Introduction
On 17 April 2024, the General Court ruled, in case T-112/22, Ideella föreningen Svenska Bankföreningen med firma Svenska Bankföreningen, Näringsverksamhet & Länsförsäkringar Bank v Commission, that a Swedish tax on only nine banks was not selective by not taxing the many smaller banks.1
The applicants, a Swedish banking association and a Swedish bank, respectively, sought the annulment of Commission decision SA.56348 on a Swedish tax on credit institutions. The Commission had considered that the tax measure, which taxed large banks, was not selective and therefore did not constitute State aid for the smaller banks. The purpose of the tax was to generate revenue that could be used to cover losses in case a systemic bank would default. Even though only nine banks were liable for the tax, the Commission concluded that the tax and its thresholds were not discriminatory.
The applicants claimed that their procedural rights had been infringed because the Commission ought to have experienced serious difficulties in determining that the tax did not constitute State aid and therefore it should have opened the formal investigation procedure.
The obligations of the Commission during the preliminary examination of a public measure
The General Court began its analysis by noting the difference between the review of State aid under Article 108(3) TFEU and the formal investigation under Article 108(2) TEFU where any interested party has the right to submit comments. In case of serious doubts concerning either the existence of State aid or the compatibility of the aid with the internal market, the Commission must open the formal investigation procedure.
“(24) Evidence of the existence of such doubts, which requires investigation of both the circumstances in which the decision not to raise objections was adopted and its content, must be adduced by the applicant seeking the annulment of that decision on the basis of a body of consistent evidence”.
“(25) In that context, if the examination carried out by the Commission during the preliminary examination procedure is insufficient or incomplete, this constitutes an indication of the existence of serious difficulties in the assessment of the measure at issue, which should have triggered the Commission’s obligation to initiate the formal investigation procedure”.
“(26) Lastly, the concept of ‘serious difficulties’ is an objective one. It follows that judicial review by the Court of the existence of serious difficulties cannot be restricted to consideration of whether or not there has been a manifest error of assessment”.
Then the General Court examined the plea of the applicants concerning the selectivity of the Swedish bank tax.
Concept of selectivity
The General Court, first, referred to the definition of selectivity in the case law.
“(30) So far as concerns the condition relating to whether a selective advantage is given, it requires a determination as to whether, under a particular legal regime, the national measure at issue is such as to favour ‘certain undertakings or the production of certain goods’ over other undertakings which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and which accordingly suffer different treatment that can, in essence, be classified as discriminatory”.
Then the General Court reiterated the three-step test that is applied to tax measures.
“(32) In order to classify a national tax measure as ‘selective’, the Commission must begin by identifying the reference system, that is the ‘normal’ tax system applicable in the Member State concerned, and demonstrate, as a second step, that the tax measure at issue is a derogation from that reference system, in so far as it differentiates between operators who, in the light of the objective pursued by that system, are in a comparable factual and legal situation. The concept of ‘State aid’ does not, however, cover measures that differentiate between undertakings which, in the light of the objective pursued by the legal regime concerned, are in a comparable factual and legal situation, and are, therefore, a priori selective, where the Member State concerned is able to demonstrate, as a third step, that that differentiation is justified, in the sense that it flows from the nature or general structure of the system of which those measures form part”.
In the present case, the applicants disputed the Commission’s examination of the first two steps of the selectivity test.
The General Court recalled how the Commission concluded that the tax measure was not selective.
Since the bank tax was a special tax not linked to or deviating from any other tax, it was itself the reference system. Therefore, the Commission had to assess whether its scope was too narrow. For this reason, “(34) the Commission concluded, first, that the reference system had
not been configured according to manifestly discriminatory parameters and, second, that the fact that certain types of operators or operators whose aggregate liabilities were below the threshold set in the draft law [i.e. they were non-systemic banks] were not liable to pay the tax did not constitute a derogation from the reference system in so far as those operators were not, in the light of the objective of the tax, in a factual and legal situation similar to that of the banking institutions subject to that tax.”
Consequently, the Court examined the various elements of the tax.
The objective of the tax
The applicants argued that the objective of the tax was biased in so far as it singled out large credit institutions despite the fact that all credit institutions were likely to create problems for the economy in the event of a financial crisis.
The General Court, first, observed that “(39) the aim of the tax is to strengthen public finances by improving them and keeping public debt at a low level in order to provide room to cope with future financial crises.”
“(40) However, not all credit institutions pose the same risk to the operation of the financial system. Large credit institutions form such an important part of that system that their failure or serious disruption would, on an individual basis, present a systemic risk and have a very negative impact on that system and on the economy in general. Thus, the problems of one of the large credit institutions can quickly spread throughout the banking system.”
“(42) Credit institutions subject to the tax account for 90% of the total liabilities of all credit institutions operating in Sweden. […] Consequently, the applicants have not demonstrated that the failure of those credit institutions not subject to the tax, even taken collectively, would pose a systemic risk and would have a very negative impact on the financial system and on the economy in general, thus giving rise to significant indirect costs for society.”
The reference system
The applicants argued that elements of the reference system were inconsistent with the objective of the tax.
