An undertaking is any entity that carries out economic activities regardless of how it is classified in national law or how it is financed. The General Court, in its judgment of 20 December 2023, in case T-166/21, Autorità di sistema portuale del Mar Ligure occidentale v European Commission, also clarified that if an undertaking also carries out tasks assigned to it by the state and on behalf of the state and if it charges a fee for those tasks, the fee must be determined by the state, not the undertaking.1
The applicant, an entity designated under Italian law as a “port organisation”, sought the annulment of Commission decision 2021/1757 by which the Commission requested Italy to abolish an exemption from corporate tax benefitting ports in Italy.
In July 2013, the European Commission sent to all Member States a detailed questionnaire concerning the application of corporation tax to ports. In January 2019, the Commission, proposed “appropriate measures” to Italy for the phasing out of an exemption benefitting ports from corporate taxation – the so-called IRES. Italy rejected the Commission’s proposed measures. Subsequently, the Commission opened the formal investigation procedure which was concluded in decision 2021/1757 with a finding of incompatible aid. Since the tax regime applicable to ports was introduced before 1958, the Commission considered it to be existing aid and therefore did not order recovery. However, it ordered the abolition of that regime.
The applicant was an organisation with a legal personality that managed ports. There are 16 such port organisations in Italy managing 57 of its largest ports. Port organisations regulate and supervise the execution of port operations carried out by third-party undertakings (in particular operations involving the loading, unloading, transhipment, storage and handling of
goods and any ship-related equipment), the performance of which is subject to prior authorisation.
The status of ports
The applicant claimed that ports had the status of non-economic public bodies of national importance, which acted on behalf of the state solely for the purpose of furthering public interest. They did not seek profit and they could not be considered as undertakings.
The General Court, first, recalled the definition of the concept of undertaking. That concept covers any entity engaged in an economic activity, irrespective of its legal status and the way by which it is financed. [paragraph 65 of the judgment]
Any activity consisting in offering goods or services on a given market constitutes an economic activity. By contrast, activities which are connected with the exercise of public powers are not of an economic nature, with the result that those activities do not fall within the scope of State aid rules. [paras 66-67]
Then, the General Court clarified that the fact that an entity has, in respect of the exercise of part of its activities, powers of public authority does not, in itself, preclude it from being classified as an undertaking in so far as it carries out other activities of economic nature. In so far as a public entity carries out an economic activity which may be dissociated from the exercise of its powers as a public authority, that entity, as regards that activity, acts as an undertaking. [para 68]
In the field of State aid, the legal status of an entity under national law is irrelevant for the purposes of classifying that entity as an undertaking. Even a body which is integrated into the public administration may be classified as an undertaking. Moreover, the fact that an entity cannot go bankrupt on account of, for example, an unlimited state guarantee is not capable of preventing the classification of that entity as an undertaking. [para 69]
In addition, the fact that goods and services are supplied on a non-profit basis does not preclude those transactions from being regarded as economic activities, since they are in competition with those other operators which pursue profit. [para 70]
Consequently, the General Court rejected the claim that Italian port organisations were not undertakings because they had a special legal status and special links with the state.
Absence of market
The applicant claimed that port organisations in Italy were legal monopolies and were precluded from competing with each other. Therefore, there was no market and they could not be regarded as undertakings.
The General Court’s response was that it was wrong to claim that ports were not exposed to any competition. Although, each port organisation had a statutory monopoly in the port it
managed, the fact remained that there was competition between Italian ports, on the one hand, and competition with ports in other Member States, on the other. [para 92]
The competition arose from the fact that port operators and users could use several ports to reach the same hinterland. [para 93]
In addition, as regards the award of concessions, different ports compete to attract concessionaires. [para 94]
However, the General Court acknowledged that port organisations regulated and supervised the execution of port operations carried out by third-party undertakings. It went on to note that those tasks, such as the granting of permits or licences according to criteria defined by the relevant ministry, appeared to correspond to the prerogatives of public authorities and were of a non-economic nature. [para 100]
Then, the Court held that the Commission did not prove that the granting of authorisations and permits for port operations constituted a service provided on a market and, for this reason, upheld this part of the plea. [para 101]
The classification of fees received by port organisations
The applicant submitted that the Commission had mistakenly considered the fees collected by the port organisations as remuneration for services rendered instead of taxes.
