Commission Notice on the application of the State aid rules to measures relating to direct business taxation
10. 12. 98 EN Official Journal of the European Communities C 384/3 Commission notice on the application of the State aid rules to measures relating to direct business taxation (98/C 384/03) (Text with EEA relevance) Introduction 1. On 1 December 1997, following a wide ranging discussion on the need for coordinated action at Community level to tackle harmful tax competition, the Council (Ecofin) adopted a series of conclusions and agreed a resolution on a code of conduct for business taxation (hereinafter "code of conduct’)ØØ(˛). On that occasion, the Commission undertook to draw up guidelines on the application of Articles 92 and 93 of the Treaty to measures relating to direct business taxation and committed itself "to the strict application of the aid rules concerned’. The code of conduct aims to improve transparency in the tax area through a system of information exchanges between Member States and of assessment of any tax measures that may be covered by it. For their part, the State aid provisions of the Treaty will also contribute through their own mechanism to the objective of tackling harmful tax competition. 2. The Commission’s undertaking regarding State aid in the form of tax measures forms part of the wider objective of clarifying and reinforcing the application of the State aid rules in order to reduce distortions of competition in the single market. The principle of incompatibility with the common market and the derogations from that principle apply to aid "in any form whatsoever’, including certain tax measures. However, the question whether a tax measure can be qualified as aid under Article 92(1) of the Treaty calls for clarification which this notice proposes to provide. Such clarification is particularly important in view of the procedural requirements that stem from designation as aid and of the consequences where Member States fail to comply with such requirements. 3. Following the completion of the single market and the liberalisation of capital movements, it has also become apparent that there is a need to examine the the particular effects of aid granted in form of tax measures and to spell out the conseÜ quences as regards assessment of the aid’s compatiÜ bility with the common marketØ(ˇ). The establishment of economic and monetary union and the consoliÜ dation of national budgets which it entails will make it even more essential to have strict control of State aid in whatever form it may take. Similarly, account must also be taken, in the common interest, of the major repercussions which some aid granted through tax systems may have on the revenue of other Member States. are transparent to decisions this notice also aims the objective of ensuring that 4. In addition and Commission ensure to predictable, treatment between consistency and equality of Member States. The Commission intends, as the code of conduct notes, to examine or re examine case by case, on the basis of this notice, the tax arrangements in force in the Member States. A. Community powers of action 5. The Treaty empowers the Community take measures to eliminate various types of distortion that harm the proper functioning of the common market. It the thus essential different types of distortion. to distinguish between to is 6. Some general tax measures may impede the proper functioning of the internal market. In the case of such measures, the Treaty provides, on the one hand, for the possibility of harmonising Member States’ tax provisions on the basis of Article 100 (Council directives, adopted unanimously). On the other, some disparities between planned or existing general provisions in Member States may distort competition and create distortions that need to be eliminated on the basis of Articles 101 and 102 (consultation of the relevant Member States by the Commission; if necessary, Council directives adopted by a qualified majority). (˛) OJ C 2, 6. 1. 1998, p. 1. (ˇ) See action plan for the single market, CSE(97) 1, 4 June 1997, strategic target 2, action 1. C 384/4 EN Official Journal of the European Communities 10. 12. 98 the Commission has approved 7. The distortions of competition deriving from State aid fall under a system of prior Commission authorÜ isation, subject to review by the Community judiÜ cature. Pursuant to Article 93(3), State aid measures must be notified to the Commission. Member States may not put their proposed aid measures into effect until them. The Commission examines the compatibility of aid not in terms of the form which it may take, but in terms of its effect. It may decide that the Member State must amend or abolish aid which the Commission finds to be incompatible with the common market. Where aid has already been implemented in breach of the procedural rules, the Member State must in principle recover it from the recipient(s). B. Application of Article 92(1) of the EC Treaty to tax measures 8. Article 92(1) states that "any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain underÜ takings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market’. In applying the Community rules on State aid, it is irrelevant whether the measure is a tax measure, since Article 92 applies to aid measures "in any form whatsoever’. To be termed aid, within the meaning of Article 92, a measure must meet the cumulative criteria described below. 