The reference system for determining the selectivity of a tax measure must have its own logic and be autonomous and its identification depends on the content, structure and specific effects of the applicable rules.
A measure that does not exclude any particular undertaking can be selective if it treats differently undertakings which are in similar situations.
On 6 October 2021, the Court of Justice returned to the question whether a tax measure that excludes no particular company can be selective. The answer given in its judgment in joined cases C-51/19 P, World Duty Free Group v European Commission & C-64/19 P, Spain v European Commission was “yes”.
The World Duty Free Group [WDFG] and Spain asked the Court of Justice to set aside the judgments of the General Court of 15 November 2018, T-219/10 RENV, World Duty Free Group v European Commission and T-399/11 RENV, Banco Santander and Santusa v European Commission by which the General Court dismissed WDFG’s action for annulment of Commission decision 2011/5 and Commission decision 2011/282 concerning Banco Santander.
Spanish tax law allowed the deduction of “goodwill” from the costs of acquisition of at least a minimum of 5% shareholding in foreign companies. This option was available to any company taxable in Spain and covered the acquisition of any other company in any sector. In the case of acquisition of shareholdings in domestic companies, the deduction was possible only when companies merged.
The Commission in decision 2011/5 concluded that the measure was selective, it constituted State aid and that the aid had to be recovered for being incompatible with the internal market.
On appeal, in November 2014, the General Court, in case T-219/10, Autogrill España v European Commission, annulled the Commission decision on the grounds that the Commission failed to prove that the measure excluded any particular company. Although the measure was a deviation from the standard treatment of goodwill, according to the General Court it had general application.
On the same date, the General Court also annulled Commission decision 2011/282, in case T‑399/11, Banco Santander and Santusa v European Commission.
Both Commission decisions were essentially the same as they both dealt with the deduction of goodwill. But one concerned acquisition of shares in foreign companies within the EU while the other concerned acquisition of shares in foreign companies outside the EU.
In December 2016, the judgment of the General Court on WDFG was set aside by the Court of Justice which ruled that the measure in question was selective, even though it appeared to provide a deviation of general application which could benefit any company [C-20/15 P, European Commission v World Duty Free]. The Court of Justice considered that the measure treated differently companies which were in a similar situation, depending solely on whether the acquired shares were domestic or foreign. In addition, the Court of Justice found that the General Court was wrong to demand from the Commission proof that the measures excluded identifiable companies. According to the Court of Justice, identification of excluded companies is not a component element of the concept of selectivity.
Consequently, the WDFG case and that of Banco Santdander were returned to the General Court which, in November 2018, upheld the Commission decisions in line with the reasoning in the judgement of the Court of Justice [cases T-219/10 RENV, World Duty Free Group v Commission, and T-399/11 RENV, Banco Santander and Santusa v Commission].
WDFG and Spain [and Banco Santander, Santusa and several other companies] appealed against the 2018 judgment of the General Court. As explained below, the Court of Justice dismissed the appeal.
The concept of selectivity
The Court of Justice, first, recalled that a public measure is selective when “(32) under a particular legal regime, the national measure at issue is such as to favour ‘certain undertakings or the production of certain goods’ over other undertakings which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and which accordingly suffer different treatment that can, in essence, be classified as discriminatory”.
“(33) The examination of whether such a measure is selective is thus, in essence, coextensive with the examination of whether it applies to a set of economic operators in a non-discriminatory manner”.
Then the Court reiterated the well-established three-stage test of selectivity. “(35) In order to classify a national tax measure as ‘selective’, the Commission must begin by identifying the reference system, that is the ‘normal’ tax system applicable in the Member State concerned, and thereafter demonstrate that the tax measure at issue is a derogation from that reference system, in so far as it differentiates between operators who, in the light of the objective pursued by that system, are in a comparable factual and legal situation”.
“(36) The concept of ‘State aid’ does not, however, cover measures that differentiate between undertakings which, in the light of the objective pursued by the legal regime concerned, are in a comparable factual and legal situation, and are, therefore, a priori selective, where the Member State concerned is able to demonstrate that that differentiation is justified, in the sense that it flows from the nature or general structure of the system of which those measures form part”.
How to identify the reference system
WDFG [and Banco Santander] argued that the General Court [and the Commission] erred in the definition of the reference system.
