The Challenge of Identifying the Reference Tax System: The Spanish Goodwill Case, Again

To determine whether an aid measure is selective, the treatment of the beneficiaries has to be compared to those undertakings which are in a comparable position.


On 15 November 2018, the General Court ruled in case T-239/11, Sigma Alimentos Exterior v European Commission.1 Sigma Alimentos Exterior (SAE), a Spanish company, appealed against Commission decision 2011/282 which found that depreciation of goodwill resulting from acquisition of shares in non-EU companies by Spanish companies was incompatible State aid.As may be remembered, the Commission had already found in decision 2011/5 that depreciation of goodwill resulting from acquisition of shares in EU-based companies by Spanish companies was also incompatible State aid. Because EU courts were already hearing pleadings in the appeals that were lodged against Commission decision 2011/5, the proceedings of the present case were suspended, first, in 2014 to wait for the ruling of the General Court in case T-399/11, Banco Santander, and again in 2015-16 for the ruling of the Court of Justice in case C-20/15 P, World Duty Free.The judgment in World Duty Free is very significant. The Court of Justice annulled the judgment of the General Court and sent the case back to the General Court. The Court of Justice found that the General Court erred in law by ruling that the Commission had failed to prove that the Spanish tax measure applied to a well-defined group of companies. Given that the tax measure in World Duty Free was almost identical to the tax measure in the present case, the chances of success of SAE declined drastically. Nonetheless, as will be seen below, SAE advanced novel arguments. Ultimately, however, they proved to be futile. 

The concept of selectivity

The first plea of SAE was that the Spanish measure was not selective.

The General Court, first, recalled that selectivity means differential treatment of companies which are in a comparable legal and factual situation to other companies, in relation to the objective pursued by a legal system. (Paragraph 44 of the judgment)

It follows that, tax benefits resulting from a general measure applicable without distinction to all economic operators do not constitute State aid. (Paragraph 46)

The Court also reiterated the three-step test of selectivity: Identification of the common or normal tax system; demonstration of the existence of a derogation or exception to the tax system in the form of differentiation between economic operators which, in relation to the objective the system, are in a comparable factual and legal situation; proof that the differentiation cannot be justified by the nature or structure of the system. (Paragraphs 47-48)

Then the Court turned its attention to the facts of the case at hand. It considered that “goodwill” is defined as the value of the reputation of the name of a company. In accounting terms, goodwill is the difference between the cost of acquisition of a company and the market value of the assets that make up the business that is acquired.

In the Spanish tax law, goodwill can only be amortised or depreciated (i.e. deducted from the tax base) only when companies are combined or merged. Although it is not as explicitly stated in the judgment, amortisation was fiscally possible only when one company would acquire control over another or control would be established jointly. However, in the present case amortisation or depreciation was allowed when more than 5% shares were acquired in a foreign company, either in Europe or, in this case, outside Europe.

The Court noted that the Commission considered that the normal or reference system was the Spanish general corporate tax regime and, more specifically, the rules on the tax treatment of financial goodwill. Because amortisation of financial goodwill was not available to all taxpayers who were in a similar situation, the Commission determined that the reference system could not be limited to the tax treatment of the financial goodwill as defined by the contested measure, since that measure only benefited the acquisition of shares in non-resident companies. (Paragraph 54) For this reason the Commission considered the contested measure to be an exception to the reference system. (Paragraph 55) The Court also observed that, according to the Commission, the contested measure could not be regarded as a new general rule in its own right because the amortisation of financial goodwill deriving from the acquisition of domestic shareholdings was not allowed. (Paragraph 56) Furthermore, it could not be justified by the logic or nature of the tax system. (Paragraphs 57 & 59)


Existence of selectivity

The General Court began its assessment by reviewing the related judgments on the Spanish measure concerning depreciation of goodwill from the acquisition in shares in European companies. It noted that in its judgment of 7 November 2014, in case T-399/11, Banco Santander, and the General Court thought that it was not possible to declare that a tax advantage favoured certain undertakings if that advantage was available to all companies. The General Court considered that any company could benefit from a measure (an exception) of general scope when it was impossible to identify a category of companies that was excluded from that measure (exception) or a category of companies for which the measure was reserved. (Paragraph 64) The General Court concluded in the Banco Santander case that the Commission could not claim the measure was selective just because the measure was an exception to the reference system. (Paragraph 66)

Then the General Court recalled that in its World Duty Free judgment, the Court of Justice invalidated the reasoning of the General Court in Banco Santander because the General Court had introduced an additional requirement (in order to determine whether a measure was selective), that of identifying a particular category of companies that could be distinguished by their specific properties. This was a requirement that could not be inferred from the case law. (Paragraph 67)

