Is it OK to Tax Company Size?*

Is it OK to Tax Company Size?* -

Progressive tax rates that are consistent with the objective of the tax system are not necessarily selective.


Member States are free to design their corporate tax systems as long as they do not grant State aid or infringe fundamental internal market freedoms. A question that arises in discussions on what Member States may or may not do when designing their tax systems is whether they can treat favourably smaller companies. In general, tax measures that are advantageous to SMEs are considered to constitute State aid. However, on 16 May 2019, the General Court ruled, in joined cases T-836/16 and T-624/17, Republic of Poland v European Commission, that a tax that is progressive in relation to turnover, and therefore, size, may not be selective in the meaning of Article 107(1) TFEU.[1]

Poland applied for annulment of both the decision of the Commission to open the formal investigation procedure [SA.44351] and the final decision, 2018/160, declaring a turnover tax on retailers to be incompatible State aid. No recovery was ordered because the tax had not been implemented.

The liable taxpayers were retailers regardless of their legal status. The tax base was their monthly turnover. The tax system had three rates. For turnover up to PLN 17 million, the tax rate was zero. A rate of 0.8% was charged on turnover between PLN 17 and 170 million. A higher rate of 1.4% was charged on turnover exceeding PLN 170 million.

Commission decision 2018/160[2]

In its final decision, the Commission found the tax to be selective because, in its view, the higher rates could not be justified in the context of a turnover tax. It considered that the turnover tax could not be progressive because the companies with the higher turnover paid tax at higher average rates, in addition to higher marginal rates, and could also have higher costs. For example, if a tax system levies a rate of 1% for a band up to 100 of turnover and a rate of 5% for turnover above 100, then a company with turnover of 200 pays a total of 6 in tax or an average of 3%. By contrast, a company with turnover of 100 pays on 1 on the first 100 or an average of 1%.

This meant that, unlike a tax on profit, which is the difference between revenue and costs, a progressive turnover tax did not necessarily impose a higher burden on companies with a higher ability to pay. The system, according to the Commission, simply discriminated against larger companies. In fact it found that only a handful of companies paid tax at the highest rate. Since, in the Commission’s view, a turnover tax could not be progressive, it defined the reference system to be a turnover tax with a single rate. [In other cases of turnover taxes in other Member States, the Commission explained that it did not object to turnover taxes with a single rate. Single-rate taxes ensured that everybody paid the same proportion of their turnover.]

Poland argued that the tax was a general, non-selective measure. The different rates were an integral part of the reference system which was made up of the tax base, taxable persons and tax rates. The progressivity of the rates could not be regarded as a derogation from the reference system. [see paragraph 42 of the judgment.]

Poland also contended that the tax had the twofold objective of providing the state with tax revenue while distributing the tax burden equitably among the taxable persons according to their ability to pay. [paragraph 46]

The selectivity test

The General Court began its analysis by recalling that a tax measure by which the public authorities grant certain companies favourable treatment that places them in a more favourable financial position than other taxpayers constitutes State aid. [paragraph 58]

More specifically, a tax measure is selective when it favours certain undertakings in relation to others which, in light of the objective pursued by the tax system, are in a comparable factual and legal situation. [paragraph 59]

Then it outlined the well-known three-step test for determining the selectivity of tax measures:

  1. identification of the common, normal or reference system of taxation;
  2. existence of a derogation from the common, normal or reference system for certain tax payers which are in a comparable situation to others;
  3. assessment of whether the derogation or differentiation is justified by the nature or economy of the system.

Perhaps it should be explained that the identification of the reference system is not limited to delineation of the applicable tax base and listing of the relevant tax rates. It also requires identification of the undertakings which are in a comparable situation according to the purpose of the tax.

At this point the General Court made a useful clarification. According to the Court, the “nature” of the normal system means its objective or purpose whereas the “economy” of the normal system encompasses its tax rules. The Court cited case C-88/03, Portugal v Commission, paragraph 81, and case T-210/02, RENV, British Aggregates v Commission, paragraph 84. [paragraph 62]

The clarification of the General Court is indeed important, but the passages from the two cited cases merely make a distinction between objectives which are extrinsic to a tax system, such as support of SMEs, and mechanisms which are inherent in the system, such as depreciation rules.The Court, however, continued in the same paragraph to emphasise that the concept of the objective or nature of the normal tax system refers to the fundamental or guiding principles of the tax system and does not refer to policies which may be financed from the tax revenue [such as family policy], nor to the aims of the exceptions, deviations or derogations from the tax system. This is of course what was stated in the two cited cases.

