Introduction
Article 107(3)(a) areas and the outermost regions of the EU [defined in Article 349 TFEU] are more favourably treated under State aid rules. But they still have to comply with the terms of Commission authorising decisions. In case regional State aid is found to be incompatible with the internal market, their regional handicaps cannot justify any leniency in the recovery of the aid.
On 21 September 2022, the General Court ruled, in case T-95/21, Portugal v European Commission, that a favourable tax regime implemented by the Autonomous Region of Madeira was selective, the aid was incompatible, and it had to be fully recovered.[1]
Portugal appealed against Commission decision 2022/1414 [SA.21259] which found the Zona Franca da Madeira [ZFM, Madeira Free Zone] to constitute an incompatible State aid scheme. The Commission decision was reviewed here on 6 September 2022. It can be accessed at: https://www.lexxion.eu/en/stateaidpost/special-economic-zones/
The ZFM scheme provided tax advantages. The scheme was initially approved by the Commission in 1987 but was subsequently adjusted on a couple of occasions. The last adjustment that was approved by the Commission was in 2007. Afterwards, however, it was amended without any prior authorisation by the Commission. The main reason that the Commission found in decision 2022/1414 that the amended scheme was incompatible with the internal market was that the tax benefits extended to the activities of the beneficiary undertakings located outside Madeira or to profits that were not generated by their activities in Madeira. In addition, the amount of the tax benefits was supposed to be proportional to the number of jobs created and maintained in Madeira. However, the Portuguese authorities failed to verify whether indeed that was the case. Tax beneficiaries made claims about full-time jobs whose veracity was not confirmed by the relevant authorities.
Was the scheme selective?
In response to the Portuguese argument that the ZFM scheme was not selective, the General Court recalled that for a measure to be selective it is necessary to determine whether, in the context of a given legal regime, it favours certain undertakings over others which, in the light of the objective pursued by that measure, are in a comparable factual and legal situation and which are thus subject to differential treatment which may be discriminatory. [paragraph 49 of the judgment]
The Commission must, first, identify the reference or the normal tax system, and, second, demonstrate that the tax measure at issue derogates from that reference system, in so far as it introduces a differentiation between operators in comparable situations. [para 50]
The reference system does not necessarily have to extend to the whole territory of a Member State. An infra-state entity may have a de jure and de facto status which makes it sufficiently autonomous from the central government of a Member State so that it can determine the reference system. [para 51]
At this point the General Court cited the 2006 landmark judgment 2006, in case C-88/03, Portugal v European Commission, concerning the tax system in Azores in which the Court of Justice defined the tax powers of infra-state authorities that can be exercised independently of the central government.
Also, the General Court reiterated the established principle that an a priori selective measure cannot be classified as State aid when a Member State demonstrates that the differentiation between undertakings is justified because it results from the nature or general scheme of the reference system. [para 52]
Then, on the basis of the above principles, the General Court held that only companies registered in the ZFM could benefit from the tax reductions provided by the scheme in question. Therefore, the scheme was selective. [paras 55-56]
Even supposing that the reference framework was that of the territory of Madeira, undertakings registered in Madeira but outside the ZFM could not benefit from that scheme. [para 58]
In addition, the selective treatment could not be justified by the nature or general scheme of the Portuguese tax system, in the sense that it was intended to alleviate the permanent handicaps suffered by undertakings based in Madeira. [para 59]
The General Court explained that the objective of a state intervention is not sufficient to exclude it from being classified as State aid. Article 107(1) TFEU, does not distinguish between state interventions according to their causes or objectives, but according to their effects. [para 60]
Moreover, the fact that a regional tax system is designed to correct disadvantages linked to insularity does not support the conclusion that any tax advantage granted in that context is justified by the nature and general scheme of the national tax system. In particular, support for regional development or social cohesion policy cannot be inferred from the nature and general scheme of the tax system. [para 61]
The General Court also pointed out that it had not been shown how exclusion of companies established in Madeira but not registered in the ZFM was justified by the nature or general scheme of the Portuguese tax system. [para 63]
In other words, any justification that is grounded in the tax system has to be applied consistently.
Was trade between Member States affected?
In response to the Portuguese argument that trade was not affected, the General Court, first, recalled that it was not necessary to establish a real impact on trade between Member States and an effective distortion of competition, but only to examine whether the aid is liable to affect trade and distort competition. [para 66]
Then the Court reiterated that where aid strengthens the position of certain undertakings in relation to that of other undertakings competing in trade between Member States, the latter must be regarded as affected by the aid. [para 67]
Regarding the distortion of competition, aid which is intended to relieve an undertaking of the costs which it would normally have to bear, which includes operating aid such as that paid under the ZFM scheme, distorts in principle the conditions of competition. The companies registered in the ZFM carried out activities open to international competition. [paras 68-69]
Was the amended ZFM scheme new or existing aid?
Portugal claimed that the ZFM scheme was wrongly classified as “new aid” within the meaning of Article 1(c) of Regulation2015/1589 and not as “existing aid” within the meaning of Article 1(b)(i) of that Regulation.
