3. A Selective View of Recent Case Law on Selectivity
Alfonso Lamadrid
4. The Dynamics of Selectivity in Tax Ruling cases
Daniela Gschwindt
5. Selectivity in the Tax Ruling Cases: vulnerant omnes, ultima necat
Dimitrios Kyriazis
6. Selectivity and the Reference Framework: the Evolution in the Spanish Goodwill Saga
Jacques Derenne & Ana Álvarez Vidal
7. Selectivity in the Spanish Tax Lease case: Discretion of Public Authorities
López Ridruejo & Alexandre Picón
8. Selective Advantage in Tax Rulings: all the Chapters bring the Saga to one End
Nieves Bayón Fernández
9. Selectivity and Discrimination in Light of the Recent Ryanair v Commission Cases (C-209/21, C-210/21, C-320/21, C-321/21)
Juan Jorge Piernas López
10. Turbulence in the State Aid Sky: Selectivity as a New Justification for Discrimination under Articles 107(2)(b) and 107(3)(b) TFEU? An Analysis of the Ryanair-COVID cases
Sébastien Thomas
11. Discriminatory Subsidies in the European Aviation Market?
Alexander Heger
12. And now for Something Somewhat Different: an Economist’s Take on Selectivity
Simon Yarak & Nicole Robins
Editorial
Lena Hornkohl and David Pérez de Lamo
The concept of “selectivity” has taken centre-stage in the EU Courts’ recent case law in the field of State aid. In the last years, the EU Courts have delivered notable judgments concerning, inter alia:
• the “three-step test” for material selectivity in aid schemes, particularly on the definition of the relevant framework and derogation therefrom (i.e. the “first and second steps”) (Engie, C-451/21 P and C-454/21 P; Amazon, C-457/21 P; Fiat, C -885/19 P and C -898/19 P; Apple, T-778/16 and T-892/16, Starbucks, T-760/15 and T-636/16; among others);
• whether a derogation of general scope from the relevant framework can be selective (the Spanish Goodwill saga: Commission v World Duty Free, C-20/15 and C-21/15; and World Duty Free v Commission, C-51/19 and C-64/19; among others);
• when discretionary powers lead to selectivity (the Spanish Tax Lease saga: Lico Leasing, C-128/16 and T-515/13 RENV and T-719/13 RENV, among others);
• the relationship between selectivity and non-discrimination on grounds of nationality and free movement provisions (the Ryanair v Commission saga: Swedish Scheme C-209/21; French Scheme, C-210/21; SAS Sweden, C-320/21; SAS Denmark, C-321/21; among others);
• the Commission’s duty to reason the selectivity of a measure when opening the formal procedure (EDP España and Naturgy Energy Group v Commission, C-693/21 P and C-698/21 P; Comunidad Autónoma de Galicia and Retegal v Commission, C-70/16 P).
In other words, we selected the topic of “Selectivity in State Aid”, as much as it selected itself… This gave us the opportunity to invite a series of well-known but also young academics, practitioners and officials, which shared their views from a horizontal perspective:
• “Selectivity – Horizontal Reflections” by Leo Flynn
• “A selective View of recent Case Law on Selectivity ”, by Alfonso Lamadrid …and on particular topics:
• “ The dynamics of selectivity in tax ruling cases”, by Daniela Gschwindt;
• “Selectivity in the tax ruling cases: vulnerant omnes, ultima necat ”, by Dr. Dimitrios Kyriazis;
• “Selectivity and discrimination in light of the recent Ryanair v Commission cases (C-209/21, C-210/21, C-320/21, C-321/21)”, by Juan Jorge Piernas López;
• “ Turbulence in the State aid sky: Selectivity as a new justification for discrimination under Articles 107(2)(b) and 107(3)(b) TFEU? An analysis of the Ryanair-COVID cases”, by Sébastien Thomas;
• “Selectivity and the reference framework: the evolution in the Spanish Goodwill saga”, by Jacques Derenne & Ana Álvarez Vidal;
• “Selectivity in the Spanish Tax Lease case: Discretion of public authorities”, by María López Ridruejo and Alexandre Picón;
• “Selective Advantage in Tax Rulings: all the Chapters bring the Saga to one End”, by Nieves Bayón Fernández
• “Discriminatory subsidies in the European aviation market?”, by Alexander Heger
“And now for something somewhat different…” we also had “an economist’s take on selectivity ”, by S. Yarak and N. Robins. We acknowledge, as the authors do, that the topic of selectivity is mainly a legal topic. Economists typically focus on the notion of advantage. However, we made the conscious choice to push ourselves and try our chances. The result is a thought-provoking piece on the relationship between the concepts of selectivity and distortions to competition, which we encourage everyone to read.
The examination of selectivity in State aid through the prism of recent EU Courts’ case law has provided a comprehensive understanding of this pivotal concept. And yet, much remains to be discussed. As the concept of selectivity continues to evolve, we invite you to read these pieces and to further explore its intricate nuances.
In no way can the views set out in this symposium be attributed to the editors or their employers/clients.
Selectivity – Horizontal Reflections
Leo Flynn
The State aid discipline seems to go through cycles in which one of the constituent elements required for a measure to come within the scope of Article 107(1) TFEU attracts particular attention from the Union institutions, the Member States or other actors with an interest in the field. There are moments in which debate centres on the market economy operator principle, the presence (or absence) of State resources, the indices for imputability, and even on occasion the concept of effect on trade between Member States. At present, it is arguable that what holds the spotlight is the requirement for a measure to confer a selective advantage, to favour certain undertaking or certain economic activities.
Some of the reasons why that criterion holds centre stage at present relate to the vagaries of litigation – those who follow the field will have seen that in Fiat, Engie and Amazon, the issue of the reference system used to determine selectivity for fiscal measures is so fundamental that the Court sets aside its usual aversion to reexamining factual matters (such as interpretation of national law, in those cases), finding it permissible for an appellant to raise those issues without showing distortion. However, the concept of selectivity separates the legitimate use by Member States of their policy tools to compete against one another in the internal market on the merits of how their national systems treat business activities from targeted and therefore illegitimate attempts to retain economic activity that would otherwise go elsewhere or to gain such activity from where in the internal market it would go without such actions. Attention to the topic of selectivity therefore gives what is due to an issue of perennial importance.
Selectivity is an issue that arises for all measures that could constitute a State aid, but the test varies depending on whether the measure is one put in place for a single undertaking or whether it is for a wider population identified on the basis of abstract criteria.
For the former category, the Court is clear that when a measure is tailormade the examination can in principle be confined to identifying if there is an advantage (Case C-15/14 P Commission v MOL EU:C:2015:362). That approach chimes with first principles. Union law is, after all, a legal system that governs an economic order operating in accordance with the principle of an open market economy with free competition, as Articles 119 and 120 TFEU recall. In such a setting, a State-ordained advantage offered to one undertaking clearly departs from what one expects: in less elevated language, it clashes with the dictum that “there is no such thing as a free lunch”. The Court’s recognition that an individualised advantage suffices in principle to show selectivity also avoids the kinds of intellectual gymnastics attempted in cases such as that seen in the litigation on the transfer to the State of France Télécom’s pension liabilities for former civil servants (Case C-221/15 P Orange v Commission EU:C:2016:798). There the beneficiary argued that to show selectivity required a comparability analysis, that no other business was in the same position as it was, and that there it would not be selective for the State to take over part of its pension liabilities for former civil servants since it was unique (in this instance, in having to support a costly workforce of that kind). The Court’s recollection that individual advantages are inherently selective avoids artificial needs to react to such ingenuity claims of incomparability (not a term of praise, in this context).
Selectivity
For the latter category, measures drawn up to cover a possibly wider group of undertakings, the Court has always recognised that determining if there is indeed selectivity requires one to identify the normal treatment from which the alleged aid measure departs. In the seminal judgment of 1974 Italian textiles (Case 173/73 Italy v Commission EU:C:1974:71, paragraph 33), the Court underlined that a measure partially removing the economy-wide system of social charges from employees in one sector would be a deviation from the normal application of the general system unless that exemption were justified by the nature of that system. Those ideas of “normal application” and “general system” represent touchstones for the analysis of selectivity. It is crucial to the health of the State aid discipline that the tools at the disposal of all stakeholders applying Article 107(1) TFEU remain able to find selectivity in a sectorial alleviation of costs, of the kind at issue in Italian textiles. 1
However, it is not obvious that such is the direction of travel at present, looking at some developments in the recent case-law. Two strands of jurisprudence stand out.
First of all, the Court has found that in both its opening decisions and its final decisions on measures that establish financial incentives for undertakings that engage in particular activities or fulfil particular criteria the Commission must state reasons on the comparability of those beneficiaries with operators excluded from enjoying of such financial incentives (Joined Cases C-693/21 P and C-698/21 P EDP España and Naturgy Energy Group v Commission EU:C:2023:989, and Case C-70/16 P Comunidad Autónoma de Galicia and Retegal v Commission EU:C:2017:1002). The Court establishes that the measure at issue must be looked at in light of the particular legal regime to which it belongs, from which the objective pursued by that particular legal regime is the touchstone by which beneficiaries and non-beneficiaries fall to be compared. However, arguably selectivity is necessarily present in that configuration precisely because one is dealing with financial incentives within the legal regime of an open market economy with free competition. The key features of that legal regime, and indeed the underlying objective it pursues, is that operators in the market bear their own costs so that they truly compete on the merits. That the Court feels that there is a need to spell out what could be painted as a truism seems to render the duty to give reasons unduly formalist, but more importantly to be insufficiently sensitive to the wider context in which the Union’s economic law plays out.
Second, in the Court has engaged in what could turn out to be an important evolution of its three-step selectivity test for fiscal measures. For context, one should keep in mind that for fiscal measures that apply to undertakings defined in abstract terms, the three-step test is the workhorse of selectivity. There is always the possibility to show selectivity outside that approach where the measure relies on discretionary administrative practices (Joined Cases C-649/20 P, C-658/20 P and C-662/20 P Spain and others v Commission EU:C:2023:60), and in extreme instances to rely on the reference system being constructed in a manifestly discriminatory fashion in which the tax authority reverse engineers the use of apparently neutral criteria to favour systematically particular groups (Joined Cases C-106/09 P and C-107/09 P Commission v Spain v Government of Gibraltar and United Kingdom EU:C:2011:732). However, the standard frame of analysis for selectivity is the three-step test.
1. As Advocate General Warner noted in his Opinion in that case, if the Member States are free to take measures that palliate the various handicaps faced by particular industries on their territory because such measures are not considered to be aid, what is now Article 107 TFEU would rapidly become a “lettre morte”.
First, one must identify the system of reference from which one extracts an objective pursued by the Member State. Second, one must ascertain if there is a derogation from that system of reference in which the Member State treats differently taxpayers who are comparably situated in factual and legal terms seen in light of that objective. Finally, one must see if any apparently discriminatory treatment is in fact justified by the nature and logic of the tax system overall.
The test is for all those who apply Article 107(1) TFEU to use, whether the Commission, the national judge or the other authorities in the Member States. The Court has recently made a significant addition to the first limb in the first step of test, establishing the system of reference. That system is composed of a consistent set of rules that generally apply to all undertakings falling within its scope. In the Engie and Amazon judgments, the Court for the first time states that in addition to the normal tax regime being formed from the provisions determining the basis of assessment and the taxable event the reference system is also formed of “any exemptions to which the tax is subject” (Joined Case C-451/21 P and C-454/21 P Luxembourg and others v Commission EU:C:2023:948, paragraphs 112 and 118, and Case C-457/21 P Commission v Amazon.com and others EU:C:2023:985, paragraph 39).
Going back to Italian textiles, one wonders how such a means of constructing the reference system squares with the partial exemption in an economy-wide system of mandatory payments in which all other employers in all other sectors contribute based on a given formula from which one sector is exempt. Does that exercise mean that there are no longer derogations, since everything that features in national tax legislation has the same weight and falls to be treated as just another part of the reference system purely by dint of having been laid down by the legislator? If so, there is arguably a redundancy to the reminder in the recent caselaw that the reference system is to be established on the basis of an objective examination of the content, the structure and the specific effects of the applicable rules of national law (Joined Case C-451/21 P and C-454/21 P Luxembourg and others v Commission EU:C:2023:948, paragraphs 111, and Case C-457/21 P Commission v Amazon.com and others EU:C:2023:985, paragraph 38). If the bare fact that a provision is laid down by applicable rules of national law trumps any objective examination when constructing that reference system, there no longer would be any discernment called for in that exercise. By the same token, one wonders if all exemptions feed into establishing the objective pursued by the reference system in the second limb of the first test. Such an outcome is not completely impossible to envisage, but it is hard to reconcile with a threestep test for fiscal selectivity that could apprehend the Italian textiles measure as selective in character.
In conclusion, the focus on the issue of selectivity in the field of State aid is warranted. It should be an iterative process for all interested in the application of Article 107(1) TFEU. We should take those instances where disinterested observers would accept that the action of the Member State is specific to one sector and seeks to solve a problem specific to that sector and ask if our selectivity tools can apprehend such measures as selective. If they cannot, we may need to revisit the tools in question.
Leo Flynn is Principal Legal Adviser at the Legal Service of the European Commission. All views expressed are personal to the author.
SUGGESTED CITATION: Flynn, L.; “Selectivity – Horizontal Reflections”, EU Law Live, 29/07/2024, https://eulawlive. com/competition-corner/op-ed-selectivity-horizontal-reflections-by-leo-flynn/
A Selective View of Recent Case Law on Selectivity
Alfonso Lamadrid
This contribution to EU Law Live’s Symposium provides a very personal, and necessarily selective, view of the evolution and status of the law on selectivity. My first assignment as an intern in a competition law practice, in 2004, was to assist in the Basque fiscal State aid saga. Since then, and over the past 20 years, I have been fortunate enough to witness the evolution of the case law on selectivity from a privileged first row position, representing over half a hundred applicants in several of the cases previously discussed in this Symposium, including the Spanish financial goodwill (this long saga is still ongoing, as the Commission has appealed the General Court Judgment annulling its third decision; the Commission’s appeals are, however, unrelated to the selectivity condition discussed in this piece) and tax lease sagas, the appeals against the decision on digital terrestrial television annulled in Retegal (as well as in the ongoing proceedings against the decision that eventually replaced it), and in the appeal against the opening decision recently annulled in the EDP case (both discussed in Leo Flynn’s contribution).
These cases, all of which resulted in annulments of Commission decisions and/or of General Court judgments (most often due to errors in the selectivity analysis) exemplify very well: (i) the recent oscillations and evolution in the case law and decisional practice on selectivity; and (ii) the Court of Justice’s attempts to introduce order, consistency and a clear analytical framework in an unruly area of EU law, arguably (as explained below) with mixed results.
Selectivity analyses in themselves raise complex legal and factual debates and comparisons. Those challenges are moreover exacerbated by their profound economic and institutional implications as well as, in many cases, by the politically charged contexts in which they arise. Indeed, the interpretation of the notion of selectivity by the Commission and the EU Courts is liable to have a major impact on the boundaries of Member States’ sovereignty on areas of fundamental political, economic and societal importance, and on the fate of the internal market. Far from being purely anecdotal, the magnitude of those consequences in individual cases may also perhaps help explain some of the apparent inconsistencies in the case law (see, for example, Sebastian Thomas’ comments here or the Apple case discussed below), in the decisional practice, and also, importantly, in the absence of certain decisional practice (given that measures considered to be general – i.e., not selective – can fly under the radar).
Over the past few years, the law on selectivity has evolved significantly (hence the relevance and timeliness of this symposium) and there is an apparent consensus that it has become increasingly sophisticated; yet, in practice, selectivity analyses in individual cases remain largely unpredictable and open to a certain degree of discretion on the part of decision-makers. Let me briefly explain at least some of the reasons why.
The consolidation of the 3-step test: lights and shadows
In December 2016 the Court of Justice’s judgment in Santander/World Duty Free (C 20/15 P and C 21/15 P) quashing a previous General Court judgment, clarified our understanding of general measures
by finding that measures that are open de jure and de facto to all undertakings could still be selective if they favoured certain behaviours and not others in a comparable situation. This new notion of “behavioural selectivity”, which remains controversial (see, for instance, here), appeared to significantly enlarge the notion of selectivity and, therefore, the width of the State aid control, at least in theory. Perhaps aware of the consequences of this approach, at the same time (both in this very case and in the Lübeck airport case) the Grand Chamber of the Court of Justice arguably started to introduce stricter requirements, in particular by emphasising that the selectivity analysis is, in essence, a discrimination analysis (see also Jorge Pierna’s comments about this here); it is about whether undertakings in a comparable factual and legal situation receive a comparable treatment. In a way, the Court rejected a limit but insisted on another based on a material comparative exercise.
Specifically, the Court has sought to introduce increased methodological rigour in the Commission’s selectivity analysis by emphasising the relevance of the 3-step test, under which the Commission bears the burden of: (i) identifying the normal or reference system is (step 1); and (ii) establishing that the measure differentiates between undertakings that are in a comparable factual/legal situation in light of the objective of that reference system (step 2); the evidential burden shifts to Member States to show, under step 3, that the prima facie discriminatory measure is justified by the logic of the system of which those measures form part (good luck with that). The Court has since applied this framework in several tax cases (including recently, in its Apple judgment), but also in cases not involving taxes, like C-524/14 P, Lübeck or C-70/16 P, Retegal.
