20 questions on state aid and tax

Jonathan Hare

Stephen Morse

Peter Halford

Speed read

Recent investigations by the European Commission into alleged illegal state aid represent a new front on tackling perceived corporate tax avoidance. With further investigations likely, according to the Competition Commissioner, experts at PwC and PwC Legal examine this recent phenomenon.

Jonathan Hare, Stephen Morse (PwC) and Peter Halford (PwC Legal) answer the key questions on the European Commission’s investigations into alleged illegal state aid as a way of tacking perceived corporate tax avoidance.

The relevance of state aid to taxation

1. What is state aid?

State subsidies and other aid to particular businesses or sectors can distort competition. Accordingly, the Treaty on the Functioning of the European Union (TFEU) in principle prohibits any EU member state from granting state aid without the prior approval of the European Commission. Under TFEU article 107(1):

‘Save as otherwise provided in the Treaties, any aid granted by a member state or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between member states, be incompatible with the internal market’.

Case law of the Court of Justice (CJEU) and the General Court has ruled that a finding of state aid therefore requires the following elements to be present:

an economic advantage is provided to an undertaking (Altmark Trans (Case C-280/00) para 83);
it is provided by a member state and financed through state resources (Preussen Elektra (Case C-379/98) at paras 58-62, establishing that both requirements are cumulative);
it is ‘selective’ in favour of a particular undertaking or category of undertakings or in favour of a particular category of goods (Santander (Case T-399/11)) – see further below; and
it distorts or threatens to distort competition and affects trade between member states.

2. What is fiscal state aid, and why is state aid relevant to tax?

Right from the very earliest cases on the state aid provisions of the European treaties, the CJEU has held that the concept of aid includes not only positive benefits such as subsidies, but also interventions in various forms which ‘mitigate the charges which are normally included in the budget of an undertaking’ (Steenkolenmijnen (Case 30/59)).

Since the 1970s, it has been clear that this includes exemptions and reliefs from or reductions in taxes or social security charges, if they benefit particular categories of undertakings or industry sectors (see, for example, Italy v Commission (Case 173/73)). Whilst member states have sovereignty over their own tax systems, this sovereignty must be exercised consistently with EU law. This includes complying with the state aid rules as much as with the fundamental Treaty freedoms.

In 1998, the Commission issued a Notice on the application of the state aid rules to measures relating to direct business taxation (OJ 98/C 384/03). This set out its view that direct tax measures which favour particular sectors constitute aid, as do discretionary rulings or decisions which depart from the general tax rules to the benefit of individual undertakings.

A step-change occurred in 2013/14, when the Commission began investigating the tax rulings practices of various member states including Ireland, Luxembourg and the Netherlands, and commenced investigations into rulings given to a number of individual multinational groups (namely, Apple, Starbucks, FIAT and Amazon). In its Draft Commission Notice on the notion of State aid in early 2014, the Commission laid down a marker that tax rulings that apply more ‘favourable’ discretionary tax treatment to particular businesses compared with other taxpayers in a similar factual and legal situation would be regarded as state aid.

This focus on the tax affairs of multinational groups clearly has potential implications for many multinationals operating in the EU. As explained below, the Commission has power to ‘unpick’ a tax ruling and order the relevant member state to recover from the company the amount of aid deemed to have been granted, going back up to ten years from when the Commission first began its investigations.

3. What forms does fiscal state aid take?

Fiscal state aid can encompass:

legislative measures (‘aid schemes’) that favour particular economic sectors or categories of companies, or particular regions;
discretionary rulings in favour of individual undertakings;
unduly favourable tax settlements; and
tax amnesties not open to undertakings of all sectors and sizes.

To date, most fiscal state aid investigations have concerned legislative measures and discretionary rulings. Rulings are discussed below. As regards legislative measures, it does not matter how broad the favoured sector or group of favoured undertakings is: if a beneficial tax measure is not generally available to all types of businesses, it is likely to constitute state aid. Thus in the seminal Adria-Wien Pipeline (Case C-143/99), the CJEU held that a rebate from energy taxes available only to undertakings whose activity comprised primarily the production of goods, entailed selective aid to the entire manufacturing sector. Similarly, in Commission v Gibraltar (Case C-106/09 P), the CJEU held that a proposed new system of Gibraltar company taxation entailed selective aid to the entire ‘offshore’ sector, comprising over 99% of the companies established in Gibraltar.