The reference system

Next, the General Court turned its attention to the definition of the normal or reference tax system in the case at hand.

It agreed with Poland that the tax rates could not be excluded from the content of a tax system, as the Commission had done. Regardless of whether the tax has a single rate or multiple rates, the level of the rate, charge or levy is, like the base, part of the fundamental characteristics of the legal regime of the tax. The Commission itself states in paragraph 134 of the Notice on the Notion of Aid that the reference regime is based on elements such as the tax base, the taxable persons, the chargeable event and the tax or taxation rates. The General Court considered that, in the absence of indications as to the rate that would determine the economy of the “normal” scheme, it was impossible to examine whether there was a derogation for the benefit of certain undertakings. Therefore, if, under the same tax measure, some companies are charged different tax rates, it is necessary to determine what is the “normal” situation which is part of the “normal” system. [paragraph 65]

For the Court it was clear that the Commission sought to identify a normal system with a certain tax structure. According to the Commission, the normal system was made up of a single rate. However, the Court did not accept the Commission’s reasoning because the normal single-rate system was a hypothetical system constructed by the Commission, not the Member State. Indeed the Court did not see how the Commission’s construct followed from the Polish legal text. The Court insisted that the analysis of the selective or non-selective nature of a tax advantage had to be carried out on the basis of the actual characteristics of the tax system, and not according to assumptions that the competent Polish authority did not make. [paragraph 66]

The Court concluded its review of the tax system with the finding that the Commission identified a normal system which was either incomplete, with no tax rates, or was hypothetical, with a single tax rate, which in either case constituted an error of law. [paragraph 67]

This was a stern rebuke for the Commission. The Commission, in effect by reconstructing the Polish turnover tax, tried to go beyond the legal text of the tax. It was attempting to apply the principle enunciated in case C-106/09 P, Commission v Gibraltar, paragraphs 91-93, according to which:

The “case-law does not make the classification of a tax system as ‘selective’ conditional upon that system being designed in such a way that undertakings which might enjoy a selective advantage are, in general, liable to the same tax burden as other undertakings but benefit from derogating provisions, so that the selective advantage may be identified as being the difference between the normal tax burden and that borne by those former undertakings.”

“Such an interpretation of the selectivity criterion would require, contrary to the case-law […], that in order for a tax system to be classifiable as ‘selective’ it must be designed in accordance with a certain regulatory technique; the consequence of this would be that national tax rules fall from the outset outside the scope of control of State aid merely because they were adopted under a different regulatory technique although they produce the same effects in law and/or in fact.”

“Those considerations apply particularly with regard to a tax system which, as in the present case, instead of laying down general rules applying to all undertakings from which a derogation is made for certain undertakings, achieves the same result by adjusting and combining the tax rules in such a way that their very application results in a different tax burden for different undertakings.”

In essence, the Commission seemed to have wanted to prove that the different rates of the Polish tax were inherently discriminatory in the same way that the Gibraltar system was designed on purpose to exclude offshore companies. The Commission may still succeed in this respect when it argues the case before the Court of Justice, but it will have to resolve a fundamental problem. Tax systems with different rates and bands have been found to be non-discriminatory.

The General Court went on to stress that the only normal system was the tax in the retail sector itself, with its structure including its progressive rate scale and its turnover bands including the tax-free band of turnover from PLN 0 to 17 million. This tax-free band was a de facto part of the tax structure and, although exempt from taxation, the corresponding activity fell within its sectoral scope of application. [paragraph 68]

We now have a fundamental conflict between two apparently opposite principles. On the one hand, the Court of Justice has said that in order to determine whether certain companies receive an advantage we must look at whether the tax system results in a “different tax burden”, not at its structure or regulatory technique. In the case of the Polish turnover tax, the different tax rates resulted in a differentiated tax burden simply because larger companies paid more tax on average. On the other hand, the General Court says that the objectives of the tax system, as designed or intended by the tax authorities, cannot be disregarded. The Commission had to accept that the Polish turnover tax had three rates and none was the standard or benchmark rate that corresponded to the normal tax system.

In principle, the General Court is right that it is the prerogative of Member States to design their tax systems as they see fit, as long as they do not grant State aid through surreptitious discrimination. But how can discrimination be discovered or discounted when the tax system merely sets three rates with no further explanation as to which one is the standard rate? In order to answer this question, we must first see how the General Court took into account the objectives of the Polish tax system.