In the latter judgment, in particular, the Court surprised many when it ruled the Commission is required to conduct meaningful comparability analysis also in relation to measures confined to a given sector because that sector, or companies in that sector, may not be in the same legal and factual situation as others. More recently, in EDP, the Court clarified that the Commission is required to conduct this analysis, albeit in a preliminary manner, already in any decision to open a formal investigation.
The welcome progressive juridification and consolidation of the 3-step test has not dispelled all doubts, and certainly not the margin for administrative or judicial discretion. The devil then is in the details of who needs to compare what, in what step, and in the light of what criteria. Both the identification of the reference system and the comparability analysis remain subjective and yet, as the Court and other contributors to this symposium have highlighted; see here and here), an error made in that regard will vitiate the whole analysis. There is a risk, for example, that the Commission and/or the Courts may define the reference system based not only on rules and principles inherent to national law, but based on external or hypothetical principles (while the Court had consistently warned against this in most cases in relation to tax rulings, it surprisingly did the opposite in Apple (C-465/20 P), under the reasoning that it was bound by findings by the General Court that Apple had failed to challenge in a cross-appeal and that were therefore res judicata).
There is a further risk that, in some cases, the Commission or the Courts may define an excessively wide reference system (e.g. the corporate tax system or even “normal market conditions”) under step 1 only to then find that any specific rule or formal derogation to that system is prima facie selective under step 2. A remarkable illustration, unknown to many, of this approach is visible in the Commission’s new decision in the digital terrestrial television saga following the annulment in Retegal (currently under appeal before the General Court in Case T-715/21). In that decision, the Commission advances, as its primary line of reasoning, an interpretation of selectivity under which any subsidy is by definition selective because it constitutes a derogation from normal market conditions (see here; paras. 169-170). A version of this
argument is also presented in the comments to the EDP case here. The reader is invited to consider the consequences that would arise if the Court were to accept these shortcuts to establish selectivity (e.g. would this mean that all public subsidies granted to address the effects of the Covid-19 pandemic must be treated as selective measures?).
Establishing selectivity outside the 3-step test: some practical challenges
The Court has also accepted, in specific circumstances, valid shortcuts or derogations to the 3-step test; these scenarios raise their own challenges.
Beyond scenarios where the reference system is constructed in a manifestly discriminatory fashion (i.e. the Gibraltar scenario), the Court has accepted that the 3-step test is not necessary in the case of individual measures (which are presumed selective once an advantage is established; e.g., in some tax ruling cases discussed here); in some cases, however, distinguishing individual measures from scheme may not be necessarily straightforward, but a matter of optics (e.g. an advance price agreement viewed in isolation may seem like an individual measure, but is it an individual measure if other companies in a comparable situation benefit from comparable agreements?).
The Court has also accepted that the 3-step test is not necessary in cases where public authorities retain a margin of discretion to determine the scope of applicability/beneficiaries of the measure at issue. In the Spanish tax lease case, C-649/20 P and others, para. 63, also discussed here), the Court accepted that, since the selectivity analysis must be conducted from an ex ante perspective, the existence of discretion necessarily results in the selectivity of the measure even in cases where there is no evidence that this discretion was actually used to favour, de jure or de facto, certain undertakings over others (which raises a question: in those cases, the aid is selective in favour of whom?).
This same case illustrates another practical difficulty arising in discretion=selectivity scenarios: the case law accepts that there is no selectivity where the degree of latitude of the public authorities is limited to verifying certain objectives/criteria inherent to the tax system (see C-6/12, P Oy), but assessing whether certain criteria are objective may not always be an objective exercise; in this particular case, for example, the Commission and the EU Courts found that that the criteria used by Spanish public authorities were “vague” even when they were arguably materially identical criteria to the criteria (applied by the same authorities) that were considered as objective, consistent, rational and necessary in the decision confirmed in Netherlands Maritime (C-100/15 P).
Conclusion
In spite of all of the progress made and of all the valuable lessons learnt in recent years, and of the Court of Justice’s commendable efforts to set a generally applicable, more sophisticated and more rigorous analytical framework, the analysis of selectivity in individual cases continues to remain, in many cases, highly unpredictable.
The principles and rules set by the case law have certainly raised the standard for the Commission, which is now required, as a matter of principle, to engage in a material comparability analysis before finding any measure to be prima facie selective. The precise mechanics of this comparability analysis remain, however, unclear. While this may, in some cases, result in a certain margin of maneuver for the Commission, it also
Selectivity
affords a significant margin of discretion for the Court of Justice, which has moreover shown its readiness to step in and have the last word in these often politically and economically sensitive cases.
As the analysis of selectivity has gained in sophistication, complexity and unpredictability, the relevance of the selectivity condition may perhaps be of declining importance in the future as State aid law evolves (rightly or wrongly) towards less notifications, more flexibility and more opportunities for selective/ discriminatory measures to be found compatible with the internal market. Indeed, the interpretation of the selectivity condition is arguably the most important factor in determining how wide we cast the State aid control net, but the size of the net will be the less relevant the more holes in it.
Alfonso Lamadrid is a partner in the EU and competition law practice at a Spanish international law firm in Brussels and a professor at the College of Europe in Bruges.
SUGGESTED CITATION: Lamadrid, A.; “A selective view of recent case law on selectivity”, EU Law Live, 24/10/2024, https://eulawlive.com/competition-corner/a-selective-view-of-recent-case-law-on-selectivity-by-alfonso-lamadrid/
The Dynamics of Selectivity in Tax Ruling Cases
Daniela Gschwindt
The dynamics of selectivity in tax ruling cases involves a complex interplay between national tax laws and EU State aid rules and highlights the ongoing tension between ensuring fair competition in the internal market and respecting the fiscal sovereignty of Member States. The reason why transfer pricing has increasingly come under the spotlight of the Commission is the widespread phenomenon of profit shifting, whereby groups have a certain degree of discretion in allocating expenses and income to their subsidiaries and permanent establishments in different locations. To date, the internationally accepted, non-binding standard for the allocation of taxable income between associated undertakings is the arm’s length principle (ALP), as set out in the OECD Model Tax Convention. Uncontrolled transactions must be subject to the full play of market forces in order to be considered arm’s length. In other words, transfer prices must not be manipulated to artificially shift profits abroad, but must ensure equal treatment of related and unrelated transactions.
Tax rulings in national law are a generally straightforward and unproblematic procedure whereby taxpayers can obtain formal confirmation of the tax consequences from the national tax authorities before transactions are finalised, setting out the transfer pricing method applied. In this way, they provide taxpayers with legal certainty when determining the ALP and the value of transactions. Tax rulings do not constitute aid if they are merely interpretations and applications of tax rules based on objective criteria. However, if the authority exercises discretionary powers that go beyond the simple administration of tax revenues, a measure may be selective. The main problem is therefore the method chosen to calculate transfer prices between affiliated undertakings. What has caused a lot of outrage recently is that the Commission has based its decisions on some tax rulings on its own methodology instead of relying on the respective national approach and assumes that Art. 107 TFEU contains an independent European ALP.
Revolutionising selectivity? The Commission’s new approach
The most prominent tax rulings investigated by the Commission concern Amazon’s profit shifting between its subsidiaries (C-457/21 P), Apple’s shifting of income between its Irish subsidiaries (T-778/16 and T-892/16), Fiat’s granting of an intra-group loan to its subsidiaries (C-885/19 P and C-898/19 P), Engie’s intra-group financial transactions (C-451/21 P and C-454/21 P) and Starbucks’ application of intragroup transfer pricing (T-760/15 and T-636/16). Although the cases were analysed for differing factual reasons, they all revolve around the criterion of selectivity, in particular vis-à-vis the definition of the reference system. In these tax ruling cases, the Commission has defined the general corporate tax system as the reference system. As a result, the Commission’s definition of the reference system includes both integrated (group companies) and non-integrated companies (stand-alone companies). The Commission is of the opinion that intra-group transactions of integrated companies should be priced at arm’s length in order to ensure equal treatment between them and non-integrated companies on the basis of Art. 107(1) TFEU. The Commission derives the ALP directly from primary law (Commission Notice, para. 172) and bases this on the judgement of the European Court of Justice in Forum 187 (C-182/03 and C-217/03,
paras. 95-97), according to which the Member States should apply their national ALP for the correct choice of transfer pricing method and the correct approximation of prices that would have been calculated under conditions of free competition.
When assessing the selectivity of a measure, the Commission resorts to the three-step test, which comprises the determination of a reference system (i) from which a derogation must be established by comparing the tax treatment under the ‘normal’ system with that under the deviating measure (ii) and a justification analysis (iii). When assessing comparability within the three-step test, the Commission does not take into account the economic and structural differences between groups and individual companies, i.e. two undertakings in different factual situations are considered comparable. It would make more sense to compare an integrated undertaking that benefits from a ruling with an undertaking that does not benefit from a ruling but from the normal transfer pricing rules under national law. Furthermore, the Commission is simply creating its own reference system, based neither on national law nor on existing EU law, but on its subjective interpretation and the derivation of a hypothetical standard from it. The national legal framework is simply ignored. In this context, it also chooses a very incoherent methodological approach by basing its arguments on the OECD guidelines, while at the same time clearly emancipating its own ALP from that of the OECD.
Refining the framework: the Court’s clarification
The Court’s approach to selectivity in tax ruling cases has been shaped by several significant rulings. In Starbucks, the General Court determined that the European Commission had not sufficiently demonstrated the existence of a selective advantage, indicating that merely identifying a methodological error was insufficient to prove State aid (T-760/15 and T-636/16, paras. 200-205, 427). Similarly, in Apple, the General Court concluded that the Commission failed to establish that a selective advantage existed (T-778/16 and T-892/16, paras. 312 et seq.). Advocate General Pitruzzella supported the Commission, suggesting that important arguments were overlooked and emphasizing the application of the ALP according to the OECD approach. However, this stance seems odd given that the European Court of Justice in cases such as Engie and Fiat clearly stresses the importance of national law in determining the reference system.
In November 2022, the European Court of Justice delivered a pivotal Grand Chamber judgment in the Fiat case, where it annulled the Commission’s decision ordering Fiat to repay €30 million in taxes to Luxembourg. The General Court supported the Commission’s approach, which treated integrated and stand-alone companies equally, referencing the Forum 187 judgment and using the EU ALP as a benchmark (T-755/15, paras. 134-187, 211-285). The General Court’s ruling validated the autonomous nature of the State aid concept and the ALP, and thereby the wide discretion of the Commission. However, the European Court of Justice, concurring with Advocate General Pikamäe, overturned this ruling, clarifying that the reference system must be based on national law rather than an idealised version of the ALP. The European Court of Justice rejected the Commission’s interpretation of Forum 187, asserting that the Commission and the General Court had improperly interfered with the tax sovereignty of Member States by relying on a hypothetical ALP not grounded in national legislation (C-885/19 P and C-898/19 P, paras. 72-74, 102-104, 122). This decision underscored the necessity for the Commission to demonstrate systematic discrimination against transactions between stand-alone companies compared to those between integrated companies, setting a high evidentiary standard but leaving room for future investigations into fiscal State aid. Unfortunately, the Court did not address whether a broad or narrow definition of the reference system should have been chosen and whether Luxembourg had applied the national legislation correctly. In
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Amazon, the European Court of Justice reiterated its stance from the Fiat case and emphasised once more that there is no autonomous ALP operating independently of its integration into national law but missed to clarify the aforementioned point (C-457/21 P, paras. 41-59).
In Engie, the European Court of Justice clarified that classifying a measure as selective requires understanding the content of relevant national provisions and examining national administrative and judicial practices. In cases where the Commission was unable to show deviation from national practice in comparable transactions, it failed to demonstrate that national provisions were infringed. Justifying a derogation by merely stating that a measure deviates from the general objective of taxing all companies is insufficient without reference to the specific provisions detailing how that objective is to be achieved (C-451/21 P and C-454/21 P, paras. 104-132, 151-160, 168-186). Advocate General Kokott’s opinion in the Engie case further highlighted the importance of examining only tax measures and decisions designed in a manifestly discriminatory manner under State aid law. She proposed that only those (manifest) derogations that cannot be plausibly explained to a third party should be scrutinized, rather than incorrect applications or rulings, to avoid overburdening the Commission and the European Courts with the task of correctly interpreting national tax rules (paras. 86-101, 152-154, 163 et seq.).
In summary, the Court’s approach emphasizes the necessity of grounding assessments in national law, setting high standards for proving discrimination and ensuring that derogations are plausibly explained to avoid undue burdens on the judicial system. This approach maintains respect for Member States’ tax sovereignty while allowing for scrutiny of potentially discriminatory practices.
Conflation of selectivity and advantage in the State aid analysis
In assessing the infringement of Art. 107 TFEU in the tax rulings mentioned, the Court and especially the Commission confused the criteria of selectivity and advantage. Instead of following the traditional threestep assessment approach, the Court first established the reference system, then determined whether there was an advantage and only then proceeded to steps two (derogation) and three (justification). Although the European Court of Justice recognised advantage and selectivity as two separate criteria with distinct aims, it considered that these criteria could be examined together as a third condition (selective advantage) (C-15/14 P, paras. 59-60). Although the European Court of Justice has stated that the fulfilment of the condition of advantage in principle, i.e. not always, creates a rebuttable presumption that the condition of selectivity is fulfilled, the Commission seems to overlook the decoupling of the two conditions when it considers that a selective advantage exists when a tax ruling confirms a result that does not reflect what would result from the normal application of the ordinary tax system (to an independent company) (Commission Notice, para. 170). The application of the ‘normal’ system is thus equated with the approximation of a market economy result. Such an approach is problematic as the methodology for determining selectivity is not coherent in itself and now adds another layer of complexity by conflating these criteria.
This conflation undermines the clarity of the selectivity analysis, as the criteria of selectivity and advantage are aimed at different aspects of State aid. Selectivity focuses on whether a measure favours certain undertakings over others in similar circumstances, while advantage examines whether the measure offers an economic benefit that would not otherwise exist. Combining these assessments not only blurs these different concepts, but also risks inconsistent application of the law. Thus, while the Court’s intention
Selectivity
to streamline the assessment process may be aimed at efficiency, the blurring of selectivity and advantage in the analysis poses significant methodological challenges to the application of the classic three-step test. There is a risk that important contextual and justifying factors, such as the specificities of national tax systems and the rationale behind certain tax rulings, are ignored. Different cases can and are already subject to varying interpretations and standards, undermining the uniform application of EU law and leading to legal uncertainty for Member States and businesses. Moreover, in such a scenario, the burden of proof is no longer on the Commission, but on the parties, who must prove that an advantage is not selective. This current simplistic approach denies Member States and affected parties a complete assessment of all elements of Art. 107 TFEU.
Concluding thoughts
Despite the concerns of Member States that the Commission is engaging in disguised tax harmonisation, the Court has clarified that tax measures, including tax rulings, can indeed fall within the scope of State aid law and thus are subject to examination under Art. 107 TFEU. This seems to be a natural consequence of the efforts to preserve the competitiveness of the internal market.
In its assessment of tax rulings, the Commission goes beyond merely verifying the correctness of the method applied, but performs an independent assessment of the objectivity of the tax calculation. The Commission asserts that group companies and stand-alone companies should be treated equally, eliminating a proper assessment of the first and second step of the three-step test. These are replaced by the addition of the advantage requirement. A recent novelty in the Commission’s approach has been the reference to the ALP, arguing that it derives from Art. 107 TFEU. This assumption of an autonomous European ALP led to a wave of cases before the European Courts.
The European Court of Justice clarified that only national law should be used to determine the reference system. The Commission must demonstrate systematic discrimination against (stand-alone) companies carrying out comparable transactions (see Fiat, Amazon and Engie). Both Advocates General and the Court have cautioned against the dangers inherent in determining the reference system, warning that it risks transforming the Commission and the Court into a de facto supreme tax authority and court. A critical question that was not resolved is whether a wide margin of discretion granted by national legislators to tax administrations in applying the ALP automatically constitutes State aid. Even without such wide discretion, it was not specified which characteristics a tax ruling must possess to be considered State aid. Determining taxable profit is not an exact science, as transfer pricing methods provide only approximations. The Commission and Courts should therefore limit themselves to consistency and plausibility checks, bearing the burden of proof for all elements of Art. 107(1) TFEU.
As an immediate consequence of these judgements, the Commission must revise its Commission Notice, which explicitly refers to the existence of an autonomous ALP under Art. 107(1) TFEU. Given the increasing international interdependence of businesses, the need for binding statements and legal certainty for multinational companies is also growing. Hence, clear State aid guidelines are necessary to inform companies and tax authorities about the permissible room for maneuver. It appears that the Commission’s practice is driven more by considerations of tax fairness than by the applicable norms of international tax law and attempts to remedy this shortcoming through state aid law.
Selectivity in State Aid
For these reasons, consideration should be given to reorganising the three-step test for tax aid in general and even introducing a new test. The creation of a reference system, which harbours the above-mentioned risks, could be replaced by a simple comparability analysis, as is the case for the assessment of tax measures under the fundamental freedoms. This would eliminate the need for benchmarking, both for selectivity and for advantage, and the test would be limited to a rule of reason-like assessment to determine the (non-)existence of equal treatment.
