Application of State aid law to tax measures: 2021 review and 2022 outlook


By several rulings issued in 2021, the Court of justice of the EU (CJEU) has specified its case-law on the verification of two requirements for tax measures to fall within the scope of State aid: the conditions related to advantage and selectivity. We aim to look into the effects of these recent judgements.

A few helpful reminders

As is well known, the matter of direct taxes falls under the exclusive jurisdiction of Member States. This means that Member States enjoy fiscal autonomy in the design of the direct taxation systems and are free to decide on the economic policy which they consider most appropriate and, in particular, to spread the tax burden as they see fit across the various factors of production.

Nevertheless, Member States must exercise this competence in accordance with European Union (EU) law. Notably, any tax measure a Member State adopts must comply with the EU State aid rules, which are binding for Member States and enjoy primacy over their domestic legislation. According to settled case-law, Member States must not introduce or maintain legislation which entails incompatible State aid (see, for instance, judgment of 17 September 2009, Glaxo Wellcome, C-182/08).

Thus, it is crucial for both undertakings and policy makers to identify whether a tax measure falls within the notion of State aid, since such qualification has extremely important substantive and procedural implications.

To fall within the notion of State aid, a measure must fulfil four cumulative criteria. It must:

  • be imputable to the Member State and be granted by the State or through State resources;
  • confer an advantage on the beneficiary undertaking;
  • favour certain undertakings or the production of certain goods (so-called selectivity of aid);
  • affect trade between Member States and cause distortion of intra-EU competition (see Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union, OJEU C 262 of 19.7.2016, p. 1).

The conditions on imputability/State resources and effect on trade and competition are easily met regarding tax measures. On the contrary, the conditions related to advantage and selectivity are more complex. They have resulted in an extensive decisional practice from the Commission since the early 2000’s and a very rich case-law of the EU jurisdictions, further clarified in 2021.

What are the main developments that took place in 2021?

The notion of advantage

Under State aid law, an “advantage” is defined as an economic benefit which relieves an undertaking of charges that are normally included in its budget. This is the case for tax exemptions, preferential tax rates, tax deductions or transactions between the tax administration and the taxpayer.

In a recent judgement Commission v FC Barcelona (C-362/19 P of 4 March 2021), the CJEU addressed the notion of advantage where tax measures are involved.

That case was about four Spanish professional football clubs which were operating as non-profit legal persons and enjoyed, in that capacity, a special rate of income tax. The beneficiaries argued that the tax regime in question did not provide any advantage. In particular, they claimed that this regime had an effect not only on the tax rate, but also on the level of deductions applicable which was less favourable for them compared to other sports companies.

By decision of 4 July 2016, the Commission took the view that that legislation, in introducing a preferential corporate tax rate, constituted a State aid. The General Court annulled the Decision on the grounds that the Commission should have taken into account not only the advantage resulting from the reduced tax rate, but also the other components of the tax regime at issue, which are inseparable from that regime, such as the possibilities of deductions, in so far as capping those deductions could offset that advantage (judgement T-865/16 of 26 February 2019).

The Commission brought an appeal. In its judgment of 4 March 2021, the CJEU confirmed the Commission’s decision and applied a wide interpretation of the notion of advantage. According to the EU Court, when a tax measure is conceived as an aid scheme – that applies to more than one companies – and not as individual aid, the Commission is required to carry out a global assessment of the aid scheme, taking into account all the components, both favourable (reduced tax rate) to its beneficiaries and unfavourable (lower rate of deduction) to them. However, in that case, the Commission needs only to demonstrate that the aid scheme taken as a whole is capable of resulting in the tax liability being lower than it would have been if the general tax regime had been applied, irrespective of the precise level of taxation for a tax year and the real effects on the financial situation of the beneficiary.

The condition of selectivity

To fall within the scope of Article 107 (1) of the Treaty, a State measure must be selective in that it “favours certain undertakings or the production of certain goods”. The criterion of selectivity is one of the most controversial issues in the field of State aid.

A distinction must be made between:

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

Based on a well-established case law, are deemed to be selective the measures that apply to undertakings having a certain size, active in certain sectors, having a certain legal form or to companies belonging to a group having 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 when 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.

First, the system of reference must be identified. It is the ordinary or “normal” tax system applicable in the Member State concerned. Second, it must be determined whether a given measure derogates from the general system. This is the case when a measure differentiates between economic operators who, in light of the objectives intrinsic to the system, are in a comparable factual and legal situation. Assessing whether a derogation exists is the key element of the test. In the third step of the test, it needs to be established whether the derogation is justified by the nature or the general structure of the reference system.

In this respect, in a judgment delivered on 16 March 2021, Commission v Hungary, the CJEU reaffirmed the rules to identify the "system of reference" (C-596/19 P). That case was about the Hungarian advertisement tax of a progressive nature, applicable to broadcasters and publishers and calculated on the basis of the turnover generated by the broadcasting or publication of advertising messages. The Commission held that the measure was selective on the assumption that the progressive structure of the taxation constituted a derogation from the reference system, which should have been based on a single rate.

By judgment of 27 June 2019 (T‑20/17), the General Court overturned the decision of the Commission and criticised the Commission’s analysis of selectivity because of its erroneous definition of the reference system.

