Many Tax Rulings Do Not Make a Single Aid Scheme

Many Tax Rulings Do Not Make a Single Aid Scheme - StateaidHub blogpost11 Lexxion 2019 Tax Commission EU judgement scaled

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”.

On 14 February 2019, the General Court appeared to deal a blow to the Commission’s attempts to rein in unfair tax competition. Its judgment in joint cases T‑131/16, Belgium v European Commission and T‑263/16, Magnetrol International v European Commission, annulled Commission decision 2016/1699.1 In that decision, the Commission found that Belgium had granted incompatible State aid through advance tax rulings to 35 multinational companies.The Commission lost the battle, but it may have moved closer to winning the war. This is because Belgium succeeded to persuade the General Court that its tax authorities enjoyed considerable discretion when evaluating requests for advance rulings and issuing such rulings. This seems to strengthen the argument of the Commission that the tax rulings were selective measures.
In Belgium the base of the corporate income tax is the total amount of profits, including distributed dividends. The relevant tax law allows tax authorities to provide advance tax rulings on requests concerning the application of tax provisions. An advance ruling is a decision of the tax authorities on how the law applies to a particular situation or transaction that has not yet occurred and, therefore, has not yet produced tax consequences.
The Belgian tax law also imposes limits on advance rulings. They may not exceed a five-year period and cannot offer tax exemptions or tax reductions.With respect to taxation of cross-border transactions of multinational groups, the relevant tax law includes the “arm’s length” principle in order to prevent the charging of prices between related companies [“transfer prices”] which do not reflect market conditions. Accordingly, tax authorities are allowed to carry out an “appropriate adjustment” on a case-by-case basis.The text of the judgment of the General Court describes how the adjustment is done. “(10) The upward adjustment … allows the profit made by a resident company that is part of a multinational group to be increased in order to include the profit that the resident company would have made from a transaction carried out at arm’s length.” “(11) The downward correlative adjustment, …, is intended to avoid or undo a (potential) double taxation. … Moreover, it is specified that [the relevant law] does not apply if the profit made in the partner State is increased such that it is greater than the profit that would have been obtained had the arm’s length principle been applied.” This is the so-called “excess profit exemption”. In other words, Belgium takes into account whether resident companies are excessively taxed abroad.The Commission, in decision 2016/1699, found the excess profit exemption [EPE] to constitute a selective scheme [it benefited only the multinational groups] and, furthermore, to be incompatible State aid. Consequently, it ordered Belgium to recover it.The Commission considered the EPE to be an aid scheme because, in its view, the exemptions were granted without the need of any implementing measures, as the advance rulings were thought to be merely technical applications of that scheme.

Perhaps it should be recalled that the case law says that when the Commission examines a scheme it can assess it in an abstract manner by taking into account its general features and without having to identify the particular beneficiaries and the precise amounts of aid they receive.

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:



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. von Pierpaolo Rossi

    In this case, both the Commission and the General Court have misapplied the notion of aid scheme within the meaning of Article 1d of Reg 2015/1589, which does not refer in any way to discretion. This is not new, because the national tax rulings practices are still fundamentally misunderstood. Any such national practice corresponds to a tax scheme by which a taxpayer (generally a multinational group which is confronted with the problem of international double taxation), without need of further implementing measures, asks the tax administration to have access to special rules, which are also general, to define the tax base in a way that eliminates or reduces international double taxation. This is what even the General Court has misunderstood. Discretion is the general administrative discretion that any tax administration needs to have when applying such general rules. Administrative discretion is fully irrelevant provided that the administration acts within its general prerogatives, and cannot turn an aid measure into “individual aid”.

  2. von Phedon Nicolaides

    “This is an interesting observation. If the Commission appeals or when the Commission re-opens the cases, it will hopefully clarify the difference between general discretion and discretion which confers a selective advantage. More broadly, when general policy principles have to be applied objectively, governments assign their implementation to independent institutions which ensure impartiality and equal treatment [e.g. sectoral regulators, competition authorities, etc]. This is because it is very difficult to define ex ante rules that ensure impartial and objective implementation. In fact EU courts have said in multiple judgments that when an institution exercises decision-making discretion, it is important that it follows strict procedures. Procedural discipline is the safeguard to administrative discretion. Therefore, is it possible to define such rules or procedural safeguards with respect to the application of advance tax rulings? Is it possible to identify indicators of objective exercise of general administrative discretion? Perhaps the Commission will enlighten us either in its appeal or new decisions.”

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