The General Court, first, noted that Article 4(1) Regulation 794/2004 describes as an amendment of existing aid any change, other than changes of a purely formal or administrative nature, which influences the assessment of the compatibility of the aid measure with the internal market. [para 80]
In order to assess the nature of amendments made to existing aid, it is necessary to examine whether the amendments affect the constituent elements of an aid scheme, such as the circle of beneficiaries, the objective of the financial support or the source of that support and its amount. [para 81]
In the present case, the Commission noted that the original ZFM scheme had been amended by the current scheme, primarily concerning the requirement to create or maintain jobs and the exclusion of certain activities from the scope of that scheme. Such amendments were substantial in that they concerned the constituent elements of the scheme of the initial ZFM and, in particular, the circle of its beneficiaries and the amounts concerned. [paras 82-83]
The General Court also pointed out that a substantial amendment is independent of whether that amendment leads to the extension or restriction of the scope of the aid measure. [para 84]
Then the General Court examined extensively the various communications between Portugal and the Commission and rejected Portuguese claims that the Commission was aware of the amendment and implementation of the ZFM scheme and, therefore, it had to be considered as existing aid.
Was the ZFM scheme compatible with the internal market?
The tax reductions of the ZFM scheme constituted operating aid. For this reason the General Court reminded us that operating aid may be granted exceptionally in regions benefiting from the derogation under Article 107(3)(a) TFEU, such Madeira, provided that it is justified by its contribution to regional development and that its amount is proportional to the handicaps it aims to remedy. That means that only activities affected by handicaps and therefore the additional costs specific to those regions must be eligible for such operating aid. Thus, activities carried out outside those regions which, as a result, are not affected by those additional costs, even if they are carried out by companies established in those regions, may be excluded from the benefit of that aid. [paras 136-138] Therefore, the ZFM scheme was incompatible with the internal market.
Recovery of incompatible aid
The General Court recalled that the abolition of unlawful and incompatible aid, by means of recovery, is the logical consequence of the finding that the aid is incompatible. The obligation of the Member State concerned to abolish incompatible aid is intended to restore the previous situation, causing the beneficiary to lose the advantage which it actually enjoyed over its competitors. [para 194]
Indeed, according to Article 16(1) of Regulation 2015/1589, the Commission is required to order the recovery of incompatible aid, unless its recovery would run counter to a general principle of EU law.
In this case, the General Court found that the principle of protection of legitimate expectations was inapplicable. When State aid is granted without prior notification to the Commission, with the result that it is unlawful under Article 108(3) TFEU, the beneficiary of the aid cannot entertain any legitimate expectations. Such expectations arise only when the Commission provides the beneficiaries of the aid, with precise, unconditional and consistent assurances. [paras 197-198]
Absolute impossibility of recovery
Portugal then argued that the contested decision did not enable it to determine the amounts to be recovered without undue difficulty because it did not have sufficient information about the activities of beneficiary undertakings.
The General Court, first, noted that the Commission cannot adopt a recovery order the enforcement of which would be objectively absolutely impossible to achieve. No one should be required to do the impossible. [paras 221-222]
Then the General Court rejected the Portuguese claims on the grounds that Portugal failed to show that it encountered insurmountable obstacles, that it tried to recover the aid or that it proposed alternative methods of recovery to the Commission in the context of its obligation for sincere cooperation with the Commission. No provision of EU law requires the Commission, when ordering the recovery of unlawful and incompatible aid, to fix the exact amount of aid to be repaid. [paras 223-229]
The Court also noted that it was settled case-law that the fact that the recovery of unlawful and incompatible aid could lead to the bankruptcy of the companies which had unlawfully benefited from it could not affect the compulsory nature of the recovery. [para 240]
The limitation period for recovery
Portugal contended that, in view of the date of the decision to initiate the formal investigation procedure, which was notified to it on 9 July 2018, aid paid up to 9 July 2008 should have been excluded from recovery in accordance with the ten-year limitation period laid down in Article 17 of Regulation 2015/1589.
The General Court recalled that under Article 17(1) and (2) of Regulation 2015/1589, in the context of an aid scheme, the ten-year limitation period begins to run on the day on which the unlawful aid is actually granted to its beneficiary and not on the day on which the aid scheme is adopted or amended. [para 245]
Any measure taken by the Commission in respect of unlawful aid interrupts that limitation period. That is the case, in particular, with the letters sent by the Commission to Member States by which it informs them that a measure may be classified as State aid or asks them to notify a measure or requests information. [para 246]
In the present case, the Commission sent to Portugal on 12 March 2015, a request for information concerning the implementation of the ZFM scheme.
Since the ZFM scheme was lastly authorised on 27 June 2007, the ten-year limitation period was interrupted on 12 March 2015. Consequently, Portugal was wrong to claim that the aid paid up to 9 July 2008 was excluded from recovery.
Since none of the Portuguese pleas was successful, the appeal was rejected in its entirety.
[1] The full text of the judgment in languages other than English can be accessed at: