How to Determine the Selectivity of a Tax Measure

A tax exception is normally a selective measure. However, exceptions which are open to all undertakings are not selective, even if they deviate from the standard tax rate or base. Exceptions which are open only to a few undertakings escape from being classified as selective only when the beneficiary undertakings are in a different legal or factual situation than non-beneficiaries. Whether undertakings are truly in different situations does not depend on their circumstances but rather depends on the objectives of the tax system or the reference system.



Determining the selectivity of a tax measure is often tricky. This is because Member States enjoy significant tax autonomy and they exercise that autonomy by levying many different taxes for different purposes. Each of these taxes does not necessarily apply to all economic transactions or undertakings. Their limited scope, however, does not make them selective in the meaning of Article 107(1) TFEU. This is because a tax is a selective measure when it does not apply to a transaction or undertaking to which it should apply in principle. A tax should apply in principle to all transactions or undertakings which are in a similar situation. Hence, whether a measure is selective depends on an assessment of whether different undertakings or transactions are in a similar situation. Although in most instances, it is a fairly simple matter to identify a selective measure, classifying a tax as selective can be quite tricky.

How tricky it can be is demonstrated by the judgment of the General Court of 4 February 2016, in case T‑620/11, GFKL Financial Services v Commission.[1] The judgment provides useful guidance on how to establish whether a tax measure constitutes an exception that falls within the scope of Article 107(1) TFEU, because it treats differently undertakings which are in fact in the same situation, or whether there are objective grounds for making a distinction in their tax treatment.


GFKL appealed against Commission decision 2011/527 that found that certain tax measures in Germany constituted incompatible aid which had to be recovered.

GFKL had encountered financial difficulties and faced the prospect of bankruptcy. In 2009 a private investor acquired 80% of the shares of the company by injecting EUR 50 million into its capital and in so doing, the new owner prevented its bankruptcy.

At that time the company fulfilled all the conditions defined in German law concerning the restructuring of companies. The relevant law granted certain tax advantages to restructuring companies that were taken over by others.

Under the German tax law any company could reduce its tax liability by carrying forward losses to subsequent years. Past losses could be set against future profits. The carrying forward of past losses, however, was not allowed when a company was acquired by another. The purpose of this exclusion was to prevent companies from taking over inactive accompanies for the sole purpose of using the losses of the acquired company in order to reduce the tax liability of the acquiring company. In other words, the exclusion aimed to prevent abuse. However, a so-called “carry-forward clause” did allow the use of past losses in order to reduce future liability whenever the company that was taken over had financial difficulties and together with the take-over the company was restructured so that it could return to viability under a new ownership.

Given the complexity of the various provisions of the German tax system, the measure in question can be better understood in the diagram below:

(1) Taxation of profits


(2) Exception from tax of profits (1) that are set against losses carried forward


(3) Non-application of exception (2) in case of companies taken over


(4) “Carry-forward clause” [ = exception from (3) = application of exception (2)] for problematic companies taken over


In 2011, the Commission, after a formal investigation, concluded that the carry-forward clause constituted incompatible State aid which had to be recovered.

The judgment

With respect to the substance of the case, the General Court considered first the plea that the Commission failed to provide sufficient explanations. The Court recalled well-established principles that a decision is sufficiently explained when it is possible to understand the analysis of the Commission in a way that enables affected parties to know the reasons for which the decision was taken. The Court reiterated that the Commission does not have to explain all issues covered in its decision, nor is it obliged to respond to all points raised by interested parties.

GFKL contested in particular the characterisation of the carry-forward clause as selective. In paragraph 91 of the judgment, the General Court observed that the reference tax system, as defined by the Commission, was the German tax system for legal persons. In the reference system, when a company changed ownership by more than 50%, previous losses were forfeited and could not be used to offset subsequent tax liability. Therefore, the Commission was of the opinion that the general rule in the reference system was the forfeiture of losses when a change of ownership occurred. For the General Court this was a sufficiently precise definition of the reference system and of the characterisation of the carry-forward clause for restructuring companies as being selective. [Paragraphs 92-93]

Then it turned its attention to the crux of the issue which was whether indeed the carry-forward clause could be characterised as a deviation from the reference system.