On the other hand, in Santander (Case T-399/11), the General Court annulled the Commission’s decision that the Spanish goodwill amortisation relief (which allowed amortisation for Spanish corporation tax purposes of shareholdings acquired in foreign companies) entailed aid to multinational businesses: the relief was available in principle to all Spanish companies if they chose to invest in foreign shareholdings, and therefore was not selective in favour of any sufficiently clearly defined category of undertakings.

4. What is the Commission’s general approach to fiscal state aid?

Looking in turn at the requisite elements of state aid, any economic advantage provided by a tax measure or ruling is, by definition, provided by the state (whether at national level or local governmental level), and financed out of state resources. Moreover, if such advantage is selective in favour of an undertaking or category of undertakings, then by definition it strengthens their position compared with other undertakings, and thereby affects the latter’s competitive position (Philip Morris (Case 730/79) para 11; Unicredito (Case C-148/04) para 56). The EU case law holds that any aid intended to relieve an undertaking of costs which it would normally have had to bear in its normal activities, in principle distorts or threatens to distort competition (Wam SpA (Case C-494/06) para 54). The case law holds further that aid will be regarded as affecting trade between member states if the relevant markets are open to international competition, such that the aid may distort competition at the expense of economic operators which might come from other member states (Mediaset (Case T-177/07)).

It follows that normally in cases of alleged fiscal aid, the key elements which cause difficulty are the requirement of an economic advantage and the requirement of ‘selectivity’. In cases involving the tax treatment of an individual undertaking (e.g. tax rulings or settlements), the pertinent issue is whether the tax authorities have provided an advantage which diverges from the ‘normal’ tax treatment in the relevant member state; if so, it will by definition be selective in favour of the relevant undertaking. In cases involving legislative measures such as tax reliefs, by definition the measure provides an economic advantage, but the pertinent issue is whether it is ‘selective’ in favour of any sufficiently clearly definable category of undertakings.

As set out in its 2014 Draft Commission Notice on the notion of State aid, and based on the CJEU case law (for example, Paint Graphos (Case C-78/08)), in analysing legislative tax measures the Commission generally applies a three-stage approach to the question of selectivity.

First, it identifies the ‘reference system’ of normal taxation in the relevant member state. In the case of a corporation tax relief, the ‘reference system’ will be the normal corporation tax rules (Paint Graphos, at para 50).

Second, it determines whether the relevant measure entails a ‘derogation’ from the reference system, liable to favour certain undertakings or the production of certain goods as compared with other undertakings which are in a similar factual and legal situation in light of the intrinsic objectives of the reference system (‘prima facie selectivity’).

Third, it determines whether the derogation is nevertheless ‘justified’ by the nature or general scheme of the reference system. Only objectives inherent to the tax system – such as preventing tax avoidance, preventing double taxation, or the progressive nature of income tax – can be relied upon to justify a prima facie selective tax measure. Extrinsic objectives – such as maintaining employment – cannot be so relied upon (P Oy (Case C-6/12)).

The 2014 Draft Notice explains that a legislative measure may be de jure selective (formally reserved for certain categories of undertaking only) or de facto selective (formulated in general terms, but in practice likely to favour a particular group of undertakings).

5. Is state aid always unlawful?

EU law does not absolutely prohibit state aid. First, ‘existing’ aid and aid schemes (including legislative measures) already in force at the time when the relevant member state joined the EEC/EU – 1 January 1973 in the UK’s case – are permitted, subject to ongoing review by the Commission. However, if, on review, the Commission concludes that an ‘existing aid’ is incompatible with the internal market, it must require the member state to abolish it with effect for the future, within a specified period of time.

Second, TFEU article 107(2) automatically permits certain very limited categories of aid, which are deemed compatible with the internal market.