The General Court, first, recalled that the designation of an entity under national law is not relevant for its classification as an undertaking within the meaning of State aid rules. Similarly, the arrangements for financing, in particular the name given by national law to an entity’s income, are not relevant to the classification of that entity as an undertaking. Thus, the Commission rightly observed, the name used at national level for amounts collected, whether they are called fees, port charges or port taxes, does not affect that classification. [paras 105-106]
Discretion in determining the level of fees
Next, the Court observed that port organisations had discretion in setting fees and other charges, that those fees and charges were not set by the state and that they varied depending on the nature of the service provided. [paras 107-110]
However, with respect to the fees for licences or permits, the General Court noted that the Commission did not examine how they were calculated, nor the extent of involvement of the state. It accepted that those fees were set according to parameters determined by the relevant ministry. [paras 112-113]
Then, the Court recalled settled case-law according to which the fact that a product or service supplied by a public body and connected with the exercise by that body of public powers is
supplied in return for remuneration defined by law is not sufficient for that activity to be classified as an economic activity and the entity which carries it out as an undertaking. [para 114]
For this reason, the General Court held the plea that the applicant did not act as an undertaking when granting licences or permits. [para 115]
Transfer of state resources
The applicant claimed that the tax exemption did not result in loss of revenue for the state because port organisations were part of the state, meaning that the state would not gain or lose anything by transferring resources from one part of the state to another.
The General Court rejected this claim. Even though the port organisations were governed by public law, they were legal entities separate from the state. [para 126] Thus, non-payment of taxes gave rise to a transfer of state resources. [para 127] Moreover, public entities did not fall outside the scope of Article 107(1) TFEU, given that any discrimination between public and private beneficiaries would breach the principle of neutrality in Article 345 TFEU. [Art 128]
The selectivity of the tax regime for ports
The applicant contended that the Commission misidentified the reference tax system because state entities including port organisations were subject to special rules.
First, the General Court recalled that in order to define the reference system, it is necessary to identify the entire body of the rules that determine the tax burden of undertakings. This approach ensures that a tax measure is assessed in the light of a framework encompassing all relevant provisions. The reference system cannot consist of a few provisions of the national law of the Member State concerned which have been artificially taken out of a broader legislative framework. In other words, where the tax measure in question is inseparable from the general system of taxation of the Member State concerned, it is to that system that reference should be made. [paras 145-147]
In the present case, the Commission had considered that the normal corporate tax applied to port organisations. The General Court agreed and held that the special provisions on state entities including port organisations formed part of a broader tax system. That system defined, among other things, the taxable persons, the taxable profit and the tax rates. Accordingly, taxable persons included, inter alia, public bodies, regardless of whether their activities were of an economic nature. [para 152]
The Court also noted that the special provisions on state entities constituted an exemption from the general rule of taxation of all income, which stated that the exercise of a commercial activity by an entity governed by public or private law was the decisive criterion for the imposition of corporate tax. The Court observed that, without that general rule, the exemption provided for state entities would be entirely useless. [para 153]
The last sentence in paragraph 153 above is very important. A tax provision, even a narrow one, can be the reference system only if it can exist autonomously. If it depends on other provisions, then it only constitutes a deviation from a broader system which is the reference system that must be taken into account.
Comparability of port organisations to typical companies
Selectivity means some kind of differentiation between undertakings which, in view of an appropriate benchmark [i.e. the reference system], are comparable or in comparable situations. The applicant claimed that port organisations were not in a similar position to that of other companies.
The General Court, first, recalled that it was in the light of the objective of the reference system that it had to be examined whether the port organisations were in a factual and legal situation comparable to other entities which were subject to corporate taxation. [para 163]
It then held that the factual and legal situation of port organisation, in so far as they carried out economic activities, was comparable, if not identical, to that of other entities subject to corporate taxation, and not to that of the state or public bodies which exercised public powers. To this extent, there was no difference between the economic activities of port organisations and those of the other entities subject to corporate taxation. Therefore, their tax treatment derogated from the reference system.
Justification by the nature or general scheme of the reference system
The applicant claimed that the derogation was justified by the nature or general scheme of the reference system.
A derogation is justified where it follows directly from the basic or guiding principles of the reference system or where it results from mechanisms inherent in the system which are necessary for its functioning and effectiveness. [para 169]
The General Court noted that the applicant argued that the exemption of port organisations stemmed from the general principles of Italian tax law, namely the principle that the state was not taxed, the principle that taxes could not be taxed (again) and the principle that the managers of public assets were not subject to corporate taxation. [para 172] However, according to the Court, those arguments were based on the incorrect premise that port organisations carried out only non-economic activities, which had already been found to be false.
The General Court reiterated its earlier finding that the Commission had not demonstrated to the requisite legal standard that the granting of authorisations for port operations constituted an economic activity. In view of the separable nature of the activities of port organisations classified as economic, the General Court annulled Commission decision 2021/1757 in so far as it classified the granting of authorisations for port operations as an economic activity.