Daniela Gschwindt is a doctoral candidate in EU state aid law at the University of Vienna.
SUGGESTED CITATION: Gschwindt, D.; “The dynamics of selectivity in tax ruling cases”, EU Law Live, 11/06/2024, https:// eulawlive.com/competition-corner/the-dynamics-of-selectivity-in-tax-ruling-cases/
Selectivity in the Tax Ruling Cases: vulnerant omnes, ultima necat
Dimitrios Kyriazis
“They all wound; the last one kills”. This Latin motto perfectly captures the effect certain key ECJ rulings have had on the EU Commission’s selectivity approach in the tax ruling cases of the past decade.
The purpose of this short opinion piece is to illustrate how, in my view, the Commission’s selectivity theory has been “treated” by the EU Courts. Spoiler alert: the answer is not one that would please DG COMP officials.
Firstly, we need to define tax ruling cases. These will be defined lato sensu for the purposes of this Symposium, thus including the Fiat case, the Engie case, and the Apple case (still pending before the ECJ), amongst others. The precedent that they have set, and the deference shown to Member States’ fiscal autonomy, will arguably continue to reverberate and expand in other fiscal State aid cases which do not directly concern tax rulings, such as the UK CFC case (see already the Opinion of AG Medina in this direction).
Secondly, and before we proceed any further, a disclaimer: I am actually rather opinionated about these cases, which is natural given that both my doctoral research at Oxford University and my subsequent OUP monograph focused on them. In fact, since 2016 I have been arguing, in various articles and blog posts, that the Commission’s overall approach in the tax ruling cases should be rejected by the ECJ because it is not legally sound and not safely grounded on the ECJ’s case law. Recent developments before the EU Courts therefore constitute a vindication of sorts, a fact which might be influencing my assessment.
Thirdly, we need to give to Caesar what belongs to Caesar. The Commission has managed to influence an important piece of the selectivity puzzle in its favour. I am referring to the (by now infamous) MOL “presumption”. In June 2015, in the MOL case, the ECJ established the following rule (para 60): in cases of individual aid ‘the identification of the economic advantage is, in principle, sufficient to support the presumption that it is selective’. This dictum has not been overturned by the ECJ and had actually massively assisted the Commission in (almost) all its final State aid decisions in the tax ruling cases, e.g. Starbucks/ Apple/Fiat/Amazon, since it provided a selectivity “shortcut” which the Commission did not shy away from using as its (primary) selectivity reasoning. This presumption is therefore here to stay and will continue to aid the Commission whenever it seeks to substantiate the fulfilment of the selectivity condition in cases of individual aid. However, a remark is pertinent here: this presumption does not mean that a conflation of two distinct State aid conditions (advantage and selectivity) is permissible. The ECJ in its MOL judgment did not intend to pardon the conflation of the two most important State aid conditions. In fact, in para 59 of the same ruling, the ECJ had clearly stated that ‘the requirement as to selectivity under Article 107(1) TFEU must be clearly distinguished from the concomitant detection of an economic advantage, in that, where the Commission has identified an advantage, understood in a broad sense, as arising directly or indirectly from a particular measure, it is also required to establish that that advantage specifically benefits one or more undertakings’.
Fourthly, and crucially, let us dig into our “main course” for the purposes of this Op-Ed: what have been the main “wounds” to the Commission’s selectivity approach? I will assert that we can single out one major issue, namely the deference shown towards national fiscal autonomy. This can be further broken down into two elements, with the first specifically concerning the identification of the reference framework (the first step of the three-step selectivity test) and the second concerning the emphasis placed on tax autonomy more generally. These are briefly examined in turn.
As regards the first issue, the ECJ in the Engie case of December 2023 ruled (para 177) that the reference system must include the provisions laying down the exemptions which the national tax authorities considered to be applicable, where those provisions do not, in themselves, confer a selective advantage for the purposes of Article 107(1) TFEU. The significance of this dictum cannot be overstated. The ECJ also went on to add that in ‘such a situation, in the light of the Member States’ own competence in the matter of direct taxation and the regard to be had for their fiscal autonomy [...] the Commission cannot establish a derogation from a reference framework merely by finding that a measure departs from a general objective of taxing all companies resident in the Member State concerned, without taking account of provisions of national law specifying the manner in which that objective is to be implemented’.
Based on this understanding of the selectivity test, which is extremely important as a matter of principle and can be applied more broadly to potentially any fiscal State aid case, the Court went on to actually find – in the Engie case – that the misidentification of the reference framework by the Commission had vitiated the whole of the selectivity analysis, which had been carried out on the basis of a reference framework encompassing the Luxembourg corporate income tax system.
This was obviously an ad hoc defeat for the Commission, but most importantly it was a heavy doctrinal loss, given that there can be no shortcuts in the first step of the selectivity exercise. It is not sufficient to point at a national tax provision which sets out an exception to the “rule” in this area of taxation and immediately and automatically classify it as a State aid derogation. The Commission needs to do better than that: exception and derogation are two different concepts and this had never been stressed with such vigour by the Court.
As regards the second issue, i.e., the deference shown towards national fiscal autonomy, our starting point will be the Fiat case of the ECJ’s Grand Chamber. More specifically, the Court there stated that (para 73), ‘outside the spheres in which EU tax law has been harmonised, it is the Member State concerned which determines, by exercising its own competence in the matter of direct taxation and with due regard for its fiscal autonomy, 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. This includes, in particular, the determination of the basis of assessment and the taxable event’. In other words, the normal tax regime (or reference system) needs to stem from national law, not from a hypothetical, notional and artificial amalgamation of soft law or from creative interpretations of primary EU law, which is - in my opinion - what the Commission had endeavoured to do by inventing an independent EU lawderived arm’s length principle stemming directly from Article 107 TFEU.
In the same vein, the Court found (para 74) that it followed ‘that only the national law applicable in the Member State concerned must be taken into account in order to identify the reference system for direct taxation, that identification being itself an essential prerequisite for assessing not only the existence of an advantage, but also whether it is selective in nature.’ This was the nub of the case, together with the
finding that the General Court, by accepting that the Commission may rely on rules which were not part of Luxembourgish law infringed the provisions of the TFEU. More specifically, the Commission infringed the provisions relating to the adoption by the European Union of measures for the approximation of Member State legislation relating to direct taxation, in particular Article 114(2) TFEU and Article 115 TFEU. The ECJ also highlighted that the autonomy of a Member State in the field of direct taxation, as recognised by settled case-law, cannot be fully ensured if, in the absence of any such approximation measure, the examination carried out under Article 107(1) TFEU is not based exclusively on the normal tax rules laid down by the legislature of the Member State concerned (para 94).
Coming back to the Engie case, the ECJ here reiterated some of the points made in its Fiat ruling, while further stressing the significance of national autonomy. For instance, in para 111, the Court noted that the determination of the reference framework (i.e. the first step of the selectivity test), which must be carried out following an exchange of arguments with the Member State concerned, must follow from an objective examination of the content, the structure and the specific effects of the applicable rules under the national law of that State. The ECJ also repeated that, outside the spheres in which EU tax law has been harmonised, it is the Member State concerned which determines, by exercising its own competence in the matter of direct taxation and with due regard for its fiscal autonomy, 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. This includes, in particular, the determination of the basis of assessment, the taxable event and any exemptions to which the tax is subject.
Finally, in para. 120 of its judgment, the Court held that ‘when determining the reference framework for the purpose of applying Article 107(1) TFEU to tax measures, the Commission is in principle required to accept the interpretation of the relevant provisions of national law given by the Member State concerned […], provided that that interpretation is compatible with the wording of those provisions’. The Court thus stressed that the Commission is in principle (i.e. as a default rule) obliged to accept the interpretation of national law which the Member State gives it, as long as the latter is compatible with the wording of those provisions.
This clarification is self-evident, i.e., the Member State should not engage in contra legem interpretation. What does this mean in practice? It means that, as a rule, the Commission cannot second guess Member States’ interpretation of its own laws. This should go without saying, but evidently it needed to be said, and it was thankfully said loud and clear by the Court. The rule is simple: Member States interpret their own laws, the EU interprets its own laws. This is straightforward and reflects the rule of law principle, the principle of legality, as well as the principle of conferral and division of competences between the EU and its Member States.
Therefore, all of the above illustrate the growing emphasis placed by the Court on national tax sovereignty. In my view, this is surely in the right direction, and reflects the right balance between an exclusive EU competence (State aid) and the Member States’ fiscal autonomy.
This series of defeats has greatly “wounded” the EU Commission, but the final case will probably put the nail in the coffin. In the pending Apple case, despite the Opinion of Advocate General Pitruzzella, which was not compelling for the reasons I have described elsewhere, the ECJ is expected to follow the key tenets of its reasoning as set out in the Fiat and Engie cases and hand the Commission yet another defeat. More specifically, AG Pitruzzella arguably disregarded the due respect paid by the ECJ to national fiscal autonomy
and insisted on using the arm’s length principle and its variations as a reference point for establishing the existence of a state aid advantage in favour of the Apple group. For instance, he failed to recognize that the “Authorized OECD- approach” (AOA) should not have been used in the first place to assess Apple’s tax arrangements in Ireland; only Irish tax law is relevant! Fiscal autonomy and national benchmarks reign supreme as regards both the advantage and selectivity conditions.
A similar development to Apple, i.e. another Commission defeat, is, in my view, to be expected in the pending UK CFC State aid case, where Advocate General Medina has advised the ECJ to quash the GC’s ruling and annul the Commission’s decision, with similar reasoning in relation to national fiscal autonomy (paras 58 et seq.). More specifically, the AG stressed that the combined effect of the Fiat and Engie rulings make it clear that the Commission’s analysis must rely on tax principles that are explicit in national law. It thus follows, in her (correct) view, that the reference framework must be established on the basis of national law as interpreted by the Member State, which is entitled to define the objectives and the constitutive elements of the tax legislation in question as well as the practical implementation of that legislation. Due to the Commission not accepting, inter alia, that the UK’s CFC rules were part of the UK general corporation tax regime, but instead arguing that they formed their own reference framework, the Commission had committed a legal error that vitiated its selectivity analysis.
To conclude, it has been shown that the Commission’s selectivity approach in cases which do not solely involve individual aid has come under fire by the ECJ, with the latter disagreeing with it in one key respect, namely the proper emphasis to be placed on national fiscal autonomy. After a series of setbacks and another key case still pending, the Latin motto chosen can be said to be apposite: vulnerant omnes, ultima necat.
Dimitrios Kyriazis (DPhil, Oxford) is an Assistant Professor of EU Law at the Law School of the Aristotle University of Thessaloniki.
SUGGESTED CITATION: Kyriazis, D.; “Selectivity in the tax ruling cases: vulnerant omnes, ultima necat”, EU Law Live, 11/06/2024, https://eulawlive.com/competition-corner/op-ed-selectivity-in-the-tax-ruling-cases-vulnerant-omnes-ultima-necat-by-dr-dimitrios-kyriazis/
Selectivity and the Reference Framework: The Evolution in the Spanish Goodwill Saga
Jacques Derenne & Ana Álvarez Vidal
Introduction
The criteria of selectivity for a State measure to qualify as an aid measure under Article 107(1) TFEU is probably the most problematic issue in certain circumstances, in particular regarding tax measures. Selectivity makes possible to categorise a measure as State aid and to distinguish it from a mere general tax or economic measure introduced by Member States within their autonomous policy powers (Air Liquide Industries Belgium C-393/04 and C-41/05, para 32). In short, selectivity may be seen as the hinge allowing the application of State aid rules in tax matters.
One prime example of the sophistication of dealing with selectivity in State aid tax measures is undoubtedly embodied in the so-called Spanish Goodwill saga, showing as well how it is unsettled that the necessary and satisfactory legal stability and certainty of this condition has been reached. This is a complex, neverending and, as a matter of fact, not-yet-fully-ended litigation chronicle: there is a parallel litigation existing against Decision of 15 October 2014 (SA.35550) concerning a Spanish scheme for the tax amortisation of financial goodwill for foreign shareholding acquisitions. This parallel case concerns a new administrative interpretation adopted by the Kingdom of Spain extending the scope of application of that scheme. This decision was annulled in September 2023 (Banco Santander and Santusa, T-12/15, T-158/15, T-258/15 - appealed by the Commission: C-777/23 P, pending). This branch of litigation will not be subject to comment in the present article since it does not specifically concern the issue of the reference framework.
When examining this saga, one element rises as capital for the correct determination and application of the legal standard as regards material selectivity: the reference framework to be used when assessing a tax measure under the lens of State aid (see, for instance, Daniela Gschwindt, ‘The dynamics of selectivity in tax ruling cases’, EU Law Live, 11 June 2024).
According to the Commission 2016 Notice on the Notion of State aid, ‘the reference system constitutes the benchmark against which the selectivity of a measure is assessed’ (para 132). The determination of the reference framework is of particular importance in the case of tax measures, since the existence of an economic advantage for the purposes of Article 107(1) TFEU may be established only when compared with ‘normal’ or ‘ordinary’ taxation. The reference framework, also called ‘reference system’, ‘common regime’ or ‘normal regime’ (Banco Sandanter and Santusa, T-399/11 RENV, para 29) is part of the three-step approach method developed by the EU case-law (already present in Paint Graphos, C-78/08 to C-80/08, paras 50-54) and consolidated in the Commission 2016 Notice used to assess material selectivity.
This three-step test first identifies the reference framework (which constitutes the benchmark of normal taxation against which the advantage should be compared) to, secondly, assess if any advantage arising from the measure is indeed selective by derogating from the reference framework and is not granted to all
undertakings in comparable legal and factual situations. Thirdly, it examines the possible justifications put forward by the Member State that may establish that the measure is justified by the overall nature or logic of the system to which it belongs.
It should be noted that this three-step approach, based on the identification of the reference framework, even if established by the case-law, has not always convinced all. In this regard, it is worth noting the opinion of Advocate General Øe in A-Brauerei (C-374/17), where it openly supported a reversal of the method and the case-law to go back only to the traditional availability test (where any advantage which is not open to all undertakings present on the national territory is to be seen as selective) versus the three steps, which are also known as the “discrimination test”. The Court’s approach was criticised for promoting a ‘subjective’ or ‘behavioural selectivity’ (see, e.g., Conor Quigley QC, Update on World Duty Free Group in ‘Milestones in State Aid Case Law’, EStAL’s First 20 Years in Perspective, Lexxion, 2022, pp. 459-468; Jacques Derenne, ‘Commission v World Duty Free Group a.o.: Selectivity in (Fiscal) State Aid, quo vadis Curia’, Journal of European Competition Law & Practice, 2017, Vol. 8, No. 5, pp. 311-313).
The Court in that case, however, did not follow this proposal, although it paradoxically did not properly and orderly follow the three steps and jumped to the derogation from the common tax system before the analysis of the reference framework (A-Brauerei, paras 35 and following).
This practice has been relatively frequent and has even been noted by the EU case-law in the Spanish Goodwill saga: ‘the comparison exercise which applies for the purposes of implementing the second step of the method […] now resembles, to a large extent, the method that the Court of Justice also uses for the purposes of defining the material scope of the reference framework’ (World Duty Free, T-219/10 RENV, para 144) In the same line, Advocate General Pitruzzella noted how ‘the approach now established in the case-law of the Court […] tends to equate the notion of selectivity with that of discrimination’ and how ‘the central importance of that reference system cannot, however, be disputed’ (World Duty Free, C-51/19 P and C-64/19 P, para 39). This has involved a long, sometimes tortuous, judicial route.
Where it all started: The 2009 and 2011 Commission Decisions
The saga takes us back two decades ago, where the Spanish authorities introduced new rules on the amortisation of financial goodwill in the Spanish Corporate Tax Act (Article 12(5) of Law 43/1995 on corporate tax). The reform allowed companies taxable in Spain to amortise the financial goodwill resulting from the acquisition by an undertaking resident in Spain of a shareholding at least 5% in a foreign company (that is, a non-Spanish company but still a EU company). However, acquisitions by undertakings taxable in Spain of shareholdings in other resident (not foreign) undertakings did not give rise to this benefit, unless they followed a business combination.
After receiving Parliamentary questions regarding the measure in 2005 and 2006, and after several rounds of information exchanges with the Spanish authorities, the Commission initiated the formal investigation procedure in October 2007. After careful examination, the Commission adopted a negative decision (‘the 2009 Decision’) declaring the incompatibility of the Spanish scheme with the internal market as regards aid granted to beneficiaries in respect of intra-EU acquisitions. In parallel, the Commission had kept the procedure open as regards outside-EU acquisitions, as the Spanish authorities still had to provide information regarding the impact on direct investments by Spanish companies in non-EU States.
Selectivity
Following its previous 2009 Decision, the Commission declared the Spanish aid scheme incompatible with the internal market as regards aid granted to beneficiaries in respect of extra-EU acquisitions in its decision of 12 January 2011 (‘the 2011 Decision’).
