This is a rather long posting divided into two parts both of which deal with the concept of economic activity. In part I, I analyse two cases outside the field of state aid that dealt with the concepts of undertaking and economic activity. Both of them originated in legal proceedings initiated before Austrian courts.
In part II (that will come next week), I examine two Commission decisions which also deal with the notion of economic activity. The first of the two is likely to be quoted extensively in the foreseeable future. There is no other comparable decision in recent memory where the Commission went to greater lengths to investigate whether certain activities were economic or not.
This decision is notable for another reason. It concerns the only case I am aware of where the Commission accepted that it was “absolutely impossible” for Italy, which was the Member State in question, to recover incompatible state aid.
Part I
Data collection and management
In the posting of 3 July 2013, I examined the reasons which lead the European Commission to conclude that the digitization of books in libraries in the Czech Republic did not constitute an economic activity [Commission Decision SA.35529]. In its decision the Commission referred to the judgment of the Court of Justice of 12 July 2012 in case C‑138/11, Compass-Datenbank GmbH v Republik Österreich.[1]
The case was a reference for preliminary ruling concerning a possible abuse of dominance in the meaning of Article 102 TFEU by a public authority that collected certain data. Since it was not a state aid case, it may have escaped the attention of state aid professionals. Therefore, given its significance, it is worth considering what the Court said on the nature of economic activity.
The question that was put to the Court was whether the storing of data, which undertakings are obliged to report on the basis of statutory obligations, constitutes an economic activity. The implication being, of course, that the public authority responsible for the collection and management of the date could be regarded as an undertaking.
As is well established in the case law, an undertaking is any entity which engages in an economic activity, irrespective of its legal status and the way it is financed. The case law also makes it clear that an economic activity is an activity consisting of offering goods and services on a given market. This is a “functional” definition. It does not depend on institutional objectives, structure or status but on what it is actually done. Therefore, as is well understood, a public authority may indeed act as an undertaking. By contrast, activities which fall within the exercise of public powers are not economic in nature. A public entity that exercises public powers but also offers goods or services can be both a non-undertaking and an undertaking for those activities which are economic.
The decisive element is whether the various activities can be separated. As the Court observed “in so far as a public entity exercises an economic activity which can be separated from the exercise of its public powers, that entity, in relation to that activity, acts as an undertaking, while, if that economic activity cannot be separated from the exercise of its public powers, the activities exercised by that entity as a whole remain activities connected with the exercise of those public powers.” [para 38]
Furthermore, the Court made an important clarification. “The fact that a product or a service supplied by a public entity and connected to the exercise by it of public powers is provided in return for remuneration laid down by law and not determined, directly or indirectly, by that entity, is not alone sufficient for the activity carried out to be classified as an economic activity and the entity which carries it out as an undertaking.” [para 39] This means that if a public authority charges a fee for the services or data it provides, it does not necessarily become an undertaking. It is unfortunate, however, that the Court did not elaborate whether this conclusion would still hold if the fee charged by the public authority would not be simply nominal but would be sufficient to cover its full costs. My guess is that as long as the fee is linked to a compulsory activity or exercise of official powers, its level is irrelevant because there cannot be a market for such an activity.
Indeed, market interaction is, by definition, voluntary. The existence of compulsion indicates the absence of voluntary transactions. Therefore the Court found that “data collection … on the basis of a statutory obligation on those undertakings to disclose the data and powers of enforcement related thereto, falls within the exercise of public powers. As a result, such an activity is not an economic activity.” [para 40]
Income on a continuing basis
In a more recent request for preliminary ruling, the Court of Justice had another opportunity to examine the concept of economic activity. On 20 June 2013 ruled in case C‑219/12, Finanzamt Freistadt Rohrbach Urfahr v Unabhängiger Finanzsenat Außenstelle Linz on whether Article 4 of the Sixth VAT Directive 77/388 could apply to the deduction of input VAT relating to a photovoltaic installation on the roof of a residential house.[2]
The Directive applies to economic activities. In particular, it stipulates that “the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.”