Third, and more pertinently to tax measures, article 107(3) gives discretion to the Commission to approve, as being compatible with the internal market, aid falling under a number of rather broader categories. In a tax context, the most significant is article 107(3)(c), which permits the Commission to approve ‘aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’.

The Commission has sole competence to approve state aid (falling within the categories in article 107(3)) as compatible with the internal market. Where a member state proposes to introduce a new measure likely to entail state aid (for example, a legislative exemption likely to favour a particular sector, region or category of undertakings), it must first notify it to the Commission under article 108(3). The Commission’s decision on compatibility must balance the positive impact of the aid measure against its potential negative effects of distortion of competition. Pending the Commission’s final decision, the member state is prohibited from implementing the aid (article 108(3), final sentence – the ‘standstill clause’).

Fourth, the Commission has enacted a large number of block exemptions (currently in Commission Regulation (EU) No. 651/2014), exempting specified categories of aid from the notification and approval process, under strictly defined conditions. For example, these include aid to SMEs, aid for environmental protection and aid for research and development, each within specified limits and subject to strict conditions. The Commission has also exempted ‘de minimis’ aid, permitting aid of up to €200,000 to any single undertaking or corporate group over any period of three fiscal years.

6. Is state aid only relevant for EU entities?

The European Economic Area (EEA) Agreement of 1993 contains broadly similar state aid rules (in article 61) to those in TFEU article 107. Accordingly, similar state aid rules to those applicable in the EU apply in relation to undertakings established in Iceland, Liechtenstein and Norway.

In addition, the bilateral free trade agreement of 1972 between Switzerland and the EU contains more limited state aid rules. However, where state aid is found to have been granted by Switzerland and to be incompatible with the 1972 agreement, the only consequence is that Switzerland is required to abolish it within three months. In particular, there is no provision under the 1972 agreement for recovery of historic aid.

The consequences of unlawful state aid

7. How does a state aid investigation start?

As explained under Q5, the ‘standstill clause’ in TFEU article 108(3) prohibits the grant of ‘new’ aid (i.e. aid not provided under legislation already in force when the member state acceded to the EU or EEC) not exempted under a block exemption, unless it is first notified to and approved by the Commission. Aid granted in breach of the standstill clause is defined as ‘unlawful aid’ (Council Regulation (EU) 2015/1589 (the consolidated ‘Procedural Regulation’), article 1(f)).

The standstill clause can be enforced in two ways. First, the Commission may open an investigation. Second (often in tandem), an interested party such as a competitor of the alleged aid beneficiaries may seek to initiate proceedings.

The Commission may on its own initiative examine information from any source regarding alleged unlawful aid. It is legally obliged to examine any complaint about alleged unlawful aid submitted by an ‘interested party’ whose interests might be affected by the grant of aid, such as a competitor of the alleged aid beneficiaries (Procedural Regulation, article 12(1)). Complaints by competitors are a common trigger for an investigation. Investigations may also be triggered by information received from any other source. The Commission has extensive powers to require the member state to provide further information.

If, following preliminary examination, the Commission forms a prima facie view that a measure comprises unlawful aid and it has doubts whether the alleged aid is compatible with the internal market, it must initiate the ‘formal investigation procedure’. This procedure can take more than a year. If, following formal investigation, the Commission concludes that the measure or decision comprises aid incompatible with the internal market, it must so determine (a so-called ‘negative decision’), and must order the member state to recover the aid from the beneficiaries with interest (Procedural Regulation, article 16).

8. What happens if unlawful aid is found to have been granted?

As noted above, if the Commission concludes that a measure has entailed the grant of aid incompatible with the internal market, it must order the member state to recover it from the beneficiaries together with interest from the date of payment to the date of repayment (Procedural Regulation, article 16(2)). (For how the member state or the alleged aid beneficiaries can challenge the Commission’s decision, see Q16 below in relation to actions for annulment.)

