The scope of a tax must be objectively defined in order for those excluded from the tax not to benefit from a selective advantage.
Taxes are burdens, so they fall outside the scope of Article 107(1) TFEU which prohibits selective benefits funded with state resources. Normally, Article 107(1) applies to benefits from tax exemptions or tax derogations which result in loss of tax revenue.
However, a tax can also confer a benefit to those who are not subject to the tax. A tax with a narrow scope of application can be a form of State aid for those who are excluded, even if the exclusion is not formally an exemption or derogation. For example, a tax on companies using cars with diesel engines may be State aid for companies using cars with petrol [benzine] engines, despite the fact that the tax makes no mention of petrol engines. Whether the narrow scope of the tax constitutes State aid depends on whether those who are subject to the tax and those who are excluded are in a similar situation. In turn, whether they are in a similar situation depends on the objective of the tax.
Recently, Sweden notified to the Commission, for purposes of legal certainty, a “risk tax” on credit institutions. The problem was that the risk tax applied only to institutions above a certain size. Delineation of the scope of a tax according to size is a pretty strong indicator of its selective nature. Yet, in the end the Commission concluded that the Swedish tax was not selective and that it was not designed to discriminate in favour of the undertakings that were excluded from its scope.
The tax would be levied on an annual basis on large credit institutions in Sweden. The objective of the tax was to strengthen public finances with contributions from large credit institutions. Given the systemic significance of those institutions, they could cause harm to the economy in case they would encounter financial difficulties. The tax would create a reserve to ameliorate potential harm from economic disruption.
Credit institutions would be liable to the risk tax if their liabilities would exceed SEK 150 billion [approx. EUR 15.1 billion]. The tax rate was 0.05% of liabilities. Therefore, the tax would also act as a disincentive for financial institutions to become too large. Foreign institutions would be liable only in respect of their liabilities in Sweden.
The Commission concluded in decision SA.56348 that the tax did not constitute State aid for the credit institutions that were excluded from its scope.
Existence of State aid
Since the criteria of Article 107(1) TFEU are cumulative, the Commission limited its analysis to whether the tax was selective. It began its assessment by reiterating the three-step test defined by the Court of Justice: identification of the reference tax system, determination of whether the tax measure is a derogation from the reference system, consideration of whether the derogation can be justified by the nature or the general scheme of the reference system.
Identification of the reference system
“(34) The Court of Justice has clarified that, outside the spheres in which Union tax law has been harmonised, the determination of the characteristics constituting each tax – including the taxable persons, the choice of tax rate, which may be proportional or progressive, and also the determination of the basis of assessment and the taxable event – falls within the discretion of the Member States, in accordance with their fiscal autonomy, that discretion having, in any event, to be exercised in accordance with Union law.”
“(35) Such characteristics constituting the tax, as defined by the Member States, form, in principle, the reference system or the ‘normal’ tax regime for the purposes of analysing the condition of selectivity. This is particularly the case for special-purpose levies, which do not form part of a wider taxation regime. As a result, and provided that the boundaries of the levy have not been designed in a clearly arbitrary or biased way, the reference system is, in principle, the levy itself.”
(36) The Commission can, nonetheless, assess and demonstrate that a reference system has been configured according to manifestly discriminatory parameters intended to circumvent Union law on State aid. […] The Commission will therefore evaluate whether the boundaries of the reference system have been designed by Sweden in a consistent manner, in the light of the objective of the tax, or, conversely, in a manifestly discriminatory manner, intended to circumvent Union law on State aid.”
“(37) The determination of the reference system, which is based on such elements as the tax base, the taxable persons and the tax rates, must follow from an objective examination of the content, the structure and the specific effects of the applicable rules under the national law of the Member State concerned. Where it appears that a measure is clearly severable from the general tax system of the Member State concerned, the reference system 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.”
The full text of the Commission decision can be accessed at:
Then the Commission cited the features that made up the reference system which was risk tax itself:
Tax base: The liabilities of financial institutions.
Tax rate: 0.05% per year.
Taxable persons: Financial institutions established in Sweden or carrying out business operations through a branch in Sweden.
Threshold: SEK 150 billion.
Next, the Commission identified the objective of the risk tax which was “(42) to strengthen public finances with contributions from large credit institutions potentially creating significant indirect costs to the society, thereby creating scope to cope with such indirect costs future financial crises may entail.”
“(44) The scope of the Act covers credit institutions established in Sweden or carrying out business operations through a branch in Sweden. It makes liable to the tax those market participants, whose failure (or a serious disruption in their activities) risks causing significant indirect costs to the Swedish society in the event of a financial crisis. In assessing which credit institutions are at risk of causing significant indirect costs to the society, Sweden considered that the size of the institutions is an important factor.”
With respect to possible favourable treatment of excluded institutions, the Commission noted that “(46) other financial institutions are subject to a different and typically lighter regulatory regime, which is in itself an indication that their capacity to generate systemic risks, and, ultimately, indirect costs, is different and typically lower than the credit institutions’ capacity. In this regard, the focus of the risk tax on credit institutions does not reveal a manifestly discriminatory element.”
With respect to the exclusion of mortgage funds, the Commission considered that they “(47) do not engage in other critical activities carried out by credit institutions, such as taking deposits or offering loans to non-financial corporations. Moreover, as Sweden notes, even in the market of household mortgages their total share remains significantly low.”
“(48) The Commission therefore considers that the definition of the undertakings subject to the risk tax does not reveal a manifestly discriminatory element in the design of the tax.”
Metric and threshold for taxation:
“(49) Sweden has further identified the size of a credit institution’s liabilities as a metric suitable to represent the systemic risk that may be caused by a credit institution and the risk of significant indirect costs to the society in the event of a financial crisis. The tax liability is thus triggered when the liabilities of a credit institution or a group of credit institutions exceed a threshold at the beginning of a fiscal year, set at SEK 150 billion for the fiscal year starting in 2022.”
“(50) The Commission recalls that liabilities are redeemable on demand or at a specified maturity by the creditors of credit institutions and are thus a ‘source of instability’ for credit institutions with regard to their capacity to maintain lending, to sustain losses on credits and thereby also to transmit risk to the financial system and the real economy. The Commission thus observes that using the sum of liabilities as a metric for defining which credit institutions should be subject to the risk tax constitutes an element that is inherent in the reference system, consistent with its objective, and does not reveal a manifestly discriminatory element in the design of the tax.”
“(54) Overall, the Commission observes that such a choice in the design of the tax constitutes an exercise of fiscal sovereignty, is consistent with the objective of the tax and does not reveal a manifestly discriminatory element. Accordingly, the fact that credit institutions with liabilities below the threshold are not in the scope of the tax cannot be regarded as conferring a selective advantage on those undertakings.”
Calculation of the threshold and the tax base:
“(55) When the liabilities exceed the threshold, the tax base includes all the liabilities of the credit institution or group of credit institutions – less provisions and untaxed reserves – including those below the threshold. The risk tax contributions are, therefore, designed to increase with the credit institutions’ total liabilities, and, thus, the building up of leverage.”
Domestic intra-group situations:
“(57) The reference system provides for a consolidation mechanism in domestic intra-group situations that excludes from the calculation of both the threshold and the tax base: (a) liabilities to a Swedish credit institution that is part of the same group; and (b) liabilities to a foreign credit institution that is part of the same group, on the business operations carried out by a Swedish branch.” “(58) The Commission observes that such a mechanism, which follows the same logic as regards the calculation of both the threshold and the tax base, addresses the need to avoid double-counting of the same liabilities and thereby allows to obtain a fair view of the relevant group entities’ liabilities (to third parties). It should be regarded as inherent in the reference system and consistent with its objective and does not reveal a manifestly discriminatory element in the design of the tax.”
Then the Commission assessed the treatment of foreign subsidiaries and branches of Swedish institutions and of Swedish subsidiaries and branches of foreign institutions and concluded that they were subject to the tax in accordance to their impact on systemic stability; i.e. in accordance with the objective of the tax itself. For example, the liabilities of foreign subsidiaries in Sweden were taxed, but not those of foreign branches in Sweden.
“(63) Accordingly, the Commission finds that applying – under the risk tax – the principle of worldwide taxation to Swedish credit institutions and the principle of territoriality to foreign credit institutions is consistent with Sweden’s sovereignty in tax matters. In this context, such features should be seen as being inherent to the reference system and consistent with the tax’s objective and do not reveal a manifestly discriminatory element in the design of the tax.”
“(66) In view of the above, the Commission concludes that the reference system, […], has not been configured according to manifestly discriminatory parameters intended to circumvent Union law on State aid.”
Derogation from the reference system
The Commission proceeded to the next step of its analysis which was to determine whether the risk tax constituted a derogation from the reference system. In this context, it examined several possible derogations and concluded that none existed.
Absence of a derogation as regards the treatment of other financial institutions:
“(68) The Commission recalls that the scope of the Act covers only credit institutions; thus, other financial institutions are excluded therefrom. As stated above in recital (50), a credit institution’s liabilities are a ‘source of instability’ for credit institutions with regard to their capacity to maintain lending, to sustain losses on credits and thereby also to transmit risk to the financial system and the real economy. The regulatory regime applicable to credit institutions has been designed to take this source of instability into account, as explained in recitals (46) and (47). Other financial institutions, such as insurance companies, pension funds, investment firms and investment funds, do not have a liability structure that gives rise to the same degree of instability and thus are subject to different regulatory regimes, which lack or have lighter provisions with regard to addressing the instability risks arising from liabilities. This is an indication that their capacity to generate systemic risks and, ultimately, significant indirect costs, is different and typically lower than the credit institutions’ capacity. Thus, other financial institutions are not in a similar factual and legal situation as credit institutions in light of the objective of the risk tax.”
“(69) As regards mortgage funds, those funds may engage in similar activities as credit institutions. However, as noted above in recital (47), those funds do not engage in other critical activities carried out by credit institutions and even in the market of household mortgages their share remains significantly low. […] Thus, these entities are not subject to a comprehensive regulatory framework comparable to the one applicable to credit institutions and are not able to generate significant indirect costs in the same magnitude as credit institutions.”
“(70) In view of the above, the Commission concludes that, since other financial institutions are not in a similar factual and legal situation in light of the objective of the risk tax, their exclusion does not constitute a derogation from the reference system.”
Absence of a derogation as regards the treatment of credit institutions holding liabilities below the threshold:
“(71) The Commission further recalls that tax liability is triggered when the liabilities of an institution or a group exceed a given threshold. The use of a threshold to this end distinguishes between credit institutions based on their potential to create significant indirect costs, given their size as reflected in the sum of their liabilities. As noted above in recital (45), large credit institutions, in particular, may be systemically important, have a significant influence and impact on the markets, and are critical to the real economy, as opposed to smaller ones. They are therefore more likely to cause significant indirect costs in the event of a crisis. Thus, they are not in a similar factual and legal situation in the light of the objective of the risk tax. For completeness, the Commission refers also to the considerations set out in recital (52) regarding the choice of the threshold in this case, indicating that it has been set in a consistent manner in the light of the risk tax’s objective.”
“(72) Since those credit institutions whose liabilities are below the specified threshold are not in a similar factual and legal situation in light of the objective of the risk tax as credit institutions holding liabilities exceeding this threshold, their exemption does not constitute a derogation from the reference system.”
Derogation from the reference system as regards the provisions concerning the foreign tax credit:
“(73) Credit institutions may be entitled to a reduction in the risk tax under certain conditions, by applying the foreign tax credit. That foreign tax credit is calculated on a comparable tax base based on the sum of liabilities and paid by another credit institution of the same group in another EEA State (see above, recitals (16) and (17)).”
“(74) The Commission considers that credit institutions that are entitled to benefit from a foreign tax credit are in a comparable factual and legal situation, in light of the objective of the risk tax, to those entities that are subject to the risk tax but do not benefit from such a tax credit.”
“(75) The provisions concerning the foreign tax credit therefore depart from the reference system and the more advantageous treatment granted to credit institutions that could benefit from a foreign tax credit constitutes a derogation from the reference system. In that respect, the notified measure is prima facie selective.”
Justification of the derogation
“(76) A Member State which introduces a differentiation between undertakings, which are in a comparable factual and legal situation, needs to establish that this differentiation is actually justified by the nature and general scheme of the reference system in question.”
“(77) As stated above, the treatment granted to credit institutions that could benefit from a foreign tax credit constitutes a derogation from the reference system. According to Sweden, the provisions concerning the foreign tax credit are structured in such a way so as to produce a similar outcome for the purposes of calculating the tax base as the provisions concerning the treatment of intra-group liabilities in cases of domestic intra-group situations covered by the Act. The provisions concerning domestic intra-group situations aim at avoiding double counting of the same liabilities and therefore avoid charging risk tax twice on the same liabilities (see recital (58)).”
“(78) The Commission observes that this treatment, which avoids (economic) double taxation, can be considered justified by the logic and general scheme of the reference system in question. In particular, the tax credit applies in a cross-border situation where the absence of the tax credit could lead to a double (economic) taxation of intra-group liabilities (Swedish credit institution’s liabilities subject to the Swedish risk tax and foreign credit institution’s corresponding liabilities subject to the foreign tax equivalent to the risk tax).”
“(79) Furthermore, it does not go beyond what is necessary to achieve the legitimate objective being pursued, given the limitations to which it is subject, as referred to in recital (17) above.”
“(81) The Commission therefore concludes that, along those lines, the application of the foreign tax credit is justified and, account taken of its scope of application, it does not go beyond what is necessary to achieve the legitimate objective pursued.”
The Commission concluded that the risk tax involved no State aid for excluded institutions because “(82) the reference system has been designed by Sweden in a consistent manner and has not been configured according to manifestly discriminatory parameters intended to circumvent Union law on State aid. It is not designed in a clearly arbitrary or biased way so as to favour certain undertakings over others, which are in a comparable situation with regard to its underlying logic. Besides, any derogations from it are justified and proportionate, taking into account the objective it pursues, and do not involve a selective advantage to certain undertakings.”