Developments on the Concepts of Advantage and Selectivity

airplane

The advantage conferred by State aid is not necessarily equivalent to the economic benefit that is eventually enjoyed by aid recipients. Incompatible State aid has to be repaid regardless of whether it is passed on to the customers of the aid recipients. Undertakings derive an advantage when state intervention reduces the costs they would bear under “normal market conditions” whereby “normal market conditions” are the prevailing conditions before the intervention. Whether an apparently general measure is in reality selective and whether an apparently selective measure is in reality general depends solely on whether they confer a favour to some or all undertakings, respectively, which are in a comparable situation.

 

Introduction
 
On 21 December 2016, the Court of Justice ruled on four appeals lodged against judgments of the General Court. The European Commission won three of them. The appeals concerned the following cases: C-164/15 P, European Commission v Aer Lingus[1]; C-131/15 P, Club Hotel Loutraki and Others v European Commission[2]; C-524/14 P, European Commission v Hansestadt Lübeck[3]; and C-20/15 P, Commission v World Duty Free Group.The first two cases are reviewed in this article. The third case will be reviewed in next week’s article. The fourth case will be reviewed separately, as it deals at length with the concept of selectivity and, in particular, with the definition of derogation from the normal tax system. The judgment in this case is likely to impact on the pending appeals against the recent Commission decisions on Apple, Fiat, Starbucks and the Belgian excess profit scheme.
 
Part I
 
1. Commission v Aer Lingus
 
In its ruling in the Aer Lingus case, the Court of Justice also dealt with the appeal brought by the Commission [case C-165/15 P] against the judgment of the General Court in an almost identical case involving Ryanair [T-473/12 and T-500/12, respectively]. The two airlines benefited from a reduction of an air travel tax [ATT]. The ATT, amounting to EUR 10 per passenger, was imposed on any flight departing from Ireland. However, the ATT was reduced to EUR 2 per passenger for flights terminating at airports located less than 300 km from Dublin.The Commission took the view that the reference rate was EUR 10 per passenger. It applied to about 85% of all flights. The reduced rate which in practice was borne only by domestic flights constituted a derogation that could not be justified by the logic of the reference system.Normally passenger taxes serve three purposes. First, they raise revenue. Second, they offset the costs of transport infrastructure not included in the budgets of airport operators [e.g. public access roads, security, customs and immigration facilities] and the costs of managing air navigation. Third, they partly internalise externalities from the environmental damage caused by air travel. The Commission could not identify any justification for the reduction of the ATT for flights terminating less than 300 km from Dublin. If, for example, the ATT had an environmental objective, the distance that mattered should have been the distance flown by the aircraft, not the distance of the destination airport from Dublin. Obviously, the reduction was designed in such a way as to favour domestic airlines.The General Court agreed with the Commission’s point of view. The reduced rate was indeed State aid. However, the General Court found that the Commission had committed an error of assessment and an error of law in ordering the recovery of the difference between the standard ATT rate and the reduced rate, which amounted to EUR 8. The General Court accepted the argument put forth by Aer Lingus and Ryanair that they had passed all or part of the aid to passengers in the form of reduced air fares. Hence, they claimed, they derived no or only partial advantage.

This conclusion of the General Court was defective in at least two respects. First, it was based on reasoning that appeared to be contradictory. If Aer Lingus and Ryanair derived no advantage when they passed on the aid to passengers, then how could it be established in the first place that the reduced rate constituted State aid? By definition, a measure is State aid when all criteria of Article 107(1), including that of advantage, are satisfied. These criteria are objective and do not depend on the behaviour of the aid recipient. Otherwise, the aid granting authority would not know whether the aid it provides is indeed aid.

Second, and most importantly, aid recipients do derive an advantage even if they pass 100% of the aid to their customers. At minimum they enjoy free publicity. And if the reduced fares attract more passengers, the airlines gain from higher capacity utilisation, reduced unit costs and perhaps improved liquidity.

The Court of Justice examined first whether the reference rate was correctly established and whether a measure that infringed other provisions of EU law could be classified as State aid.

With respect to the reference rate, Ryanair argued that since the two rates were introduced simultaneously, it could not be assumed that the higher rate was the reference rate. The Court of Justice rejected the argument on the grounds that “(58) […] if the Court were to find that the lower rate of ATT did not procure a selective advantage for the undertakings liable to pay that rate on the sole ground that that rate was introduced at the same time as the rate of EUR 10 per passenger, that would be tantamount to a finding that the decision whether a State intervention measure constituted State aid depended on the technique used. As is apparent from the Court’s established case-law, Article 107(1) TFEU does not draw a distinction between measures of State intervention on the basis of the techniques used by the national authorities”.

Then Aer Lingus contented that since the ATT was incompatible with EU law because it discriminated in favour of domestic flights and therefore conflicted with the free provision of services guaranteed under Article 56 TFEU, the lower rate of the ATT could not be characterised as State aid. The Court of Justice replied that “(69) […] the fact that a tax measure is contrary to provisions of EU law other than Articles 107 and 108 TFEU does not mean that the exemption from that measure enjoyed by certain taxpayers cannot be classified as State aid, as long as the measure in question produces effects vis-à-vis other taxpayers and has not been either repealed or declared unlawful and, therefore, inapplicable.” Then the Court clarified that “(72) […] the reimbursement to an undertaking of an amount of tax which it was required to pay in breach of EU law or the damages which national authorities are ordered to pay to undertakings to compensate for the damage they have caused them does not constitute State aid.” But in this case “73 the State aid […] derives neither from the reimbursement of a tax contrary to the provisions of EU law other than Articles 107 and 108 TFEU that was paid by Aer Lingus and Ryanair, nor from the payment of compensation to those two undertakings.”


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Having dispensed with those two issues, the Court turned its attention to the question of the recovery of the aid. It began by reiterating the principle that the “(89) […] obligation on the Member State concerned to abolish, through recovery, aid considered by the Commission to be incompatible with the single market has as its purpose […] to restore the situation as it was before the aid was granted”. “90 That objective is attained once the aid in question, together, where appropriate, with default interest, has been repaid by the recipient, or, in other words, by the undertakings which actually enjoyed the benefit of it. By repaying the aid, the recipient forfeits the advantage which it had enjoyed over its competitors on the market, and the situation prior to payment of the aid is restored”.

The Court of Justice went on to explain that “91 […] the recovery of unlawful aid with a view to re-establishing the status quo ante does not imply reconstructing past events differently on the basis of hypothetical elements such as the choices, often numerous, which could have been made by the operators concerned, since the choices actually made with the aid might prove to be irreversible”.

It then made an important distinction between the advantage conferred by the aid and the eventual economic benefit generated by the aid. Accordingly, “(92) […] recovery of such aid entails the restitution of the advantage procured by the aid for the recipient, not the restitution of any economic benefit the recipient may have enjoyed as a result of exploiting the advantage. That benefit may not be the same as the advantage constituting the aid and there may indeed be no such benefit, but that cannot justify any failure to recover that aid or the recovery of a different sum from that constituting the advantage procured by the unlawful aid in question.” 93 With regard, in particular, to unlawful aid granted in the form of a tax advantage, it is also the Court’s settled case-law that recovery of aid means that the transactions actually carried out by the recipients of the aid in question must be subject to the tax treatment which the recipients would have received in the absence of the unlawful aid”. Hence Aer Lingus and Ryanair had to bear the burden of the tax by repaying the aid they received. The problem now for these two airlines is that if they passed on the aid to passengers, the amount that they will eventually pay back may exceed any economic benefits they have derived in the meantime.

The Court of Justice also dismissed as irrelevant arguments that the ATT was classified as “excise duty” [paragraph 98] and that that the aid was passed on [paragraph 99]. The Court stressed that “(100) […] the recovery of aid entails the restitution of the advantage procured by the aid for the beneficiary, not the restitution of the economic benefit that may have been conferred by the aid as a result of the exploitation of the advantage. There is therefore no need to examine whether and to what extent those airlines actually utilised the economic advantage arising from the application of the lower rate.”

Therefore, the Court of Justice found that the General Court erred in law because its judgment “(101) […] disclose[d] the same confusion between the advantage obtained as a result of the effect of the lower rate of ATT and the benefit which the aid recipients derived or could have derived from that advantage.”

The two airlines claimed that they could not recover the aid from their passengers. The Court of Justice pointed out that “(115) […] as the unlawful aid identified by the Commission in the decision at issue consisted in the application of the lower rate of ATT, that is, a partial exemption from a tax borne not by the customers of those airlines but by those airlines themselves, the recovery of that aid necessarily entails the repayment of the difference between the two rates applicable. […][T]hat is also the case even where the recipients of the aid have derived no benefit from the advantage in question, either because they have passed that advantage on to their customers, or for some other reason.” “(116) Lastly, the imposition of the obligation to recover that aid infringes neither the principle of proportionality nor the principle of equal treatment. First, it is the Court’s settled case-law that abolishing unlawful aid by means of recovery is the logical consequence of a finding that it is unlawful. Accordingly, the recovery of such aid, for the purpose of restoring the previously existing situation, cannot in principle be regarded as disproportionate to the objectives of the provisions of the FEU Treaty relating to State aid.”

On those grounds, the Court of Justice annulled the judgments of the General Court. In doing so, the Court of Justice restored the principle that incompatible aid has to be repaid regardless of how the aid has been used and made a useful distinction between the advantage conferred by the aid and the economic benefit that it may generate.

2. Club Hotel Loutraki AE and Others v European Commission

Club Hotel Loutraki, a casino, and six other casinos appealed against the judgment of the General Court in case T-58/13, Club Hotel Loutraki v Commission, which found that the Commission correctly concluded that an agreement between the Greek state and OPAP, an organiser of games of chance, was free of state aid. The agreement granted to OPAP exclusive rights for two kinds of games: i) football pools and other games of chance and ii) video lottery. With respect to the video lottery, OPAP was granted a licence to operate 35,000 video terminals for a period of 10 years.

The Commission reached the conclusion that the agreement was free of State aid on the following grounds. The fee for the video lottery terminals [VLT] was EUR 560 million. This amount, however, was lower than the net present value of the VLT. On the other hand, the levy imposed by Greece for the other games was higher than their net present value. In addition, in response to a request by the Commission, the Greek authorities committed themselves to raise the levy so that the sum of the fee and the levy would be equal or exceed the sum of the net present values of the VLT and the other games. This arrangement would ensure that OPAP would not derive any abnormal advantage from the exclusive right to operate the various games of chance.

The first plea of the applicants was that the Commission should have had “serious difficulties” about the measure and should have opened the formal investigation procedure. The reply of the Court of Justice was that the concept of “serious difficulties” is objective and depends on the information that the Commission has at its disposal. The Commission is required to open the formal investigation procedure when it has doubts as to the compatibility of the aid with the internal market. The Court went on to clarify that the Commission is under the same obligation when it entertains doubts as to the classification of a measure as state aid. However, in the context of the sincere cooperation between Member States and the Commission, Member States may provide sufficient information and clarifications during the preliminary state, which can dispel the doubts of the Commission and make unnecessary any formal investigation. [Paragraphs 30-37]

The applicants also contended that the Commission failed to give adequate reasoning by omitting important elements of its analysis on the grounds that they constituted professional secrets. According to the Court of Justice “(48) […] the obligation laid down in Article 339 TFEU to preserve professional secrecy cannot justify deficiencies in the statement of reasons. In accordance with the case-law, the obligation to respect professional secrecy cannot be given so wide an interpretation that the obligation to provide a statement of reasons is thereby deprived of its essential content”. “(51) However, in paragraphs 74 and 75 of that judgment, it held that ‘the Commission’s reasoning [was] in fact clear from the non-confidential version of the [decision at issue] to which the applicants had access’ because that version ‘clearly [showed] the methodology followed by the Commission in the case’”. The Court of Justice concluded that the General Court was correct in finding that “(55) […] the non-confidential version of the decision at issue discloses in a clear and unequivocal fashion the reasoning followed by the Commission and the methodology used by it”.

Then the Court of Justice dealt with the most important plea of the applicants, namely that the exclusive agreement between Greece and OPAP in fact contained State aid because it conferred an advantage to OPAP.

First the Court reiterated the principle that “(70) […] measures which, whatever their form, are likely directly or indirectly to favour certain undertakings or which are to be regarded as constituting an economic advantage that the recipient undertaking would not have obtained under normal market conditions meet the conditions for the conferral of an economic advantage”. “(71) In the same way, the conditions which a measure must meet in order to be treated as ‘aid’ for the purposes of Article 107 TFEU are not met if the recipient undertaking could, in circumstances which correspond to normal market conditions, have obtained the same advantage as that which has been made available to it through State resources”. Therefore, the decisive element in the concept of advantage in the meaning of Article 107(1) TFEU is the meaning of “normal market conditions”.

The Court went on to explain that “(72) […] the expression ‘normal market conditions’, within the meaning of that settled case-law, is to be interpreted as covering the conditions applying to the economy of a Member State where it does not intervene in favour of certain undertakings”. This restates the well-established idea that advantage is a change in favour of the aid recipient brought about by government intervention. It is not, as often thought, conferred only when the market functions well. This is because advantage is conferred also when the government removes a disadvantage that the aid recipient would not have suffered had the market functioned smoothly. The decisive issues are, first, government intervention and, second, the consequent reduction in the costs borne by the beneficiary, not the ideal or correct functioning of the market or the definition of the relevant market.

Indeed the Court added that “(73) consequently, a general obligation for the Commission to define, prior to any analysis of the possible conferral of an economic advantage in favour of one or several undertakings, the market or markets concerned by the State intervention subject to examination under Article 107 TFEU cannot be deduced from that case-law.”

But then the Court introduced another qualification that concerned more the selectivity of an aid measure rather than the nature of the advantage conferred by the aid. “(74) As Article 107(1) TFEU is intended to prevent the recipient undertaking from being placed, by means of State resources, in a more favourable financial position than that of its competitors […] the Commission may directly assess […] whether the State measure at issue is capable of placing its recipients in a more favourable financial position than that of their identified competitors or type of competitors.”

However, the very next paragraph makes clear, by using very much the same language without explicitly saying so, that the Court moved on to addressing the selectivity aspect of State aid measures. “(75) Furthermore, in so far as, for the purposes of classifying State intervention as State aid within the meaning of that provision, the Commission analyses whether that intervention has the effect of favouring its recipient and, therefore, of placing the latter in a more favourable financial position than that of its competitors, there is nothing, in principle, to prevent the Commission from having the possibility, where several State interventions affect the financial position of the same undertaking, of examining them jointly where this proves to be appropriate.”

The Court concluded that “(77) in those circumstances, the General Court properly held that the appellants had not demonstrated the existence of errors of law when the Commission carried out a joint assessment of the [two agreements].

——————————————————-

[1] The full text of the judgment can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=&docid=186499&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=189715.

[2] The full text of the judgment can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=&docid=186503&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=189715.

[3] The full text of the judgment can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=&docid=186485&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=189715.

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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