Special Tax Treatment for a Major Infrastructure Project

Special Tax Treatment for a Major Infrastructure Project - State Aid Uncovered photos 16

Introduction

In April 2013, the Commission received a complaint alleging that State aid had been granted to the Oresund fixed link. The link is a major transport infrastructure project consisting of a bridge, an artificial island and tunnels between Denmark and Sweden. In October 2014, the Commission concluded that the public funding of the hinterland road and rail connections was not State aid, while state guarantees constituted compatible aid.

After an appeal by the complainant, the General Court partially annulled the 2014 Commission decision on the grounds that the state guarantees were not limited and that they amounted to operating aid after the completion of the construction phase of the project [T-68/15, HH Ferries v Commission].

In February 2019, the Commission opened the formal investigation procedure which was concluded with the present decision on cases SA.52162 concerning Denmark and SA.52617 concerning Sweden.1 The Commission found that, first, certain depreciation and loss-carry-forward rates did not confer a selective advantage and were not State aid. Second, state guarantees were existing aid. And, third, certain other special depreciation and loss-carry-forward rates were incompatible aid that had to be recovered.

The project

The project is managed by a consortium: The Øresundsbro Konsortiet. The consortium is owned by A/S Øresund and SVEDAB, which are Danish and Swedish state-owned companies, respectively. The consortium derives its income from tolls it levies on road and rail users of the bridge and tunnels.

Economic activity

The Commission, first, examined, in a long and detailed analysis in paragraphs 287-302, whether the consortium was an undertaking. Denmark and Sweden argued that they exercised their public powers by entering into a bilateral treaty to commit to the construction and operation of the project. No company could undertake such a project. The response of the Commission was as follows.

“(292) It is true that Article 107(1) TFEU does not apply where States act ‘by exercising public power’, or where public entities act in their capacity as public authorities. An entity may be deemed to act by exercising public power, where the activity in question forms part of the essential functions of the State, or is connected with those functions by its nature, its aim, and the rules to which is it subject.”

“(294) The Consortium, as the owner and operator of the Fixed Link infrastructure, is active on the market of providing a transport service for remuneration to citizens and undertakings: the Consortium will charge a fee (toll) from the users of the road section of the Fixed Link for crossing the Øresund strait; in addition, the Swedish Transport Administration and the Danish State Rail Administration pay a fee for the use of the railway infrastructure on the Fixed Link. The Consortium’s revenues from road and rail are intended to finance the total cost of planning, project design, construction, maintenance and operation of the Fixed Link, and also the costs of the construction of the road and rail hinterland connections, through the distribution of dividends to the parent companies (recital (70)).”

“(295) It should be noted that the Consortium has not been granted specific public powers in relation to the construction and operation of the Fixed Link, but it will construct and operate the infrastructure as an economic operator. The construction and commercial operation of large infrastructure projects does not, in itself, constitute an exercise of public powers, and the construction and operation of the Fixed Link is governed by an economic logic, given that it is financed to a very large extent by user fees. Indeed, the activities of the Consortium are very different from what, in the past, has been held to be part of public power activities, such as the army or the police, air navigation safety and control, maritime traffic control and safety, anti-pollution surveillance, organisation, financing and enforcement of prison sentences, development and revitalisation of public land by public authorities, and the collection of data to be used for public purposes on the basis of a statutory obligation imposed on the undertakings concerned to disclose such data”.

“(296) There is a market for crossing the Øresund strait, in particular, because the service was already provided for remuneration by an existing ferry operator, which is a private undertaking operating under market conditions. Hence, the transport services provided by the Consortium are in competition with the transport services provided by ferry operators. The Commission does not accept the States’ argument, […], that the Consortium cannot be considered to compete with the ferry services. As the States admit, the Consortium’s pricing policy can significantly affect the Complainant’s business. Whether the Consortium was conceived with the intention of competing with the ferry service or not, it is offering a service to cross the Øresund strait, which directly affects the competitive position of the already-established market operators. The Commission, therefore, concludes that the Consortium, in operating the Fixed Link, is engaged in an economic activity”.

“(297) In addition, the Commission notes that an activity that consists of offering goods or services on a market does not acquire the character of the exercise of public power solely because a Member State chose to grant a public entity a monopoly to offer the goods or services in question. In that regard, the Commission recalls that the question of whether a market exists for certain services may depend on the way those services are organised in the Member State concerned, and that, due to political choice or economic developments, the classification of a given activity can change over time. The mere fact that a public company falls within the competence of a Minister, however, does not preclude it from being regarded as carrying on an economic activity. In addition, the mere fact that an entity is established on the basis of an international agreement does not mean that the activity carried out by that entity is the exercise of public power; this must be assessed on a case-by-case basis, in light of the activity carried out by that entity. The Commission considers that the crucial question is whether, by operating the Fixed Link, the Consortium is providing a good or a service on a market. The Commission notes that that is clearly the case, as set out above.”

