03 Oct
Member News

PwC | EU General Court delivers judgements in State aid cases

The EU State aid rules continue to cause significant uncertainty for taxpayers as to the correct application of tax rulings and transfer pricing rules within the European Union. These judgements are one of many steps in providing further clarity and guidance on the application of the State aid rules.Companies should continue to track state aid developments and assess the potential impact of recent judgements. State Aid remains a dynamic area and we expect to see more interesting judgements delivered.

EU General Court rules Spain’s goodwill deduction not unlawful State aid

The General Court of the European Union (GCEU), on September 27, delivered its judgement upholding several appeals brought by the Spanish Government and several companies against the European Commission’s (EC) decision that declared the Spanish tax scheme on the deduction for indirect acquisitions of shareholdings in foreign companies to be unlawful State aid. As a result, the GCEU annulled the EC’s decision.

In 2002 the Spanish authorities introduced a corporate income tax scheme allowing companies that acquired shareholdings in a foreign company to deduct the resulting goodwill over a certain number of years. In 2006, in response to different parliamentary questions, the EC stated that such a scheme did not breach the EU State aid rules.

Despite that, following a complaint by a private company, the EC initiated a formal investigation procedure that eventually led to the adoption of two separate decisions. These decisions concerned acquisitions of shareholdings made within the European Union and outside the European Union (the two initial decisions). The decisions also declared that the measures in question constituted State aid and therefore were incompatible with the internal market. However, the EC ruled that, in certain cases, the scheme could continue to apply, due to the principle of the protection of legitimate expectations. After a long appeal procedure, both decisions ultimately were upheld by the CJEU (Cases C-50 to C-53/19P, C-64/19P and C-65/19P). See our prior PwC Newsalert for details.

In 2012 the Spanish authorities introduced a new interpretation of the tax scheme through a binding opinion delivered by the General Directorate for Taxation and a resolution by the Central Tax Tribunal. According to this new interpretation, the goodwill amortization regime would apply in both direct and indirect acquisition cases. The EC reviewed this interpretation and concluded that it extended the initial scheme by allowing the amortization of the goodwill resulting from indirect shareholding acquisitions. This was in contrast to the initial interpretation upheld by the national tax administration.

In an October 15, 2014 decision (the third decision), the EC concluded that that new interpretation was, in fact, new aid, which was incompatible with the internal market. As a result, Spain was required to terminate the aid scheme and recover all aid granted, without any exceptions based on the principle of protection of legitimate expectations.

– CGEU judgement 

The GCEU judgement pertains to the third decision, which the GCEU annulled on two separate grounds.

First, the GCEU considered that the EC no longer was entitled to adopt the third decision, since the two initial decisions already covered acquisitions of both direct and indirect shareholdings. Therefore, by mandating the recovery of all aid granted for indirect acquisitions in its third decision, the EC essentially revoked two lawful decisions that recognized the protection of legitimate expectations under certain conditions.

Second, the GCEU ruled that, even if it assumed that the EC was entitled to adopt the third decision, it erred in law by refusing to acknowledge in favor of the aid scheme beneficiaries a level of protection of legitimate expectations similar to that acknowledged in the two initial decisions. According to the GCEU, the parliamentary responses from 2006 that gave rise to a legitimate expectation as to the lawfulness of the aid scheme did not differentiate between the two types of acquisitions (direct and indirect). As a result, the (initial) interpretation that the national authorities applied to the tax scheme did not affect the legitimate expectations that were formed based on statements made by the EC at the EU level in 2006.

 

General Court considers the Belgian Excess Profits Ruling to be unlawful State aid

The General Court of the European Union (GCEU) on September 20 ruled for the second time in the case of the Belgian Excess Profits Ruling (Belgian EPR) (judgement of the General Court in case T-131/16). Contrary to its first judgement in 2019 on EPR, it has confirmed the European Commission (EC) decision of January 11, 2016 that the EPR constituted an unlawful tax scheme and infringed the EU State aid rules.

By advance ruling, Belgian entities that were part of a multinational group were able to reduce their tax base in Belgium to reflect the position that part of the residual profit generated through synergies, economies of scale, and similar benefits of being a vertically integrated multinational group should not be attributable to the Belgian entities.

The EC, on January 11, 2016, concluded that the Belgian EPR constituted unlawful State aid, giving its beneficiaries a selective advantage, for the purposes of Article 107(1) TFEU, that was incompatible with the internal market. The decision obligated the Belgian government to recover the alleged unlawful aid provided to several economic operators.

The GCEU, on February 14, 2019, annulled the EC decision, finding that the EC had erred in qualifying the measure as an ‘aid scheme.’ The ECJ, on September 16, 2021, annulled the GCEU judgement and, by doing so, upheld the EC decision regarding the qualification of the Belgian EPR as an aid scheme. The ECJ then referred the case back to the GCEU.

– CGEU judgement 

The CGEU now has ruled that the EC was correct in deciding that the Belgian EPR infringes EU State aid rules. The GCEU rejected the arguments that Belgium put forward, including the EC’s failure to take into account the tax rules applicable in Belgium. More specifically, the GCEU concluded that the EC:

  • demonstrated that the EPR granted tax advantages to its beneficiaries;
  • correctly concluded on the selectivity of the EPR, as the members of a multinational group benefitting from it were treated differently from entities subject to the standard Belgian Corporate Income Tax regime;
  • was right in finding that the EPR was not open to companies that did not make investments, centralize activities, or create employment in Belgium, and was not available to members of a small group.

Observation: The CGEU judgement is open for appeal before the European Court of Justice (ECJ), but any appeal should be limited to points of law. Whether the Belgian government or the concerned multinational groups will appeal the judgement on points of law is not yet known. An appeal can be lodged within two months. In the absence of an appeal, this judgement becomes the final step in the proceedings and the tax due by each impacted operator should be recalculated as if the State aid had not been granted.

Observation: This judgement illustrates the complexity of State aid rules in transfer pricing matters, particularly when assessing domestic fiscal policy incentives stemming from an era well before the OECD/G20 project on Base Erosion and Profit Shifting. The launch of the proposal for the Transfer Pricing Directive on September 12, 2023, regarding the codification of the arm’s length principle in the European Union demonstrates the need for clarity. Particularly relevant is the contemplated introduction of mandatory corresponding adjustments in the case of primary downward adjustments in one country, which appears to be inspired by the EPR case.

Observation: This judgement comes at a time when the EC is actively seeking ‘matching’ responses to fiscal incentives granted outside the EU economic bloc. These incentives aim to accelerate investment in areas such as the green agenda, digitalization, and reliable supply chains, with a focus on energy and critical raw materials. This aligns with the priorities outlined in Executive Vice-President Dombrovskis’ press release on September 16, 2023, which prioritizes maintaining the EU’s traditional openness, while shoring up economic resilience, and seeks to maintain the EU’s standing in the world marketplace and competitiveness.

 

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