In 2005 Mr Thomas Fuchs had a photovoltaic installation fitted on the roof of his house, which he used as a dwelling. The installation had no storage capacity and the whole of the electricity produced was supplied to the network on the basis of a contract. The electricity supplied to the network was subject to VAT. During the period from 2005 to 2008, Mr Fuchs fed into the network the whole of the electricity produced by his photovoltaic installation, namely 19,801 kWh. Mr Fuchs applied for reimbursement of input VAT in the amount of EUR 6,395 in connection with his purchase of the photovoltaic installation. The Finanzamt took the view that Mr Fuchs was not entitled to deduct the input VAT on the ground that he had not carried out any economic activity by operating his photovoltaic installation. Therefore, the question put to the Court of Justice was whether the operation of a photovoltaic installation with no independent power storage capability on a privately‑owned house used for residential purposes could be considered an “economic activity”.
The Court of Justice first explained that an analysis of the definitions of “taxable person” and “economic activity” shows that the scope of the term economic activities is very wide, and that the term is objective in character, in the sense that the activity is considered per se and without regard to its purpose or results. The operation of a photovoltaic installation can be regarded as falling within the concept of economic activity if it is carried out “for the purpose of obtaining income on a continuing basis.” The concept of income, the Court said, must be understood as meaning remuneration received as “consideration for the activity carried out.” [para 23] In other words, there is equivalence between the value of the activity and income received or equivalence between the value of what is supplied and the payment made by the buyer.
The property of Mr Fuchs which was used as a dwelling, was, “by reason of its very nature, capable of being used for both economic and private purposes.” [para 22] Then the Court added that “for a finding that the exploitation of tangible or intangible property is carried out for the purpose of obtaining income therefrom, it is irrelevant whether or not that exploitation is intended to make a profit.” [para 25]
“Given that the installation on the roof of the house which is used by its operator as a dwelling produces electricity which is fed into the network in return for remuneration, it must be held that the exploitation of that installation is carried out for the purpose of obtaining income therefrom.”[para 26] In addition, Mr Fuchs’s contract with the network operator was for an indefinite period. This led the Court to conclude that “the supply of electricity by that photovoltaic installation to the network takes place on a continuing and not just on an occasional basis.” [para 27] According to the Court it was not relevant that “the amount of electricity produced by that installation is always lower than the amount of electricity consumed by the operator in meeting his household needs.” [para 29]
The immediate consequence of the finding that supply of electricity from a private photovoltaic installation is an economic activity is that the VAT paid in the purchase price can be deducted from the VAT that is included in the price of electricity that he feeds into the network.
In a broader context, the question is whether this judgment has any impact on our understanding of what constitutes economic activity. Since this case concerned the interpretation of the specific provisions of a directive, the findings of the Court may not be easily generalizable. The Court appears to be saying that even if there is no likelihood that costs can be fully covered, generating income from an activity on a permanent basis is economic in nature. This seems to diverge from established case law where a decisive criterion of what does not constitute economic activity is inability to cover the full costs of the provision of a good or service [not just absence of profit]. The market would never provide a good or a service where it is not feasible in principle to cover all costs.
But I think that, in addition to the fact that this judgement has to be understood in its specific situation, persons who install photovoltaic equipment on the roofs of their houses are primarily concerned about reducing their own consumption and only in a secondary place motivated to sell excess electricity to the network. For them the benefit is not just what they can sell but more importantly what they can save in terms of reduced electricity consumption. My conclusion is that the significant element in the judgment was not the linkage between economic activity and receipt of income on a permanent basis [which was the definition in the VAT directive] but the reiteration by the Court that income is “consideration” and that economic and non-economic may co-exist.
Do you know we also publish a journal on State aid?
The European State Aid Law Quarterly is available online and in print, and our subscribers benefit from a reduced price for our events.