“(298) The Commission notes, further, that, even if it could be found that the Consortium exercises some powers as a public authority, this does not, in itself, preclude its other strands of activity from being an economic activity. It follows from settled case-law that an entity may, in parallel, carry out an economic activity and public power.”

“(300) Therefore, the Commission considers that the operation of the Fixed Link constitutes an economic activity.”

“(301) The construction of infrastructure that is indissociably linked to that economic activity, also constitutes an economic activity.”

The presence of advantage in the state guarantees

The Commission, first, recalled on how to determine the presence of State aid in a guarantee.

“(311) A public guarantee, granted on preferential terms, may grant the borrower an advantage by enabling it to borrow at an interest rate that would not have been obtainable on the market without the guarantee. […], the States undertook to jointly and severally guarantee all loans and other financial instruments taken out by the Consortium in connection with the financing of the Fixed Link. The Consortium is not required to pay an annual guarantee premium on the outstanding debt covered by the State guarantee model, […] The States have not provided any evidence that the absence of a guarantee premium is in line with market terms; they do not even argue that such would be the case. Since the benefit of a guarantee is that the risk associated with the guarantee is carried by the guarantor, that guarantor would normally be remunerated by an appropriate premium for such risk-carrying. […] In the Øresund judgment, the General Court held that the grant of a guarantee on terms not equivalent to market terms, is, as a rule, liable to confer an advantage on the beneficiary. In this case, the States, moreover, went beyond simply granting a guarantee to the Consortium on non-market terms, but, in fact, undertook a legal obligation to guarantee all of the Consortium’s borrowing in connection with the financing of the Fixed Link, without requiring any compensation for the States undertaking the risks associated with that obligation. The Commission notes that, as the beneficiary of that obligation, the Consortium

would have enjoyed an immediate advantage, as from when that obligation was granted, insofar as it had an enforceable right to State guarantees in respect of all of its borrowing needs in connection with the financing of the Fixed Link.”

The rules on loss-carry-forward and depreciation

In Denmark, partnerships, such as the consortium, are treated as transparent entities for tax purposes. This means that the Danish tax rules only apply to the Danish partner of the consortium, i.e. A/S Øresund, and not to the consortium itself. However, the Commission considered that, because taxes are levied on the profits that the consortium derives from its economic activities, the beneficiary of any preferential tax treatment is the consortium. Then it proceeded to examine whether the rules on loss-carry-forward [LCF] and on depreciation [DEP] did confer a selective advantage to the consortium. Given that individual measures are selective when they confer an advantage, the Commission focused in determining the presence of advantage. But because it was A/S Øresund that was responsible for 50% of the taxes owed by the consortium, given its tax transparency, the Commission examined whether A/S Øresund derived an undue benefit.

     1999-2001 LCF

“(323) The determination of the system of reference 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 that are in a comparable factual and legal situation depends on the prior definition of the legal regime in 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.”

“(324) Section 1 of the Danish Corporate Income Tax Act lists the legal entities that are subject to Danish corporate income tax. Limited liability companies, such as A/S Øresund, are included in that list. In addition, […], the relevant loss carry-forward rules can be found in the Danish Tax Assessment Act (Section 15) for the periods between 1991 and 2012”.

“(325) Section 15 of the Danish Tax Assessment Act established that, for the 1991-2001 LCF period, losses could be carried forward in the taxable income of the taxpayer for the five subsequent years […] The limitation of five years was an integral part of the generally applicable loss carry-forward rule (a general measure, applicable without distinction to all economic operators), rather than an exception to a broader legislative framework. In this regard, it must be noted that that five-year limitation is inseparable from the general corporate income tax system, which provides for the carry-forward of tax losses, as those rules are relevant to determine the tax base. […] The tax provisions included in the Construction Act, including the 1991-2001 LCF, do not form part of that system, as they apply to one particular project, only. […] It is, therefore, against the benchmark of both Section 1 of the Danish Corporate Income Tax Act and Section 15 of the Danish Tax Assessment Act, and, in light of the above objective, that the 1991-2001 LCF must be assessed under the second step of the three-step analysis”.

“(326) Second, the Commission notes that, under Section 11 of the Construction Act, A/S Øresund could carry-forward losses for 15 tax years or, for losses incurred before the Fixed Link was put into service, for 30 tax years. This also applied to 50% of the losses of the Consortium, in light of A/S Øresund’s 50% ownership. […] this also benefits the Consortium, insofar as a reduction in A/S Øresund’s tax burden results in a reduction in the Consortium’s financial burden.”