The Court of Justice held that a measure was selective if it resulted in differentiation between undertakings which, from the point of view of the reference system, were in a comparable factual and legal situation and, therefore, revealed a discrimination against companies which were excluded. The Court of Justice also held that the fact that companies could obtain the advantage provided by the contested measure when they made acquisitions within Spain could still lead to the conclusion that the measure was selective. (Paragraph 68)

On the basis of the above reasoning, the General Court, in the present case, inferred that the verification of the selectivity of a measure does not necessarily result from the fact that certain undertakings find it impossible to benefit from the advantage provided by that measure due to legal, economic or practical constraints. The selectivity can result from the mere observation that there is an operation that, despite being comparable to an operation which can obtain the advantage provided by the measure in question, does not have the right to receive the same advantage. It follows that a tax measure can be selective even if any company can freely choose to perform the operation which benefits from the advantage established by that measure. (Paragraph 69)

The General Court went on to conclude that the emphasis was placed on a concept of selectivity based on the distinction between companies that choose to carry out certain operations and companies that choose not to carry them out, and not on the distinction between companies based on their own specific characteristics. (Paragraph 70)

Then the General Court applied the principles derived above to the contested measure and, not surprisingly, found that it benefitted Spanish companies that chose to acquire shares in foreign companies, in comparison with Spanish companies that chose to acquire shares in domestic companies. (Paragraph 72)

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Comparability of transactions

SAE claimed that there were obstacles to cross-border acquisitions that justified the tax advantage conferred by the contested measure. While Spanish companies could combine or merge with domestic companies without difficulty, allegedly they encountered obstacles in doing the same with foreign companies. SAE argued that foreign transactions were in a different legal and factual situation which justified a different tax treatment. Consequently, the General Court examined the scope of the reference system.

The General Court turned to the case law for guidance and found criteria with respect to the geographic scope of the reference system (here the General Court cited the Azores case C-88/03, Portugal v Commission, and Luebeck case C-524/14 P, Commission v Luebeck). In relation to the material scope of the reference system it considered that it was delineated in connection with the measure in question. (Paragraph 85)

It based its finding on the material scope of the reference system on the following cases. In Paint Graphos (C-78/08) the reference system was defined by the purpose of the relevant tax measure. (Paragraph 86) From case C-279/08, Commission v Netherlands, the General Court inferred that, despite absence of an explicit legal definition, the reference system had an environmental objective. (Paragraph 87) Drawing on these two judgments, the General Court deduced that the reference system was a regime whose objective was similar to the measure under assessment. Although, in the present case, the reference system (i.e. the regime applying to domestic acquisitions) was less favourable than the contested measure, it nevertheless applied to operators who were in situations comparable to those of the beneficiaries of the measure. (Paragraph 88)

The conclusion of the General Court in paragraph 88 is important. It defines the reference system through a process of comparison, first, of the objectives of different measures and, second, a comparison of the situations of the companies subject to the different measures.

The General Court argued that, in addition to the existence of a link between the objective of the measure in question and that of the reference system, the examination of the comparability of the situations to which the measure applied and of the situations to which the reference system applied, also allowed the material delimitation of the scope of the system. (Paragraph 89)

It is also the comparability of those situations which makes it possible to assess the existence of an exception or derogation when the situations to which the contested measure applies are treated differently despite being comparable to those covered by the reference system or the normal regime. (Paragraph 90)

The General Court applied the reasoning developed above to the case at hand and found that the fact that a company acquired shares in a domestic or foreign company had no connection with the treatment of goodwill in the company’s accounts and, therefore, with the objective of the tax treatment of goodwill. (Paragraph 107)

It was irrelevant that there could have been obstacles to the cross-border combinations or merger of companies. The tax treatment of goodwill was not intended to compensate for the existence of obstacles to cross-border business mergers. Its purpose was to allow the depreciation of goodwill arising from the difference between the price for the shares of the acquired company and the value of its assets. (Paragraph 108) Companies that acquired shares in foreign companies were, from the point of view of the objective pursued by the tax treatment of goodwill, in a legal and factual situation comparable to that of companies that acquired shares in domestic companies. (Paragraph 109) The contested measure, by allowing the amortisation of goodwill from acquisition of shares in foreign companies without a merger or combination between companies, applied to foreign transactions different treatment from the one applied to the acquisition of shares in domestic companies, although the two types of transactions were in a comparable legal and factual situation from the point of view of the objective pursued by the reference system. (Paragraph 111)


A different system or another independent frame of reference?

The General Court also examined whether the measure in question could constitute on its own an autonomous frame of reference.