The purpose of ordering recovery is to restore the competitive position as it was before the aid was granted (‘status quo ante’) (Unicredito (Case C-148/04)). The interest (‘illegality interest’) must be compounded annually (Commission Regulation (EC) No. 794/2004, article 11(2)). Recovery must be effected in accordance with the procedures under the national law of the member state, provided that they allow immediate and effective execution of the Commission’s decision (Procedural Regulation, article 16(3)). If procedures under national law do not allow execution, it appears that they will need to be amended, as the member state is under an obligation to give effect to the Commission’s decision.

The Commission’s power to order recovery is subject to a ten year limitation period (Procedural Regulation, article 17(1)). However, any action taken by the Commission (or by a member state at its request) with regard to the unlawful aid interrupts the limitation period and starts time running afresh (article 17(2)). This means that the Commission can order recovery of aid going back ten years from the date when it first commenced its investigations.

Even if the member state or an (alleged) aid beneficiary has applied for annulment of the Commission’s decision on grounds of unlawfulness, this does not automatically suspend recovery. Moreover, absolute impossibility of recovery is not a defence unless the company is liquidated and has no recoverable assets (Commission v Spain (Case C-499/99)). Recovery is, however, prohibited if it would be contrary to a fundamental EU right. It may, therefore, be a defence to recovery that the Commission (but not the member state) has created a legitimate expectation that a measure will not be regarded as constituting aid. In the Spanish goodwill negative decision (2011/5/EC, OJ 2011/L 7/48), the Commission ruled that a response to a question in the European Parliament in January 2006, when a Commissioner had answered that the Spanish goodwill amortisation relief did not comprise state aid, created a legitimate expectation. Accordingly, it only ordered recovery of amortisation relief granted in respect of shareholdings acquired after the Commission’s decision on 21 December 2007 to initiate the formal investigation.

Where the company which received the aid has since been sold at an arm’s length price, the aid must be recovered from the vendor (Banks (Case C-390/98), para 77). However, the recovery order can be extended to the purchaser if the acquisition was at less than market value (Commission v Germany (Case C-277/00), para 72).

The recovery order requires the aid beneficiary to repay the aid to the member state which granted it. In the context of fiscal state aid, however, this has recently led to suggestions that it is unfair that the member state which granted the unlawful aid should profit from its recovery. On 19 January 2016, the European Parliament passed a resolution calling on the Commission to amend the rules to provide for recoveries instead to be paid to ‘the member states which have suffered from an erosion of their tax bases’, or to the EU budget.

9. How is the amount of aid to be recovered calculated?

In the case of fiscal aid, the amount to be recovered will generally be the tax that would have been payable had it not been for the measure ruled to constitute aid. Thus, where a particular tax exemption, relief or reduction is held to comprise aid, the amount to be recovered will be the amount of tax (going back up to ten years from when the Commission commenced its investigations) which would have been payable if the exemption, relief or reduction had not been granted.

On the other hand, recent case law of the General Court has held that where a tax is intended to be, and is, passed on to a business’s customers, and a reduction in the tax comprises unlawful state aid, the amount of the aid falling to be recovered is limited to the consequential economic advantage actually retained by the business: see Aer Lingus (Case T-473/12) and Ryanair (Case T-500/12) (concerning the reduced rate of Irish air travel tax of €2 per ticket for flights of less than 300km, compared with the rate of €10 for longer flights). However, the Commission has appealed against these decisions to the CJEU, which is expected to hear the appeals in 2016 or 2017.

10. Can the recovery of aid give rise to foreign tax credits?

This is a complex area which will need to be looked at on a case-by-case basis. The answer may depend in part on the method chosen by the relevant member state to recover the aid. One improvement to the state aid rules that has been called for is a measure to clarify that in fiscal state aid cases, the amount recovered is actually tax.

The current investigations

11. What are the current investigations about?

In 2013 and 2014, the Commission commenced preliminary examination of specific advance transfer pricing rulings given (a) by the Netherlands to Starbucks and (b) by Luxembourg to FIAT and to Amazon; and of branch profits rulings given by Ireland to Apple. In June and October 2014 it initiated the formal investigation procedure in relation to these rulings, setting out its preliminary view in each case that the rulings comprised state aid and that it had doubts as to their compatibility with the internal market. In each case, the Commission’s preliminary view was that the rulings diverged from the ‘arm’s length principle’ and therefore provided the respective groups with a selective economic advantage.