9. Firstly, the measure must confer on recipients an advantage which relieves them of charges that are normally borne from their budgets. The advantage may be provided through a reduction in the firm’s tax burden in various ways, including: - a reduction in the tax base (such as special deductions, special or accelerated depreciation arrangements or the entering of reserves on the balance sheet), - a total or partial reduction in the amount of tax (such as exemption or a tax credit), - deferment, cancellation or even special rescheÜ duling of tax debt. is equivalent 10. Secondly, the advantage must be granted by the loss of tax State or through State resources. A revenue to consumption of State resources in the form of fiscal expenditure. This criterion also applies to aid granted by regional or local bodies in the Member StatesØ(—). Furthermore, State support may be provided just as much through tax provisions of a legislative, regulatory or adminisÜ trative nature as through the practices of the tax authorities. 11. Thirdly, the measure must affect competition and trade between Member States. This criterion presupposes that the beneficiary of the measure exercises an economic activity, regardless of the legal status or means of financing. beneficiary’s Under settled case law, for the purposes of this provision, the criterion of trade being affected is met if the recipient firm carries on an economic activity involving trade between Member States. The mere fact that the aid strengthens the firm’s position compared with firms which are that of other competitors in intraÜCommunity trade is enough to allow intraÜ Community trade is affected. Neither the fact that aid is relatively small in amountØ(Ñ), nor the fact that the recipient is moderate in size or its share of the Community market very smallØ(Ò), nor indeed the fact that the recipient does not carry out exportsØ(Ó) or exports virtually all its production outside the CommunityØ(Ô) do anything to alter this conclusion. the conclusion to be drawn that it certain favours of "certain undertakings or 12. Lastly, the measure must be specific or selective in the that selective goods’. The production advantage from an involved here may derive exception to the tax provisions of a legislative, reguÜ latory or administrative nature or from a discreÜ tionary practice on the part of the tax authorities. However, the selective nature of a measure may be justified by "the nature or general scheme of the system’Ø(Õ). If so, the measure is not considered to be aid within the meaning of Article 92(1) of the Treaty. These various aspects are looked at below. (—) Judgment of the Court of Justice in Case 248/84 Germany v. Commission [1987ü ECR 4013. (Ñ) With the exception, however, of aid meeting the tests of the de minimis rule. See the Commission notice published in OJ C 68, 6. 3. 1996, p. 9. (Ò) Joined Cases CÜ278/92, CÜ279/92 and CÜ280/92 Spain v. Commission [1994ü ECR IÜ4103. (Ó) Case 102/87 France v. Commission [1998ü ECR 4067. (Ô) Case CÜ142/87 Belgium v. Commission [1990ü ECR IÜ959. (Õ) Case 173/73 Italy v. Commission [1974ü ECR 709. 10. 12. 98 EN Official Journal of the European Communities C 384/5 Distinction between State aid and general measures 13. Tax measures which are open to all economic agents operating within a Member State are in principle general measures. They must be effectively open to all firms on an equal access basis, and they may not de facto be reduced in scope through, for example, the discretionary power of the State to grant them or through other factors that restrict their practical effect. However, this condition does not restrict the power of Member States to decide on the economic policy which they consider most appropriate and, in particular, to spread the tax burden as they see fit across the different factors of production. Provided that they apply without distinction to all firms and to the production of all goods, the following measures do not constitute State aid: setting - tax measures of a purely technical nature (for example, taxation, the depreciation rules and rules on loss carry overs; provisions to prevent double taxation or tax avoidance), rate of - measures pursuing general economic policy objectives through a reduction of the tax burden related to certain production costs (research and development (R&D), the environment, training, employment). 