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/