The General Court, first, recalled that “(46) where the tax measure in question is inseparable from the general tax system of the Member State concerned, reference must be made to that system. On the other hand, where it appears that such a measure is clearly severable from that general system, it cannot be ruled out that the reference framework to be taken into account may be more limited than that general system, or even that it may equate to the measure itself, where the latter appears as a rule having its own legal logic and it is not possible to identify a consistent body of rules external to that measure […] A measure is capable of constituting its own reference framework where it introduces a clearly defined tax regime which pursues specific objectives and is therefore different from any other tax regime that is applied in the Member State concerned”.
In the present case, the Commission defined the reference system to be the tax itself.
“(48) The Court notes that the characteristics constituting the tax form, in principle, the reference system or the ‘normal’ tax regime for the purposes of analysing the condition of selectivity. That said, it cannot be ruled out that those characteristics may reveal a manifestly discriminatory element, which it is, however, for the applicants to demonstrate”.
“(49) In order to assess whether the characteristics of the tax indicate a manifestly discriminatory element, it is necessary to determine whether the choice of criteria for taxation, by favouring certain credit institutions, appears inconsistent in the light of the objective of that tax”.
“(50) Outside the spheres in which EU tax law has been harmonised, it is the Member State concerned which determines, […], the characteristics constituting the tax, which define, in principle, the reference system or the ‘normal’ tax regime, from which it is necessary to analyse the condition relating to selectivity. That applies in particular to the determination of the choice of tax rate, the tax base, the taxable event, the threshold and the methods for calculating the basis of assessment […] In addition, whether tax is levied at a single rate or at a progressive rate, the tax rate also forms part of the fundamental characteristics of a tax levy’s legal regime, just as the group of taxable persons does”.
Tax base
Then, the General Court examined whether the tax base established on the basis of the liabilities of credit institutions was discriminatory.
First, the Court observed that “(56) the Commission found that the size of a credit institution’s liabilities was one indicator, among others, of its overall size, its importance and the risk that its failure may pose for the macroeconomic environment in Sweden. Thus, according to the Commission, that criterion was consistent with the objective of the tax and did not reveal any manifestly discriminatory element.”
“(57) The Court notes that EU law thus does not preclude non-progressive taxation from being based on the aggregate sum of the liabilities of credit institutions. The fact that there are more relevant or more precise indicators than the aggregate sum of the liabilities of credit institutions is irrelevant in matters of State aid, since EU law on that matter seeks only to remove the selective advantages from which certain undertakings might benefit to the detriment of others which are placed in a comparable situation”.
But, is it not likely that if there are more precise indicators for identifying the tax base, there may be a misalignment between the amount of the tax paid or not paid by undertakings that, given the objective of the tax or reference system, they pose less or more risk, respectively, to financial stability? In other words, does it not follow from the logic of the tax that the tax base should correlate closely with the harm that a bank can cause in case it fails, and therefore, non- or less taxation of equally harmful banks is discriminatory and selective?
The banks liable to the tax
The applicants claimed that there was no correlation between the nine institutions subject to the tax and the institutions of systemic importance.
The General Court recalled that “(71) the Commission found that the persons liable to the tax were large credit institutions the failure or serious disruption in the activities of which could, on an individual basis, cause significant indirect costs to Swedish society in the event of a financial crisis.” “(72) In addition, other financial institutions are subject to a different and typically lighter regulatory regime, which indicates that their capacity to generate systemic risks and indirect costs is lower.”
“(74) The applicants state, however, that the undertakings to which the strictest rules of that regime apply are less likely to give rise to indirect costs, since they are less likely to fail. However, […], the tax is not aimed at credit institutions which represent a greater risk of failure, but applies to credit institutions whose failure, once materialised, may give rise, on an individual basis, to significant indirect costs for society.”
Please note the comment made above with respect to the tax base.
The General Court concluded that, “(81) first, the applicants have not called into question the ability of large credit institutions alone to cause, on an individual basis, by their failure, a systemic risk, to have a very negative impact on the financial system and on the economy in general and to generate significant indirect costs for society. Second, they have not shown that the failure of establishments not liable to the tax, even taken collectively, would have the same consequences.”
The threshold for liability to the tax
The applicants argued that the risks to financial stability did not arise only when the threshold for liability to tax had been exceeded.
Again, the General Court started its assessment by examining at the outset the contested Commission decision. “(88) The Commission stated that the threshold of SEK 150 thousand million did not constitute a manifestly discriminatory element and represented a legitimate expression of the Kingdom of Sweden’s sovereignty. Moreover, the application of that threshold would ensure that persons liable to the tax represent 90% of the aggregate balance sheet total of all credit institutions in Sweden, including the Swedish branches of foreign credit institutions.”
Then the General Court explained that “(89) according to case-law there are taxes whose nature does not preclude them from being accompanied by variation mechanisms, which may extend as far as exemptions, without those mechanisms leading, however, to selective advantages being granted. Special provisions laid down for certain undertakings by reason of situations specific to them, causing them to benefit from a variation in, or even an exemption from, tax, must not be analysed as constituting a selective advantage if those provisions do not contravene the objective of the tax in question”.