It first pointed out that a measure may constitute its own reference framework when it establishes a clearly defined tax regime, which pursues specific objectives and which is thus distinguished from any other tax regime applied in a Member State. In such a case, in order to assess whether a measure is selective, it is necessary to determine whether certain operators are excluded from the scope of application of that measure despite being, from the point of view of the objective pursued, in a comparable legal and factual situation with the operators to whom the measure applies (the General Court cites here T-210/02 RENV, British Aggregates v Commission). (Paragraph 113)

Apart from a brief reference in the opinion of the Advocate General in case 173/73, Italy v Commission, the General Court found no further guidance in the case law on how to identify, within a broader system, a different regime that may constitute a reference framework. It then turned to the definition of the reference system in the Commission’s Notice on the Notion of Aid, according to which it consists of a coherent set of rules that are generally applied, based on objective criteria, to all companies that fall within its scope of application, as defined by its objective. (Paragraphs 114-118)

It concluded that the contested measure was only a particular form of application of a more general tax which established a clearly defined tax regime. (Paragraph 120)

It then rejected the argument of SAE that the favourable tax treatment accorded to foreign acquisitions was justified because it was intended to compensate for the presence of obstacles to those acquisitions. According to the General Court, the objective pursued by the reference system did not aim to allow companies to enjoy the tax advantage involved in the amortisation of goodwill when they encountered difficulties which prevented them from merging or forming combinations with other undertakings. (Paragraph 131)

It therefore dismissed the appeal in its entirety.


A couple of thoughts on the judgment

Regardless of one’s own opinion, the principle laid down by the Court of Justice in World Duty Free is now the golden rod by which to determine the existence of selectivity. The objective of the reference or normal system identifies the companies which are in a comparable situation. Any differentiation between companies in comparable situations results in a selective treatment, unless the differentiation can be justified by the logic or nature of the system. For example, if the objective of the system is to tax urban activities that emit into the atmosphere certain particulates or pollutants, exemption of restaurants on the grounds that they cook food is a derogation because their chimneys also release pollutants into the atmosphere. However, the derogation may be justified if the atmospheric emissions of restaurants do not contain any of the particulates targeted by the reference system.

But the usefulness of the golden rod of World Duty Free has limits. When the reference system is a tax, then it is relatively easy to establish who is in principle subject to that tax and therefore is in a comparable situation to everybody else who is not subject to the same tax. But comparability is not so easy to determine when the reference system limits the application of a more general tax.

Take, for example, the Spanish goodwill measure as it applied to domestic acquisitions. The Spanish tax law defined the tax base. The goodwill measure reduced that base by the difference between the price of the shares and the value of the assets of an acquired company, whenever two conditions applied: the acquired company was domestic and the acquisition resulted in a transfer of ownership of the company and its assets, i.e. the exercise of control over it. The measure that applied to foreign acquisitions allowed the depreciation of goodwill without transfer of ownership or control.

In order to perform any comparison, it is first necessary to determine the relevant criterion or benchmark of comparison. In the case of a tax, the benchmark is given by the objective of the tax. But in the case of an exception, such as the Spanish goodwill measure, what is the relevant criterion or benchmark? Is it (a) acquisition of shares, (b) acquisition of shares over 5%, or (c) acquisition of shares in foreign as opposed to domestic companies?

If it is (a) or (b), then it is irrelevant that acquired companies are domestic or foreign. All acquiring companies are in comparable situation. But if it is (c), then acquiring companies are simply not in comparable situations, despite the similarities identified by the General Court. The problem is that neither the Court of Justice, nor the General Court identified the criteria of the reference system that determined the comparability of the domestic and foreign acquisitions. In fact the Court of Justice in World Duty Free stated that the two categories of transaction were “(92) objectively in a comparable situation, in the light of the objective pursued by the ordinary Spanish tax system”. And here lies the problem of how to frame correctly the question of whether a measure is selective. The provisions that applied to both domestic and foreign transactions were themselves derogations from the ordinary Spanish tax system. It is puzzling why the Court of Justice did not pursue the principle it expounded to its logical conclusion and ask (a) whether the depreciation of goodwill benefited domestic companies that merged at the expense of domestic companies that remained independent and (b) whether the depreciation of goodwill benefited domestic companies that merged at the expense of domestic companies that acquired shareholdings below 50%. Why, for example, did the Court of Justice consider that a company with 49% share in another company was in a non-comparable situation to a company with 51% share in another company? Perhaps there were technical or accounting reasons that can explain the depreciation of goodwill in domestic acquisitions. But such reasons do not appear in the reasoning of either Court.



1 This article is based on my own, imperfect translation. The full text of the judgment, in French and Spanish, 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.

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