Special Economic Zones

Member States must check that the State aid claimed by undertakings established in special economic zones concern activities that are actually carried out within those zones.


Several Member States have special economic zones in which companies enjoy preferential tax treatment. These zones can be divided into two categories: those that can be found mostly in the new Member States such as Poland and those which are located in the outermost regions of the EU such as the French overseas departments.

In the former, the preferential tax treatment is mostly linked to specific new or extension investments and the amount of aid is capped by the relevant aid intensity laid down in the regional aid map. In the latter, the preferential tax treatment has a broader scope, covers also operating expenses and, therefore, has to comply with the relevant rules on regional operating aid.

The European Commission has recently examined one such special economic zone on the Portuguese island of Madeira and concluded that it was incompatible with the internal market. It found, in decision 2022/1414, that Zona Franca da Madeira [ZFM] extended the preferential tax treatment also to the operations of companies outside the island and that the Portuguese authorities failed to ensure that the aid beneficiaries created a certain minimum number of local jobs, as required by regional aid rules.[1]

The ZFM regime

The ZFM regime was approved by the Commission in 2007 on the basis of the then applicable rules on regional operating aid. State aid was granted in the form of reduced corporate income tax on profits resulting from activities effectively and materially performed in Madeira, exemption from municipal and local taxes, as well as exemption from transfer tax payable on immovable property for setting up of a business in the ZFM. The amount of aid was linked to the number of jobs created and maintained locally, while the amount of tax liability was capped by progressive ceilings on the taxable base. This meant that the higher the number of jobs created, the higher the taxable base ceiling and the larger the amount of aid.

In 2013, after a request from Portugal, the Commission authorised a 37% increase in the taxable base ceilings leading, of course, to larger amounts of aid.

In 2015, the Commission carried out ex post monitoring of the ZFM. It looked in particular into the geographic scope of the activities of beneficiary undertakings and the number of jobs created and maintained locally. Because it had doubts as to whether the ZFM regime complied with the conditions of the authorisation decisions, in 2018 the Commission opened the formal investigation procedure which eventually led to decision 2022/1414.

Existence of State aid

With respect to the criterion of transfer of state resources, Portugal argued that “(67) the ZFM scheme does not involve State resources (i.e. an increase in expenditure or even a reduction in revenue for the public budget). The scheme does not correspond to ‘real tax expenditure’ but simply to a virtual tax expenditure or even accounting fiction (‘theoretical tax revenue losses’). Portugal further explains that companies are only established in the ZFM, and invest there, following the existence of the tax relief. Otherwise, without the tax benefit, they would not have established in the ZFM or paid the usual taxes applicable in continental Portugal or in Madeira.” [see also para 123 of the decision]

The Commission’s response was as follows:

“(127) A loss of tax revenue for the State is equivalent to consumption of State resources in the form of tax expenditure. By allowing a tax reduction from the CIRC in compliance with the ZFM scheme approved by Article 36 of the EBF, Portugal foregoes revenue that it would have obtained if it had not enacted this fiscal provision. The corporate income tax reduction, is granted through State resources. This measure has been put into effect in the form of a State regulation (the Tax Incentives Statute, Estatuto dos Benefícios Fiscais ‘EBF’ that is a parliamentary act) that is a legal act attributable to the Portuguese State. Since this tax benefit is granted by the Portuguese authorities, it is imputable to the State.”

“(128) The concept of ‘aid’ encompasses not only positive benefits, but also measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without being subsidies in the strict meaning of the word, are similar in character and have the same effect.”

“(129) The Commission therefore concludes that the corporate income tax reduction (including the additional 50 % corporate income tax cut for companies carrying out industrial activities in the ZFM industrial zone) is granted from State resources and imputable to the State.”

Although the statements of the Commission are not wrong, they do not really address the Portuguese position that had the ZFM regime not been implemented, it would receive any tax revenue at all. Each side is using a different benchmark to determine loss or absence of loss of tax revenue. I hasten to add that Portugal made a claim that was not substantiated. No one knows how many companies would have established presence in Madeira had the ZFM regime not been implemented. At any rate, the legally correct reply to the Portuguese argument is that the loss of state revenue is not determined according to how much tax revenue could be raised by a hypothetical tax but by how much tax revenue could be raised had taxable persons paid an actual tax. The possibility that, under a different tax regime, they could choose to establish commercial presence elsewhere is irrelevant.

With respect to the selectivity of the measure, Portugal maintained that the ZFM regime was not selective as “(130) all companies engaged in commercial, industrial, maritime or other service activities are likely to be established in the ZFM.”