“(327) Denmark confirmed that the special Danish rules on loss carry-forward and depreciation were created for A/S Øresund, and apply in its capacity as partner in the Consortium. […] While it is true that A/S Øresund is responsible for a large investment, it is not precluded that other limited liability companies could undertake similarly significant investments, or investments for which losses can be expected to extend beyond five years.”

“(328) Third, the Commission finds that the derogation noted at recital (327) is not justified by the nature or the general scheme of the system. The Commission recalls that a measure, which is prima facie selective, may still be found to be non-selective if it is justified by the nature or general scheme of that system. This is the case where a measure derives directly from the intrinsic basic or guiding principles of the system of reference, or where it is the result of inherent mechanisms necessary for the functioning and effectiveness of the system. External policy objectives, which are not inherent to the general tax system, cannot be relied upon for that purpose. It is up to the Member State concerned to demonstrate that a measure, which is, at first sight, selective, is justified by the nature or general scheme of its tax system.

“(329) The Commission notes that the Danish authorities had argued, in the course of the preliminary investigation, that the special Danish rules on loss carry-forward and depreciation can be regarded as justified by the logic of the system due to the extraordinary character of the entire Fixed Link project in terms of its size and purpose, making it incomparable to any other infrastructure project that has been subject to Danish corporate income tax. In that regard, the Commission recalls that the objective of the system of reference is to establish a general system of taxation for companies on their profits, and, more specifically, to provide rules relating to the determination of the tax base, including rules allowing carry-forward of losses for all companies, without distinction (recital (325)). As indicated at recital (327), the system of reference does not distinguish between entities according to the size of the projects they undertake, and it is not precluded that other limited liability companies could undertake similarly significant investments, or investments for which losses can be expected to extend beyond five years. In those circumstances, the Commission does not consider that the character of the Fixed Link project would justify a different treatment for A/S Øresund, in view of the nature and general scheme of that system. In other words, the Commission does not consider that such different treatment would be consistent, necessary, and proportionate in light of the guiding principles of the Danish tax system. […] The Commission, therefore, concludes that the measure does not constitute a justified derogation to the application of the system of reference, directly resulting from the basic or guiding principles of that tax system.”

“(330) The Commission, therefore, finds that the 1991-2001 LCF resulted in a selective advantage to A/S Øresund, connected to the economic activity of the Fixed Link. As noted at

recital (319), the Consortium would be the beneficiary of any selective advantage created by the special Danish rules on loss carry-forward and depreciation, in view of the fact that both A/S Øresund and the Consortium form a single undertaking for the purpose of the economic activity of the Fixed Link. Therefore, the Commission concludes that the 1991-2001 LCF resulted in a selective advantage to the Consortium.”

     2002-2012 LCF

“(331) For the 2002-2012 LCF, the Commission recalls that, […], the Danish Tax Assessment Act (Section 15) was amended on 21 May 2002, and no longer imposed any limitation on the possibility for legal entities (including limited liability companies) subject to Danish corporate income tax to carry-forward their losses. The Commission does not consider that that specific legislative amendment impacted either (i) the scope of the system of reference for the 2002-2012 LCF, as compared to the 1991-2001 LCF, or (ii) the objective of that system of reference. The Commission, therefore, finds that, for the 2002-2012 LCF period, the system of reference provided that legal entities (including limited liability companies) subject to Danish corporate income tax were entitled to carry-forward their losses, without any limitation with respect to the period within which losses could be carried forward.”

“(332) The Commission notes that, similar to the Danish Tax Assessment Act, the Construction Act was amended to remove the limitation of 15 years that had been applicable to A/S Øresund according to the 1991-2001 LCF. In those circumstances, for losses incurred as from the tax year 2002, A/S Øresund was subject to the same rule as was present in the generally applicable rules (i.e. no limitation in time to carry-forward losses). In other words, A/S Øresund was not subject to a derogation from the system of reference.”

“(333) Consequently, the Commission concludes that the 2002-2012 LCF did not result in a selective advantage for A/S Øresund. As a result, the 2002-2012 LCF did not, either, result in a selective advantage for the Consortium. Therefore, the 2002-2012 LCF did not constitute State aid to A/S Øresund or the Consortium.”

     2013-2015 LCF

“(334) For the 2013-2015 LCF period, the generally applicable loss carry-forward rule is found in Section 12 of the Danish Corporate Income Tax Act. […] legal entities (including limited liability companies) subject to Danish corporate income tax could carry-forward losses for an unlimited period. However, only a loss amounting to DKK 7 500 000 (EUR 1 005 311) plus, if an additional loss remained, an amount corresponding to a maximum of 60% of the taxable income in excess of DKK 7 500 000 (EUR 1 005 311), could be deducted in a given tax year”.