14. The fact that some firms or some sectors benefit more than others from some of these tax measures does not necessarily mean that they are caught by the competition rules governing State aid. Thus, measures designed to reduce the taxation of labour for all firms have a relatively greater effect on labour intensive industries than on capital intensive industries, without necessarily constituting State aid. Similarly, tax incentives for environmental, R&D or training investment favour only the firms which undertake such investment, but again do not necesÜ sarily constitute State aid. cation for this exemption on the basis of the nature or general scheme of this system’ constituted State aid. The judgment also states that "Article 92 does not distinguish between the measures of State interÜ vention concerned by reference to their causes or aims but defines them in relation to their effects’. The judgment also points out that the fact that the measure brings charges in the relevant sector more in other into Member States does not alter the fact that it is aid. Such divergences between tax systems, which, as pointed out above, are covered by Articles 100 to 102, cannot be corrected by unilateral measures that target the firms which are most affected by the disparities between tax systems. line with those of its competitors 16. The main criterion in applying Article 92(1) to a tax measure is therefore that the measure provides in favour of certain undertakings in the Member State an exception to the application of the tax system. The common system applicable should thus first be determined. It must then be examined whether the exception to the system or differentiations within that system are justified "by the nature or general scheme’ of the tax system, that is to say, whether they derive directly from the basic or guiding prinÜ ciples of the tax system in the Member State concerned. If this is not the case, then State aid is involved. The selectivity or specificity criterion 17. The Commission’s decision making practice so far shows that only measures whose scope extends to the entire territory of the State escape the specificity criterion laid down in Article 92(1). Measures which are regional or local in scope may favour certain undertakings, subject to the principles outlined in itself qualifies as aid paragraph 16. The Treaty measures which are the to promote economic development of a region. Article 92(3)(a) and (c) explicitly provides, in the case of this type of the general aid, principle of in Article 92(1). for possible derogations from laid down incompatibility intended 15. In a judgment delivered in 1974Ø(Ö), the Court of Justice held that any measure intended partially or wholly to exempt firms in a particular sector from the charges arising from the normal application of the general system "without there being any justifiÜ (Ö) See footnote 8. 18. The Treaty clearly provides that a measure which is sectorally specific is caught by Article 92(1). Article 92(1) expressly includes the phrase "the production of certain goods’ among the criteria determining whether there is aid that is subject to Commission C 384/6 EN Official Journal of the European Communities 10. 12. 98 monitoring. According to well established practice and case law, a tax measure whose main effect is to promote one or more sectors of activity constitutes aid. The same applies to a measure that favours only national products which are exportedØ(˛˝). Furthermore, the Commission has taken the view that a measure which targets all of the sectors that are subject to international competition constitutes rate of aidØ(˛˛). A derogation corporation tax for an entire section of the economy therefore constitutes, except for certain casesØ(˛ˇ), State aid, as the Commission decided for a measure concerning the manufacturing sectorØ(˛—). the whole of the base from 19. In several Member States, different tax rules apply depending on the status of the undertakings. Some public undertakings, for example, are exempt from local taxes or from company taxes. Such rules, which accord preferential treatment to undertakings having the legal status of public undertaking and carrying out an economic activity, may constitute State aid within the meaning of Article 92 of the Treaty. 20. Some tax benefits are on occasion restricted to certain types of undertaking, to some of their functions (intra group services, intermediation or coordination) or to the production of certain goods. In so far as they favour certain undertakings or the production of certain goods, they may constitute State aid as referred to in Article 92(1). Discretionary administrative practices 21. The discretionary practices of some tax authorities may also give rise to measures that are caught by Article 92. The Court of Justice acknowledges that treating economic agents on a discretionary basis may mean that the individual application of a general measure takes on the features of a selective the measure, in particular where exercise of (˛˝) Joined Cases 6 and 11/69 Commission v. France [1969ü ECR 561. (˛˛) Commission Decision 97/239/EC of 4 December 1996 in the "Maribel bis/ter’ case (OJ L 95, 10. 