The parcours before the EU Courts: first round
Both Commission decisions were challenged in parallel, based on pleas alleging a Commission’s error when applying the selectivity condition to the measure. The two decisions were annulled on 7 November 2014 by the General Court on the basis of a misapplication of the notion of material selectivity (Autogrill España, T-219/10 and Banco Santander and Santusa, T-399/11) by the Commission. The General Court confirmed the three-step analysis and argued that the Commission had misapplied the method since ‘a derogation from or exception to the reference framework identified by the Commission cannot, in itself, establish that the measure at issue favours ‘certain undertakings or the production of certain goods’ within the meaning of Article 107(1) TFEU, since that measure is available, a priori, to any undertaking’ (judgments of 7 November 2014, cited above, paragraphs 52 and 56 respectively).
Importantly, it further concluded that EU case-law required the identification of a particular category of undertakings or the production of certain goods which could be distinguished on account of their specific characteristics in order to classify the tax measure as selective (judgments of 7 November 2014, paragraphs 81 and 85 respectively).In short, the Commission had not demonstrated to the required legal standard that the Spanish scheme conferred a selective advantage on certain undertakings or the production of certain goods, since the disputed measure applied to all acquisitions of holdings of at least 5% in foreign companies without establishing a particular category of undertaking or production, but only a category of economic transactions (Autogrill España, para 53).
As both judgments were appealed, the Court of Justice examined them together and set them aside on 21 December 2016, ruling that ‘the appropriate criterion for establishing the selectivity of the measure at issue consists in determining whether that measure introduces, between operators that are, in the light of the objective pursued by the general tax system concerned, in a comparable factual and legal situation, a distinction that is not justified by the nature and general structure of that system’ (World Duty Free, C-20/15 P and C-21/15 P, para 60). In other words, the (non-justified) discriminatory nature of the contested measure to the exclusion of certain operators (in a comparable situation) had to be established.
The Court criticised the General Court for misconstruing Article 107(1) TFEU ‘by holding that the Commission had not, in the contested decisions, demonstrated to the requisite legal standard that the measure at issue conferred a selective advantage on certain undertakings or the production of certain goods’ (World Duty Free, para 61). The Court stressed how even where an advantage is of general application, the Commission must establish that the measure differentiates between undertakings which, in the light of the objective pursued by the legal system are in a comparable factual and legal situation, (and whether it is justified by the nature or general logic of the system). In this context, the Court rejects that, in order to find selectivity in a measure which seems in principle accessible to any undertaking, a particular category of undertakings with specific properties common to them should be identified. For the Court, this would be a ‘supplementary requirement’ which cannot be found in the case-law (World Duty Free, para 71).
Finally, the Court referred the cases back to the General Court to examine the remaining pleas that involved an assessment of facts.
Referral to the General Court and new appeal to the Court: second round and much needed clarifications
In its judgments on referrals (World Duty Free, T-219/10 RENV and Banco Santander and Santusa T-399/11 RENV), the General Court dismissed the applicants’ actions and upheld the Commission’s decisions. The General Court examined the plea concerning a Commission’s error in identifying the reference system and rejected that the measure could constitute an autonomous reference system. As it happened in the first round of litigation, the General Court’s judgments were appealed and joined for a final examination by the Court of Justice, who dismissed the appeals on 6 October 2021 (World Duty Free, C-51/19 P and C-64/19 P and judgments delivered at the same time in C-50/19 P, C-52/19 P, C-53/19 P, C-54/19 P and C-55/19 P). In this landmark judgment, the Court of Justice confirmed the three-step approach as the test to examine the selectivity of a measure which ‘is thus, in essence, coextensive with the examination of whether it applies to a set of economic operators in a non-discriminatory manner’(World Duty Free, C-51/19 P and C-64/19 P para 33). In fact, this judgment provided with further observations that have settled and shaped the three-step analysis.
Among other pleas, the appellants had argued that the General Court (and subsequently the Commission) had erred in defining the reference system. Importantly, the Court stated how the determination of the reference system constitutes the starting point for the comparative examination to assess selectivity. Thus, ‘an error made in that determination necessarily vitiates the whole of the analysis of the condition relating to selectivity’ (World Duty Free, C-51/19 P and C-64/19 P para 61).
The Court examined the applicants’ argument that the General Court substituted its own reasoning for that of the decision at issue in ruling out the possibility that the measure at issue might constitute a reference system in its own right. In this regard, the EU case-law has been consistently sustaining that the very measure cannot constitute the reference system. For example, in Paint Graphos, the Court defined the reference framework as the corporate tax when the measure at issue consisted of an exemption from corporation tax. Similarly, in Heiser (C-172/03, para 40) the reference framework was the VAT system. Some of these examples have in fact been used in the Commission 2016 Notice to illustrate how the reference system is ‘composed of a consistent set of rules that generally apply — on the basis of objective criteria — to all undertakings falling within its scope as defined by its objective’ (Commission 2016 Notice, para 133).
In this Spanish Goodwill second appeal, the Court however allows the possibility that ‘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’(World Duty Free, C-51/19 P and C-64/19 P, para 63). In practice, however, a clear severability will tend to be the exception rather than the rule.
The Court also stresses that, to identify the reference system, an objective examination of the content and structure of the national rules should be made. This surely allows judicial review of the assessment. Nevertheless, the objectives pursued by the tax measure concerned may not be considered, as the objective of State measures is not sufficient to leave them out of the scope of the State aid qualification (World Duty Free, C-51/19 P and C-64/19 P paras 65 and 66). Moreover, and as noted by the Court, the use of a particular regulatory technique cannot enable national tax rules to evade State aid provisions
either and thus cannot be decisive to determine the reference framework. It is the derogation caused by such technique which is relevant. The Court also recalled how the mere fact that the measure at issue is of a general nature, in that it may a priori benefit all undertakings subject to corporate tax, does not mean that it cannot be selective.
Finally, the Court backs the General Court’s finding that companies acquiring shareholdings in non-resident companies are, in the light of the objective pursued by the tax treatment of goodwill, in a comparable factual and legal situation to that of undertakings which acquire shareholdings in resident companies. On that basis, in spite of the error in law recognised in the General Court’s substitution of its own reasoning of the objective of the reference system (to ensure consistency between the tax treatment and accounting treatment of goodwill), the Court rejects the applicants’ plea.
Conclusion
The Spanish Goodwill saga illustrates the complexity of the analysis for material selectivity and the balance needed with the powers of the Member States to introduce their own national tax policies and measures. The Member States in principle define the reference system by using their exclusive powers on direct taxation, but the Commission can (and will) challenge the reference framework.
This balance should be achieved by an objective examination of rules under national law by the Commission, without taking into account the objectives pursued by these provisions (objectives are not sufficient to exclude the classification of State aid). This exercise is difficult and can be the source of much legal uncertainty. This is what Advocate General Pitruzzella expressed in his opinion of 21 January 2021: ‘I am well aware of the difficulty of that task and the strength of the arguments of those who believe that the reference system is (and cannot be) anything other than the result of a subjective choice. However, given the importance that that notion has acquired in the analysis of the selectivity of tax measures, I consider it more useful to try to find a way to ‘live’ with it, rather than persevere in highlighting the objective difficulties of its practical application’ (footnote 72).
In this respect, the Commission 2016 Notice is well outdated regarding material selectivity and the reference framework, the selectivity criterion being already its longest and most complex section. It is well known that the application of State aid rules to tax matters (even further proved by the tax ruling cases) is very complex. Deciphering selectivity is a complex exercise whose examination should be integrated within the one of the five/four criteria for the notion of State aid and not be collapsed with the requirement of “advantage”, in particular in tax matters (and against the latest practice of the Court). In recent tax ruling cases, one of the parties submitted that the reference framework “must be based on the national tax system at issue and not on a hypothetical tax system” (Fiat and Ireland v Commission, C-885/19 P and C-898/19 P, para 56), when referring to the argument that the arm’s length principle could be applied in the situation at hand only if the national legislation constituting the normal taxation system had incorporated it. In other words, the derogation from the reference framework had to consider rules and principles that were actually included in the national system constituting that framework and not on external (or hypothetical) rules.
Jacques Derenne is avocat, Brussels and Paris bars, and Professor at the University of Liège & at the Brussels School of Competition.
Ana Álvarez Vidal is abogada, Salamanca and Brussels bars.
SUGGESTED CITATION: Derenne, J. and Álvarez Vidal, A. ; “Selectivity and the reference framework: the evolution in the Spanish Goodwill saga”, EU Law Live, 30/60/2024, https://eulawlive.com/competition-corner/selectivity-and-the-reference-framework-the-evolution-in-the-spanish-goodwill-saga-by-jacques-derenne-ana-alvarez-vidal/
Selectivity in the Spanish Tax Lease case: Discretion of Public Authorities
María López Ridruejo & Alexandre Picón
In what has been described by AG Pikamäe as a ‘veritable legal saga’ that lasted almost 10 years and implied five rounds of judgments from the EU Courts, the Court of Justice definitely confirmed that the Spanish Tax Lease (STL) constituted illegal State aid.
As previously discussed here, the STL saga deals with a complex tax scheme which allowed for accelerated and early depreciation of new vessels (subject to prior authorisation from the Spanish tax authorities) during their construction. This generated a tax expense in favour of Economic Interest Groupings (EIGs) formed by various investors. Since EIGs were fiscally transparent, the tax expense was passed on to its investors, who in turn deducted it for tax purposes achieving a tax advantage. These tax advantages were then partially transferred to the shipping companies that bought a new ship.
In its decision (SA.21233 C/2011), the Commission stated that despite the STL scheme appeared to be a general measure, taken as a whole, it was selective in nature due, on the one hand, to the discretionary powers of the tax administration to grant the mandatory authorization of early repayment on the basis of vague requirements and, on the other hand, to the fact that the administration only authorized SEAF transactions intended to finance sea vessels (paras. 130 and 133-139). Thus, the element of discretion played a key role for the Commission when determining whether the STL scheme conferred a selective advantage to the beneficiaries (para. 156).
It is indeed a general principle derived from the case law of EU Courts that general measures which prima facie apply to all undertakings but are limited by the discretionary power of the public administration are selective (C-256/97, para. 27). This is the case where meeting the given criteria does not automatically result in an entitlement to the measure but requires review and authorization by the tax administration under certain conditions. However, the mere fact that the tax deduction requires prior administrative authorization does not imply by itself that the measure at hand would qualify as selective, particularly when the prior authorization is based on objective, non-discriminatory criteria which are known in advance, thus imposing limits on the exercise of the public administrations’ discretion (see Commission’s Communication on the Concept of Aid, para. 125). Under this umbrella, EU Courts assessed the STL in question, reaching at first quite different conclusions.
The first round of judgments: discretion at the core of the debate
Discretion was the key element that led the General Court to annul the Commission decision in first place. According to the General Court judgment (T-515/13), the discretionary power of the Spanish tax administration would only have led to determine the type of operation that could benefit from the STL, namely operations aimed at financing sea vessels, excluding other assets. That did not exclude that any other company had the possibility of participating in the tax lease scheme without any restriction and remained eligible for the tax advantages in question (paras. 142-143). Under these circumstances, the advantage
could not be considered selective, irrespective of an authorization system which supposedly contained discretionary elements (para. 155).
However, the Court of Justice (C-128/16 P) ruled that the General Court erred in law by failing to examine whether the authorization system provided for in the Spanish legislation gave the tax administration a discretionary power, given that its assessment was based on the incorrect premise that only the investors, and not the EIGs, could be regarded as beneficiaries and that it was therefore by reference to the investors, and not the EIGs, that the condition relating to selectivity had to be examined (para. 58). The Court of Justice sent back the case to the General Court.
Second round of judgments
In its second judgment (T-515/13 RENV), the General Court submitted that the thesis put forward by Spain regarding the lack of discretion of tax authorities in relation to the verification of the conditions laid down in the Spanish Corporate Income Tax Law and its Regulation was incorrect in view of the legal provisions examined (para. 96). The judgment established that the law introduced vague criteria which could not qualify as objective, particularly regarding the possibility to set the start date for the depreciation or the ‘specific nature of the economic use of the asset’, whose interpretation gave the tax administration a significant margin of discretion (para. 93).
Furthermore, the Regulation conferred important discretionary powers to the tax administration, including the ability to (i) require all the information and documents it deemed appropriate, which supposedly gave the tax administration important discretionary powers as regards the type of information and documents it could require, (ii) set a different start date for the depreciation, without further clarification, and (iii) grant the authorization based on vague criteria (para. 94-95).
Making sense of the case law
The assessment of the selectivity condition in STL does not seem to be in line with previous cases in which the role played by tax administration was central to the analysis.
In particular, in the OY P case (C-6/12), the Court of Justice assessed a Finish deduction to the corporate income tax law which required prior authorization by tax authorities in case more than half of the company’s shares changed ownership. The Court held that an authorization system did not by itself imply a selective measure if the powers of the competent authorities are limited to verifying the conditions to pursue an identifiable tax objective and the criteria applied by those authorities are inherent in the nature of the tax regime (paras. 23-24). When the criteria followed by the competent authorities to determine the beneficiaries or the conditions under which the aid is provided are unrelated to the tax system (such as maintaining employment), the tax scheme could be deemed as selective (para. 26). However, if the authorities only have a degree of leeway limited by objective criteria related to the tax system in question the scheme cannot be considered selective (para. 27). In the STL, however, the Commission and EU Courts did not expressly follow that path and their assessment was not based on whether the criteria followed by the administration was related to the tax system or not.
Similarly, in France v. Commission (C-241/94), the Court of Justice dealt with a social plan to cope with redundancies on economic grounds, which comprised a number of measures jointly financed by the State. France submitted that the assessment made by public authorities was intended to ensure that equality of treatment was granted, by following different circulars which set limits to the administration (para. 18). However, besides the fact that the administration could depart from its own guidelines, the Court of Justice considered that it enjoyed a degree of autonomy which allowed to adjust its financial assistance, including the choice of beneficiaries, the amount and the conditions under which it was provided (paras. 23-24). Again, these factors were not present in the STL case and yet the Court of Justice concluded that the scheme was still discretionary in nature.
Last, in the decision regarding the French tax Economic Interest Groups (GIE fiscaux) (Case N° C46/2004), the Commission stressed that the granting of a tax advantage was related to the realisation of investments having ‘significant economic and social interest both in general and from an employment standpoint in particular’ (para. 12). Such vaguely formulated criteria led the Commission to conclude that the measure in question granted the French tax authorities a wide margin of discretion (para. 20). In the STL, the Court considered that the criteria with regard to the possibility to set the start date for the depreciation or the ‘specific nature of the economic use of the asset’ were vague and gave the tax administration a significant margin of discretion. However, these do not seem to directly impact the granting of the tax advantage as in the GIE fiscaux case.
Conclusions
Selectivity and taxation remain one of the greyest areas in State aid law and the line between the general and selective nature of a tax measure has been and continues to be slippery, and it does not seem likely to become any less so in the future.
The STL saga has probably been one of the longest and most challenging cases dealing with the discretionary powers of the tax authorities to authorize tax deduction schemes of the past decade. The response of EU Courts did not seem entirely satisfactory with regard to the role played by the Spanish tax administration in the case at hand in view of previous case law. Different issues arising from the Commission Decision seem to remain still open even after two judgments of the Court of Justice. In particular, the mere fact that the tax authorities had the ability to require all the information and documents it deemed appropriate does not necessarily introduce an element of discretion if the authority cannot in practice refuse the authorization on the basis of the said documents.
Along the same lines, Spain has also seen several other major cases being brought up to the EU Courts calling into question the criteria followed by the European Commission when assessing the selectivity of a tax measure. In parallel to the STL case, the EU Courts were also dealing with another important State aid ‘saga’ concerning the Spanish financial goodwill tax deduction granted to indirect acquisition of shareholdings in foreign companies (for a previous entry on this case, see here), where the Court of Justice ultimately concluded that a tax measure which grants an advantage upon satisfaction of the condition that an economic transaction is performed may be selective even where any undertaking may freely choose whether to perform that transaction ( Joined Cases C-51/19 P and C-64/19 P).
These precedents show that the tension between direct taxation and State aid control is far from being resolved and that a relevant degree of uncertainty persist with regard to the assessment of the selectivity
condition. In particular, the case law of the EU Courts still seems to leave room for more in-depth discussion regarding the role of discretionary powers of tax authorities and there is still a need for more clear guidelines both for undertakings and authorities.
María López Ridruejo and Alexandre Picón are Counsel and Principal Associate at an international law firm headquartered in Spain. The views presented in this article are issued in the authors’ personal capacity and do not reflect the views of any organisation they are associated with, nor do they constitute legal advice. Both authors have been involved in the late stages of the case T-514/14 - Hispavima v. Commission, before the General Court.
SUGGESTED CITATION: López Ridruejo, M. and Picón, A.; “Selectivity in the Spanish Tax Lease case: Discretion of public authorities”, EU Law Live, 09/07/2024, https://eulawlive.com/competition-corner/selectivity-in-the-spanish-tax-lease-case-discretion-of-public-authorities-by-maria-lopez-ridruejo-and-alexandre-picon/
Selective Advantage in Tax Rulings: All the Chapters bring the Saga to one End
Nieves Bayón Fernández
The year 2019 marked the beginning of the development of an important line of case law in the application of State aid rules to national tax rulings, as the General Court delivered its judgments in Belgian Excess Profits (Cases T-131/16 and T-263/16), Fiat (Cases T-755/15 and T-759/15), Starbucks (Cases T-760/15 and T-636/16), Apple (Cases T-778/16 and T-892/16), Amazon (Cases T-816/17 and T-318/18) and Engie (Cases T-516/18 and T-525/18). These judgments clarified important aspects concerning the application of State aid rules in the field of direct taxation and, more specifically, on Member States’ discretion to grant tax rulings.