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The objectives of the system

The first of the two objectives of the Polish measure was to raise revenue. A zero rate of tax is ineffective for that purpose. Therefore, the zero rate cannot be consistent with the objective of the measure. While it is true that all liable taxpayers would obtain the same benefit for the band to which the zero rate applied, the fact remains that a zero rate cannot be justified by the objective of that system. This leaves the other two rates. In this connection, the General Court in effect said that, since no standard or benchmark rate could be identified, both of those rates were the standard or benchmark rate. But this necessarily means that the zero rate was a deviation from those two rates precisely because it was not consistent with the objective of raising revenue. However, the zero rate and the other two could still be justified by the other objective of the tax system which was progressivity according to ability to pay.

Indeed, the Court cautioned that even though the Commission erred in the identification of the applicable normal tax system, it still had to be ascertained whether the conclusion to which it arrived was justified by other reasons which were capable of proving the existence of a selective advantage for certain undertakings. [paragraph 69]

The General Court noted that the Commission did not merely consider that the progressive structure of the tax at issue derogated from a normal system but, basing its reasoning on the Gibraltar judgment, also found the system was designed to confer a selective advantage for companies with low turnover. In the Commission’s view, the structure of the retail tax and its progressive rates were contrary to the revenue-raising objective of that tax. Poland, the Commission argued,had deliberately designed the tax in such a way as to arbitrarily favour certain undertakings. The General Court wanted to ascertain whether the Commission’s assessment was well founded. [paragraph 70]

The Court found the reasoning of the Commission to be faulty for the following reasons. First, all taxes aim to raise revenue. However, the progressive structure of tax rates cannot in itself be contrary to the objective of collecting revenue.[paragraph 72]

Second, the aim of the Polish authorities was to introduce a sectoral tax based on the principle of redistribution. [paragraph 73] In other words, the General Court was telling the Commission that it had to respect the objective of the tax as defined by the national legislature.

Third, although the turnover tax was presented as a means of financing family policy measures, it was intended to raise revenue for the general budget. [paragraph 74]

Fourth, even though the tax was levied on turnover, it could still be consistent with its progressive objective because a larger company could enjoy economies of scale resulting in costs which could be proportionately lower than those of a smaller company, enabling it to pay proportionally more in respect of a turnover tax. [paragraph 75]

On the basis of the above reasoning, the General Court confirmed the position of Poland that the objective of the tax was to introduce sectoral taxation on turnover with a redistributive logic and that the Commission made a second mistake by assigning to the retail sales tax a different objective from that defined by the Polish authorities.[paragraphs 76-77]

The statement of the Court on the economies of scale corresponding to the ability to pay is partly true and partly false. It is true if you compare companies selling the same product [e.g. a large furniture shop and a small furniture shop]. But it is probably false when you compare companies with the same turnover in different retail sectors, such as, for example, a furniture shop with a fast-food shop generating the same amount of turnover. The furniture shop requires a large exhibition area and needs to hold a large inventory [resulting in large turnover and a small margin], while the fast-food shop needs no more than a counter and does not have to hold more than a day’s stock [resulting in large turnover and a large margin]. In fact, this simple example demonstrates the difficulty of establishing the equivalence between companies even of the same turnover. Is a furniture shop and a restaurant of the same turnover in a truly similar situation? The furniture shop requires a large exhibition space, but even a large restaurant is different because it needs to have refrigeration facilities and procedures for safe food handling. The similarity of their turnover says nothing about the revenue they can afford to forgo and therefore their ability to pay. It follows that a turnover tax discriminates against companies which incur higher costs to generate the same amount of turnover. A profit tax treats all companies of the same profit equally. In fact, economic theory suggests that risk-adjusted profit rates eventually converge. Sectors with high profits attract new companies until profit rates decline to the level that prevails in other sectors. In this sense, profit is the outcome when everything else is taken into account and, therefore, is a much better indicator of the ability to pay than turnover.

At any rate, the purpose of the Court’s reference to economies of scale was to show that companies with larger turnover could afford to pay more in taxes. In other words, the Court implicitly conceded that a tax that claims to be redistributive has to be consistent with the principle of ability to pay and has to target the resources that a company can afford to pay in taxation. After all, ability to pay means resources one can afford to forgo, i.e. to do without. The rich can pay a euro without pain, while the poor depend on that euro. But this is exactly what a profit tax does. It targets resources that can be forgone. By contrast, a revenue tax directly taxes size and only indirectly and incidentally taxes resources that a company can spare.