In October 2015, the Commission concluded its investigations into the rulings given to Starbucks and FIAT, issuing negative decisions with recovery orders and estimating the amount to be recovered as €20-30m in each case. Its investigations into the rulings given to Apple and Amazon are still ongoing, with decisions expected in the first half of 2016.

The Starbucks and FIAT decisions – and therefore the Commission’s detailed grounds for its final conclusions – are not yet publicly available: the member state and the beneficiaries are given the opportunity to redact confidential information before publication, which can take months. We do, however, have a brief summary in a Commission press release issued on 21 October 2015.

In Starbucks’ case, the press release states that, in the Commission’s view, the Netherlands tax ruling agreed an inflated royalty (not reflecting arm’s length market value) to a UK limited partnership for coffee-roasting knowhow, and an inflated price paid to a Swiss affiliate for green coffee beans, thereby reducing the group’s taxable profits in the Netherlands. In FIAT’s case, the press release states the Commission’s view that the group financing company’s taxable profits were agreed on the basis of a capital base lower than it would have expected in an equivalent independent lending enterprise, and a return on capital lower than market rates.

In Amazon’s case, the Commission’s October 2014 opening letter opined that the tax ruling agreed an excessive royalty paid by the Luxembourg operating company (LuxOpCo). Further, in the Commission’s view, LuxOpCo’s taxable profits were calculated inappropriately on the basis that the royalty was a variable royalty leaving LuxOpCo with a limited mark-up on costs. In addition, the Commission noted that no transfer pricing report appeared to have been provided to the Luxembourg authorities, and the ruling had remained in force without amendment for more than ten years despite the expansion of Amazon’s business over that period.

In Apple’s case, the Commission’s June 2014 opening letter likewise noted that it was concerned by the apparent lack of a transfer pricing report, and by the duration of the rulings (one of which remained in place without amendment for more than 15 years) given Apple’s growth during that period. It alleged further that the rulings were ‘negotiated rather than substantiated by reference to comparable transactions’, and ‘reverse engineered’ to arrive at taxable income of around $30–40m a year, a figure which the Commission considered to be lower than a comparable independent enterprise would have made.

12. Are the investigations only into individual rulings given to specific companies?

The Commission is reviewing tax rulings practices across the EU generally. In most cases its examinations are at the preliminary stage. However, in addition to its formal investigations into the rulings given to the four groups mentioned above, in February 2015 it opened a formal investigation into Belgium’s ‘excess profit tax ruling system’, concluding this investigation with a negative decision and recovery order on 11 January 2016.

This investigation differs from the others – it is into a regime as a whole rather than into specific rulings given to particular taxpayers. The Belgian ‘excess profit’ regime permits a downwards transfer pricing adjustment of a Belgian group company’s profits, to the extent that they would have been attributable to another group company if the pricing between them had been at arm’s length.

Once again, the Commission’s final decision is yet to be published, but we do have a press release issued on 11 January 2016; this records the Commission’s conclusion that in its view the ‘excess profit’ rulings practice gives multinationals a selective advantage compared with stand-alone companies and purely domestic Belgian groups, which cannot benefit from this treatment. It also records the Commission’s conclusion that the rulings diverge from the ‘arm’s length principle’ because the Belgian subsidiary’s profits are ‘discounted unilaterally’: in its view, in an independent situation the ‘excess profit’ would be shared out amongst all participating entities. Further, the Commission’s view is that these downwards adjustments cannot be justified on grounds of the prevention of double taxation, since the regime does not require the group to show that the ‘excess profit’ was actually taxed elsewhere and thus, on the contrary, potentially gives rise to double non-taxation.

The Commission has ordered Belgium to recover the ‘full unpaid tax’ from at least 35 multinational groups that it says have benefited from the regime. The Belgian government is required to calculate the precise amounts of tax to be recovered, but the Commission has estimated that they amount to at least €700m.