However, uncertainty still remained as to the approach that the European Court of Justice would take when ruling on appeal. Starting in 2021, with its judgment in Belgian Excess Profits (Case C-337/19 P), and pending its ruling in Apple (Case C-465/20 P), the European Court of Justice has now brought together the different chapters of the tax rulings saga first in Fiat ( Joined Cases C-885/19 P and C-898/19 P) and then in its latest judgments in Engie ( Joined Cases C-451/21 P and C-454/21 P) and Amazon (Case C-457/21 P). Developing a so far consistent line of case law, the European Court of Justice has made it clear that, although Member States must refrain from adopting tax measures liable to constitute State aid that is incompatible with the internal market, the European Commission’s discretion in its State aid analysis of national tax ruling measures is rather limited: to safeguard Member States’ national fiscal autonomy in matters involving direct taxation that have not yet been harmonised, the Commission shall base its State aid analysis exclusively on national law tax rules.
Of the conditions required by Article 107(1) TFEU for there to be State aid, establishing the existence of a selective advantage has proven to be the most controversial requirement in tax ruling cases - in particular, in relation to the determination of the reference framework. As this Op-Ed will show, the latter is of particular importance in analysing the State aid nature of national tax measures, as (i) an economic advantage under Article 107(1) TFEU may be established only when compared with normal taxation; and (ii) it is the first step of the selectivity analysis, which determines which undertakings can be compared.
The Role of the Arm’s Length Principle in Determining the Existence of an Economic Advantage under Article 107(1) TFEU
The Commission Decisions in Fiat (SA.38375), Starbucks (SA.38374), Apple (SA.38373) and Amazon (SA.38944) found the granting of an advantage to the respective beneficiary undertakings stemming from the wrong application of the arm’s length principle (“ALP”) - which the Commission argued was an EU law principle, implicit in Article 107(1) TFEU and applicable even if national law did not recognise it.
The Commission’s approach failed to take into account that the existence of an economic advantage shall be established with reference to the normal (national) taxation system (in the words of Daniela Gschwindt,
“[t]he national legal framework [was] simply ignored”; see the Op-Ed on the Dynamics of selectivity in EU Law Live). Indeed, the General Court confirmed already in its first judgments that the Commission did not have at this stage of development of EU law competence to define the applicable reference system, disregarding national tax rules (see e.g. General Court in Fiat, para 112, Starbucks, para 159 and Apple, para 223). The General Court left however the door open for the Commission to rely on the ALP as a “tool” to determine whether a given national tax measure is in line with market conditions (see e.g. General Court in Fiat, para 151, Starbucks, para 163 and Apple, para 214), understanding also that to the extent the national tax system did not distinguish between integrated and standalone, or resident and non-resident companies, for the purpose of the corporate income tax (“CIT”), it had adopted the ALP (see e.g. General Court in Fiat, para 157, Starbucks, para 159, Amazon, para 120 and Apple, paras 221-224). The European Court of Justice has clearly overturned also this possibility. In its judgment in Amazon, in particular, the European Court of Justice has clearly confirmed that:
(i) the existence of an economic advantage may be established only when compared with normal taxation (para 35);
(ii) outside the sphere in which EU tax law has been harmonised, it is for the Member State concerned to determine the characteristics of the reference system (para 39);
(iii) there is no autonomous ALP under EU law (para 42);
(iv) to apply the ALP, the Commission must, as a preliminary step, satisfy itself that this principle was incorporated into the national tax law concerned, which as a minimum requires that that law refer “explicitly” to it (paras 46 and 54); and
(v) the OECD Guidelines have practical importance to the extent that national tax law makes reference to them and the Commission shall prove that they have been, wholly or in part, “explicitly” adopted in national law (paras 47 and 56).
These conclusions add to the ruling of the European Court of Justice in Fiat, which had imposed a high standard (“manifestly inconsistent” with the objective of the reference system, leading to a “systematic undervaluation” of the applicable transfer prices) on the Commission to prove the existence of an advantage when a Member State has chosen to apply the ALP (European Court of Justice in Fiat, para 122; see also the Op-Ed on the Fiat case in EU Law Live by Ricardo García Antón and Nieves Bayón Fernández).
Although the judgments of the European Court of Justice in Amazon and Fiat have both pointed to the same end, the Apple case could constitute a turning point. The judgment of the General Court had annulled the underlying Commission Decision on the basis that it had relied on a method which was inconsistent with the applicable national law (General Court in Apple, paras 186, 187, 259, 361, 362, 379). Advocate General (“AG”) Pitruzella has however proposed that the European Court of Justice set aside the judgment of the General Court on the basis that it incurred a number of errors in law when ruling that the Commission had not proved the existence of an advantage to the requisite legal standard (AG Pitruzella in Apple). There is a question however as to whether in spite of the errors identified by AG Pitruzella, the underlying Commission Decision can be upheld to the extent that it did not appear to rely exclusively on national law in the assessment of the existence of the advantage as required in line with Amazon or Fiat. Dr. Dimitrios Kyriazis actually pointed out that “AG Pitruzella arguably disregarded the due respect paid by the [European Court of Justice] to national fiscal autonomy and insisted on using the arm’s
length principle and it variations as a reference point for establishing the existence of a [S]tate aid advantage in favour of the Apple group” (see the Op-Ed on Selectivity in tax ruling cases in EU Law Live).
The Role of National Law in Defining the Reference System for the Purposes of the Selectivity Analysis under Article 107(1) TFEU
In its tax ruling cases concerning the application of the ALP, the Commission identified the CIT system as the reference system (Fiat, Section 7.2.1, Starbucks, Section 9.2.1, Apple, Section 8.2.1, and Amazon, para 587), without taking into account the administrative tax ruling practice of the national tax authorities, and disregarding national tax law in its selectivity analysis. Although the General Court only analysed the selectivity condition in Fiat (and it did so “irrespective of the reference framework used”), its judgments in Fiat, Starbucks, Apple and Amazon, all suggest that the General Court accepted the broad definition of the reference system adopted by the Commission.
In Engie, which did not concern the application of the ALP, the Commission had also identified the CIT system as the reference system (Engie, Section 6.2.1.1.), but it still performed a subsidiary analysis, considering a narrower reference system. The General Court confirmed the underlying Commission Decision. In its judgment, it only reviewed the analysis performed by the Commission under the narrower reference framework, arguably rejecting the Commission’s analysis in light of the broader reference system (paras 232 and 234) and it appeared to confirm that the Commission could find links between national provisions that national law did not appear to have - at least explicitly - created (paras 292-301) and decide on the interpretation of national provisions on abuse of law and assess their selective nature, without referring to the administrative practice of the national tax authorities (para 409).
The judgments of the European Court of Justice in Belgian Excess Profits, Fiat, Amazon and Engie all broadly overturn the Commission’s and General Court’s approach, making it clear that:
(i) the administrative practice of the national tax authorities can constitute an aid scheme (European Court of Justice in Belgian Excess Profits);
(ii) correctly identifying the reference system is “necessary” to assess the selective nature of a national measure (European Court of Justice in Amazon, para 37 and Engie, para 110);
(iii) an error made in that determination necessarily vitiates the whole of the analysis of the condition relating to selectivity (European Court of Justice in Amazon, para 37 and Engie, para 110);
(iv) in cases concerning direct taxation, when determining the reference system, the Commission has an obligation to “exclusively” take into account the national law applicable in the Member State concerned (European Court of Justice in Fiat, paras 74 and 94 and Engie, para 113) and is in principle required to accept the national interpretation of the relevant provisions of national law (Engie, para 120);
(v) respect to Member States’ national fiscal autonomy entails that the Commission cannot rely on the general objective of the CIT system to apply an ALP not based on national law (European Court of Justice in Fiat, paras 91 and 96) and can neither establish a derogation from the reference framework merely by finding that a national measure departs from a general objective of taxing all resident companies, without taking account of national law provisions specifying how that objective is to be implemented (European Court of Justice in Engie, para 177);
(vi) it is not for the Commission to define what does or does not constitute a correct application of a national provision: the Commission cannot conclude that the non-application of a certain provision by the tax authorities grants a selective advantage unless that non-application departs from the national case law or administrative practice relating to that provision (European Court of Justice in Engie, para 155).
The latest cases have made it clear that correctly defining the reference framework taking due account of national law is crucial in the Commission’s analysis of the selective nature of tax ruling measures. Although the European Court of Justice still refers to its ruling in Gibraltar ( Joined Cases C-106/09 P and C-107/09 P) to clarify that the reference framework itself could be incompatible with EU law if configured according to manifestly discriminatory parameters, it is not very clear today under which conditions the Commission could be able to go beyond the (national) “regulatory technique” used by Member States as provided in Gibraltar, at least in what concerns tax rulings.
The European Court of Justice has also accepted that a systematic contra legem application of a national tax measure by the tax authorities of a Member State could be part of an administrative practice and de facto constitute a scheme. It remains to be seen however, as Daniela Gschwindt also noted in her Op-Ed, under which circumstances a wide margin of discretion granted by national legislation to the national tax authorities can per se constitute State aid (and this is a question that is not completely clear as the case law stands today; see the Op-Ed on Selectivity in the Spanish Tax Lease case in EU Law Live by María López Ridruejo and Alexandre Picón). This is important because one could conclude that, if national tax laws do not necessarily grant a margin of discretion upon the national tax administration and the tax ruling practice of the national tax authorities may constitute an aid scheme, the Commission always needs to analyse (and can never presume) selectivity (at least in cases concerning tax rulings) (see also “Fiat, Starbucks, Apple, Amazon and Engie: Do Individual Tax Rulings Confer a Selective Advantage?”, Milestones in State Aid Case Law EStAL’s First 15 Years in Perspective, by José Luis Buendía Sierra and Nieves Bayón Fernández).
Ultimately, the EU Courts have made it clear in their latest judgments that the Commission shall respect Member States’ fiscal autonomy in their selectivity analysis of national tax measures, a principle that plays a particular role when identifying the reference framework, which itself determines which undertakings can be compared.
Conclusions
Establishing the existence of a selective advantage has proven to be the most controversial requirement in the State aid analysis of tax ruling measures. During the past five years, the EU Courts have issued a series of judgments that now make it clear that in the matter of direct taxation, in areas that have not been harmonised under EU law, and that are therefore within the Member State’s fiscal autonomy, the Commission’s discretion in its State aid analysis is limited and shall be performed with due regard to Member State’s national laws.
The effects of this case law go however well beyond the sphere of tax rulings and in the next few years we might see further developments on how the EU Courts assess Member States’ discretion in designing the objectives and elements of their national reference framework. The latest developments outside the tax rulings sphere show that the burden to show that a national tax system contains manifestly discriminatory elements in line with Gibraltar is rather high, ensuring respect for Member States’ national fiscal autonomy
(see, in particular, the Analysis of the Ideella judgment by Nieves Bayón Fernández).
The latest developments do not however mean that the debate surrounding the selective advantage condition in cases concerning direct taxation measures within the sphere of Member States’ exclusive competence is close to being closed. Jacques Derenne and Ana Álvarez Vidal have recently analysed the complexity of the determination of the reference framework in tax ruling matters in relation to the Spanish Goodwill saga (see their Op-Ed on Selectivity and the reference framework), concluding that “[d]eciphering selectivity is a complex exercise”, a complexity that also applies when analysing the existence of an advantage to the extent that the latter may be established only when compared with normal (national) taxation.
Nieves Bayón Fernández is an Associate at the EU and Competition law department of an international firm in Brussels.
SUGGESTED CITATION: Bayón Fernández, N.; “Selective Advantage in Tax Rulings: All the Chapters Bring the Saga to One End”, EU Law Live, 06/08/2024, https://eulawlive.com/competition-corner/selective-advantage-in-tax-rulings-all-the-chapters-bring-the-saga-to-one-end-by-nieves-bayon-fernandez/
Selectivity and Discrimination in Light of the Recent Ryanair v Commission Cases (C-209/21,
C-210/21, C-320/21, C-321/21)
Juan Jorge Piernas López
In a number of recent judgments, the Court of Justice has analysed the relationship between the State aid rules and the general principle of non-discrimination based enshrined in article 18 TFEU. As summarized by Cyndecka, the Court found that State aid is discriminatory by nature, but compatible aid does not breach the principle of non-discrimination. It is worth examining the implications of these judgments in the context of the definition of State aid, and particularly for the criterion of selectivity, as well as for the compatibility of State aid.
Discrimination and the notion of aid
The Court found that Article 107(1) TFEU is linked to discrimination, as this provision deems incompatible national measures that introduce differences in treatment between undertakings in a comparable situation (e.g. case C-320/21 TFEU, para. 111). The case-law of the Court in recent years appear to confirm this finding.
Indeed, the Court has increasingly linked the notion of aid, and particularly the criterion of selectivity therein, with discrimination. For instance, the Grand Chamber of the Court referred to discriminatory parameters in Commission v Poland and Commission v Hungary. Similarly, concerning fiscal aid, Advocate General Kokott has held that “the decisive factor is whether […] the conditions governing the tax advantage have been selected in a non-discriminatory manner [concluding that, in essence] this selectivity test is a discrimination test.”
The General Court also observed in case T-378/20 (paragraph 65) that “individual aid […] by definition benefits only one company, to the exclusion of all the other companies, including those in a situation comparable to that of the recipient of that aid. Consequently, such individual aid, by its nature, brings about a difference in treatment, or even discrimination, which is however inherent in the individual character of that measure.” Similarly, the European Commission concluded in 2016 that “fiscal measures that discriminate between taxpayers in a similar factual and legal situation constitute, in principle, State aid.”
It therefore appears safe to conclude, as did Advocate General Pitruzella, that “the case-law of the Court has, for some time now, highlighted the close connection between the concept of selectivity, inherent in the concept of aid, and the concept of discrimination”. To this extent, Advocate General Jacobs already observed in the 1996 Kimberley Clark case ( paragraph 28) that a difference in the treatment of different operators “is the kernel of the concept of aid within the meaning of Article [107(1) TFEU]”.
Discrimination and the compatibility of aid
Assuming that discrimination is enshrined in the concept of State aid, and notably in the criterion of selectivity, the Court was asked to analyse whether the principle of non-discrimination based on nationality under Article 18 TFEU play any role in the analysis of the compatibility of State aid.
Confirming the view of the General Court and of Advocate General Pitruzella, the Court found that the principle of non-discrimination under Article 18 TFEU is implemented in the Treaty State aid provisions, and therefore that this provision does not apply independently in the State aid field (e.g. case C-320/21 TFEU, paras. 110-112). This finding is based on the well-settled case-law of the Court according to which Article 18 TFEU applies independently only to situations governed by Union law for which the Treaty lays down no specific rules of non-discrimination. To this extent, the Court has underlined that in relation to the freedom of movement for workers, the right of establishment, the freedom to provide services and the free movement of capital, the principle of non-discrimination was implemented in specific Treaty provisions (see e.g. C-379/92 Peralta).
The Court´s finding would also be consistent with the 2004 Thermenhotel Stoiser Franz judgment, where the General Court held that the first paragraph of Article 18 TFEU was not apt to be applied independently in the context of a State aid case “by reason of the existence of the competition rules of the Treaty. They cover discrimination, not in relation to the nationality of the undertakings allegedly affected, but by reference to the geography and sector of the market considered” seemingly linking the notion of discrimination to that of material or geographical selectivity.
However, the foregoing must be reconciled with the case-law of the Court, in Grand Chamber formation, according to which the application of the State aid rules must never produce a result which is contrary to the specific provisions of the Treaty or the general principles of Community law, such as the principle of equal treatment, cited by the Court in Nuova Agricast, Hinkley and Braesch. The judgments under review quote this case-law. However, as explained above, they consider that Article 18 TFEU does not apply independently as the State aid rules are specific provisions under this article. Despite this finding, I think the previous case-law of the Court and the objectives of the State aid rules under the Treaty demand a thorough analysis of whether the principle of equal treatment and non-discrimination has been respected.
In relation to the previous case-law, even assuming that the Treaty rules are specific provisions under Article 18 TFEU, and therefore that this latter provision does not apply independently, the general principle of equal treatment and non-discrimination would still apply in my opinion, as the Grand Chamber of the Court has underlined in recent judgments. This principle prohibits blatant discriminations based, for instance, on nationality. To this extent, in Nuova Agricast the Court analysed whether the Commission had infringed the principle of equal treatment in a State aid decision and underlined that this principle “requires that comparable situations must not be treated differently and that different situations must not be treated in the same way unless such treatment is objectively justified.”