Part II:
Non-commercial activities and absolute impossibility to recover incompatible aid
Commission Decision 2013/284 on municipal real estate tax exemption granted to real estate used by non-commercial entities for specific purposes implemented by Italy [SA.20829][3]
This decision concerns three measures:
i) Exemption from the municipal tax on real estate for real estate used by non-commercial entities and intended for social assistance, welfare, health, cultural, educational, recreational, accommodation, sports and religious activities (Imposta Comunale Sugli Immobili, ICI).
ii) Exemption from municipal tax for non-commercial entities performing specific activities (Imposta Municipale Propria, IMU).
iii) Tax exemption for ecclesiastical institutions and amateur sports clubs (Testo Unico delle Imposte sui Redditi, TUIR).
The ICI measure
Italy claimed that the beneficiaries were not undertakings. The Commission had doubts because the non-commercial entities which benefited from the measures in question performed, at least partially, economic activities. In its decision, the Commission went to considerable lengths to explain why it accepted or rejected Italy’s reasoning.
Italy maintained that activities such as assistance for young mothers in difficulty or management of a building in the mountains where children from a parish go on their summer holidays did not constitute an economic activity. Those activities – targeting
well-defined categories of recipients – did not constitute a supply of goods or services on the market and were not in competition with the activities performed by commercial undertakings. Therefore, those non-commercial entities, operating in the public interest, could not be considered to be undertakings. Moreover, according to the Italian authorities in many cases there was no actual market for those activities. Almost all of those activities also had specific characteristics, which were claimed to be the following:
- a) they were provided free of charge or at reduced fees/prices;
- b) they were provided for purposes of solidarity and social benefit, which fell outside the scope of commercial undertakings;
- c) they had a reduced tax-paying capacity compared with commercial undertakings, which operated on market principles;
- d) they generated deficits or low income; any profit had to be reinvested in line with the entity’s objectives.
The Commission reiterated the case law defining the concept of economic activity and then went on to observe that the “functional” definition of economic activity had “three important consequences”:
“(100) First, the status of an entity under a specific national law is immaterial. This means that its legal and organisational form is irrelevant. Therefore, even an entity which is classified as an association or a sports club under national law may nevertheless be regarded as an undertaking for the purposes of Article 107(1). The only relevant criterion is whether or not the entity concerned carries on an economic activity.”
“(101) Second, the application of the state aid rules does not depend on whether the entity is set up to generate profits, since non-profit entities can also offer goods and services on the market.”
“(102) Third, the classification of an entity as an undertaking is always relative to a specific activity. An entity that carries on both economic and non-economic activities is regarded as an undertaking only with regard to the former type of activity.”
Then the Commission added that because the characteristics claimed by the Italian authorities for those activities [please see above] were not present in all cases, it could not be excluded that some of the activities of those entities were economic in nature.
The problem for the Commission was that Italian law granted tax exemptions regardless of whether the beneficiary non-commercial entities also carried out economic activities together with their other non-economic ones. The Commission gave many examples of what it considered not to be sufficient grounds for ensuring the non-economic nature of those activities. “In the health sector the main requirement was that the non- commercial
entities had concluded an agreement or a contract with the public authorities. It is clear that this condition cannot per se exclude the economic nature of the activities concerned. Similarly, as regards education, the school had to comply with teaching standards, be accessible to disabled pupils, apply collective working agreements and a non-discriminatory enrolment policy and reinvest profits in the educational activity. Again, these requirements do not exclude the economic nature of the educational activities carried on in this way. As regards cinemas, they were required to show films of cultural interest or with a quality certificate or films for children. As regards accommodation services, the requirement was that these should not be open to the public at large but to predefined categories and that the service was not provided all year round. The service supplier also had to apply prices significantly lower than market prices and the structure could not operate as a normal hotel. Once again, these conditions do not rule out the economic nature of the activities concerned.” [para 104]
“(105) The Commission also observes that, even if in most cases the activities are carried on in the public interest, this element alone does not per se rule out the economic nature of such activities. In any case, even if an activity has a social aim, this alone is not enough to preclude it from being classified as an economic activity. Furthermore, non-commercial entities may indeed have a reduced tax-paying capacity, but this does not imply the absence of any economic activity. This factor is of no relevance to a real estate tax that is based on the possession of real estate and takes no account of other elements of tax-paying capacity.”