The Court of Justice stressed that “(60) the determination of the reference framework is of particular importance in the case of tax measures, since the existence of an economic advantage for the purposes of Article 107(1) TFEU may be established only when compared with ‘normal’ taxation. Thus, determination of the set of undertakings which are in a comparable factual and legal situation depends on the prior definition of the legal regime in the light of whose objective it is necessary, where applicable, to examine whether the factual and legal situation of the undertakings favoured by the measure in question is comparable with that of those which are not”.
“(61) For the purposes of assessing the selective nature of a tax measure of general application, it is, therefore, necessary that the common tax regime or the reference system applicable in the Member State concerned be correctly identified in the Commission decision and examined by the court hearing a dispute concerning that identification. Since the determination of the reference system constitutes the starting point for the comparative examination to be carried out in the context of the assessment of the selectivity of an aid scheme, an error made in that determination necessarily vitiates the whole of the analysis of the condition relating to selectivity”.
“(62) The determination of the reference framework, […], must follow from an objective examination of the content, the structure and the specific effects of the applicable rules under the national law of that State. In that regard, the selectivity of a tax measure cannot be assessed on the basis of a reference framework consisting of some provisions of the national law of the Member State concerned that have been artificially taken from a broader legislative framework”.
“(63) Where the tax measure in question is inseparable from the general tax system of the Member State concerned, reference must be made to that system. On the other hand, where it appears that such a measure is clearly severable from that general system, it cannot be ruled out that the reference framework to be taken into account may be more limited than that general system, or even that it may equate to the measure itself, where the latter appears as a rule having its own legal logic and it is not possible to identify a consistent body of rules external to that measure.”
“(64) Next, since outside the spheres in which EU tax law has been harmonised, it is the Member State concerned which defines, by exercising its exclusive competence in the matter of direct taxation, the characteristics constituting the tax, the determination of the reference system or the ‘normal’ tax regime, from which it is necessary to analyse the condition relating to selectivity, must take account of those characteristics”.
“(65) It must also be borne in mind that, in so far as the determination of the reference framework must be based on an objective examination of the content and structure of the applicable rules under national law, it is not necessary, during that first stage of the examination of selectivity, to take account of the objectives pursued by the legislature when adopting the measure under examination. In that regard, the Court has held on numerous occasions that the objective pursued by measures of State intervention is not sufficient to exclude those measures outright from classification as ‘aid’ for the purposes of Article 107 TFEU, since that provision does not distinguish between measures of State intervention by reference to their causes or their aims but defines them in relation to their effects”.
“(66) Lastly, the rules which must make up the reference system should be identified according to objective criteria, in particular to enable judicial review of the assessments on which that identification is based. It is for the Commission to take into account any factors put forward by the Member State concerned and, more generally, to carry out its examination in a rigorous and sufficiently reasoned manner in order to enable full judicial review.”
The above analysis is very important as it is rare for the Court of Justice to describe in so much detail how the reference system may be identified. Five conclusions may be drawn:
First, although the Court refers to “objective examination of the content, the structure and the specific effects of the applicable rules under the national law” and to “objective criteria”, it does not really tell us what the content may include, what the structure may cover, what the specific effects may be and what may constitute objective criteria.
Second, the only criterion that appears to be practically applicable is that the reference system must stand-alone, be self-contained or, as later described by the Court, be autonomous. It follows that it cannot be some provision whose implementation requires a link or reference to some other provision. Indeed, as explained by the Court, it should have its own logic.
Third, it is for Member States to define their tax systems and their characteristics.
Fourth, the objectives, reasons, motives or aims of the specific tax rules are irrelevant to the identification of the reference system. But, I think on this point the Court should have added a qualification. It is true that the policy aim of a measure is irrelevant for its classification as State aid and, in particular, for the identification of whether it deviates from a more general rule. But if the specific rule can stand alone and constitute a reference system of its own, then it seems to me that its objectives must necessarily be different from any other reference system and therefore, the objective becomes one of its defining characteristics [e.g. taxation of profits v taxation of a harmful activity]. By contrast, measures that belong to the same reference system are likely to have the same objectives [see paragraph 93 below] but because they differ in other aspects some of them constitute a deviation from the reference system. It is in this sense that the Court stated that the objective of a measure is irrelevant to its classification as State aid. Since it is the deviation from a reference system that makes a measure selective, it follows that it is the extra objective of the deviation that is irrelevant. So, in fact there are two sets of objectives: the objectives of the reference system and the objective(s) of the deviation.