In my opinion, a discrimination based on nationality is liable to go beyond what is necessary under Article 107(2) or (3) TFEU, and therefore be contrary to the principle of equal treatment and the case-law of the Court, a possibility that should be analysed separately in the compatibility assessment. To this extent, in 2021 the Commission invoked Article 18 TFEU in an opening State aid decision as one of the EU Law provisions the contravention of which would make a State aid scheme incompatible with Article 107(3)
TFEU, and citing the abovementioned Hinkley decision, therefore assuming that Article 18 TFEU is relevant in the context of the compatibility analysis (and has not been subsumed by Articles 107(2) and 107(3) TFEU), although this decision certainly predates the judgments under review. In particular, the Commission noted that the measure under review “introduce[d] a discrimination — based on nationality — […] Such discrimination based on nationality is incompatible with Union law, in particular with Article 18 TFEU.”
Even in cases of more subtle discrimination, a detailed analysis would in my opinion have to be carried out. The Schumacker decision of the Court could provide some guidance. In that judgment, the Court noted that national rules which made a distinction on the basis of residence in that non-residents were denied certain benefits which were, conversely, granted to persons residing within the national territory, were liable to operate mainly to the detriment of nationals of other Member States, constituting prima facie indirect discrimination by reason of nationality. However, the Court did not stop the analysis at that point, but instead added that discrimination can arise only through the application of different rules to comparable situations or the application of the same rule to different situations, and concluded that, in relation to direct taxes, the situations of residents and of non-residents were not, as a rule, comparable.
The question for our purposes could therefore be, whether, in relation to the State aid rules, and particularly to the granting of aid to alleviate the consequences of a crisis, the situations of resident and of non-resident undertakings are (or are not) comparable and, if so, whether there is any justification for the different treatment. It therefore appears that the principle of equal treatment, even absent Article 18 TFEU, has an independent role to play in the context of the analysis of the compatibility of State aid measures.
Finally, concerning the goals of the State aid rules within the Treaty architecture, the State aid rules aim to ensure the level playing field in the internal market, which can certainly be hampered by discrimination based on nationality. This type of discrimination might also increase disparities among Member States, whose financial resources are very different, which would be contrary to the goals of economic, social and territorial cohesion in the Union recognized in Articles 3 TEU and Article 174 TFEU. In this context, the words of Professor Ryziger in 1965 are still relevant today: « il est assez peu probable de voir un Etat, tout au moins dans la période actuelle, accorder des aides a des entreprises étrangères, qu’il va sans dire que les aides d’Etat vont d’abord aux nationaux, et que dans cette mesure on peut dire que l’incompatibilité entre certaines aides et le Marché Commun se rattache à l’interdiction de discrimination en raison de la nationalité. » (PaulFrancois Ryziger « Discriminations et subventions », in Dix ans de jurisprudence de la Cour de justice des Communautés européennes, Europäische Arbeitstagung (Köln : Heymanns, 1965), pp- 245-258 at page 253).
Juan Jorge Piernas López is a Senior Lecturer and Jean Monnet Chair, University of Murcia Law School, Spain; Consultant to The World Bank, Washington DC, USA, and other public institutions
SUGGESTED CITATION: Piernas López, J.J.; “Selectivity and discrimination in light of the recent Ryanair v Commission cases (C-209/21, C-210/21, C-320/21, C-321/21)”, EU Law Live, 14/06/2024, https://eulawlive.com/competition-corner/selectivity-and-discrimination-in-light-of-the-recent-ryanair-v-commission-cases-c-209-21-c-210-21-c-320-21-c-32121-by-juan-jorge-piernas-lopez/
Turbulence in the State Aid Sky: Selectivity as a New Justification for Discrimination under
Articles 107(2)(b) and 107(3)(b) TFEU?
An Analysis of the Ryanair-COVID Cases
Sébastien Thomas
Introduction
As is well-known, the COVID crisis severely hit the European economy. As a consequence of the lockdown measures that were adopted by most EU Member States as of March 2020, some economic activities in particular, such as air transport, were faced with unprecedented and unexpected difficulties, as most of the flights had to be cancelled or rescheduled during that period, resulting in a decreased demand for air passenger transport of more than 90 % for some companies.
In this context, the European Commission swiftly adopted a communication setting out a ‘ Temporary Framework for State aid measures to support the economy in the current COVID-91 outbreak’. Soon thereafter, several Member States adopted measures, in the form of individual aid or aid schemes, to support airlines operating in their territory. Those measures, based on Article 107(2)(b) TFEU or Article 107(3)(b) TFEU, depending on the case, were swiftly declared compatible with the internal market by the Commission, without the formal investigation procedure provided for in Article 108(2) TFEU being initiated.
Ryanair challenged most of these decisions before the General Court. In all these cases, Ryanair contested the alleged discriminatory nature of the aid measures approved by the Commission. Ryanair claimed, in particular, that the Commission could not have authorised such aid, as it was contrary to Article 18 TFEU, which prohibits any discrimination based on nationality, and to internal market rules, in particular the freedom to provide services and the freedom of establishment.
In a first series of cases (T-238/20 and T-259/20), Ryanair challenged the Commission’s decisions declaring the aid schemes adopted by Sweden and France, respectively, to be compatible with the internal market, on the basis of Article 107(3)(b) TFEU, as those aid schemes made the granting of the aid subject to the holding of a licence, and hence the principal establishment, in the Member State concerned.
In a second series of cases (T-378/20 and T-379/20), Ryanair complained essentially of the use that had been made of Article 107(2)(b) TFEU by Member States, with the approval of the Commission, by adopting individual measures favouring major national airlines, instead of providing compensation to all airlines (including Ryanair) in proportion to the damage that they had suffered as a result of the COVID crisis.
Both the General Court and the Court, on appeal, rejected these claims. While the outcome has been applauded by some commentators, as it leaves a large margin of discretion to Member States in designing
their aid measures and in deciding how to best allocate their resources in times of crisis, the reasoning adopted by the EU judges raises important questions in terms of State aid policy. Indeed, EU State aid control is – in principle – meant to achieve the double objective to limit distortions of competition in the internal market and to avoid costly and inefficient subsidy races between Member States (see, inter alia, J. Buendía Sierra, ‘The Role of Competitors in State Aid Procedures’, EStAL 14, Issue 4, 2015, p. 451). One may wonder whether the approval of such massive amounts of State aid, even in times of crisis, without making them available to all airlines (including Ryanair) in proportion to the damage that they have suffered or to their contribution to the national economy, is compatible with those objectives.
Five main takeaways can be found in the Court’s judgments on appeal in cases C-209/21 P, C-210/21 P, C-320/21 P and C-321/21 P :
1. Article 107(2)(b) TFEU is not limited to aid schemes and can be used to compensate one single undertaking for the damage caused by an ‘exceptional occurrence’, even though other undertakings may also have suffered damage caused by the same event.
2. Article 107(3)(b) TFEU can be used by a Member State to grant State aid only to national companies in the light of the particular role of these companies for that Members State’s economy and/or for its connectivity.
3. Articles 107(2) and 107(3) TFEU constitute ‘special provisions’ justifying a derogation to the principle of non-discrimination based on nationality enshrined in Article 18 TFEU.
4. As any State aid is by definition selective, so that it cannot be declared incompatible with the internal market for the sole reason that it would be discriminatory.
5. Therefore, if the aid pursues a legitimate objective under Article 107(2) or (3) TFUE, it does not matter whether, as such or by some of its modalities, it is contrary to Article 18 TFEU or to free movement rules.
As these judgments have already been analysed elsewhere, the present analysis will focus on the reasoning followed by the Court on appeal, as regards the scope of Articles 102(2)(b) and 107(3)(b) TFEU and their relationship with other provisions of the Treaty, such as Article 18 TFEU.
The scope of Article 107(2)(b) TFEU – is there a requirement to grant aid to all the victims of the damage caused by an exceptional occurrence ?
First, as regards the scope of Article 107(2)(b) TFEU, it is worth reminding the reasoning followed by the General Court, which found, in essence, that:
• There is no requirement for Member States to grant any aid to make good the damage caused by an exceptional occurrence within the meaning of Article 107(2)(b) TFEU.
• Specifically, first, while Article 108(3) TFEU requires Member States to notify their plans as regards State aid to the Commission before they are put into effect, it does not, however, require them to grant any aid.
• Secondly, an aid measure may be directed at making good the damage caused by an exceptional occurrence, in accordance with Article 107(2)(b) TFEU, irrespective of the fact that it does not make good the entirety of that damage.
• Consequently, it does not follow from either Article 108(3) TFEU or from Article 107(2)(b) TFEU that Member States are obliged to make good the entirety of the damage caused by an exceptional occurrence, such that they likewise cannot be required to grant aid to all of the victims of that damage. (T-379/20, paras. 22-25).
As Advocate General Pitruzzella rightly noted in his Opinion, this reasoning suffers from a ‘leap of logic’: ‘It does not logically follow (or necessarily follow, in any event) from the fact that there is no obligation upon the Member States to adopt support measures within the meaning of Article 107(2)(b) TFEU or, in the event that such measures are adopted, to ensure that they make good the entirety of the damage, that that provision may serve as the legal basis for the adoption of aid measures confined to a single undertaking when all the undertakings operating in the market in question have suffered damage.’ (AG Opinion in Case C-320/21 P, para. 15)
The AG proposed, nevertheless, to uphold the General Court’s judgment (and the Commission’s Decision) on the following grounds: ‘[…] the compensatory logic of Article 107(2)(b) TFEU does not preclude the choice of the beneficiary of a measure adopted in circumstances such as [the COVID crisis] from being dictated by specific objectives pertaining to the economic activity carried on by the operator or to its specific characteristics, such as supporting an undertaking which, in normal times, provides a service of general public interest or an undertaking which is vital to employment and therefore to social stability, those objectives being in line with the function of the measure placed at the Member States’ disposal to make good the consequences of the events contemplated by that provision and, in an emergency such as that created by the COVID-19 pandemic, taking on even greater importance.’ (AG Opinion in Case C-320/21 P, para. 17, emphasis added)
The Court essentially confirmed that reasoning, albeit with some nuances, which shows the difficulty faced by it to address this issue convincingly. Indeed, according to the Court : ‘ (…) the objective pursued by Article 107(2)(b) TFEU, which is to compensate for the disadvantages caused directly by an exceptional occurrence, does not mean that a Member State cannot, without that being dictated by a desire to favour one undertaking over its competitors, choose, for objective reasons, to grant only a single undertaking the benefit of a measure adopted under that provision. Moreover, a contrary interpretation of Article 107(2)(b) TFEU would deprive that provision of much of its effectiveness. If that provision only allowed a Member State the option of granting aid to all the victims of an exceptional occurrence without being able to reserve that aid to a limited number of undertakings, or even just one, Member States would often be deterred from making use of that option because of the costs involved in the grant, in such circumstances, of significant aid to all undertakings that suffered damage coming under its authority. It follows from the foregoing considerations that Article 107(2)(b) TFEU cannot be interpreted in the manner advocated by Ryanair without undermining the objective and effectiveness of that provision.’ (C-320/21 P, paras. 24-26, emphasis added)
The Court held nevertheless that :’(…) aid measures granted under Article 107(2)(b) TFEU which, although intended to make good damage suffered as a result of an exceptional occurrence, are, in fact, motivated by considerations that are arbitrary or unrelated to that objective, such as the wish to favour, for reasons not
connected with that objective, a particular undertaking compared with its competitors, especially an undertaking which was already in difficulty before the occurrence of the event in question, cannot be held to be compatible with the internal market. (…) However, contrary to what Ryanair suggests, the mere fact that aid under Article 107(2)(b) TFEU is granted to only one undertaking, as in the present case to SAS, from among a number of undertakings potentially adversely affected by the exceptional occurrence at issue, does not mean that that aid necessarily pursues other objectives to the exclusion of the one pursued by that provision or that it is granted arbitrarily.’ (C-320/21 P, paras. 28 and 31, emphasis added)
While the Court’s reasoning seems to be dictated by a desire of compromise between the willingness to safeguard Member State’s autonomy in times of crisis and the integrity of the State aid rules, it is not easy to draw useful conclusions from it.
Firstly, the Court and the Advocate General did not specify what are the ‘objective reasons’ that may be invoked by a Member State when applying Article 107(2)(b) TFEU for the benefit of only one single undertaking.
Secondly, it is not clear whether only SAS fulfilled those objectives in the case at hand, and to what extent that company could be distinguished from other airlines, such as Ryanair, having suffered from the same ‘exceptional occurrence’, namely COVID. In any event, one may wonder whether such external ‘objective reasons’, can legitimately be taken into account when applying Article 107(2)(b) TFEU. As the Court recalled earlier (C-320/21 P, para. 20), since this provision is an exception to the principle of incompatibility of State aid, it should be interpreted narrowly. Are such external objectives not more adequately taken into account within the framework of Article 107(3)(c)TFEU ?
Thirdly, it is not clear either why Member States would ‘often be deterred’ from making use of that provision if another interpretation had been followed, ensuring that all undertakings (or at least those operating in a same economic sector) having suffered damage caused by a same ‘exceptional occurrence’, should be entitled to be equally compensated, in proportion to the damage suffered as a consequence of that event (see also, in that sense, P. Nicolaides, cited above). Arguably, even if a cake is not infinite, one does not see why distributing its pieces equally would deter Member States from baking and serving a cake at all. It seems rather that the here the Member States concerned wanted to have their cake and eat it by applying Article 107(2)(b) to only one carefully selected beneficiary.
One may easily see the potentially problematic consequences of the Court’s interpretation: if a Member State wishes to grant State aid in order to compensate for damages caused by a natural disaster such as a flood, for example, does it mean that, from now on, it can decide to restrict the right to obtain compensation to specific companies only (although many of them may have suffered damage caused by the same event), on the basis of criteria which are completely unrelated to the objective mentioned in Article 107(2)(b) such as their importance for employment and social stability for example? If yes, would this not amount to an arbitrary discrimination, which the Court precisely wishes to avoid? What are the criteria in order to differentiate between a discriminatory measure which is justified by ‘objective reasons’ and one which is motivated by considerations that are ‘arbitrary’ or not connected to that objective? Further clarification by the Court would certainly have been welcome on this point.
Articles 107(2) and 107(3) TFEU constitute ‘special provisions’ justifying a derogation to the principle of non-discrimination on the basis of nationality enshrined in Article 18 TFEU
A second issue which the Court faced on appeal was the question whether the aid measures granted under Article 107(2) and 107(3) TFEU could not have been declared compatible with the internal market, as they are contrary to the principle of non-discrimination on the basis of nationality (Article 18 TFEU). In this regard the question arises whether, as the General Court found, Article 107(2) and (3) TFEU constitute ‘special provisions’, within the meaning of Article 18 TFEU justifying a derogation to the principle of nondiscrimination on the basis of nationality enshrined in that provision.
According to the Court, as any State aid is by definition selective, and therefore discriminatory, it cannot be declared incompatible for reasons that are solely linked to whether the aid is selective or distorts or threatens to distort competition (C-320/21 P, para. 108, and C-209/21 P, para. 32).
Ryanair relied on a constant line of case-law (the ‘Nuova Agricast case-law’), according to which ‘State aid which, as such or by reason of some modalities thereof, contravenes provisions or general principles of EU law cannot be declared compatible with the internal market’ (C-390/06, paras. 50-51, recently confirmed in the Hinkley Point judgment (grand chamber), para. 44.).
The Court reminded, however, that Article 18 TFEU is intended to apply independently only to situations governed by EU law in respect of which the TFEU lays down no specific prohibition of discrimination (C-209/21 P, para. 34 and the case-law cited). Yet, according to the Court, since Article 107(2) and (3) TFEU provides for derogations from the principle that State aid is incompatible with the internal market, and thus allows, in particular, differences in treatment between undertakings, subject to fulfilment of the requirements laid down by those derogations, those derogations must be regarded as ‘special provisions’ provided for in the Treaties, within the meaning of the first paragraph of Article 18 TFEU (C-209/21 P, para. 35 and C-320/21 P, para. 111). The Court confirms, therefore, that it is only necessary to examine whether the difference in treatment brought about by the measure at issue is permitted under Article 107(2) and (3) TFEU. Likewise, the differences in treatment entailed by the aid scheme at issue likewise do not have to be justified on the grounds set out in Article 52 TFEU (C-320/21 P, paras. 112-113, and C-209/21 P, paras. 36-37).
Such a conclusion is far from obvious though and it is difficult to reconcile with the Court’s earlier case-law, which was invoked by Ryanair, with the logic of the State aid rules and with the Commission’s decisional practice.
Firstly, as AG Pitruzzella pointed out in his Opinion, it is not easy to see in Article 107 TFEU a rule for implementing the prohibition of discrimination on grounds of nationality of the same kind as the provisions of the FEU Treaty concerning the four freedoms (e.g. C-181/19, para. 78; and C-591/17, para. 40). As the AG rightly noted, like Article 18 TFEU, the rules of State aid ‘constitute a means for keeping discrimination in check; they themselves do not contain any rule of non-discrimination’ (AG Opinion in Case C-320/21 P, para. 64).
The AG recognised, nevertheless, that Article 107(2) and (3) TFEU ‘in so far as they provide for the compatibility of some aid with the internal market under certain conditions, allow certain differences in
treatment where they are necessary and proportionate for the purpose of attaining the objectives contemplated by those provisions and are therefore significant for the purposes of the application of the principle of nondiscrimination, as ‘special provisions’ within the meaning of the first paragraph of Article 18 TFEU’ (AG Opinion in Case C-320/21 P, para. 64, emphasis added).