The Commission dismissed this argument. It does not matter whether any company was free to establish presence in the ZFM. As the Court of Justice ruled in its World Duty Free judgments [C-20/15 P and C-51/19 P], it is not relevant for the purpose of determining the selectivity of a measure that no undertaking is excluded from it. What matters is that companies there received a more favourable treatment than other companies outside the ZFM. “(134) Companies registered in the ZFM benefit from a corporate income tax reduction on profits or from other tax exemptions until 31 December 2020. The ZFM scheme enables the beneficiaries to save on their expenses. This derogation is put in place with the specific objective of benefiting and promoting activities carried out by the companies registered in the ZFM, putting these companies in a more favourable position than other companies located elsewhere in the country or in the ARM [Autonomous Region of Madeira].”

“(135) Therefore, the measure under examination confers an advantage solely to the companies established in the ZFM. Given its geographical scope of application, the measure under examination is selective, as it is only available to the companies registered in the limited ZFM.”

Given this selective treatment, the Commission also found that beneficiaries obtained an advantage that was capable of affecting trade and distorting competition because they carried out cross-border activities.

Since all of the criteria of Article 107(1) TFEU were satisfied, the Commission concluded that the ZFM regime constituted State aid.

It is worth noting that the Commission also pointed out that if the tax benefit enjoyed by individual undertakings did not exceed the threshold of the then applicable de minimis regulation [Regulation 1998/2006] and complied with all of the provisions of that regulation, it would not be classified as State aid. Similarly, aid that fell within the scope of the current de minimis regulation [Regulation 1407/2013] which applies retroactively [Article 7 of that Regulation] did not constitute state aid.

Compatibility of the aid with the internal market

The Commission found the aid not to be compatible with the internal market on the grounds that, first, the tax benefits were not limited to profits arising from local activities and, second, there was no evidence that the required local jobs were actually created and maintained.

Origin of the profits benefiting from the income tax reduction

The Commission, first, explained that “(154) there is no question that Madeira is an outermost region for the purposes of Article 349 TFEU and is therefore eligible under Article 107(3)(a) TFEU.”

“(155) However, the contribution of an operating aid scheme to the regional development of a region has to be assessed in relation and in proportion to the handicaps of this region, which in the case of outermost regions are structural and permanent handicaps recognized by the TFEU, such as remoteness, insularity, small size, difficult topography and climate, economic dependence on few products, as enshrined in Article 349 TFEU.”

“(156) The ‘raison d’être’ of regional operating aid for outermost regions is to compensate the additional costs companies incur in these regions due to these handicaps.”

“(159) Contrary to what Portugal says, companies registered in the ZFM only incur such additional costs if they effectively and materially conduct their activities in Madeira, which implies that their profits are resulting from operations directly burdened with such additional costs. Other type of profits, not burdened by these costs because realised as a result of activities carried out outside the region, cannot be taken into account in the taxable base benefiting from the tax measure.”

“(160) The Commission notes that Portugal clearly stated throughout the 2015 monitoring and confirmed in the course of the formal investigation that beneficiaries did not necessarily have to conduct their activity in the region and that even activities carried out outside the region benefited from aid under the scheme”.

“(161) The Commission considers that […] the implementation of the ZFM scheme on the origin of the profits is not in line with the provisions on operating aid in those Guidelines.”

Job creation/maintenance in the region

The Commission, first, recalled that “(168) the maximum aid amounts that beneficiaries registered in the ZFM can benefit from under the approved regional operating aid scheme are calculated on maximum taxable base ceilings based on the jobs held each fiscal year by the beneficiaries.”

“(169) The Commission points out that the requirement of job creation/maintenance was a condition to access the scheme and was embedded in the method of calculation of the aid amount in the ZFM scheme as notified by Portugal, and approved by the 2007 and 2013 Commission Decisions.”

“(171) Consequently, the number of jobs is a parameter of the aid amount and a measurement of the contribution of the scheme to regional development and, for both purposes, it should be based on an objective proven method used in State aid decision practice.”

“(173) Contrary to what Portugal argues the Commission considers that the application of the method set out in paragraph 58 of the 2007 RAG, and especially the related footnote 52 to calculate the number of jobs created/ maintained, i.e. ‘the number of employees means the number of annual labour units (ALU), namely the number of person employed full time in one year, part-time and seasonal work being ALU fractions’, is appropriate, even if this definition is included only in the section of the 2007 RAG relating to regional investment aid. This method is also referred to in Article 5 of the Commission Recommendation concerning the definition of micro, small and medium-sized enterprises, which is of general application of Union legislation and in particular of Union State aid rules, as those Recommendations were consistently included as Annex I to the 2008 GBER, as well as to the 2014 GBER.”

“(174) Contrary to Portugal’s argument, such a definition of jobs in FTEs and ALUs is the best way to include without discrimination all types of labour relationships and contracts, permanent or temporary employment, employees and board members under multiple labour contracts with different companies, teleworkers, the time effectively spent by employee for the company in the ZFM being computed in an objective and verifiable manner. The Commission remains neutral with regard to the nature of the labour relationship under national law, as long as the computing of the jobs for State aid purposes is done in an objective manner.”