Fifth, because Member States are free to define their own tax systems, because the reference system has to be identified on the basis of objective – i.e. non-subjective – criteria and because the Commission must carry out a rigorous and reasoned examination, the implication, I think, is that whatever is defined by Member States must be logically consistent. They should not define multiple sets of specific rules, none of which can stand alone.
The EStALI Autumn Conference offers a platform to discuss and exchange views on current developments in EU State aid law, both in Berlin and online. Expert panels and fictitious case studies with leading practitioners invite participants to get actively involved in the debates, exchange experiences and receive guidance on particular questions and cases. A great networking opportunity!
Was the reference system incorrectly identified?
WDFG argued that the relevant Spanish reference system was incorrectly identified.
The Court of Justice replied that “(77) since the amortisation of goodwill deriving from the simple acquisition of shareholdings was allowed only in the case of cross-border shareholding acquisitions and not in the case of the acquisition of domestic shareholdings, the measure at issue thereby introduced a difference in treatment between domestic transactions and cross-border transactions, with the result that it could not be considered a new general rule in its own right.”
“(78) When the Commission designated the ‘rules on the tax treatment of financial goodwill’ as the reference system, it intended to refer not only to the rules specifically applicable to the amortisation of goodwill in the event of the acquisition of shareholdings, but also to the rules of the general Spanish corporate tax system governing the amortisation of goodwill in general, since those general rules do indeed provide a relevant assessment framework for those more specific rules.”
“(79) Accordingly, the General Court did not err in law in determining the reference system.”
Was the measure at issue an autonomous reference system?
Next, the Court of Justice examined whether the identified reference system was autonomous or stand-alone.
It pointed out that “(82) the reference system could not be limited to the tax treatment of financial goodwill, introduced by the measure at issue, since that measure benefited only undertakings acquiring shareholdings in non-resident companies, and that, in order to assess the existence of discrimination against undertakings making acquisitions of the same type but in resident companies, it was necessary to take account of the general provisions of the corporate tax system as applicable to situations in which the emergence of goodwill leads to a fiscal benefit.”
Then, Court of Justice rejected the argument advanced by WDFG that the purpose of the measure in question was to help Spanish companies to overcome obstacles in acquiring companies abroad. According to WDFG, the Commission could not compare domestic and foreign acquisition or to hold that they both belonged to the same reference system.
“(85) Contrary to the appellants’ contentions, it is not because of a lack of recognition of obstacles to cross-border business combinations that the Commission decided that the measure at issue could not be the correct reference system for the purposes of the selectivity analysis, but because it took the view that that measure should be assessed in the light of a broader set of rules, which included both the rules applicable to the amortisation of financial goodwill in the case of the acquisition of shareholdings in resident companies and the principles applicable to the amortisation of goodwill in general, which, according to the Commission, were aligned with each other in providing that goodwill was deductible only if the acquisition of a shareholding was followed by a business combination.”
Comparability of foreign and domestic acquisitions
The Court also addressed the question whether, in the light of the objective of the reference or normal regime identified by the Commission, undertakings acquiring shares in domestic companies and those acquiring shares in foreign companies were in a comparable legal and factual situation.
The Court, first, explained that the “(91) examination of comparability is not directly connected to the delimitation of the reference framework which must be carried out under the first stage of the examination of selectivity, notwithstanding […] ‘the existence of links between those two steps, or even in some cases, such as the present, a common line of reasoning’.”
The Court of Justice pointed out that “(92) the General Court examined whether the measure at issue could in itself, in the light of its own specific characteristics and therefore regardless of any comparative analysis, constitute an autonomous reference framework.” “(93) It is indeed apparent […] that the General Court relied on the purpose and effects of that measure and not on merely formal considerations. In particular, […] the measure at issue constituted an exception to the general rule that only business combinations may lead to the amortisation of goodwill.”
The Court also acknowledged that “(94) the regulatory technique used cannot be decisive for the purposes of determining the reference framework”.
Although “(95) for the purposes of establishing the selectivity of a tax measure the regulatory technique used is not decisive, with the result that it is not always necessary for it to derogate from a common tax system, the fact that it is a derogation as a result of the use of that regulatory technique is relevant for those purposes where it follows that two categories of operators are distinguished and a priori treated differently, namely those covered by the derogation and those which are covered by the ordinary taxation regime, even though those two categories are in a comparable situation with regard to the objective pursued by that system”.