This amounts to the idea that any State aid is by nature selective, but that it should only be authorised for the purpose of attaining one of the objectives contemplated by Articles 107 (2) and (3) TFEU.
It is striking, however, that, while the Court relied on the AG’s Opinion in that regard, it did not require to examine whether the difference in treatment brought by the aid scheme at issue was necessary and proportionate for the purpose of attaining the objective pursued, i.e. either to compensate for the damage caused by an exceptional occurrence (Article 107(2)(b) TFEU) or to remedy a serous disturbance in the economy of a Member State (Article 107(3)(b) TFEU), contrary to the approach also put forward by the GC.
Secondly, it is true that any State aid is selective, in that favours certain undertakings or certain sectors of the economy compared to others, so that State aid ‘cannot be considered incompatible with the internal market for reasons that are solely linked to whether the aid is selective or distorts or threatens to distort competition’ (C-320/21 P, para. 108, and C-209/21 P, para. 32). It does not mean, however, that any State aid is necessarily compatible with the internal market either, as it must fit one of the grounds for compatibility set out in Articles 107(2) or 107(3) TFEU and not contravene other provisions of the Treaty or general principles of EU law. The Court’s reasoning in that respect is tautological and does not really help to answer the arguments raised by Ryanair.
The fact that the Court seems to equate selectivity with discrimination is not new (e.g. C-20/15 P and C-21/15 P, World Duty Free, and C-524/14 P, Hansestadt Lübeck). However, it is quite different to accept that State aid can be discriminatory, even within the scope of application of the objective invoked for its compatibility. State aid may be selective for many reasons, without necessarily being discriminatory within the scope of application of the legal basis used for its compatibility. In the cases at hand, for example, the State aid measures adopted by Sweden and France are selective inasmuch as they are directed only at the air transport sector. They are, moreover, selective, insofar as they apply only to some companies with a ‘national license’, to the exclusion of other airlines such as Ryanair. While the ‘national license’ condition for grating the aid may, in some cases, be proportionate to achieve the objective pursued, namely to ‘remedy a serious disturbance of the economy if a Member State’, as the GC found, is it still the case if some companies are treated differently than their competitors, while they are in a comparable situation as regards the objective pursued, thereby reinforcing distortions of competition within the market concerned? Is it equally obvious that Member States may discriminate between companies within a same sector, equally affected by an exceptional occurrence such as Covid, for example, when they grant State aid aimed to make good the damage caused by that exceptional occurrence, under Article 107(2) (b) TFEU?
Moreover, reliance by the Court on the Iannelli & Volpi case-law (C-320/21 P, para. 121), is not entirely convincing in that regard. Indeed, in Iannelli & Volpi, the Court merely stated, in essence, that when some aspects of an aid which contravene other provisions of the TFEU are so indissolubly linked to the object of the aid that it is impossible to evaluate them separately, that aid must be examined as a whole, by including those aspects in the assessment of its compatibility with the internal market (C-74/76, para. 14). In other
words, as the Court has stated repeatedly since, a State aid which, by itself or by one of its components which is indissolubly linked to that aid, such as its granting modalities or its financing, contrary to other specific provisions of the Treaties or general principles of EU law, such aid cannot be declared compatible with the internal market. It does not mean, however, as the Court seems to suggest, that any discriminatory effect of a State aid is necessarily inherent to that aid and cannot, for that reason, be considered incompatible with the internal market (C-320/21 P, para. 108, and C-321/21 P, para. 96). In fact, as the Court stated in Iannelli & Volpi, ‘the fact that the inevitable consequence of the aid is often protection and therefore some partitioning of the market in question, as far as concerns the production or undertakings which do not derive any benefit from it, cannot imply that the aid produces restrictive effect which exceed what is necessary to enable it to attain the objectives permitted by the Treaty’ (C-74/76, para. 15, emphasis added).
Thirdly, it is not clear why the Court considered that Articles 107(2) or 107(3) TFEU would be ‘deprived of all practical effect’, if they were interpreted consistently with the Nuova Agricast case-law mentioned above. Obviously, a State aid cannot be declared incompatible with the internal market solely because it constitutes selective State aid. It is quite reductive and simplistic to interpret Ryanair’s argument relating to the Nuova Agricast case-law in this way though. The fact that a provision of the Treaty needs to be interpreted in a way which is compatible with other provisions of the Treaty and with general principles of EU law is nothing really new. It is surprising – to say the least – that the Court now seems to consider that adopting such an interpretation for Articles 107(2) and 107(3) TFEU would deprive these provisions of their ‘practical effect’ (‘effet utile’).
One may wonder, therefore, whether the Nuova Agricast case-law is still good law or whether it is ‘not deprived of all practical effect’. Indeed, according to the Court, even if a measure adopted on the basis Article 107(2) (b) or Article 107(3)(b) TFEU entails some difference in treatment (or even if it is discriminatory on grounds of nationality), it is only necessary to examine whether the difference in treatment brought about by that measure is permitted under one of those provisions (C-320/21 P, para. 112, and C-209/21 P, para. 36). In other words, it does not matter whether Ryanair may have been discriminated by the conditions for granting the aid, it is sufficient that the aid measure pursues one of the objectives mentioned by those provisions, insofar as its beneficiaries are concerned. Any differential treatment seems to be justifiable under Articles 107(2) or 107(3) TFEU as such, without any need to examine its compatibility with other provision of the Treaty or with general principles of EU law. Arguably, this does not leave much scope to the external review of legality set out in the Nuova Agricast case-law.
Fourthly, it is a fact that Member States have only limited resources, so that they need to make policy choices as to how to best allocate the aid that they wish to grant to achieve specific objectives. This does not mean, however, that they should be authorised to grant State aid which, as such or by some of its modalities, openly discriminates between companies in light of its objective (see also P. Nicolaides, quoted above).
It should also be reminded as well that the Commission has only limited discretion within the framework of Article 107(3)(b) TFEU and no discretion at all within the framework of Article 107(2)(b) TFEU. It is for that reason precisely, that the Court has consistently held that those provisions, which constitute derogations to the principle of incompatibility of State aid sate out in article 107(1) TFEU, should be interpreted narrowly (C-320/21 P, para. 20).
Finally, the reasoning followed by the Court in that regard appears difficult to reconcile with Commission’s decisional practice, or with the General Block Exemption Regulation (see Article 1(5) GBER). Similar
wording also appears in many Commission guidelines. If Articles 107(2) and 107(3) TFEU constitute ‘lex specialis’ allowing State aid to be granted (and to be declared compatible with the internal market) even if it entails a discrimination on the grounds of nationality, why did the EU legislator consider that there was a need to insert such provisions in the GBER?
Conclusion
‘We must adjust to changing times and still hold to unchanging principles.’ This famous quote by former US President Jimmy Carter reflects the necessity of adhering to core principles, such as human rights and the rule of law, especially in times of crisis. The same holds true for the core principles governing the rules on State aid.
The outcome of those Ryanair cases may be politically understandable: why should Member States grant State aid to all airlines operating on their territory, when they only wish to ‘save’ their national airlines during turbulent times, in order make sure that those companies will still be able to operate after the crisis, and ultimately to ensure long-lasting connectivity within and out their own territory. The Court’s reasoning to support that outcome is quite unsatisfactory, however, for the reasons mentioned above.
Following these judgments, it is not clear therefore whether the Nuova Agricast case-law mentioned above is still good law and how it should be applied in other cases. One may legitimately wonder whether any aid which is discriminatory – even within the scope of application of one of the grounds for compatibility set out in Articles 107 (2) and (3) TFEU – may now be justified on the basis of the inherent ‘selective’ character of State aid.
It is a pity that the Court did not hold firm on these principles and that the Commission gave up on them so easily in the context of the Covid crisis, as if they had to be ‘suspended’ because of the COVID crisis.
Of course, in the absence of a fully-fledged EU Sovereignty Fund for all sectors of the economy, Member States remain competent to adopt State aid on their own territory (which is the relevant framework to assess selectivity), insofar as such aid is compatible with the internal market. Does it mean however, that it can openly discriminate between national and foreign companies when granting State aid for one of the objectives mentioned in Articles 107(2) or (3) TFEU? In the case of Ryanair, is the consequence of the Court’s judgments that it should have convinced Ireland to adopt a similar aid scheme, rather than complain to the Commission for having approved aid schemes with discriminatory features in other Member States?
As always, ’hard cases make bad law’, so that one can only hope that the Court will clarify in the future that it did not mean that any State aid can be declared compatible with the internal market on the basis of Articles 107(2) and 107(3) TFEU, even if it openly discriminates between companies within the scope of these provisions.
Fragmentation of the internal market and subsidy races between Member States are typically the negative effects of State aid that EU State aid rules aim to avoid. One may wonder whether the Court’s judgments, and the Commission’s decisions in these cases, have contributed to pursue those objectives in the airlines sector.
Selectivity in State
Sébastien Thomas (LL.M.) is a Senior Advisor in EU & Competition Law in a major law-firm in Luxembourg. Previously, he served as a law clerk for different judges both at the General Court and at the Court of Justice. He was also a Member of the Legal Service of the European Commission (State aid team) and worked as an academic assistant at the College of Europe (Bruges). Sébastien is the co-author of a book in State aid law (in French) as well as several articles and case-law analysis in this field.
SUGGESTED CITATION: Thomas, S.; “Turbulence in the State aid sky: Selectivity as a new justification for discrimination under Articles 107(2)(b) and 107(3)(b) TFEU? An analysis of the Ryanair-COVID cases”, EU Law Live, 25/06/2024, https:// eulawlive.com/competition-corner/50637/
Discriminatory Subsidies in the European Aviation Market?
Alexander Heger
Aviation was one of the sectors most affected by the impact of the COVID-19 pandemic. Due to the spread of the virus and the ensuing travel restrictions, passenger demand for air travel fell dramatically. The development (and recovery) of demand and air transport services was also highly uncertain in view of the numerous unpredictable factors. In this context, the Member States of the European Union granted substantial government rescue programmes and individual aid to airlines (see McMahon, EStAL 20 (2021), 249 and OECD, Policy Responses to Coronavirus: COVID-19 and the aviation industry), which were unanimously approved by the European Commission.
Strategic attack on aid: Not a resounding success
In particular, the airline Ryanair challenged the respective European Commission decisions with actions for annulment under Article 263(4) TFEU before the General Court and in appeal proceedings before the Court of Justice. The first judgments of the General Court were handed down in February 2021 with regard to the Swedish and French State aid schemes (Case T-238/20 and Case T-259/20). The Court of Justice issued its appeal decisions in November 2023 (Case C-209/21 P and Case C-210/21 P). In June 2024, the Court of Justice ruled on the Spanish recapitalisation fund. Moreover, individual aid granted by Member States was frequently challenged before the EU Courts. The Danish and Swedish aid to SAS was challenged before the General Court in Cases T-378/20 and T-379/20. The case was dismissed before the General Court, and the decision was upheld on appeal by the Court of Justice (Case C-320/21 P and C-321/21 P). The recapitalisation of Lufthansa (Case T-34/21 and T-87/21) and SAS (Case T-238/21) through a new, adapted aid scheme in Denmark and Sweden from August 2020 and Air France/KLM (Case T-216/21 and Case T-494/21) were also the subject of proceedings before the General Court. In that latter group of cases, the General Court held the Commission’s decisions to be contrary to EU law. Nevertheless, these procedures diverge to a certain extent from those previously described, as they pertain to the implementation of the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak.
Even if the individual proceedings cannot be fully mapped out here (for a comprehensive examination of the most relevant decisions, see Piernas López, Selectivity and discrimination in light of the recent Ryanair v Commission cases (C-209/21, C-210/21, C-320/21, C-321/21) and Thomas, Turbulence in the State aid sky: Selectivity as a new justification for discrimination under Articles 107(2)(b) and 107(3)(b) TFEU? An analysis of the Ryanair-COVID cases), it should be noted that the main questions regarding State aid law, to which Ryanair’s actions for annulment relate, concern, on the one hand, the relation between the provisions of State aid law (Art. 107 TFEU) and the prohibition of discrimination under EU law (for example, from Article 18(1) TFEU or the fundamental freedoms) and, on the other hand, the legality of the restrictive scope of beneficiaries of subsidies and possible discriminatory effects. The CEO of Ryanair,
Michael O’Leary, stated in May 2020: ‘Instead of governments treating all airlines equally, they are massively subsidising the State aid junkies like Lufthansa and Air France. […] it is discriminatory and it is in breach of State aid rules.’
Both the General Court and the Court of Justice rejected such an argument in the first cases.
The State aid regime as a special prohibition of discrimination
The plea concerning a breach of the principle of non-discrimination, as laid down, for instance, in Article 18(1) TFEU, follows from the Court of Justice’s case law, according to which State aid which infringes provisions or general principles of EU law ‘cannot be declared by the Commission to be compatible with the common market’ (Nouva Agricast, Case C-390/06, para. 50 et seq; Republic of Austria v European Commission, Case C-594/18 P, para. 36 et seq.). The Court of Justice ruled that State aid which is selective but justified under Article 107(2) and (3) TFEU cannot be considered incompatible with the internal market solely based on this characteristic or effect alone, as otherwise the exemptions under Article 107 TFEU would be rendered ineffective (Case C-209/21 P, para. 31 et seq; Case C-210/21 P, para. 36 et seq.). From this, the Court of Justice correctly concludes that Article 18(1) TFEU cannot be applied in the present case, as Article 107(2) and (3) TFEU are to be regarded as ‘special provisions’ within the meaning of Article 18(1) TFEU. Thus, Article 107 TFEU in its entirety constitutes a special prohibition of discrimination (Case C-209/21 P, para. 35; Case C-210/21 P, para. 40, for a critical analysis, Thomas, Turbulence in the State aid sky: Selectivity as a new justification for discrimination under Articles 107(2) (b) and 107(3)(b) TFEU? An analysis of the Ryanair-COVID cases).
This result is convincing for several reasons: The specific nature of selectively granting an advantage sets it apart from a State’s general tax or economic policy measures. The decisive factor is the reference framework, which establishes the basis for evaluating the selective granting of an advantage and identifies the relevant undertakings to be considered. The Court of Justice grounds its case law on the comparable factual and legal situation of the various undertakings. When an economic advantage is granted solely to one undertaking, determining the relevant framework becomes less significant, as this specific undertaking is clearly favoured over other undertakings in a comparable situation (see Opinion of AG Bobek , Case C-270/15 P, points. 23, 24). However, the assumption of a selective measure becomes all the more problematic if the state measure does not contain an individual differentiation (in favour of a specific undertaking), but is differentiated on a sectoral basis or according to other criteria (Opinion AG Bobek, Case C-270/15 P, point. 21). In principle, this is intended to ensure that State measures do not give rise to a differentiation between undertakings, which are in a comparable factual and legal situation (see Opinion AG Wahl, Case C-15/14 P, point. 53). Accordingly, the Court of Justice also assumes that the examination of selectivity is closely linked to discrimination (Commission v Hansestadt Lübeck, Case C-524/14 P, para. 53; Eventech, Case C-518/13, para. 53, see Piernas López, Selectivity and discrimination in light of the recent Ryanair v Commission cases (C-209/21, C-210/21, C-320/21, C-321/21). However, there is no selective measure, if the difference in treatment is justified by the nature and/or the overall structure of the system (ANGED, Case C-233/16, para. 42; Case C-524/14 P, para. 41).
The comparability of the undertaking results from the fact that the various air carriers each hold a comparable operating licence within the meaning of Article 4 of Regulation (EC) No 1008/2008, which authorises
them to provide intra-Community air services. If the selectivity is given (for instance, by granting an advantage to a single airline or in the context of a general State measure) and the additional requirements set forth in Article 107(1) TFEU are also fulfilled, the discriminatory impact inherent to the aid is evident. Article 107(1) TFEU therefore constitutes a much broader concept of discrimination than, for instance, the fundamental freedoms or Article 18(1) TFEU. It should be noted that the comparability test also covers domestic companies. Article 18(1) TFEU addresses discrimination against foreigners, but not discrimination against nationals (see Driancourt v Cognet, Case 355/85, para. 11). In addition, the fundamental freedoms also require a cross-border connection (cross-border situations). Therefore, purely domestic situations do not fall within the material scope of the fundamental freedoms (see also Case 355/85, para. 8 et seq; Servizi Ausiliar, Case C-451/03, para. 29). Given the disparate scope of the primary law provisions, Article 107 TFEU constitutes a special provision. Nevertheless, if there is a discriminatory effect resulting from selective aid, this does not per se exclude the original justification set out in Article 107(2) and (3) TFEU. However, it is a closed system whose applicability cannot be undermined by other standards. It is not possible to extend the prohibition of discrimination to a more extensive application. This also does not negate the effect of the Court of Justice’s case law, according to which aid may not be granted in breach of other provisions of the EU Treaties. Indeed, in the Nouva Agricast case, the Court of Justice rejected an argument of infringement of the principle of equal treatment on the grounds that the undertakings in question ‘were not in a comparable situation’ (Nouva Agricast, Case C-390/06, para. 77-78).
