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 beneficiaries. Administrative discretion turns an aid measure into “individual aid”.
Belgium and Magnetrol raised several pleas each, but the General Court limited its judgment to only two: whether the Commission had encroached on the tax sovereignty of a Member State and whether it had wrongly classified the EPE to be a scheme.
Encroachment on the exclusive jurisdiction of Belgium in matters of direct taxation
The General Court noted first that “(62) while direct taxation, as EU law currently stands, falls within the competence of the Member States, they must nonetheless exercise that competence consistently with EU law … On the other hand, it is undisputed that the Commission is competent to ensure compliance with Article 107 TFEU.”
“(63) Thus, interventions by Member States in areas which have not been harmonised in the European Union, such as direct taxation, are not excluded from the scope of the State aid rules. Accordingly, the Commission may find that a tax measure constitutes State aid provided that the conditions for making such a finding are met … The Member States must therefore exercise their competence in the field of taxation consistently with EU law … Accordingly, they must refrain from adopting any measure, in that context, liable to constitute State aid incompatible with the internal market.”
Belgium counter-argued that it had competence to adopt measures to avoid double taxation. Apparently, the rationale of the EPE, as stated in Belgian law, was to prevent double taxation. The General Court responded that “(71) it is for the Member States to take the measures necessary to prevent situations of double taxation, by applying, in particular, the apportionment criteria followed in international tax practice … However, as noted in paragraph 63 above, the Member States must exercise their tax competences in accordance with EU law and refrain from adopting any measure liable to constitute State aid incompatible with the internal market. Accordingly, the Kingdom of Belgium cannot invoke the need to avoid double taxation as an objective pursued by the Belgian tax authorities’ practice as regards excess profit, in order to justify an exclusive competence in that respect, the exercise of which would fall outside the scope of the Commission’s power to verify compliance with Article 107 TFEU.”
Then the General made an important observation. “(72) It does not appear that the non-taxation of excess profit, as applied by the Belgian tax authorities, pursued the objective of avoiding double taxation. The application of the measures at issue was not subject to the condition that it be demonstrated that the excess profit in question had been included in the profit of another company. Nor was it necessary to demonstrate that that excess profit had actually been taxed in another country.”
In other words, the Belgian authorities deviated from what the law required or, at least, adopted practices not specified in the relevant law. As we will see below, this proved decisive for the finding of the Court that the EPE was not a scheme. But it may also deal a fatal blow to any future defence of the Belgian advance tax rulings.
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The existence and features of an aid scheme
Article 1(d) of the Procedural Regulation [Regulation 2015/1589] defines an “aid scheme” as an act on the basis of which, without the need of any further implementing measures, individual aid awards may be made to undertakings whose eligibility to receive State aid must also be specified in the relevant act.
The General Court explained that “(78) the Commission may confine itself to examining the characteristics of the scheme at issue in order to assess, …, whether, by reason of the arrangements provided for under the scheme, the latter gives an appreciable advantage to beneficiaries in relation to their competitors and is likely to benefit in particular undertakings engaged in trade between Member States. Thus, in a decision which concerns such a scheme, the Commission is not required to carry out an analysis of the aid granted in individual cases under the scheme. It is only at the stage of recovery of the aid that it is necessary to look at the individual situation of each undertaking concerned”.
“(81) However, in recital 125 of the contested decision, it is indicated that no provision of the [relevant Belgian law] provides for an abstract unilateral exemption of a fixed part or percentage of the profit actually recorded by a Belgian entity forming part of a group. It is also indicated that [relevant Belgian law] allows downward transfer pricing adjustments subject to the condition that the profit to be exempted, generated by the international transaction or arrangement in question, has been included in the profit of the foreign counterparty to that transaction or arrangement.”
On the basis of the above, the Court concluded that “(84) it must be examined whether the alleged aid scheme, based on the acts identified by the Commission, requires further implementing measures within the meaning of Article 1(d) of Regulation 2015/1589.”
Then the Court went back to the Procedural Regulation to identify three elements that are indispensable to a scheme. “(86) First, if individual aid awards are made without further implementing measures being adopted, the essential elements of the aid scheme in question must necessarily emerge from the provisions identified as the basis for the scheme.” “(87) Secondly, where the national authorities apply that scheme, those authorities cannot have any margin of discretion as regards the determination of the essential elements of the aid in question and whether it should be awarded. For the existence of such implementing measures to be precluded, the national authorities’ power should be limited to the technical application of the provisions that allegedly constitute the scheme in question, if necessary after verifying that the applicants meet the pre-conditions for benefiting from that scheme.” “(88) Thirdly, it follows from Article 1(d) of Regulation 2015/1589 that the acts on which the aid scheme is based must define the beneficiaries in a general and abstract manner, even if the aid granted to them remains indefinite.”
It then proceeded to examine each one of these three elements.
Application of the essential elements of a scheme to advance tax rulings
“(92) At the outset, it must be underlined that the Commission stated, in recitals 101 and 139 of the contested decision, that the essential elements of the alleged aid had been identified on the basis of an analysis of a sample of advance rulings. Thus, the Commission itself acknowledged that those essential elements did not emerge from the acts on which it considered the scheme was based, but from the advance rulings themselves or, rather, from a sample of those rulings.”