The Commission went on to examine whether the tax exemptions could be justified by the logic or nature and the general scheme of the tax system of which they form part.
Italy argued that the differentiated treatment of activities which had a high social value and were provided in the public interest was within the logic of the taxation system. Those activities were inspired by the solidarity principle, which was a fundamental principle of both domestic and Union law. In addition, the non-commercial entities concerned shared specific social functions with the state.
The Commission rejected those arguments for being extraneous to the tax system. The fact that a constitution or state may also explicitly support solidarity, for example, is not enough to lead to the conclusion that such policy objectives form part of the logic or nature of the tax system. The only relevant objectives are intrinsic or ‘inherent” to the tax system; i.e. they are defined within the tax system itself.
The IMU measure
The IMU measure replaced the ICI measure under stricter conditions of eligibility. There was no permanent or blanket exemption for all activities of non-commercial entities. The relevant Italian law defined the “non-commercial basis” of those entities as follows:
(a) they are not-profit making;
(b) in keeping with the principles of EU law, by their nature they are not in competition with other market operators that are profit-making; and
(c) they put into practice the principle of solidarity and subsidiarity.
The Commission recognised that by referring expressly to EU law, it guaranteed in general that the activity would not be in competition with other profit-making market operators, which is an “essential characteristic of non-economic activities”.
The relevant Italian went further by imposing the following requirements:
(a) ban on distributing, even indirectly, any profits, operating surplus, funds, reserves or capital during the life of the entity, unless it is imposed by law or is in favour of entities that belong to the same structure and that perform the same activity;
(b) any profit and surplus must be reinvested exclusively in developing activities that contribute to the institutional aim of social solidarity; and
(c) if the non-commercial entity is wound up, its assets must be attributed to another non-commercial entity that performs a similar activity, unless otherwise provided by law.
On the basis of the above the Commission reached the conclusion that the beneficiary entities were not undertakings because they were obliged to offer their services free of charge or for a symbolic fee which had “no relationship” to the cost of the service. Moreover, they were not able to choose those to whom they offered services.
The TUIR measure
The application of the TUIR measure was more precisely defined in the relevant Italian law. If beneficiary non-commercial entities would carry out economic activities they would lose their favourable tax treatment. “(158) In the light of the above, the Commission considers that the legal instruments exist to ensure that abuse of the non-commercial status of ecclesiastical institutions and amateur sports clubs is effectively prevented or suppressed. The Italian authorities have also demonstrated that the competent authorities do exercise their powers of control and that both ecclesiastical institutions and amateur sports clubs can lose their non-commercial status if they carry out primarily economic activities. Therefore, ecclesiastical institutions and amateur sports clubs can lose their entitlement to the tax treatment granted to non-commercial entities in general. Consequently, there is no system of perpetual non-commercial status” and no state aid in the meaning of Article 107(1).
Non-recovery because of “absolute impossibility”
The Commission found the ICI measure to constitute state aid while the IMU and TUIR measures were not state aid. The state aid in the ICI measure was also incompatible with the internal market, therefore, it had to be recovered. In what appears to be a unique decision, the Commission accepted that the aid could not be recovered due to “absolute impossibility”. There is no other case in living memory where a Member State successfully showed that it was absolutely impossible to recover aid. So how did Italy do it?