The CJEU dismissed the appeal brought by the Commission and outlined that Member States are free to establish the system of taxation which they deem most appropriate. According to the Court, this includes, in particular, the choice of tax rate, which may be proportional or progressive, and also the determination of the basis of assessment and the taxable event. The Commission had erroneously based its analysis on a system characterised by a single rate. In addition, according to the Court, the tax regime in question was intended “to introduce a sectoral tax with a redistributive purpose”. Given the legitimacy of such objective, contrary to what was argued by the Commission, a progressive turnover tax was considered to be appropriate for achieving this purpose and therefore non-selective.

In 2021, the EU Court also clarified its case-law on the criterion of selectivity for tax measures in the World Duty Free case. By several judgements delivered on 6 October 2021, the CJEU put an end to a long-lasting dispute (C-50/19 P, C-51/19 P, C-52/19 P, C-53/19 P, C-54/19 P, C-55/19 P, C-64/19 P and C-65/19 P).

What is involved in that case is the Spanish tax law, under which the acquisition by an undertaking which is taxable in Spain of a shareholding in a foreign company gives rise to a tax deduction from the basis of assessment to the corporation tax. The Commission found that this measure was selective. In its first judgement in that case issued on 7 November 2014 (T-219/10), the General Court annulled the Commission decision on the grounds that the Commission had failed to establish that the Spanish regime was selective. According to the Court, the Spanish regime was not aimed at any particular category of undertakings, but a category of economic transactions and was available, a priori, to any undertaking irrespective of its activity.

The CJEU set aside the judgement of the General Court. In its final judgement, it held that the only relevant criterion in order to establish the selectivity of a national tax measure consists in determining whether that measure introduces a distinction between operators that are, in the light of the objective pursued by the general tax system concerned, in a comparable factual and legal situation. As a result, the selectivity criterion does not require the identification of a category of undertakings with specific characteristics.

It follows from this judgement that a national tax measure may be considered selective even when all the undertakings established in the territory of the Member State concerned, regardless of their size, legal form, sector of activity or other specific characteristics, potentially have access to the advantage conferred by that measure on condition that they make a specific type of investment.

What is expected for 2022?

In 2022, the CJEU will have to rule again on the interpretation of the notion of selectivity regarding national tax measures.

More specifically, the Court of justice is expected to issue its final judgement on the Spanish tax lease system (case C-649/20 P) and the General Court shall rule on the Gibraltar’s corporate tax exemption regime for interest and royalties (case T-508/19). Both these tax regimes have been found by the Commission to be illegal under State aid rules. In addition, the CJEU is expected to answer the preliminary question referred to it by the Income tax Tribunal of Gibraltar on other related tax measures applicable in Gibraltar. It is interesting to note that, in its opinion delivered on 10 March 2022, the advocate general Kokott stressed “the current uncertainty in dealing with national tax law in relation to EU law on State aid” (case C-705/20).

Moreover, the CJEU will have to clarify the principles applicable to tax rulings, defined as measures issued by national tax authorities to determine in advance the application of national tax rules to specific tax situations.

It is recalled that, by the end of 2014, the Commission asked all Member States to provide information about their tax ruling practice and the list of tax rulings they had recently issued. The Commission has classified as incompatible State aid tax rulings granted by several Member States, such as the Netherlands, Belgium, Ireland and Luxembourg, on the grounds that such rulings confer a selective advantage. The majority of these decisions concerns tax rulings which endorse transfer pricing arrangements proposed by the taxpayer for determining the taxable basis of an integrated group company.

In 2022, the CJEU is expected to rule on the appeals brought by the Commission in two important cases (C-465/20 P and C-451/21 P). In both cases, the Commission concluded that the tax rulings issued by the national tax authorities of Ireland and Luxembourg had lowered the tax paid by the two companies without any valid justification. The General Court generally confirmed the approach adopted by the Commission but ultimately annulled its decisions on the grounds that the Commission had failed to satisfy the burden of proof on the existence of an “advantage”. The EU Court will have to specify the level of evidence required to classify a tax ruling as State aid.

Assessment of the impact on beneficiaries of national tax measures

In the Commission v FC Barcelona and the World Duty Free cases, the CJEU interpreted very broadly the conditions of advantage and selectivity. For that reason, these decisions have been criticised as they can lead to an undue extension of the scope of application of State aid and a limitation of the powers of Member States in tax matters.

They also put at risk a large number of national tax measures. Indeed, this recent case-law has led to great legal uncertainty for undertakings which are involved in certain economic transactions and fulfil the conditions laid down in national law for a favourable tax treatment. In that case, the question arises as to whether such national tax measures may be classified as illegal State aid.

Currently, the beneficiary undertakings face a double risk:

  • first, at European level, in case of an investigation launched by the Commission;
  • second, at national level in the context of litigations brought by competitors of the aid beneficiary, which are directly affected by the distortion of competition arising from the implementation of the illegal aid.

In both cases, if a tax measure is found to fall within the notion of State aid, its implementation without a prior notification to the Commission constitutes an illegal aid and is subject to recovery measures.

In this context, the beneficiary undertakings may find themselves in a difficult situation where they are automatically eligible for a favourable tax measure which is likely to constitute State aid but have no means to require the Member State to notify the Commission of the measure, which could remove uncertainty. However, the question remains as to whether in some cases the beneficiaries will have no other choice but to take the risk of a possible infringement of State aid rules.

An assessment on the application of the State aid criteria and especially on the interpretation of the conditions of “advantage” and “selectivity” always needs to be made in the light of the latest judgements of the CJEU. In the meantime, we remain at your disposal for any clarification you may require.