Then the General Court accepted the argument of Belgium and Magnetrol that elements identified by the Commission in its decision did not “(94) follow, even implicitly, from the acts referred to by the Commission in recitals 97 to 99 of the contested decision as the basis of the scheme at issue. If those elements which, according to the Commission itself, constitute essential elements of the alleged aid scheme do not feature in the acts that supposedly constitute the basis of the scheme, the implementation of those acts and thus the grant of the alleged aid necessarily depends on the adoption of further implementing measures, with the result that there is no aid scheme within the meaning of Article 1(d) of Regulation 2015/1589.”
The findings in paragraph 94 of the judgment have an important consequences and raise an intriguing question. The consequence is that it is now established that the advance rulings were not in fact based on the provisions of the relevant Belgian law. Belgium was acting in an ad hoc manner. Ad hoc decisions can make public measures selective.
The question is what is the ultimate strategy of Belgium? Inevitably, the Commission will have to reopen the case. But then it will be much more difficult for Belgium to argue that it was not acting in an ad hoc manner, if it has already succeeded to persuade the General Court that the practices described by the Commission were not prescribed in law. Of course, there is also the possibility that Belgium will argue that the Commission described something that did not exist in reality. But it is very unlikely that the Commission identified non-existent practices. In fact, the following part of the judgment confirms that the Belgian authorities had significant decision-making discretion.
The margin of discretion of the Belgian tax authorities
First the General Court noted that “(100) the fact that a prior request for approval must be submitted to the competent tax authorities in order to benefit from an aid does not imply that those authorities have a margin of discretion, when they merely verify whether the applicant meets the requisite criteria in order to benefit from the aid in question”.
“(101) In the present case, it is undisputed that the non-taxation of excess profit is subject to the grant of an advance ruling. In that respect, it must be noted that Article 20 of the Law of 24 December 2002 defines an ‘advance ruling’ as the legal act by which the Federal Public Service for Finance determines, in accordance with the applicable provisions, how the law will apply to a particular situation or transaction that has not yet had tax consequences.”
“(102) It must therefore be examined whether, in issuing such advance rulings, that service had a margin of discretion allowing it to influence the amount and the essential elements of the excess profit exemption and the conditions under which it was granted.”
“(103) First, … the downward adjustment provided for in Article 185(2)(b) of the CIR 92 must be carried out on a case-by-case basis in the light of the available information provided, in particular, by the taxpayer. In addition, it is indicated that no criteria may be established in respect of that adjustment, since the latter must be carried out on a case-by-case basis. However, it is stated that a correlative adjustment should be made only if the tax administration or the Ruling Commission considers both the principle and the amount of the primary adjustment to be justified.”
“(104) It may be inferred from a combined reading of the acts mentioned in paragraph 103 above that, when the Belgian tax authorities issued advance rulings on excess profit, they did not carry out a technical application of the applicable regulatory framework, but, rather, carried out a qualitative and quantitative assessment of each request on a ‘case-by-case’ basis, in the light of the reports and evidence provided by the entity concerned, in order to decide whether it was justified to grant the downward adjustment provided for in Article 185(2)(b) of the CIR 92. Accordingly, contrary to the Commission’s assertions, inter alia in recital 106 of the contested decision, and in the absence of any other instructions that would limit the decision-making power of the Belgian tax administration, that administration necessarily enjoyed a genuine margin of discretion in deciding whether it was appropriate to grant such downward adjustments.”
“(111) More specifically, as the Kingdom of Belgium and Magnetrol International rightly submit, the parameters for calculating the excess profit and the instructions necessary for the purpose of taking account, when issuing advance rulings, of synergies, investments, the centralisation of activities and the creation of jobs in Belgium are not set out in the acts on which, according to the Commission, the scheme at issue is based. … It cannot therefore be maintained that the margin of discretion of the Belgian tax authorities was limited to the mere technical application of the provisions identified in recital 99 of the contested decision.”
Definition of the beneficiaries
“(116) In the present case, the beneficiaries of the scheme, as the latter is found to exist by the Commission, correspond to a much more specific category than that of companies forming part of a multinational group in the context of their reciprocal cross-border relationships.”
“(119) Accordingly, it cannot be concluded that the beneficiaries of the alleged aid scheme are defined in a general and abstract manner by the acts on which the Commission found the scheme was based. Further implementing measures therefore necessarily have to be taken in order to define such beneficiaries.”
The General Court also faulted the Commission for basing its decision on a sample of advance tax rulings without explaining how the sample was determined and whether it was representative of the remaining rulings. The Court stressed that “(129) the Belgian tax authorities examined each request on a case-by-case basis and had a margin of discretion that went well beyond a mere technical application of the [relevant law] …, when they issued each advance ruling following that examination, which, in itself, undermines the systematic nature of the approach allegedly followed by the Belgian tax authorities.”
The Court proceeded to annul Commission decision 2016/1699 in so far as it was based on the premise that the EPE constituted an aid scheme.
The task now facing the Commission is to show that each of the advance tax rulings was an ad hoc measure. It will take time to go through so many individual cases, but how difficult will it be to prove their selectivity?
1 The full text of the judgment can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=210761&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=3312431.