Three-stage test of selectivity

The Court recalled that according to established case law the characterisation of a tax measure as selective requires, first, the identification of the normal or reference tax system. Second, the measure in question must be shown to be a deviation or exception from the reference system, conferring an advantage to certain undertakings in relation to others which are in the same situation. Whether they are in the same situation is determined by the objectives of the reference system. Third, it must also be examined whether an apparently selective measure can be justified by the nature or economy of the reference system. [Paragraph 101]

The Court also explained that the onus of proof is on the Commission to demonstrate that the measure in question differentiates between undertakings which are in the same situation, given the objectives of the reference system. By contrast, it is for Member States to prove that the differentiation can be justified by the nature or economy of the system. [Paragraph 102]

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Reference system

The Court agreed with the Commission that the reference system was the relevant rule concerning the forward carrying of losses, which was allowed for all undertakings, except those which changed ownership. The Court observed that in the relevant tax law the limitation of the forward carrying of losses applied regardless of the characteristics or specific conditions or needs of undertakings. Hence, the carry-forward clause that applied only to companies undergoing restructuring was an exception from the general rule of forfeiting the advantage of forward carrying of losses in case of change of ownership. [Paragraphs 112-113]

Similar situation

The next issue examined by the Court was whether the undertakings going through restructuring were in the same situation as other undertakings. The Court agreed with the findings of the Commission that the objective of the reference system was to tax profit and therefore to allow for past losses to be counted against profits in subsequent years. In addition, the system aimed to prevent profitable companies from taking over unprofitable ones in order to reduce their tax liability by using the past losses of the companies that they acquired. The Commission had concluded that the exception for companies undergoing restructuring was a deviation from the reference system, which could not be justified on the basis of the objectives of that system. The Court agreed that all undertakings which were taken over by others were in the same situation regardless of whether they were in financial difficulty or not [paragraph 137]. By contrast, the carry-forward clause benefitted only undertakings in difficulty. Moreover, the aim of preventing abuse was suspended in the case of undertakings in difficulty, even though there was no connection between financial difficulty and a reduced possibility of abuse [paragraph 141].

The Court also rejected the argument of GFKL that the carry-forward clause had a general application. The Court explained that whether a measure is general or not, depends on whether, in relation to the reference system, it differentiates between undertakings which are in the same legal and factual situation, given the objectives of the reference system. On the basis of these principles, the Court rejected the argument that the carry-forward clause had general application [paragraph 144]. Interestingly, the Court also referred to the judgment in the case T‑219/10, Autogrill v Commission, where an exception was found to be general in nature, despite the fact that it was framed as exception, because it was open to all undertakings. The Court pointed out that in the present case not all undertakings could benefit from the carry-forward clause because not all undertakings that were taken over were in financial difficulties [paragraph 145].

The Court also rejected the argument that undertakings in difficulty were different from undertakings in good financial position [e.g. because the latter had access to financial resources]. It reiterated that in the context of the objective of the reference system, which was to tax profits and to prevent abuse, they were in a similar situation [paragraph 146]. In other words, the German reference system did not explicitly seek to help undertakings to gain access to financial resources by facilitating their acquisition by wealthier companies.

Objective justification

The Court then turned its attention to the last stage of the analysis of tax measures, which was whether the measure in question could be justified by the logic or economy of the reference system. The Court recalled that a distinction must be made between objectives which are extrinsic to a tax system and mechanisms which are intrinsic to the system and which are necessary for achieving the fundamental objectives of the system. Tax exceptions which serve an extrinsic objective fall within the scope of Article 107(1) TFEU [paragraph 153]. [This is because the tax is an instrument for achieving a different policy objective. While achieving intrinsic objectives merely aims to ensure the implementation of the tax system itself.] Moreover, a measure can be justified by the nature or economy of the reference system only if it is coherent with the features of the system and the application of that system, complies with the principle of proportionality and does not go beyond the minimum necessary [paragraph 154].

