-economic exercise of official tasks. For example, the adoption of laws is one of the primary responsibilities of the state. Is the publication of laws a task that is inseparable from the act of legislating? The issuing of money is a state prerogative. Is the design or printing of money inseparable from the issuing of money? Incarceration of criminals is a state task. But is the running of prisons or the transport of prisoners an inseparable task? None of these ancillary activities are truly inseparable, but all of them are necessary for the completion of the public service tasks. It is their role in the completion of the tasks that is decisive rather than their inseparability. As previous judgments have indicated, what appears to matter more is whether the public authority concerned decides to carry out such ancillary tasks itself or to farm them out.
In the present case, however, the ports did not provide any evidence to show that the economic activities were inextricably linked to the exercise of public authority, such as security, control of maritime traffic or surveillance to avoid pollution. According to the Court, the mere fact that there was an economic relationship between those activities, since the economic activities of ports allowed for the total or partial financing of their non-economic activities, was not sufficient to establish an inextricable link between those activities. [paragraph 87]
Rather significantly, the Court went on to remark that the economic activities of ports were not made compulsory by reason of their non-economic activities of general interest and that, in the absence of the former, the non-economic activities would not necessarily be deprived of their usefulness. [paragraph 88]
These two links must therefore be important criteria for determining whether economic and non-economic activities can be considered to be inseparable in the sense that, as explained above, they are necessary for the completion of the public service tasks.
Alleged absence of market
The ports claimed that there was no market in which they offered their services.
The General Court’s reply was that a body with a legal monopoly could offer goods and services on a market and therefore could be an undertaking. The existence of a market for the services in question does not depend on national choices or considerations. Even if it were assumed that ports had a legal monopoly and that there were no private port operators in Belgium competing with them, there was clearly competition at EU level between various seaports to attract vessels or other service providers. There was a market for port activities even if ports had a natural and legal monopoly in Belgium. [paragraphs 98-99]
The conclusion of the General Court on this point is instructive. A single undertaking which is a legal monopoly in one country can still compete with legal monopolies in other countries in markets that transcend national borders.
Selectivity
Before considering the various arguments of the ports that the Belgian measures in their favour were not selective, the General Court summarised the findings of the Commission [paragraphs 111-123]:
- Belgian ports were exempt from corporation tax.
- Ports were in principle “companies” for the purposes of income tax and should have been subject to corporation tax.
- The fact that ports did not have a profit-seeking purpose did not mean that they were in a situation different from that of other taxable economic operators.
Then the General Court summarised the relevant case-law on the selectivity. [paragraphs 124-134] A measure is selective when it favours certain undertakings over others which, in terms of the purpose pursued by that measure, are in comparable factual and legal situation, resulting in different treatment which is discriminatory.
In order to qualify a tax measure as selective, it is first necessary to identify the common or normal tax system. Second, it must be shown that the tax measure at issue derogates from that common system in so far as it differentiates operators who, in the light of the objective pursued by that system, are in a comparable factual and legal situation. However, the concept of State aid does not cover measures where such differentiation is justified by the nature or the economy of the reference system.
Nonetheless, it must be borne in mind that the classification of a tax measure as selective does not depend on whether the companies which may qualify for a selective advantage are generally subject to the same tax burden as other firms, but on whether they benefit from a derogation, whereby the selective advantage can be defined as the difference between the normal tax burden and the taxation imposed by the measure in question.
Although in order to prove the selective nature of a tax measure the legislative technique used is not decisive and, therefore, it is not always necessary to derogate from a common tax system, the fact that there is a derogation that differentiates between comparable undertakings is critical.
Then the General Court applied the principles from the case law to the case at hand. It agreed with the Commission that the reference system was the set of the general rules for the taxation of corporations. [paragraph 141]
It also agreed with the Commission that the tax regime concerning ports was a deviation from the reference system because ports had to be subject to the tax rules concerning corporations, not those concerning legal persons. The Court analysed at length the attributes of legal persons and corporations and concluded that ports had to be subject to corporate taxation because they sought to make profit. [paragraphs 143-163]
Then the applicants argued that ports were not comparable to profit-seeking companies. They cited the landmark judgment in the Paint Graphos case where the Court of Justice found cooperatives not to be comparable to other companies. The Commission counter-argued that ports did not have the characteristics of cooperatives.