Indeed, this would be the case of progressive taxes which are levied according to the principle of ability to pay.
“(90) In addition, the Court notes that the determination of the tax threshold and of the methods for calculating the basis of assessment comes within the discretion of the national legislature and is based, in addition, on technical, complex assessments that the EU Courts have only limited powers to review”.
“(91) It is apparent from that case-law that the Kingdom of Sweden cannot be prevented, on the one hand, from introducing a tax with a tax threshold and, on the other hand, from establishing a variation mechanism that goes as far as to exempt credit institutions below that threshold, provided that those elements do not run counter to the objective of the tax.”
“(92) It is therefore necessary to examine whether that threshold runs counter to the objective of the tax or is not manifestly discriminatory.”
“(93) As regards the argument that all credit institutions give rise to indirect costs for society in the event of a financial crisis, the Court recalls that, in the present case, […], the objective of the tax is to strengthen public finances by improving them and maintaining public debt at a low level in order to provide room for coping with future financial crises by imposing a tax on large credit institutions, the failure or serious disruption of which would, on an individual basis and because of their size and importance for the functioning of the financial system, present a systemic risk and would have a very negative impact on that system and on the economy in general, thus causing significant indirect costs for society. The Kingdom of Sweden claims that the failure of a credit institution whose liabilities exceed the threshold of SEK 150 thousand million would pose such risks and would generate significant indirect costs for society.”
“(97) It is clear from the contested decision – and was not effectively disputed by the applicants […] – that the application of that threshold ensures that the persons liable to the tax represent 90% of the aggregated balance sheet total of all credit institutions in Sweden.”
“(98) It follows that the applicants have not put forward any arguments which would make it possible to regard the threshold of SEK 150 thousand million as manifestly inappropriate in the light of the objectives of the tax.”
The derogation from the reference system
The applicants claimed that there were derogations from the reference system; i.e. banks with liabilities less than SEK 150 billion were not taxed.
The General Court noted that, first, “(113) the Commission found that the tax did not constitute a derogation from the reference system in the light of the treatment of other financial institutions. It found that they do not have a liability structure that gives rise to the same degree of instability and are subject to different and less strict regulatory regimes, which indicates that they are less likely to generate a systemic risk and indirect costs.
Therefore, those institutions are not in a similar factual and legal situation as credit institutions in the light of the objective of the tax.”
“(115) Second, it found that large credit institutions may be systemically important, and have an influence and impact on the market, and were critical to the real economy, unlike smaller ones. Thus, the former are more likely to cause indirect costs in the event of a crisis. Therefore, large credit institutions are not in a similar factual and legal situation as small credit institutions in the light of the objective of the tax.”
“(116) According to settled case-law, the fact that only taxpayers satisfying the conditions for the application of a measure can benefit from a measure cannot, in itself, make it into a selective measure”.
“(117) Furthermore, […], a tax is not selective if those differences in taxation and the advantages which may flow therefrom, even if justified only by the purpose governing the apportionment of tax between taxpayers, stem from the straightforward application, without derogation, of the ‘normal’ system, if comparable situations are treated comparably and if those variation mechanisms do not misconstrue the objective of the tax concerned. Similarly, special provisions laid down for certain undertakings by reason of situations specific to them, causing them to benefit from a variation in, or even an exemption from, tax, must not be analysed as constituting a selective advantage if those provisions do not contravene the objective of the tax in question”.
“(118) On the other hand, if undertakings in a comparable situation in the light of the objective of the tax or the purpose justifying a variation thereof are not treated equally in that regard, that discrimination gives rise to a selective advantage which may constitute State aid if the other conditions laid down in Article 107(1) TFEU are met”.
“(120) As regards the existence of derogations concerning the treatment of credit institutions whose liabilities do not exceed the threshold of SEK 150 thousand million, the Court notes, […], that it is apparent from the reasons for the draft law that the objective of the tax was to strengthen public finances by improving them and maintaining public debt at a low level in order to provide room for coping with future financial crises by requiring the tax to be paid by large credit institutions, the failure or serious disruption of which would, on an individual basis and because of their size and importance for the functioning of the financial system, present a systemic risk and would have a very negative impact on that system and on the economy in general, thus causing significant indirect costs for society.”
“(123) Therefore, the applicants have not demonstrated the existence of a body of consistent evidence capable of showing that the credit institutions whose liabilities exceeded the threshold were, in the light of the objective of the tax, in a factual and legal situation comparable to that of credit institutions whose liabilities did not exceed that threshold. Furthermore, […], it is clear from the file before the Court that there was no credit institution not liable to the tax whose level of liabilities was close to the threshold of SEK 150 thousand million. The Court recalls that, […], it is not for the Court to determine whether there is conclusive evidence that there are no doubts as to the classification of the measure at issue
as aid, but, on the contrary, it is for the Court to examine whether the applicant has adduced evidence that such doubts exist.”
Conclusion
The General Court concluded that “(128) it follows from all the findings above that the applicants have not established that the Commission should have had doubts as to the classification of the tax within the meaning of Article 107(1) TFEU, which should have led it to initiate the formal investigation procedure. Consequently, the action must be dismissed in its entirety”.