Consequently, the Court of Justice also rejected the argument that the specific prohibitions on discrimination of the fundamental freedoms could apply in parallel (Case C-209/21 P, para. 73; Case C-210/21 P, para. 84; Case C-441/21 P, para. 79). As regards its previous case law, the Court of Justice confirmed that ‘where the modalities of an aid measure are so indissolubly linked to the object of the aid that it is impossible to evaluate them separately’ (Nygård, Case C-234/99, para. 59; A-Fonds, Case C-598/17, para. 46), their effect on the compatibility or incompatibility of the aid exclusively evaluated under the procedure in Article 108 TFEU. The need for delimitation arises – in addition to the effects of substantive law just shown – from the fact that the Commission has the exclusive competence to evaluate the compatibility of aid, while Member States (or their courts) may assess compatibility with the fundamental freedoms as directly applicable provisions (Case C-234/99, para. 59; Case C-598/17, para. 46). An isolated assessment of the fundamental freedoms is only possible if the modality is part of an aid scheme but not indissolubly linked to the object or purpose (Case C-234/99, para. 59; Case C-598/17, para. 46).
In the relevant cases, the operating licence, which was provided as a prerequisite for the various aid programmes of the individual Member States such as France, Sweden or Spain, is an eligibility criterion. This is so closely linked that its effects on the internal market cannot be examined separately from the compatibility of the aid measure as a whole. Should this be challenged separately, the entire aid scheme would be called into question. It is also important to note that this criterion is fully harmonised under EU law. The granting of an operating licence is a mandatory requirement for the provision of air services (see Article 3(1), Article 15(1) of Regulation (EC) No 1008/2008). The Member State in which the air carrier has its principal place of business is responsible for granting the operating licence (cf. Article 4 lit. a. therein). Article 4 lit. f. and Article 5 of Regulation (EC) No 1008/2008 address the financial conditions that are mandatory for the granting of the operating licence. In accordance with the second subparagraph
of Article 8(4) of that regulation, the competent licensing authority can examine the financial situation of a company at any time and request relevant information; according to Article 9(1) of Regulation (EC) No. 1008/2008, it can also assess the financial performance. The air carriers are also obliged to provide the relevant information. According to Annex I No. 3, this includes the audited accounts, a projected balance sheet including a profit and loss account for the coming year, figures on past and projected expenses and income for items such as fuel, fares and rates, salaries, maintenance, depreciation, exchange rate fluctuations, airport charges, air navigation charges, ground handling costs, insurance, etc. Traffic/revenue forecasts, cash flow statements and liquidity plans for the following year. Furthermore, plans for the operation of a new air service that has not yet been previously served must be reported, as well as any other significant change in the scale of its operations (cf. Article 8(5) lit. a.). The aforementioned factors help to evaluate the impact of the granting of aid on the competitive parameters of the European aviation market. It is important to emphasise that the conditions of the operating licence and its granting are fully harmonised under EU law and therefore binding for the Member States authorities.
In addition, under public international law, the principal place of business, in conjunction with the ownership and control requirements, represents one of the most important prerequisites of reference for the possibility of exercising traffic rights, particularly in bilateral air transport agreements.
The only apparent instance where the General Court suggested the possibility for a dual examination pertains to an Italian compensation scheme valued at approximately 130 million euros. The legislation at issue stipulated that only companies that pay a minimum remuneration to their employees and have a home base in Italy are legally permitted to receive subsidies (General Court, Ryanair v Commission, Case T-268/21). The General Court annulled the Commission’s decision due to a lack of, or contradictory, reasoning (at least ambiguous), since the European Commission did not provide a comprehensive explanation for its decision not to examine this modality on the basis of Article 56 TFEU (see Case T-268/21, para. 33). Conversely, the General Court did not make a substantive decision on the merits with regard to the applicability of Article 56 TFEU and its compatibility.
Proportionality as a sufficient limit
In the case of selective aid, which in principle is likely to have a distortive effect on competition, only a justification of the granting of aid can result in its compatibility with EU law. With regard to both Article 107(2)(b) TFEU and Article 107(3)(b) TFEU, the proportionality of the granting of aid is a fundamental requirement. It must be necessary and limited to the strictest minimum (General Court, WestfälischLippischer Sparkassen- und Giroverband v Commission, Case T-457/09, para. 200). This is precisely to limit the excessive (selective) and potentially detrimental granting of aid (Case C-209/21 P, para. 35; Case C-210/21 P, para. 40).
Concerning both provisions, the Court of Justice ruled that Ryanair was unable to demonstrate in the respective proceedings that the operating licence did not constitute an appropriate eligibility criterion that could justify an infringement of EU law in terms of the disproportionate nature of the aid (Case C-209/21 P, para. 50 et seq.; Case C-210/21 P, para. 50 et seq.; Case C-441/21 P, para. 58 et seq.). On the contrary, proportionality also stems from the fact that the airlines with French or Swedish operating licences had high percentages of flights within France or Spain and to and from France (Case C-209/21 P, para. 57; Case
C-210/21 P, para. 51). In addition, the operating licence allows access to the financial situation of the respective airlines (see Articles 3 et seq. of Regulation (EC) No 1008/2008). In particular, with regard to Article 107(3)(b) TFEU, the principal place of business represents an appropriate criterion for achieving the elimination of the serious disturbance of economic life and ensuring the continuity of appropriate air traffic services (Case C-441/21 P, para. 58; Case C-209/21 P, para. 50 et seq.). In a final clarification, the Court of Justice asserted that the suitability of a criterion is a question of fact, contingent upon its ability to specifically contribute to the elimination of disruption or the assurance of connectivity. The Court of Justice does not review this matter in principle, and the appellant must demonstrate and prove this error with appropriate evidence (Case C-441/21 P, para. 53 et seq.; Case C-209/21 P, para. 42 et seq.). It is presumed that this has not been done, or at all possible. In relation to Article 107(2)(b) TFEU, Ryanair has also been unable to demonstrate that the beneficiaries have been overcompensated (Case C-320/21 P, para. 63 et seq.)
The conclusion reached by the Court of Justice is a convincing one. The necessity test serves to structure the aid in such a way that undue distortions of competition are avoided and to ensure that the Member State concerned has not chosen conditions that would also sufficiently guarantee the objective (c.f. Case T-457/09, para. 350). It is first necessary to recall that the European Commission is not obliged (and cannot be obliged) to rule on all alternative measures to the disputed aid schemes of the Member States (Case C-441/21 P, para. 66). The decisive factor is (solely) the proportionality test of the submitted regulation. Conversely, there is a possibility that the objective of the measure may be altered because of this course of action. In general, the European Commission and the EU Courts must consider the economic policy relevance and competence of the Member States, as set forth in Article 107(3)(b) TFEU. The examination must be conducted in accordance with the Member State’s conceptual framework and in compliance with the relevant regulation.
Secondly, in order to provide an analysis of the case-law in the context of the overarching objectives of State aid law (including the safeguarding of a level playing field within the internal market, see Piernas López, Selectivity and discrimination in light of the recent Ryanair v Commission cases (C-209/21, C-210/21, C-320/21, C-321/21)), it is essential to consider the specific economic characteristics of the air transport sector.. In particular, there are close actual links between airports that offer the corresponding infrastructure for take-off and landing. Furthermore, these airports have received State aid, which has a positive impact on all airlines. The hub-and-spoke network model may have a different impact on connectivity for EU citizens and air transport activities in a state than point-to-point air transport services. Both models have economic advantages and disadvantages. The rationale behind hub-and-spoke networks can, in turn, be elucidated through an economic lens, especially concerning long-haul traffic (see Gudmundsson, in: Finger/Button (eds), Air Transport Liberalisation, 2017, pp. 246 et seq.). A hub-andspoke system enables the creation of an efficient, large network. This should be considered in the context of the close connection between economic growth and the aviation industry. The former is sometimes described as a ‘precondition for their economic development’ (see e.g. Nath, Competition in Aviation, in: Masuti/Mendes de Leon, Elgar Concise Encyclopedia of Aviation Law, 2024, p. 198). This phenomenon can also be seen in the diminished availability of freight capacity on passenger flights, which has been significantly impacted by the global health crisis caused by the novel coronavirus. Prior to the onset of the pandemic in 2019, the proportion of available freight capacity on passenger flights was approximately 59% (IATA’s Chart of the Week 10 March 2023). In 2020, the 29% availability figure represented a decline
from the previous year. This figure decreased further in 2021 to 26%, before rising again to 41% in 2022. Despite the increase in dedicated freighters, the absolute availability remained lower than before the onset of the pandemic. Furthermore, the business models of hub-and-spoke airlines and low-cost carriers diverge in terms of their cooperation and distribution policies.
Hub-and-spoke networks are the global standard in air transport. A study conducted by Kotacharin, Maneenop and Jaroenjitrkam, Research in Transportation Economics 99 (2023), 101298, has revealed that it is also crucial to guarantee the confidence of market participants, particularly within the international business context that pervades the aviation industry. It is not possible to differentiate the European aviation market in a straightforward manner between intra-EU and extra-EU traffic. Rather, they are closely interrelated. It is of the utmost importance that the design of the aid programmes and the application of the standards set out in Articles 107 and 108 TFEEU take into account the specific characteristics of the aviation market. It is therefore not within the mandate of the European Commission or the EU Courts to replace the Member States’ objectives with their own decisions. The question of whether a standardised mechanism financed from EU funds would have been a more reasonable approach (see Adler and Andreana, European Journal of Operational Research 314 (2024), 552) is not a question of State aid law, but rather one of European fiscal and economic policy.
Alexander Heger is Research Assistant and doctoral candidate at the Institute for Public Law (Prof. Dr. Dr. Rainer Hofmann), Goethe University Frankfurt (Main), Germany. The author would like to thank Lena Hornkohl, David Pérez de Lamo and Rainer Hofmann for their valuable comments.
SUGGESTED CITATION: Heger, A.; “Discriminatory subsidies in the European aviation market?”, EU Law Live, 29/07/2024, https://eulawlive.com/competition-corner/discriminatory-subsidies-in-the-european-aviation-market-by-alexander-heger/
And now for Something Somewhat Different: An Economist’s Take on Selectivity
Simon Yarak and Nicole Robins
Introduction: what do economists have to say about selectivity?
Selectivity is undoubtedly a legal topic. As economists, we tend to spend most of our time in State aid assessing the criterion of ‘advantage’, and analysing whether compatibility criteria are met for measures that do constitute State aid. An exception is perhaps the case of certain direct taxation measures where, if the legal conclusion is that transfer pricing guidelines and the arm’s length principle may be deemed to form part of the relevant reference framework, transfer pricing analysis (based on functional analysis, and the identification of the appropriate benchmarks) may be performed.
Selectivity is one of the key criteria for a measure to constitute State aid, but there are others, and in particular the far less prominent criterion of distortions to competition (and the closely related one of effect on trade). When assessing the existence of aid, this criterion is not discussed in any detail, as it is many contexts all but assumed when an advantage is found in a liberalised sector with (potential) competition (Notion of Aid Notice, para 187). Even in the case of compatibility assessments, the effects of aid schemes or measures on the relevant markets are not always assessed in detail, and the balancing test has been referred to as something of a ‘black box’.
In this piece, we explore the links between the criterion of selectivity and that of distortions to competition. We find that, while they are related to an extent, they rest on fundamentally different principles and concepts, and intuition on how they relate to each other is not always helpful. We conclude that, as a result, the detailed assessment of selectivity at the stage of determining the existence of aid would be usefully complemented by a robust analysis of distortions when assessing the compatibility of aid measures.
Does ‘greater selectivity’ equal ‘greater distortions’?
It is intuitively tempting to equate the distortions of the aid to some sort of mathematical result of two other criteria: advantage and selectivity, i.e. a ‘more selective’ measure and a ‘greater advantage’ would result in greater distortions. As a mirror image of this view, any ‘non-selective’ measure would not be distortive, or at least less so given that the criteria are distinct.
However, this is where the factual question of distortions can differ from the question of selectivity. It is perhaps most helpfully illustrated by a case such as Eventech v Parking Adjudicator (C-518/13). In its judgment, the Court of Justice concluded that London black cabs and minicabs were in ‘sufficiently distinct’ factual and legal situations, such that the policy of only granting the former access to bus lanes was not selective. This was despite the Court’s acknowledgement that the two categories of cabs were in direct competition at least on some segments of the market (namely, pre-booked journeys). This is a
very clear example of a drastic distinction between the principles and approach that underpin selectivity on the one hand, and the market reality of competition between undertakings that are or not targeted by a measure.
The example of sectoral measures: the traps of intuition
Perhaps more interestingly, we can also use the example of aid measures or schemes provided to an entire sector (or even multiple sectors), such as a rebate on energy taxes for companies in the manufacturing sector (Adria-Wien Pipeline, C-143/99) or tax measures in favour of road hauliers (Italy v Commission, C-6/97). Intuition may lead to consider such measures as ‘less’ selective, as they would be available to a large number of undertakings, and it could therefore be tempting to consider them as less distortive.
First, to determine whether this intuition regarding the distortions is correct, an initial step is in our view to draw a distinction between the distortions to competition on the one hand, and the wider effects of the aid on the other. For example, a decarbonisation scheme offered to an entire sector is more impactful in reducing greenhouse gas emissions than a measure provide only to a few selected undertakings, all other things equal. However, this does not mean that it is more distortive, if all companies benefit to the same extent. Implicitly, the standard adopted here for distortions to ‘competition’ is one of ‘level playing field’, which is consistent with the philosophy of State aid rules.
Second, the question of the geographic scope of the effects should also be considered. Indeed, if a Member State provides a measure to an entire sector where competition takes place at a local level, the effects on competition would likely be more limited than in the case of a measure benefitting an entire sector in that Member State, but where a significant competitive constraint is imposed by imports from undertakings established elsewhere in the EU. We note that this also touches on the criterion of the effect on trade (and that the same point would also be true of measures of general application within a Member State, which do not constitute State aid).
Third, one must also ask whether the only relevant ‘competition’ is that which takes place between companies in the sector affected by the measures. For example, a measure provided to the entire ‘sector’ of biscuit producers could have distortive effects on producers of chocolate bars. In another vein, a measure in favour of the entire sector of biomass plants, which are fuelled by wood pellets, may not create significant distortions between plants, but could heavily affect other industries that also use wood pellets as an input.
The economic tool to understand the disconnect: market definition
In the two points that precede, we have deliberately avoided using one word in particular, the ‘market’. Readers familiar with other areas of competition law may have recognised in these points some key aspects of the definition of the relevant markets, an exercise that is frequently undertaken in other contexts such as mergers and antitrust, but less so in State aid. In particular, one can make out the outline of two key dimensions of market definition, namely geographic- and product market definition.
This provides the conceptual tools to articulate the difference between the concept of selectivity (especially material selectivity) and the notion of legal and factual comparability on the one hand, and the concept of
Selectivity in State
distortions, which ultimately rests on the question of the relevant markets. We understand that being in the same relevant market does not imply being in a comparable factual and legal situation (and vice versa), although there will of course be some degree of correlation in many cases.
To an extent, this disconnect between selectivity should not come as a surprise: they are, after all, two distinct criteria for the existence of aid. Furthermore, on a formal level, we understand that the Court of Justice has even confirmed in Italian Republic and Sardegna Lines v Commission (C-15/98 & C-105/99) that the existence of distortions cannot be inferred from selectivity (see Bacon, K. (ed.), European Union Law of State Aid, 3rd Edition) .
Conclusion
What to make of all this, then? As economists specialised in the field of State aid, we draw two main conclusions first, it is a good reminder that our intuition as economists of what constitutes a selective advantage, which comes primarily from our instinct of thinking about markets, should not be relied upon when thinking about selectivity. This also applies, to an extent, to companies wishing to complain about selective measures in favour of competitors—legal analysis alone is able to determine whether a measure is selective or not.
Second, the criterion of distortions to competition is clearly the ugly duckling among the criteria for the existence of aid (for example, only one page is dedicated to it in the Notion of Aid Notice; compared to the 13 pages on selectivity, or the 12 pages on advantage). However, we should not succumb to our bias as economists, and call for detailed competition analysis at the stage of determining whether a measure constitutes aid—it could be rather disproportionate.
Nonetheless, when assessing the compatibility of aid measures, for the purposes of assessing whether distortions are limited to a minimum and performing the balancing test, greater weight should be placed on factors other than the degree of selectivity of the measure, such as the characteristics of the subsidy as well as the firm and the market, including the degree of competition in the relevant market.
Simon Yarak is a Senior Consultant at an international economics and finance consultancy in Brussels, and specialises on State aid and (foreign) subsidy control issues. He is a co-author of ‘Assessing the practical implications of the Foreign Subsidies Regulation – revisiting the acquisition of Vossloh Locomotives by CRRC’, Competition Law Journal, 2023.
Nicole Robins is a Partner at an international economics and finance consultancy in Brussels, and heads its State Aid and Subsidy Control practice. She focuses on economic and financial analysis in the context of State aid and the Foreign Subsidies Regulation. She also teaches the State aid module on the postgraduate diploma in Economics for Competition Law at King’s College London.
SUGGESTED CITATION: Yarak, S. and Robins, N.; “And now for something somewhat different: an economist’s take on selectivity”, EU Law Live, 19/06/2024, https://eulawlive.com/competition-corner/and-now-for-something-somewhat-different-an-economists-take-on-selectivity-by-simon-yarak-and-nicole-robins/