In response to this counter-argument, the General Court, rather surprisingly noted that, contrary to the Commission’s view, ports did not have to display the same characteristics as those of the cooperatives so as to distinguish them from companies subject to corporation tax. [paragraph 174]
According to the case-law, it is for the Commission to establish the a-priori selective nature of a measure, which implies that it is necessary to investigate whether, despite the particular features of ports, they are in a comparable factual and legal situation to companies subject to corporation tax. [paragraph 175]
This point is important. Since no two companies are identical, it is not sufficient to identify some differences or peculiar features of a company so as to justify its exclusion from normal taxation.
Therefore, the Court stressed that the decisive criterion used to assess the comparability of ports and companies subject to corporation tax must be based on characteristics relevant and consistent with the objectives of the reference system. [paragraph 176]
In other words what makes two otherwise distinct companies comparable and subject to the same tax is the objective of the tax itself, not their similarities in terms of sector, location, size, etc.
As regards the fact that ports have no profit-making purpose and reinvest all their profits in port infrastructure in order to fulfil the tasks of public interest entrusted to them, the General Court noted that the objectives of general interest relate to the economic activities of the ports and not to their non-economic activities of general interest such as the promotion of economic growth and employment in the Flemish Region. The Court also noted that other entities reinvested their profits and pursued objectives which went beyond their individual interest without being exempt from corporation tax. [paragraph 178]
The Court continued that even assuming that non-profit making was a key feature of ports, in order to assess the comparability of the ports and companies subject to corporation tax, the non-profit criterion was not relevant and consistent with the purpose of income taxation pursued by the reference system. [paragraph 179]
In addition, tax exemption granted on the basis of the legal form of the undertaking and the sectors in which that undertaking carries out its business which are determined by the legislature’s assessment of their social worth is generally regarded as selective. [paragraph 186]
Furthermore, when the competent authorities have a wide discretion in determining the beneficiaries on the basis of criteria which are irrelevant to the tax system concerned, such as the criterion of maintaining employment or absence of competition, then the exercise of that discretion must be regarded as favouring certain undertakings or certain sectors over others which, in terms of the objective pursued by the tax measure in question, are in a comparable factual and legal situation. [paragraph 191]
A measure can be selective even when it is not a derogation
The two ports claimed that the provisions of the tax code that applied to them were not a derogation but a different system altogether.
However, according to the General Court, even assuming that the relevant provisions were not a derogation from the reference framework in the sense that tax on legal persons constituted the relevant reference framework, the Belgian income tax system was still selective because it favoured certain undertakings – i.e. ports – even though they were in a comparable factual and legal situation to other undertakings subject to corporation tax. According to the case-law, it is not always necessary for a measure to derogate from a tax system in order to establish its selectivity. [paragraphs 194-195]
Even where it is not possible to establish that a measure derogates from a tax system, the criteria which constitute the basis of taxation under that system can confer a selective advantage by characterising the beneficiary undertakings as a privileged category on the basis of their particular characteristics. [paragraphs 196-197]
In the case of Belgian ports, the relevant legal provisions simply identified ports and exempted them unconditionally from corporation tax.
Justification by the nature or logic of the tax system
The General Court, first, explained that justification of a tax measure by the nature or logic of the tax system is possible only when the Member State in question can demonstrate that the measure derives directly from the fundamental or guiding principles of its tax system. In addition, a distinction must be drawn between, on the one hand, the objectives set out in a particular tax regime which are exogenous to that scheme and, on the other hand, the mechanisms inherent in the tax system itself which are necessary for achieving those objectives. [paragraph 207]
Then the Court recalled that principles that have been found to be inherent in tax systems are, for example the avoidance of double taxation or the prevention of abuse. By contrast, objectives such as promoting international competitiveness, protecting employment or supporting social organisations are exogenous to tax systems. [paragraph 208]
The General Court concluded that, in the present case, the concepts of general interest, non-profit making and the public or private nature of port entities had nothing to do with the nature and logic of the Belgian income tax system.
Consequently, the arguments put forward by the ports that were exempt from corporation tax because they did not distribute their surplus but reinvested it, that they pursued objectives which went beyond their individual interest, that they did not seek to make profit, that they were public authorities and carried out duties of general interest, were not sufficient to justify tax treatment more favourable than that of other companies in the light of the objectives of the reference tax system.
The appeal was dismissed in its entirety.
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[1] The full text of the judgment in languages other than English can be accessed at:
