Frucona Revisited: Confusing EDF and Placing the Burden of Proof Where it Belongs

computer kayboard

We are happy to welcome Erika Ellyne on the State Aid Blog today. She is a lawyer at Van Bael & Bellis law firm where she works on EU competition law matters. Previously she was a researcher at the VUB University and the LSTS research center, where she is still an affiliate. Today she gives her insights on the Frucona case.

 

The judgment of the General Court of 16 March 2016, Case T‑103/14, Frucona Košice a.s., v European Commission,[1] carries on from the previous Frucona Košice v Commission case[2] where the Court of Justice held that, “by failing to take into account, in the assessment of the private creditor test, the duration of the bankruptcy procedure, the Commission had committed a manifest error of assessment or, in so far as it had taken that factor into consideration, had failed to state to the requisite legal standard the reasons for the initial decision.”[3]In seeking to remedy the shortcomings identified by the ECJ in its judgment, the Commission adopted a new decision on 16 October 2013, the Decision 2014/342/EU on State aid No SA.18211 (C 25/2005) (ex NN 21/2005),[4] hereunder ‘the contested decision’. Under this contested decision, the Commission again held that Slokavia had granted illegal aid through the settlement agreement it reached with Frucona with regard to excise duties it was due. Accordingly, the local tax office had failed to consider alternatives (bankruptcy and another tax execution procedure) to the settlement arrangement that would have resulted in the recovery of more taxes. 

Frucona lodged an appeal against this decision and won. The contested decision was overturned on the grounds that the Commission did not prove that neither the bankruptcy procedure nor the tax execution procedures were more advantageous to the State than the arrangement it had made with Frucona.[5]

This case is particularly interesting in that it clearly sets out the two conceptual steps in the application of the private operator principle: applicability and application. The Court makes this differentiation very early on and this conceptual distinction underlies the entire case. Few cases have been so clear and concise on the matter.

This distinction dates back to the EDF case.[6] The EDF holding stipulates that “it may be necessary to produce evidence showing that the decision is based on economic evaluations comparable to those which, in the circumstances, a rational private investor in a situation as close as possible to that of the Member State would have had carried out, before making the investment, in order to determine its future profitability.” [7] These evaluations can only be ex ante, and not realized after the measure is under scrutiny.[8] In Frucona II the Commission contested that the State had not conducted such investigations and invoked the EDF case law. [9] However, the Commission had also applied the private operator principle.[10] This constituted a legal error that the General Court went on to assess, with respect to its repercussions on the Commission’s evaluation of the measure and the different procedures. [11]

The EDF holding has been reiterated a number of times and most notably again in the ING case.[12] The Advocate General explained the two steps to the private operator test in his opinion: “In my view, there are two questions to be answered when considering the private investor test: (i) was the State’s action such that it can meaningfully be compared with an act of a private investor; (ii) if so, was that action determined by considerations which are relevant only or at least primarily to the State in its capacity as public authority, or might the same action have been taken ‘in comparable market conditions by a private investor in a situation as close as possible to that of the State’? Stage (i) concerns the applicability of the test, stage (ii) concerns its application.”[13]

As the Tribunal explains “the private creditor test is material because the conduct of the State is capable of being adopted, at least in principle, by a private operator acting with a view to profit.” [14] The applicability test is rather concerned with the question of commensurability between the State’s actions and those of a potential private market operator. Whereas the second phase of application is concerned with the effective comparison of the terms of the transaction undertaken by the State with respect to the so standard of private operator, said to represent the “normal market conditions”.[15]


Do you know we also publish a journal on State aid?

EStAL banner
The European State Aid Law Quarterly is available online and in print, and our subscribers benefit from a reduced price for our events.


 

The Court, very astutely, distinguished clearly between applicability and application of the private operator test in the Frucona II case. It explains the different legal standards presiding over both steps, the most significant element being the burden of proof.[16] With respect to applicability, it is incumbent upon the Member State that invokes the test during the administrative procedure, where there is doubt “to establish unequivocally and on the basis of objective and verifiable evidence that the measure implemented falls to be ascribed to the State acting as shareholder. That evidence must show clearly that, before or at the same time as conferring the economic advantage, the Member State concerned took the decision to make an investment, by means of the measure actually implemented, in the public undertaking.”[17] However at the stage of the application of the private operator principle, the burden of proof weighs on the Commission.[18]

EDF has undoubtedly been one of the most influential cases over the past years. However, its reach has been misconstrued by the Commission as a manner to shift the burden of proof onto the Member State with respect to the application of the private operator principle. This is exemplified in the Frucona II case, the Commission argued that on the basis of the EDF case law it was incumbent upon the applicant to meet the EDF standard.[19] This was not the first time the EDF holding has been erroneously applied, nor will it be – in all probability- the last.[20] The Court was able to curb the Commission’s over-stepping in this case, let us hope it will be apt to do so again in the future.

—————————————————————

[1] ECLI:EU:T:2016:152 (T-103/14 Frucona II).

[2] Case C-73/11, Frucona Kosice v Commission EU:C:2013:32.

[3] T-103/14 Frucona II, para. 21; The case had been referred to the General Court for it to give judgment on the pleas raised before it on which it had not ruled. However the GC found that there was no longer any need to rule on the action for annulment of the initial decision. (By reasoned order of 21 March 2014 in Frucona Košice v Commission (T-11/07 RENV, EU:T:2014:173)).

[4] Granted by the Slovak Republic for Frucona Košice a.s. (OJ 2014 L 176, p. 38).

[5] T-103/14 Frucona II, paras 185, 196, 235 & 288.

[6] Case C-124/10P, European Commission v EDF, ECLI:EU:C:2012:318 (C-124/10P EDF).