“(335) The limitations in terms of the amount of losses that could be utilised that applied to legal entities subject to Danish corporate income tax (including limited liability companies) by virtue of the system of reference did not apply to A/S Øresund. Therefore, in relation to the tax years 2013, 2014, and 2015, A/S Øresund could offset its entire profit base by utilising losses carried forward, which it would not be able to do if it were subject to the normal rules, under the system of reference.”

“(337) The Commission, therefore, finds that the 2013-2015 LCF resulted in a selective advantage to A/S Øresund. Since the Consortium and A/S Øresund form a single undertaking

for the purpose of the economic activity of the Fixed Link […], the single undertaking is a beneficiary of the selective advantage created by the 2013-2015 LCF, and, as a consequence, the 2013-2015 LCF resulted in a selective advantage to the Consortium.”

The rules on depreciation

The Commission, first, established the reference system which was the Danish Corporate Income Tax Act in conjunction with the Danish Tax Depreciation Act that set the rates and thresholds according to which such entities could depreciate their assets, in order to offset that depreciation against their taxable base.

     1991-1998 DEP

“(340) For the 1991-1998 period, Section 22 of the Danish Tax Depreciation Act determined that the normal depreciation rate for buildings and installations was, for the period up to and including the tax year 1998, 6% on a straight-line basis until reaching 60% of the acquisition costs, and, thereafter, limited to 2% of the acquisition cost, annually”.

“(341) In the Construction Act [for the Fixed Link], the depreciation rate for A/S Øresund was set at 6%/2% of the initial acquisition costs, which meant that a single general rule on depreciation was applied to all assets of A/S Øresund, including its 50% share on the assets of the Consortium. […] As a result of the provisions in the Construction Act, therefore, A/S Øresund could apply a single deprecation rule but could, for none of the asset categories, depreciate at a faster rate than other legal entities subject to Danish corporate income tax.”

“(342) The Commission, therefore, finds, that the 1991-1998 DEP did not constitute a derogation capable of resulting in a selective advantage to A/S Øresund, or, by extension, the Consortium, as compared to the ‘normal’ taxation set out in the system of reference.”

     1999-2007 DEP and 2008-2015 DEP

“(343) The Commission notes that, on 26 June 1998, the Danish Tax Depreciation Act was amended, such that, as from the tax year 1999, the normal depreciation rate for buildings and installations decreased to a maximum of 5% (Section 17 of the Danish Tax Depreciation Act). At the same time, the rule according to which a 2% depreciation rate applied after ten years was abolished. On 6 June 2007, the Danish Tax Depreciation Act was amended further, such that, as from the tax year 2008, the normal depreciation rate for buildings and installations decreased to maximum 4%”.

“(344) Tthose changes were not reflected in the Construction Act […] which maintained the rate of 6%/2% on the entire asset base. […] By declining to amend the Construction Act, […], to impose a similar limitation on the maximum rate of depreciation for A/S Øresund as under the normal rules, the Danish authorities allowed it to enjoy an advantageous position over other legal entities subject to Danish corporate income tax. The combination of the amendments to the Danish Tax Depreciation Act, and the absence of corresponding amendments to the Construction Act […], therefore, must be considered as constituting a measure in favour of A/S Øresund.”

The Commission also rejected the Danish argument that the amount of investment and the long gestation period of the project objectively justified the derogation from the reference system.

Conclusion

The rest of the decision determined that the measures in question were individual and not a scheme, that some of the aid was existing and that some of the aid was incompatible with the internal market under the provisions of the Communication on Important Projects of Common European Interest. The main reason for their incompatibility was that, as the measures in question granted operating aid, the proportionality of the aid was not proven.

Interestingly, the Commission noted towards the end of its decision that “(486) the States did not consider it appropriate or necessary to provide further comments on the compatibility of any possible aid to the Consortium in light of their position on the existing aid qualification of the State guarantee model and the no aid classification of the special Danish rules on loss carry-forward and depreciation.”

Even if indeed Denmark and Sweden did not believe that they granted State aid, it was disingenuous of them not to attempt to quantify the amount of the advantage they conferred to the consortium and ensure, for purposes of prudent use of public money, that the advantage did not go beyond what was necessary for the efficient operation of the fixed link. The lesson to be drawn here is that, regardless of whether a measure is considered to be State aid or not, respect of the principle of proportionality is always necessary when tax payers’ money is used to fund a public policy objective. It also a prudent approach in case the measure is eventually found to be State aid.

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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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