13. What is the significance of an individual tax ruling to an investigation?

The Commission makes clear in its 2014 Draft Commission Notice on the notion of State aid that tax rulings that merely interpret tax legislation, without deviating from the case law and generally available administrative practice, will not give rise to a presumption of aid. As the current Competition Commissioner, Margrethe Vestager, has stated, tax rulings give companies certainty and clarity as to how their tax will be calculated and, as such, are ‘perfectly legal’.

However, the Commission will regard tax rulings as providing a selective advantage if they have the effect of ‘granting the undertakings concerned lower taxation than other undertakings in a similar legal and factual situation’ (2014 Draft Notice, para 176). The 2014 Draft Notice states that, in particular, advance rulings may involve selectivity where the tax authorities have significant or undue discretion in granting rulings.

Nevertheless, the CJEU’s judgment in P Oy (Case C-6/12) acknowledges that the application of any tax system requires judgment by the tax authorities. Provided that such judgment is exercised within well-defined and transparent parameters relating to the relevant tax system, in principle this will not entail state aid. If, however, the authorities have a broad discretion based on criteria unrelated to the tax system – such as maintaining employment – this may be regarded as selective (P Oy, para 27).

14. What is the interaction between state aid and transfer pricing?

The Commission appears to be concerned that some member states may be providing selective favourable treatment to multinationals as compared with stand-alone companies or purely domestic groups. This has led it to focus in particular on whether member states are, in its view, properly and adequately applying ‘arm’s length’ transfer pricing standards.

This focus by the Commission on what it considers to be the proper ‘arm’s length’ standard appears to represent a departure from the approach to the questions of selectivity and ‘advantage’ in the case law of the EU courts, and also from the Commission’s own prior decision-making practice. Up to this point, the question of selectivity had been determined by reference to a derogation from the member state’s own reference system of ‘normal’ taxation, rather than a comparison with best practice or international standards.

This potentially leads to difficulties because different member states have adopted and interpreted the OECD Transfer Pricing Guidelines differently. Indeed, it remains to be seen to what extent the Commission considers the OECD guidelines to be relevant. In the press release regarding the Belgian ‘excess profit’ regime, the Commission referred to ‘the arm’s length principle under EU state aid rules’. This could potentially result in two supra-national bodies – the Commission on the one hand and the OECD on the other – developing different transfer pricing standards.

15. Are the current investigations into rulings only focused on transfer pricing?

On 3 December 2015, the Commission opened a formal investigation into tax rulings given by Luxembourg to McDonald’s. The full text of the opening letter is not yet available, but a Commission press release indicates that it considers that the rulings entail state aid, because Luxembourg agreed that the profits of the US branch of McDonald’s Luxembourg subsidiary were exempt from Luxembourg tax under the US/Luxembourg double tax treaty despite those profits not being subject to US tax.

This is the first time the Commission has challenged a member state’s application of a double tax treaty under the state aid rules. The press release emphasises the Commission’s focus on double non-taxation within the EU. However, EU jurisprudence acknowledges that in the absence of harmonisation of member states’ tax systems, double taxation can arise (see Kerckhaert & Morres (Case C-513/04)); and by logical extension the same could apply to double non-taxation. A key part of the debate in this investigation will be the extent to which any advantage can be said to arise from a unilateral act by Luxembourg (and hence potential state aid) or, on the contrary, from a disparity between Luxembourg’s and (in this case) the US’s tax systems.

In this regard it is worth noting that when the Commission issued its ‘no aid’ decision in respect of the proposed (but never in fact implemented) Dutch ‘group interest box’ regime in 2009 (decision 2008/809/EC, OJ 2009/L 288/26), it specifically accepted that the Netherlands could apply a reduced rate of tax to intra-group interest even if the interest was tax-deductible at the full rate applicable in the payer’s jurisdiction. It ruled that any tax advantage arose not simply from the proposed lower Dutch rate for intra-group interest received, but from the unlimited deduction for intra-group interest in the payer’s jurisdiction and from the difference in tax rates due to lack of tax harmonisation (see recitals (113)–(114)); it therefore would not comprise state aid provided by the Netherlands.