[7] C-124/10P EDF, para. 84.

[8] C-124/10P EDF, para. 85.

[9] T-103/14 Frucona II, paras 251, 256, 265.

[10] T-103/14 Frucona II, para. 101.

[11] T-103/14 Frucona II, para. 127.

[12]C-224/12P, European Commission v Kingdom of the Netherlands and ING group NV, ECLI:EU:C:2014:213.

[13] Opinion of the Advocate General Sharpston, Case C‑224/12 P European  Commission v Kingdom of the Netherlands and ING Group NV, para. 35.

[14] T-103/14 Frucona II, para. 96.

[15] T-103/14 Frucona II, paras 133-137; Case T-319/12 & T-321/12, Royaume d’Espagne et Ciudad de la Luz, SAU v Commission (‘T-319/12 & T-321/12 Luz’), ECLI:EU:T:2014:604, para. 133.

[16] T-103/14 Frucona II, paras 95-11 & 130-139.

[17] C-124/10P EDF, paras 82-83 ; T 103/14 para. 96-98.

[18] T-103/14 Frucona II, paras 138-139, 269 .

[19] T-103/14 Frucona II, paras 251, 256, 265.

[20] T‑319/12 et T‑321/12, Spain and City of  Luz v European Commission, ECLI:EU:T:2014:604, para 133.

[Photo by GotCredit from flickr.com]

 

 Links

 

Tags

About

Erika Ellyne

Related Posts

17. Dec 2019
State Aid Uncovered by Phedon Nicolaides

Can a Tax (rather than a Tax Exemption) Confer a Selective Advantage?

A tax that is levied at one level of government and does not apply to products and activities at a different level of government need not be selective. Introduction A tax exemption normally confers a selective advantage, unless it is justified by the logic of the tax. Counterintuitively, a tax itself can be selectively advantageous if its scope is too […]
10. Sep 2019
State Aid Uncovered by Phedon Nicolaides

Individually Notified Regional Aid

All individual awards of aid granted to the same project over a three-year period have to be counted together and remain below the maximum allowable aid intensity in relation to the sum of eligible costs. Introduction Hungary operates an aid scheme that offers tax credits to encourage regional investment. The scheme has been implemented on the basis of the GBER […]
30. Jul 2019
State Aid Uncovered by Phedon Nicolaides

The Problem with Turnover Taxes

Economies of scale do not necessarily correlate with ability to pay. Introduction On Thursday, 11 July 2019, France became the first European country to adopt a tax on digital sales. At about the same time, President Donald Trump warned that the US would retaliate with punitive tariffs. The US believes that the tax is aimed at its internet giants such […]
28. May 2019
State Aid Uncovered by Phedon Nicolaides

What Happens when Internal Market Rules and State Aid Rules Clash?

A tax refund may not be granted, if it constitutes non-notified State aid.   Introduction   It is a well-established principle that restrictions on internal market rights or freedoms may not be attached to a State aid measure. Indeed, current State aid rules [e.g. GBER, guidelines] explicitly exclude from their scope any aid measure which is inseparably linked to a […]
19. Mar 2019
State Aid Uncovered by Phedon Nicolaides

Many Tax Rulings Do Not Make a Single Aid Scheme

The autonomy that Member States enjoy in the field of direct taxation must be exercised in compliance with EU State aid law. A State aid measure is considered to be a “scheme” when (a) no further implementing acts are necessary, (b) the granting authority has no discretion in how the measure is applied and (c) the measure defines the eligible […]
08. Jan 2019
State Aid Uncovered by Phedon Nicolaides

Justification of a Tax Exemption

Prevention of excessive taxation may justify tax exemption. Prevention of abuse may justify limits to the tax exemption.   Introduction   A tax exemption may not constitute state aid if it is justified by reasons which are linked to the nature or general scheme of the tax system. This is what the Court of Justice said on 19 December 2018, […]
06. Feb 2018
State Aid Uncovered by Phedon Nicolaides

How a Private Investor Behaves: EDF v Commission

A private investor carries out an assessment of the prospective profitability of a company before it invests in it. Ex post assessment is not sufficient. Evidence that the investment is likely to be profitable is not enough. The return must be high enough to satisfy a private investor in a similar situation (by compensating it for the risk it assumes). […]
27. Dec 2016
State Aid Uncovered by Phedon Nicolaides

Funding of the Spanish Public Broadcaster and Hypothecation of Taxes

Tax payers have grounds to object to a tax on the basis of Article 107(1) TFEU only when the tax is “asymmetrical” or when it is “hypothecated” to an aid measure.   Introduction On 10 November 2016, the Court of Justice ruled in case C‑449/14 P, DTS v European Commission.[1] DTS, a Spanish television company, appealed against the judgment of the General […]
15. Dec 2016
Guest State Aid Blog by Dimitrios Kyriazis
Lexxion Seminar

Ever wondered how Lexxion Seminars are like? Read this Summary of “State Aid in Tax Measures”

The following is a summary of the main points that were presented and the issues that were discussed in the seminar on State Aid in Tax Measures that was held by Lexxion in Brussels on 7-8 November 2016. The summary has been prepared for information purposes only and it is not meant to be a precise record of the proceedings […]
05. Oct 2016
Guest State Aid Blog by Erika Szyszczak
gavel

Article 263(4) TFEU: Third Party Challenges to State Aid Decisions

We are happy to welcome back Prof Erika Szyszczak on the State Aid Blog today. She is Professor of Law and Fellow of the UK Trade Policy Observatory at University of Sussex and practising barrister and ADR mediator at Littleton Chambers, Temple, London. Today she shares her views on two cases that shed new light on third party rights to […]