“(175) In any event, the Commission further notes that, irrespective of the definition in footnote 52 of the 2007 RAG, Portugal has not applied any definition of jobs that would effectively count the number of jobs created and maintained in Madeira. […] Portugal has accepted as valid jobs under the ZFM scheme any employment of whichever legal nature irrespective of the number of hours, days, and months of active labour per year, declared by the beneficiaries in their annual tax declarations. It did so without checking the reality of the time spent by the jobholder for each beneficiary and translating it in FTEs.”

“(176) In view of the outcomes of the 2015 monitoring and information provided by Portugal during the formal investigation, the Commission considers that the Portuguese authorities, on the basis of the declarations made by the beneficiaries, were not in a position to check the reality nor the permanence of the jobs declared as requested by the 2007 and 2013 Commission Decisions, precisely because of the absence of a common objective computing methodology applicable to all cases of labour relationships.”

The findings of the Commission with respect to job creation are of a wider significance, as they apply to any State aid rules or guidelines that make the compatibility of the aid conditional on job creation.

First, Member States must count jobs correctly. It is clear that a part-time person is not the same as a full-time person. Similarly, a person temporarily seconded by an employment agency is not the same as a person directly employed by the aid beneficiary.

Second, Member States must put in place procedures or arrangements by which to be able to confirm the veracity of the claims or data submitted by aid beneficiaries.

Compatibility of the aid scheme directly on the basis of Article 107(3)(a) TFEU

Then the Commission addressed the Portuguese request to “(188) assess the impact of the ZFM scheme ‘in a manner consistent with EU policies on the outermost regions with regard to economic, social and territorial cohesion’ and take into account that it is ‘the most efficient economic policy instrument for driving cohesion, economic growth and the economic sustainability of Madeira’”

“(189) Pursuant to Article 107(3)(a) TFEU, aid to promote the economic development of the regions referred to in Article 349 TFEU, in view of their structural, economic and social situation, may be considered to be compatible with the internal market.”

Next, the Commission explained that “(190) according to the case-law, in adopting rules of conduct and announcing by publishing them that they will henceforth apply to the cases to which they relate, the Commission imposes a limit on the exercise of its discretion and, in principle, cannot depart from those rules without being found to be in breach of general principles of law, such as equal treatment or the protection of legitimate expectations. Therefore, the Commission is bound to assess the present case under the applicable guidelines, i.e. the 2007 RAG, except if the Portuguese authorities were to demonstrate that exceptional circumstances, different from those envisaged in the 2007 RAG, required the Commission to assess the ZFM scheme directly under the Treaty. Nevertheless, in the present case, the Portuguese authorities did not even invoke, let alone demonstrate, such exceptional circumstances. Even if the compatibility assessment of the ZFM scheme as implemented by Portugal should therefore be carried out under the 2007 RAG, the Commission will nevertheless assess, for the sake of completeness, in the following recitals if the ZFM scheme as implemented by Portugal could be considered compatible directly on the basis of the TFEU.”

The Commission limited its assessment to examining two aspects of the ZFM: its contribution to regional development and its appropriateness and proportionality.

With respect to the contribution to regional development, the Commission conceded that “(193) contrary to its preliminary view stated in paragraph 33 of the Opening Decision, the ZFM scheme could contribute to the regional development of Madeira, an outermost region, and therefore to an objective of common interest.”

However, with respect to the appropriateness and proportionality of the aid, the Commission concluded that “(196) the companies that benefited from the scheme as implemented were released from normal tax charges though certain companies had conducted activities for which they did not incur additional costs due to the structural handicaps of the region”.

“(197) In this context, as it was not implemented in a way as to address the structural difficulties companies may effectively incur in their activity in Madeira, the ZFM scheme cannot be considered as appropriate, nor proportional with regard to the principles/conditions of regional operating aid aiming at the promotion of the economic development of the outermost regions (Article 349 TFEU) in view of their structural, economic and social situation.”

The Commission also found the ZFM not to be compliant with the 2014 GBER [Regulation 651/2014] on the grounds that “(204) the beneficiaries of the ZFM scheme implemented by Portugal do not necessarily have their effective activity in Madeira. Moreover, the aid amounts involved are not necessarily related to gross value added, labour costs or turnover generated in Madeira.” The criteria of compatibility laid down in the GBER are different from those of earlier versions of regional aid rules.

The consequence of incompatibility

There is only one consequence of a finding of incompatibility. And that is recovery of the aid. Now Portugal has to undertake the arduous and time-consuming process of calculating the amount that beneficiaries have to pay back. That amount will depend on how much of their profit was earned on activities carried out outside Madeira and the number of jobs claimed but not actually created in terms of annual full-time equivalent positions.

[1] The full text of Commission decision 2022/1414 is published in Official Journal L 217, 22 August 2022. It can be accessed at: EUR-Lex – 32022D1414 – EN – EUR-Lex (europa.eu)

On the basis of the above analysis, the Commission concluded that the scheme was compatible with the internal market.



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.

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