Progressive tax rates

Then the General Court went on to examine whether despite the double error of the Commission, there could still be selective elements to be found in the Polish tax. As a reminder to the reader, the first error of the Commission was to identify a standard rate in an artificial system, when according to Poland there was none. The second error was to ignore the redistributive aim of the tax.

The General Court, first, recalled that according to the case law, progressive tax structures, non-taxable amounts, maximum taxable amounts or other differentiation mechanisms do not necessarily indicate the existence of selective advantages. [paragraph 80]

After reviewing several seminal judgments, the General Court deduced that when an advantage is directed at a particular economic sector in relation to other tax payers or a particular form of business or stems from differentiated treatment contrary to the purpose of the tax it has a selective character. However, the objective of a tax can itself include a differentiation mechanism aimed at spreading the tax burden or limiting its impact. [paragraph 83]

Quite interestingly, the General Court analysed five landmark judgments to demonstrate that indeed the case law allowed differentiated treatment without necessarily being selective. The Court identified three conditions that exclude the presence of selectivity. There is no selectivity if:

First, the differences in taxation and the benefits that may arise result from the application, without any derogation, of the “normal” system.

Second, comparable situations are treated in a comparable manner.

And, third, the differentiation mechanisms are not contrary to the objective of the tax. [paragraph 89]

Then the Court returned to the issue of progressivity of tax measures. It stated that progressive taxstructures, including those with significant non-taxable limits, bands or amounts, which are not exceptions to tax systems, do not imply the existence of State aid. There is nothing to limit this conclusion, as the Commission did in its final decision, to profit taxes and to exclude turnover taxes. The case law does not require Member States to limit differentiation mechanisms only to redistribution of wealth or the counteracting and prevention of certain negative effects [e.g. environmental pollution]. What is necessary is that the desired differentiation is not arbitrary, that it is applied in a non-discriminatory manner and that it remains consistent with the objective of the tax concerned.Moreover, it cannot be ruled out that a redistributive logic may also justify the progressive nature of a turnover tax. A redistributive logic may even justify a total exemption for certain companies. [paragraph 91]

Consequently, the Commission could not infer the existence of a selective advantage only from the progressive structure of the tax.

But then the General Court warned that the tax measure in question could still be selective if it were shown that the progressive tax structure in practice was adopted in a manner which largely contradicted the purpose of that tax measure.

It found that the Commission had confined itself to considering that the principle of progressive taxation gave rise to a selective advantage which, according to the Court, was an error of law. [paragraph 96]

Although the Court acknowledged that the Commission had shown that different companies bore different tax burdens, the Court insisted that the variation in the effective average rate and the marginal rate according to the size of the tax base [i.e. amount of turnover] was inherent in any progressive tax system and such a system could not, for this reason alone, give rise to selective advantages. Moreover, where the structure of a progressive tax reflects the objective pursued by that tax, it cannot be considered that two undertakings having a different tax base are in a comparable legal or factual situation with regard to that objective. [paragraph 99]

Consequently, the Court found that the Commission had failed to establish the existence of a selective advantage resulting in different treatment between operators who, in relation to the objective assigned by the Polish legislature to the retail tax, were in a comparable factual and legal situation. The errors of the Commission, in defining the normal tax system, the objective of the tax system and the existence of selective advantages in the structure of progressive taxation of turnover, did not allow it to verify whether the progressive structure, in connection to its objectives, differentiated between companies which were in the same factual and legal situation. For these reasons, the Court annulled the final Commission decision. [paragraphs 102-103]

The General Court also annulled the opening decision of the Commission.


Before concluding, it is necessary to consider the consequences of this important judgment. Although it is ostensibly about turnover taxes which are not widely used by Member States, the judgment will surely impact significantly on the design of national tax systems in three respects.

First, the Commission has to accept the tax system as defined by Member States, including all its components such as base, rates, bands, etc. The Commission may not identify a hypothetical normal system. But this means that Member States have to ensure that all the components of the system are consistent with the overall objective of that system.

Second, differentiation of tax payers is not necessarily selective as long as it follows from the objective of the system.

Third, progressivity is a form of differentiation that is not necessarily selective.