4. 1997, p. 25) (currently sub judice, Case CÜ75/97). (˛ˇ) In particular, agriculture and fisheries, see paragraph 27. (˛—) Commission decision of 22 July 1998 the in "Irish corporation tax’ case (SG(98) D/7209) not yet published. discretionary power goes beyond simple management of tax revenue by reference to objective criteriaØ(˛Ñ). the 22. If in daily practice tax rules need to be interpreted, they cannot leave room for a discretionary treatment of undertakings. Every decision of the administration that departs from the general tax rules to the benefit of individual undertakings in principle leads to a presumption of State aid and must be analysed in detail. As far as administrative rulings merely contain an interpretation of general rules, they do not give rise to a presumption of aid. However, the opacity of the decisions taken by the authorities and the room for manoeuvre which they sometimes enjoy support the presumption that such is at any rate their instances. This does not make effect in some Member States any their taxpayers with legal certainty and predictability on the application of general tax rules. to provide less able Justification of a derogation by scheme of the system’ "the nature or general 23. The differential nature of some measures does not necessarily mean that they must be considered to be State aid. This is the case with measures whose economic rationale makes them necessary to the functioning and effectiveness of the tax systemØ(˛Ò). However, it is up to the Member State to provide such justification. is 24. The progressive nature of an income tax scale or profit tax scale justified by the redistributive purpose of the tax. Calculation of asset depreciation and stock valuation methods vary from one Member State to another, but such methods may be inherent in the tax systems to which they belong. In the same way, the arrangements for the collection of fiscal debts can differ from one Member State to the other. Lastly, some conditions may be justified by objective differences between taxpayers. However, freedom tax authority has discretionary if the (˛Ñ) Case CÜ241/94 France v. Commission (Kimberly Clark Sopalin) [1996ü ECR IÜ4551. (˛Ò) Commission decision 96/369/EC of 13 March 1996 concerning fiscal aid given to German airlines in the form of a depreciation facility (OJ L 146, 20. 6. 1996, p. 42). 10. 12. 98 EN Official Journal of the European Communities C 384/7 to set different depreciation periods or different valuation methods, firm by firm, sector by sector, there is a presumption of aid. Such a presumption also exists when the fiscal administration handles fiscal debts on a case by case basis with an objective different the recovery of tax debts from the enterprise concerned. the objective of optimising from system 25. Obviously, profit tax cannot be levied if no profit is earned. It may thus be justified by the nature of the tax that non profit making undertakings, such as foundations or associations, are specifically exempt from the taxes on profits if they cannot actually earn any profits. Furthermore, it may also be justified by the nature of the tax system that cooperatives which distribute all their profits to their members are not taxed at the level of the cooperative when tax is levied at the level of their members. scheme social or (in particular, 26. A distinction must be made between, on the one hand, the external objectives assigned to a particular tax regional objectives) and, on the other, the objectives which are inherent in the tax system itself. The whole purpose of the tax system is to collect revenue to finance State expenditure. Each firm is supposed to pay tax once only. It is therefore inherent in the logic of the tax system that taxes paid in the State in which the firm is resident for tax purposes should be taken into account. Certain exceptions to the tax rules are, however, difficult to justify by the logic of a tax system. This if non resident companies are treated more favourably than resident ones or if tax benefits are granted to head offices or to firms providing certain services (for example, financial services) within a group. is, for example, the case take account of 27. Specific provisions that do not contain discretionary elements, allowing for example tax to be determined on a fixed basis (for example, in the agriculture or fisheries sectors), may be justified by the nature and general scheme of the system