By the very nature of the ICI measure, beneficiary entities were exempted from tax according to their status and classification as non-commercial entities, irrespective of whether their activities were economic or not. Tax or cadastral records could not disentangle the economic from the non-economic activities. For this reason the Commission accepted that it was absolutely impossible for Italy to recover the incompatible aid.
Still, however, the Commission showed surprising leniency. Its policy is to order recover of any aid that cannot be proven to benefit exclusively non-economic activities. The Italian authorities by not being able to prove how much of the activities of the beneficiary non-commercial entities were economic, they were also implicitly admitting that they could not prove that their activities were in fact non-economic in nature. Normally, the Commission should have instructed recovery on these grounds alone.
Provision of information
The second Commission decision is SA.25745 concerning a national website in Germany for auctions in insolvency proceedings (ZVG Portal).[4] The portal has been set up and financed jointly by the all the German laender. According to German law, lower courts are responsible for the compulsory auction of the property of insolvent companies. Lower courts have to publicise compulsory auctions. The portal is intended to facilitate the publicising of such auctions. The Commission examined the funding of the portal following a complaint by a private company which already provided information on compulsory auctions.
At issue was whether the portal set up by the German laender was an exercise of official authority or whether it could be regarded as an undertaking given that apparently a private provider of similar information was operational and a market evidently existed.
The first argument of the complainant was that the German laender had concluded an agreement among themselves and that was proof of voluntary market transaction rather compulsion by the state. The Commission reiterated that the notion of undertaking “has to be understood in a functional manner” meaning that what matters is the nature of the activity rather than its format. It then went on to dismiss the argument of the complainant because the laender could not compel each other to participate in the funding of the portal. They could fund it only via an agreement. This is a correct assessment. When public authorities or states cooperate they do so through agreements. But this does not mean that the activities which are the subject of those agreements become economic in nature.
Then the Commission clarified that “(29) generally speaking, unless the Member State concerned has decided to introduce market mechanisms, activities that intrinsically form part of the prerogatives of official authority and are performed by the State do not constitute economic activities.” The implication of this finding is that what constitutes economic activity in one Member State does not have to be economic in another. The state can create markets or eliminate them.
The Commission also referred to the Compass-Datenbank judgment on data collection and management which is analysed in part I of this posting and explained that “(32) the mere fact that private operators are already offering the service to publish certain information, when requested by public authorities, does not mean that, if the State carries out the same or a similar activity, this activity automatically has to be considered as ‘economic’ in nature. This should be judged rather on the kind of the activity concerned, considering also the context in which it takes place. The State does not forego the right to carry out a task, which is ‘public authority’ in nature, by acting at a point in time when private operators – perhaps due to lack of action by the State – have already taken the initiative to offer services to the same end.” The also leads to an important implication. The state can reassert its prerogatives whenever it wishes and can replace a market with its own action. In the Compass-Datenbank case there was compulsion in the supply of information by undertakings to the data bank. In the present case information is provided without compulsion but the state [i.e. the lower courts] have to publicise auctions in the context of insolvency proceedings.
And “(40) thus, the ‘market’ which the complainant refers to is one which is created by the decision, [of the state], to have the information published, … by bodies other than the officially designated organ for publication .”
Therefore, the publicising of compulsory auctions is “(44) an activity that forms part of the prerogatives of official authority, is as such performed by the State and does not constitute, not even in part, an economic activity.”
Finally, the “(49) the fact that a minimal cost of EUR 1 is paid by the court for the publication of the relevant information does not alter that finding. The entirely symbolic sum is not in itself sufficient to constitute ‘remuneration’ such as to render the activity economic in nature.” Once more we see that the fact that some payment is made is not sufficient to turn an activity into economic.
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[1] The judgment can be accessed at:
[2] It can be accessed at:
[3] OJ L 166, 18/6/2013. It can be accessed at:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:166:0024:0054:EN:PDF
[4] It can be accessed at:
http://ec.europa.eu/competition/state_aid/cases/247954/247954_1433360_92_2.pdf