With respect to progressivity, the General Court has stated that it has to follow from the objective of the tax itself, if it is not to be considered selective. I argued earlier that if the purpose of the progressivity was to ensure that everybody paid according to their ability, then the progressivity of the Polish tax could not be justified because a tax on turnover only incidentally correlates with ability to pay. In fact, it is rather more likely that companies with the same turnover do not have the same ability to pay. I also argued that the zero-rate band was not consistent with the other objective of the Polish tax, which was to raise revenue.

Although the judgment represents a defeat for the Commission, it does not necessarily follow that it is a major setback for the Commission. It has elements that the Commission may use to correct the decision that was annulled by the General Court. The Commission has lost a battle, but it may not have lost the war.

However, there is one more element in the judgment whose implications are rather unpredictable and certainly more serious. The General Court has stated that a progressive turnover tax [i.e. a tax with several rates, rather than a single rate] is not selective if it is consonant with the logic of the tax. What happens if the objective of a turnover tax is explicitly to tax company size, rather than pretend that it implements the principle of ability to pay? Then progressive rates will follow naturally from the objective of the tax. Will such a measure be free of State aid?

One of the reasons why the Commission concluded that the Polish tax and similar taxes in other countries were selective was that they hit hardest large multinational companies. They appeared to protect smaller, domestic companies, although Poland denied that it intended to discriminate in their favour. It argued, instead, that domestic companies also paid tax at the highest rate. If the Commission cannot use State aid rules, it may be able to use internal market rules to prevent covert discrimination. Ultimately, it may make no difference how the integrity of the internal market is safeguarded. But it still leaves unanswered the question whether Member States are now free to tax company size and target large retailers such as Amazon.


* I am grateful to Peter Staviczky for comments on an earlier draft. I am solely responsible for the views expressed here.

[1] The full text of the judgment in languages other than English can be accessed at:

[2] Official Journal L 29, 1 February 2018, pp. 38-49. The full text of the decision can be accessed 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.


  1. by Melvyn Waumsley

    Thank you for an excellent and stimulating analysis. I think your last point is the critical point, and one which I think will not be resolved by one or more judgements at the ECJ whilst the EU Treaty remains as it is. How do you fully develop and defend a single market without a common fiscal policy – i.e. federal Europe? The same might also be said about defending the Euro on the international markets, but let’s not go there!

  2. by Pierpaolo Rossi

    The General Court seems to elude some relevant considerations in what should be its analysis of the justification of the apparent selectivity of 1) the sectoral tax on the retail sector, in Poland and 2) the system of progressive rates for that tax, based on the objective of that tax. Any justification for the said two selective elements should be inherently consistent to the logic of the tax system in question. 1) Firstly, what was the logic of that sectoral tax on retailers? The first observation to make is that that tax is not a turnover tax applied on the price of the sales and borne by the customers (indirect tax, or consumption tax) but a personal tax on retailers (direct tax on their ability to pay). The question is then why only the retail sector should be hit by tax, while other economic sectors are excluded. If the logic of the tax system is to raise revenues and the ability to pay, other economic sectors (manufacturing) may have that same ability and should not be excluded from a tax on their turnovers (a breach of horizontal tax neutrality). 2) Second, the differentiation between rates maybe explained in terms of their lose correlation with (in)ability of the retailers with lower turnovers, but they are surely inconsistent with the sectoral nature of the tax. Retailers are effectively hit by the tax because of the aim of the PL tax system to charge a sector which is arguably viewed as less labour intensive (like manufacturing) than retail. In this respect, large surfaces with large turnover which comparatively employ more people are unjustifiably hit by a higher personal charge than smaller retailers. The question is then why only the large retailers should be hit by tax, while smaller retailers are exempted (a breach of vertical tax neutrality). The explanation for this otherwise illogic distinction can only be connected to the fact that the large retail distribution are mainly foreign, and accordingly the tax is design to de-facto restrict the establishment of large foreign retailers. In sum, with its judgement the General Court failed to adequately assess the nature of the tax in question, because: (i) the tax on the turnover of the retailer sector is a personal tax that is only apply on certain economic activities and therefore selective, while construed as a general tax (contribute to tax revenues and redistribute charges on the basis of ability to pay), and (ii) the tax applies mostly on undertakings that are more capital and labour intensive, without justification if not that of de-facto restricting the establishment of foreign groups which are likely to be large distribution chains and favour local shop-owners.

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