The Court considered that the carry-forward clause was introduced to help companies suffering from the economic crisis. Its aim was to facilitate their restructuring by encouraging their takeover by a healthy company [paragraph 158]. Therefore, the objective of the clause did not fall within the fundamental or guiding principles of the German tax system and consequently it was not intrinsic to that system [paragraph 159]. The carry-forward clause did not lead either to more effective taxation or to prevention of tax avoidance, which are objectives that are intrinsic to tax systems.

GFKL claimed that, given the fact that the carrying forward of losses did not apply to companies taken over in order to prevent abuse while the restructuring of companies did not result in abuse, the carry-forward clause was justified. The Court rejected this claim because the carry-forward clause was not coherent with the aim of the system. The Court found no justification in the exclusion of healthy companies which recorded losses while companies in difficulty which were taken over could benefit from the clause [paragraph 164]. In this connection the Court also rejected another argument by GFKL that companies in difficulty could not obtain finance on the market and could only find financial resources from their new owners. The Court accepted the view of the Commission that facilitating access to finance was not an objective of the tax system [paragraph 166].

After dealing with these issues, the Court turned to the next plea which was absence of transfer of state resources because the tax system, by allowing companies to carry forward their losses, it established the general principle that profits which could be set against previous losses did not belong to the state. The Court rejected it. The German state gave up resources that could have received had the carry-forward clause not applied to problematic companies that were taken over [paragraph 177]. The general system included the rule whereby losses could not be carried forward in case of a takeover. Hence, the German state had not completely resigned from taxing profits that could be set against past losses.

Legitimate expectations

Lastly GFKL claimed that the aid ought not to be recovered because it entertained legitimate expectations that the clause did not constitute State aid or that it was compatible aid because other Member States introduced similar measures which had not been notified to the Commission or were not contested by the Commission.

The Court pointed out that legitimate expectations can be entertained only when an EU institution provides specific assurances [paragraph 187]. Moreover, undertakings receiving state aid can entertain legitimate expectations only when the procedure of Article 108 TFEU is respected. The fact that the measure in question was not notified to the Commission does not mean that the beneficiary company can entertain legitimate expectations concerning its characterisation as non-State aid or as compatible aid [paragraph 189]. The Court went on to reiterate that any assurances given by national authorities are not relevant and cannot create legitimate expectations [paragraph 191] and that the existence of similar measures in other Member States can never justify the granting of state aid [paragraph 192].

Lessons to be drawn

This judgment dealt with a complex measure. When Member States introduce exceptions to their normal taxes, these exceptions must be open to all undertakings which are subject to the normal taxes. Otherwise the exceptions can become State aid.

It is also possible, however, that exceptions which are not open to all undertakings may not be State aid. This happens only when the exceptions treat differently undertakings which are not in the same legal or factual situation. Since no company is identical to any other, it would have been trivially easy to claim that any company is in a different situation in order to escape from a tax. But whether undertakings are truly in different situations does not depend on their circumstances but rather depends on the objectives of the tax system or the reference system. If the tax system intends to make a distinction between companies which are in different situations, the distinction has to be made explicitly and on objective grounds.

Lastly, exceptions have to be applied coherently. This means that they have to apply to all companies which are in the same situation. In the case of the carry-forward clause, the beneficiaries were only the companies undergoing restructuring. There was no explanation why those undergoing restructuring were different from those that had incurred losses and were taken over without restructuring. Even if it could be claimed that those undergoing restructuring were in a more dire condition and had more serious financial needs, the exclusion of companies taken over from the forward carrying of losses was not determined or explicitly modulated according to financial need. Its single aim was to prevent abuse. Yet, the carry-forward clause did not apply only in cases of reduced likelihood of abuse. By disallowing the forward carrying of losses in case of change in ownership but by allowing the forward carrying of losses in case of restructuring, the German tax system contained provisions which were not coherent with each other.


[1] The judgment does not yet exist in English. It can be accessed in other languages at:



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 is professor at the University of Maastricht and the University of Nicosia. 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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