“(96) It follows that the General Court cannot be criticised for having held, among other considerations, that the measure at issue constituted a derogation in order to examine whether it was selective.”
“(97) The General Court rightly pointed out, […], that, […], the measure at issue had not introduced a new general rule in its own right relating to the amortisation of goodwill; it had, on the contrary, introduced an ‘exception to the general rule’ that only business combinations may lead to the amortisation of goodwill, with that exception, […], being intended to remedy the adverse effects for the acquisition of shareholdings in non-resident companies created by applying the general rule.”
Then the Court cited its previous conclusions in its first World Duty Free judgment [C-20/15 P]. “(99) In any event, it must be borne in mind that the mere fact that the measure at issue is of a general nature, in that it may a priori benefit all undertakings subject to corporate tax, does not mean that it cannot be selective. As the Court of Justice has already held, with respect to a national measure conferring a tax advantage of general application, like the measure at issue, the condition relating to selectivity is fulfilled where the Commission is able to demonstrate that that measure is a derogation from the ordinary or ‘normal’ tax system applicable in the Member State concerned, thereby introducing, through its actual effects, differences in the treatment of operators, although the operators who qualify for the tax advantage and those who do not are, in the light of the objective pursued by that Member State’s tax system, in a comparable factual and legal situation”.
Was the definition of the reference system arbitrary?
WDGF alleged that the reference system was defined arbitrarily.
The Court of Justice reiterated that “(102) the premiss on which the Commission relied is based on the finding, endorsed by the General Court, that under Spanish law amortisation of goodwill is generally conditional on there being a business combination.”
“(103) Only a business combination generally allows the amortisation of goodwill, including in the case of financial goodwill resulting from the acquisition of shareholdings in resident companies, […] It is not, therefore, the non-amortisation of financial goodwill which constitutes the general rule from which the measure at issue derogates, but the principle that the amortisation is generally possible only in the case of a business combination; the General Court inferred that principle from the provisions on the tax treatment of goodwill for corporate tax purposes, whether those provisions relate to the amortisation of goodwill in the case of an acquisition of an undertaking or to the amortisation of financial goodwill resulting from the acquisition of shareholdings in resident companies followed by a merger.”
Should the comparison be made in the light of the objective of the reference system or the measure itself?
WDFG argued that the General Court considered that the case law was inconsistent as to whether the comparison ought to be carried out in the light of the objective of the measure examined or that of the system of which that measure forms part.
The Court of Justice first pointed out that “(117) WDFG does not challenge the General Court’s conclusion, […], that the examination of comparability at the second stage of the analysis of selectivity has to be carried out in the light of the objective of the reference system of which the measure under examination forms part, and not in the light of that measure’s objective.”
Then it confirmed that “(125) the examination of comparability at the second stage of the analysis of selectivity must be carried out in the light of the objective of the reference system and not that of the measure at issue.”
“(126) In the present case, the appellants submit that the objective of the reference system, which, in their view, is indissociable from that of the measure at issue, is to preserve fiscal neutrality. They state that, in the light of that objective, undertakings which acquire shareholdings in domestic companies and those which acquire shareholdings in cross-border companies are in different situations because of the obstacles to cross-border business combinations.”
But the Court of Justice stressed that “(127) a measure such as the measure at issue, which is designed to facilitate exports, may be regarded as selective if it benefits undertakings carrying out cross-border transactions, in particular investment transactions, and is to the disadvantage of other undertakings which, while in a comparable factual and legal situation, in the light of the objective pursued by the tax system concerned, carry out other transactions of the same kind within the national territory”.
Principle of proportionality
Lastly, the Court of Justice clarified that “(140) the question whether a selective advantage complies with the principle of proportionality arises at the third stage of the examination of selectivity, which examines whether that advantage can be justified by the nature or general scheme of the tax system of the Member State concerned. At that stage, the Member State is thus called on to demonstrate that a difference in treatment arising from the measure’s objective is consistent with the principle of proportionality, in that it does not go beyond what is necessary to achieve that objective and the objective could not be achieved by less restrictive measures”.
Since none of the pleas of WDFG [and Banco Santander] were successful, the appeal was dismissed in its entirety.
 The full text of the judgment can be accessed at:
 Goodwill is the difference between the price of the shares of a company and the value of the underlying assets. It also refers to the difference between the price one pays for the shares and their market value.