What will happen next?

16. Can a taxpayer challenge a Commission decision?

A Commission negative decision is addressed only to the member state alleged to have granted the unlawful aid. Under TFEU article 263, however, either the member state or any interested person to whom the decision is of ‘direct and individual concern’ – including in particular the alleged aid beneficiaries – may apply to the General Court for its annulment on grounds of (amongst others) error of law or manifest error of facts. An annulment action must be brought within two months of the publication of the measure, or its notification to the plaintiff, or, in the absence thereof, the day on which it came to the knowledge of the latter, as the case may be.

The beneficiary may also challenge the member state’s implementation of the decision by way of defence against recovery in the national courts.

The Netherlands and Luxembourg governments have brought annulment actions in respect of the Starbucks and FIAT decisions, and it is likely that an annulment action will similarly be brought in respect of the Belgian ‘excess profit’ regime decision. However, it can take several years before such action reaches a hearing before the General Court.

A further appeal to the CJEU is available against the decision of the General Court on points of law only (TFEU article 256(1)).

17. Will the EU courts agree with the Commission?

As described above, in the last few years the Commission has expanded its application of the state aid rules in the area of taxation, and in particular direct taxation. It remains to be seen whether the EU courts will support this approach.

In the recent Spanish goodwill cases (Autogrill (Case T-219/10) and Santander (Case T-399/11)), the General Court annulled the Commission’s decision that the Spanish goodwill amortisation relief (which applied only in relation to acquisitions of foreign shareholdings) was selective in favour of ‘certain groups of undertaking which made certain investments abroad’ (Autogrill, para 63). The General Court did not consider that this was an ‘inherent characteristic’ sufficient to distinguish the beneficiaries from other undertakings (para 67). Any undertaking could invest in shares in a foreign company, and so the relief was in principle available to all undertakings (para 61).

The Commission has appealed to the CJEU against the judgments of the General Court, and the appeals can be expected to be heard in 2016. If, however, the CJEU upholds the General Court’s judgments, this may call into question the Commission’s current approach to the question of selectivity in relation to tax measures.

18. Are we likely to see further investigations?

Ms Vestager has indicated that further Commission investigations are likely. It remains to be seen what the focus of such investigations will be.

Other related EU developments

19. What else is happening in the EU?

The Commission’s increased focus on fiscal state aid is in part a reflection of its concern with ‘aggressive’ tax planning and a perceived general lack of tax transparency. As such, it can be seen as part of a wider spectrum of EU measures directed against perceived tax avoidance. These include:

the agreement of the ECOFIN Council of EU finance Ministers on 6 October 2015 on a Council Directive requiring, from 1 January 2017, automatic exchange between all member states and the Commission of all tax rulings; and also
the Commission’s ‘anti-tax avoidance package’ which was announced on 28 January 2016.

The package has various elements including:

the proposed extension of the Directive on mandatory automatic exchange of information in the field of taxation (Council Directive 2011/16/EU) to include the exchange between member states’ tax authorities of taxpayers’ country-by-country reporting information; and
a proposed new Anti-Tax Avoidance Directive.

This proposed new Directive would require member states to enact:

controlled foreign company rules for low tax subsidiaries;
a ‘switch-over’ rule replacing exemption with credit for foreign tax on dividends and PE income from low tax third countries;
an ‘exit charge’ on assets moved from a member state;
an interest limitation rule;
an anti-hybrid rule; and
a general anti-abuse rule.

Practical application

20. What is the key takeaway for businesses on state aid?

The application of the state aid rules to the tax treatment of cross-border transactions is a rapidly developing area that needs close monitoring.

In the meantime, businesses may wish to review any tax rulings they have received, to confirm that they represent a correct implementation of the relevant domestic provisions and, where appropriate, accord with any international standards. Given the nature of the current investigations, it appears that the focus of any such review should be on arrangements that give rise to low or no taxation in the EU. It will also of course be important to ensure that the actual facts of a particular arrangement accord with those set out in the tax ruling, and that there is sufficient and appropriate documentation in place to support the ruling. This will especially be the case where for example the arrangements have evolved over time, the underlying business activity has developed or grown, or both.