where, for example, they reÜ quirements or of the importance of land in assets which are specific to certain sectors; such provisions do not therefore constitute State aid. Lastly, the logic underlying certain specific provisions on the small and medium sized enterprises taxation of (including is agricultural comparable to that underlying the progressiveness of a tax scale. specific accounting enterprisesØ(˛Ó)) small (˛Ó) Operators in the agricultural sector with no more than 10 annual work units. C. Compatibility with the common market of State aid in the form of tax measures 28. If a tax measure constitutes aid that is caught by Article 92(1), it can nevertheless, like aid granted in other forms, qualify for one of the derogations from the principle of incompatibility with the common in Article 92(2) and (3). market provided Furthermore, where the recipient, whether a private or public undertaking, has been entrusted by the State with the operation of services of general economic interest, the aid may also qualify for application of the provisions of Article 90 of the TreatyØ(˛Ô). for 29. The Commission could not, however, authorise aid which proved to be in breach both of the rules laid down in the Treaty, particularly those relating to the ban on discrimination and to the right of estabÜ lishment, and of the provisions of secondary law on taxationØ(˛Õ). Such aspects may, in parallel, be the object of a separate procedure on the basis of Article 169. As is clear from case law, those aspects of aid which are indissolubly linked to the object of the aid and which contravene specific provisions of the Treaty other than Articles 92 and 93 must however be examined in the light of the procedure under Article 93 as part of an overall examination of the compatibility or the incompatibility of the aid. 30. The qualification of a tax measure as harmful under the code of conduct does not affect its possible qualification as a State aid. However the assessment of the compatibility of fiscal aid with the common market will have to be made, taking into account, inter alia, the effects of aid that are brought to light in the application of the code of conduct. in particular) and where 31. Where a fiscal aid is granted in order to provide an incentive for firms to embark on certain specific projects (investment its intensity limited with respect to the costs of is carrying out the project, it is no different from a subsidy and may be accorded the same treatment. lay down Nevertheless, such arrangements must sufficiently transparent rules to enable the benefit conferred to be quantified. (˛Ô) Judgment of the Court of First Instance in Case TÜ106/95 FFSA and others v. Commission [1997ü ECR IIÜ229. Order of the Court of Justice in Case CÜ174/97 P [1998ü IÜ1303. (˛Õ) Case 74/76 Iannelli v. Meroni [1977ü ECR 557. See also Cases 73/79 "Sovraprezzo’ [1980ü ECR 1533, TÜ49/93 "SIDE’ [1995ü ECR IIÜ2501 and Joined Cases C 142 and 143/80 "Salengo’ [1981ü ECR 1413. C 384/8 EN Official Journal of the European Communities 10. 12. 98 in to linked including in nature: for example they are not 32. In most cases, however, tax relief provisions are general the carrying out of specific projects and reduce a firm’s it being possible to current expenditure without the involved when the precise volume assess Commission carries out its ex ante examination. Such measures constitute "operating aid’. Operating aid is in principle prohibited. The Commission authorises it at present only in exceptional cases and subject to certain conditions, shipbuilding, certain types of environmental protection aidØ(˛Ö) and in regions, regions, covered by the Article 92(3)(a) aid derogation provided that they are duly justified and their level is proportional to the handicaps they are intended to offsetØ(ˇ˝). It must in principle (with the exception of the two categories of aid mentioned below) be degressive and limited in time. At present, operating aid can also be authorised in the form of transport aid in ultra peripheral regions and in certain Nordic regions that are sparsely populated and are seriously handicapped in terms of accessibility. Operating aid may not be authorised where it represents aid for exports between Member States. As for State aid in favour of the maritime transport sector the specific rules for that sector applyØ(ˇ˛). ultra peripheral 33. If it is to be considered by the Commission to be compatible with the common market, State aid intended to promote the economic development of particular areas must be "in proportion to, and targeted at, the aims sought’. For the examination of regional aid the criteria allow account to be taken of other possible effects, in particular of certain effects brought to light by the code of conduct. Where a derogation the basis of regional criteria, the Commission must ensure in particular that the relevant measures: is granted on - contribute to regional development and relate to impact. The estabÜ local activities having a lishment of off shore activities does not, to the extent local economy are low, normally provide satisfactory support for the local economy, their externalities on that the - relate to real regional handicaps. It is open to question whether there are any real regional handicaps for activities for which the additional (˛Ö) Community guidelines on State aid protection (OJ C 72, 10. 