State aid and taxation

Member States enjoy fiscal autonomy in the design of their direct taxation systems. They are also free to choose the economic policies which they consider most appropriate and, in particular, to spread the tax burden as they see fit across the various factors of production. 

However, tax measures adopted by Member States must comply with the EU State aid rules. 

For a tax measure to be classified as State aid within the meaning of Article 107 (1) TFEU, it must meet the following cumulative criteria: 

1. the measure is decided by the State in the broad sense (federal state, region, county, inter-municipal association, State-owned undertaking, chamber of commerce and industry, etc.) and financed by State resources;
2. the measure confers on an undertaking an abnormal economic advantage in any form (subsidy, tax exemption, reduction of social security contributions, capital injection, loan, extension of a concession, etc.);
3. the measure favours certain undertakings or the production of certain goods and is therefore necessarily selective;
4. it distorts (or threatens to distort) competition and affects (or threatens to affect) trade between Member States.

The first condition is easily met in the case of fiscal measures. Indeed, the loss of tax revenue resulting from a favourable tax treatment is equivalent to the consumption of State resources in the form of fiscal expenditure. This condition also applies to aid granted by regional or local authorities in the Member States. Furthermore, State support may be provided just as much through tax provisions of a legislative, regulatory or administrative nature as through the practices of the tax authorities.

The last condition does not raise any specific issues related to the fiscal nature of a measure. 

On the contrary, the conditions of advantage and selectivity regarding tax measures are much more complex and have resulted in extensive case law of the Court of Justice of the  EU . Therefore, a detailed case-by-case analysis must be conducted to determine whether those two conditions are met.

In 2016, the European Commission clarified the scope of the State aid rules by publishing its Communication on the notion of State aid. This document, which consolidates European case law, provides guidance on when public spending falls within, or outside, the scope of State aid control notably regarding the selectivity criteria relevant in taxation and helps public authorities and companies to identify when public support measures can be granted without needing approval under EU State aid rules.

Furthermore, the European Commission published, also in 2016, a working paper on State aid and tax rulings, which have been since then the object of numerous landmark judgments of the Court of Justice of the EU.

To fall within the scope of Article 107 (1) TFEU, a State measure must be selective in that it "favours certain undertakings or the production of certain goods". 

A distinction must be made between:

• general measures which are open to all economic agents operating within a Member State and not classified as State aid;
• selective measures which are exclusively reserved for certain undertakings.

More specifically, tax measures which are effectively open to all firms on an equal access basis, and which are not de facto limited in scope, for example by the discretionary power of the State to grant them, are deemed to be general measures and do not fall with the scope of State aid rules.

On the other hand, measures are deemed to be selective if they apply to undertakings of a certain size, operating in certain sectors, with a certain legal form or belonging to a group with certain characteristics or entrusted with certain functions. 

Therefore, when Member States adopt ad hoc positive measures benefiting one or more identified undertakings, it is normally easy to conclude that such measures have a selective character, as they reserve favourable treatment for one or a few undertakings. 

The situation is less clear where Member States adopt broader measures applicable to all undertakings fulfilling certain criteria. In such cases, the selectivity of the measures is assessed by means of a three-step test: 

• The first step is to identify the reference system: the ordinary or "normal" tax system applicable in the Member State concerned. 
• The second step is to determine whether a given measure derogates from the general system. This is the case when a measure differentiates between economic operators who are in a comparable factual and legal situation in the light of the objectives inherent in the system. Assessing whether a derogation exists is the key element of the test. 
• The third step of the test is to establish whether the derogation is justified by the nature or the general structure of the reference system.

According to recent case law, even tax measures of a general nature may be deemed to be selective, as the selectivity may result not only from specific characteristics of the beneficiaries but also from the transaction they may decide to carry out. 

This recent case law has led to legal uncertainty for undertakings that meet the criteria laid down in national tax legislation and may benefit from a favourable tax treatment. In that case, the question arises as to whether such tax measures may be classified as unlawful State aid and be subject to recovery measures. 

Under State aid law, a tax measure constitutes an "advantage" where the measure confers on recipients an economic benefit which relieves them of charges normally included in their budgets. The advantage may be provided through a reduction in the company's tax burden in a number of ways, including:

• a reduction in the tax base (such as special deductions, special or accelerated depreciation arrangements or the inclusion of reserves on the balance sheet);
• a total or partial reduction in the amount of tax (such as an exemption or a tax credit);
• deferral, cancellation or even special rescheduling of tax debt.

The Commission is required to carry out a global assessment of a tax regime, taking into account all its components, both favourable to its beneficiaries and unfavourable to verify whether any such advantage exists.

This notion of advantage is also broadly interpreted. 

By the end of 2014, the Commission asked all Member States to provide information on their tax ruling practice and a list of recent tax rulings.

The Commission found a number of tax rulings by several Member States, such as the Netherlands, Belgium, Ireland and Luxembourg, to be incompatible with State Aid on the grounds that those rulings conferred a selective advantage. Most of these decisions concern tax rulings approving transfer pricing arrangements proposed by the taxpayer to determine the tax base of an integrated group company.

Several cases are still pending before the Court of Justice of theEU and the case law is not yet clear in this area. 

The Commission is still investigating other cases involving potential tax State aid.
In these circumstances, close legal monitoring is highly recommended to ensure the compliance of tax arrangements with EU law and prevent the risk of recovery of incompatible State Aid.

The application of State Aid rules to tax measures is a complex issue, as it involves not only EU law principles but also national tax legislation. Classifying a national measure as State aid requires an in-depth understanding of the national framework and its assessment in the light of CJEU case law and the European Commission's decisional practice.

Our State aid experts work closely on these matters with our lawyers specialized in national tax legislation.

CMS lawyers represent both public authorities and private companies on all aspects of State aid rules. This includes:

• Legal assessment of possible State aid and its compatibility; 
• Analysis of the compatibility of a tax measure and the potential obligation to notify it to the European Commission;
• Assisting public authorities in notifying State aid to the European Commission;
• Assisting public authorities or beneficiaries in State aid investigations by the European Commission. 
• Drafting and lodging complaints with the European Commission; 
• Litigation before national and EU courts.

The CMS State Aid Practice Area Group comprises 40 State aid law specialists practising State aid law in 17 jurisdictions located in 20 cities in Europe and beyond – all committed to assist you. 

Find your local contact person in our brochure CMS State Aid Group.