Going forward, businesses may wish to establish a framework within which to assess any proposed new arrangements against the state aid criteria.

Issue: 1298
Categories: Analysis , Anti-avoidance , Compliance , Corporate taxes , International taxes , Investigations , Litigation , Tax policy , Tax policy & administration , state aid

State aid and tax: the US view

State aid and tax: where next?

The consequences of unlawful state aid

The European Commission’s anti-tax avoidance package

The EC state aid ruling on the Belgian ‘excess profit’ tax scheme

The Austrian goodwill case: treaty freedoms and state aid

30 questions on BEPS

20 questions on the diverted profits tax

Speed read

The relevance of state aid to taxation

1. What is state aid?

Case law of the Court of Justice (CJEU) and the General Court has ruled that a finding of state aid therefore requires the following elements to be present:

an economic advantage is provided to an undertaking (Altmark Trans (Case C-280/00) para 83);
it is provided by a member state and financed through state resources (Preussen Elektra (Case C-379/98) at paras 58-62, establishing that both requirements are cumulative);
it is ‘selective’ in favour of a particular undertaking or category of undertakings or in favour of a particular category of goods (Santander (Case T-399/11)) – see further below; and
it distorts or threatens to distort competition and affects trade between member states.

2. What is fiscal state aid, and why is state aid relevant to tax?

3. What forms does fiscal state aid take?

Fiscal state aid can encompass:

legislative measures (‘aid schemes’) that favour particular economic sectors or categories of companies, or particular regions;
discretionary rulings in favour of individual undertakings;
unduly favourable tax settlements; and
tax amnesties not open to undertakings of all sectors and sizes.

4. What is the Commission’s general approach to fiscal state aid?

5. Is state aid always unlawful?

Second, TFEU article 107(2) automatically permits certain very limited categories of aid, which are deemed compatible with the internal market.

6. Is state aid only relevant for EU entities?

The consequences of unlawful state aid

7. How does a state aid investigation start?

8. What happens if unlawful aid is found to have been granted?

9. How is the amount of aid to be recovered calculated?

10. Can the recovery of aid give rise to foreign tax credits?

The current investigations

11. What are the current investigations about?

12. Are the investigations only into individual rulings given to specific companies?

13. What is the significance of an individual tax ruling to an investigation?

14. What is the interaction between state aid and transfer pricing?

15. Are the current investigations into rulings only focused on transfer pricing?

What will happen next?

16. Can a taxpayer challenge a Commission decision?

The beneficiary may also challenge the member state’s implementation of the decision by way of defence against recovery in the national courts.

A further appeal to the CJEU is available against the decision of the General Court on points of law only (TFEU article 256(1)).

17. Will the EU courts agree with the Commission?

18. Are we likely to see further investigations?

Ms Vestager has indicated that further Commission investigations are likely. It remains to be seen what the focus of such investigations will be.

Other related EU developments

19. What else is happening in the EU?

the agreement of the ECOFIN Council of EU finance Ministers on 6 October 2015 on a Council Directive requiring, from 1 January 2017, automatic exchange between all member states and the Commission of all tax rulings; and also
the Commission’s ‘anti-tax avoidance package’ which was announced on 28 January 2016.

The package has various elements including:

the proposed extension of the Directive on mandatory automatic exchange of information in the field of taxation (Council Directive 2011/16/EU) to include the exchange between member states’ tax authorities of taxpayers’ country-by-country reporting information; and
a proposed new Anti-Tax Avoidance Directive.

This proposed new Directive would require member states to enact:

controlled foreign company rules for low tax subsidiaries;
a ‘switch-over’ rule replacing exemption with credit for foreign tax on dividends and PE income from low tax third countries;
an ‘exit charge’ on assets moved from a member state;
an interest limitation rule;
an anti-hybrid rule; and
a general anti-abuse rule.