3. 1994, p. 3). for environmental (ˇ˝) Guidelines on national regional aid (OJ C 74, 10. 3. 1998, p. 9). costs have little incidence, such as for example the transport costs for financing activities, which lend themselves to tax avoidance, - are examined in a Community contextØ(ˇˇ). The Commission must in this respect take account of any negative effects which such measures may have on other Member States. D. Procedures 34. Article 93(3) requires Member States to notify the Commission of all their "plans to grant or alter aid’ and provides that any proposed measures may not be put the Commission’s prior approval. This procedure applies to all aid, including tax aid. into effect without is therefore incompatible with 35. If the Commission finds that State aid which has been put into effect in breach of this rule does not qualify for any of the exemptions provided for in the Treaty and the common market, it requires the Member State to recover it, except where that would be contrary to a general principle of Community law, in particular legitimate expectations to which the Commission’s behaviour can give rise. In the case of State aid in the form of tax measures, the amount to be covered is calculated on the basis of a comparison between the tax actually paid and the amount which should have been paid if the generally applicable rule had been applied. Interest is added to this basic amount. The interest rate to be applied is equivalent to the reference rate used to calculate the grant equivalent of regional aid. 36. Article 93(1) states that the Commission "shall in cooperation with Member States, keep under constant review all systems of aid existing in those States’. Such review extends to State aid in the form of tax measures. So as to allow such review to be carried out, the Member States are required to submit to the Commission every year reports on their existing State aid systems. In the case of tax relief or full or partial tax exemption, the reports must provide an estimate of budgetary revenue lost. it Following its review, the Commission may, if (ˇ˛) Community guidelines on State aid to maritime transport (ˇˇ) Case 730/79 Philip Morris v. Commission [1980ü ECR (OJ C 205, 5. 7. 1997, p. 5). 2671. 10. 12. 98 EN Official Journal of the European Communities C 384/9 considers that the scheme is not or is no longer compatible with the common market, propose that the Member State amend or abolish it. E. Implementation publication, examine the plans for tax aid notified to it and tax aid illegally implemented in the Member States and will review existing systems. This notice is published is not exhaustive. The Commission will take account of all the specific circumstances in each individual case. for guidance purposes and 37. The Commission will, on the basis of the guidelines set out in this notice and as from the time of its 38. The Commission will review the application of this notice two years after its publication. NonÜopposition to a notified concentration (Case No IV/M. 1202 - Renault/Iveco) (98/C 384/04) (Text with EEA relevance) On 22 October 1998, the Commission decided not to oppose the above notified concentration and to declare it compatible with the common market. This decision is based on Article 6(1)(b) of Council Regulation (EEC) No 4064/89. The full text of the decision is only available in French and will be made public after it is cleared of any business secrets it may contain. It will be available: - as a paper version through the sales offices of the Office for Official Publications of the European Communities (see list on the last page), - in electronic form in the number 398M1202. CELEX Community law; for more information concerning subscriptions please contact: "CFR’ version of the CELEX database, under document is the computerised documentation system of European EURÜOP, Information, Marketing and Public Relations (OP/4B), 2, rue Mercier, LÜ2985 Luxembourg. Tel. (352) 29Ø29 42455, fax (352) 29Ø29 42763. Withdrawal of notification of a concentration (Case No IV/M. 1246 - LHZ/Carl Zeiss) (98/C 384/05) (Text with EEA relevance) On 24 September 1998, the European Commission received notification of a proposed concenÜ tration between LH Systems and Carl Zeiss Stiftung. On 1 December 1998, the notifying parties informed the Commission that they withdrew their notification