The European Commission has suffered its first court defeat in a tax rulings case. The General Court recently overturned an order to recover over EUR 700 million worth of tax breaks from 55 beneficiaries, because the Commission had wrongly qualified Belgian's excess profit exemption system as an "aid scheme".
The ruling is a welcome clarification of what can be considered an "aid scheme" under the EU State aid rules. Time will tell which steps the Commission will take next.
Since 2005, Belgian entities forming part of a multinational group of companies could, after having demonstrated new investments in Belgium, in the creation of jobs and/or the centralization or increase of activities in Belgium, obtain an advance ruling from the tax authorities, exempting them from corporate income tax on the so-called "excess profits" they made from being part of a multinational group.
On 11 January 2016, the European Commission concluded that such a system constitutes an illegal state aid scheme, and it ordered Belgium to recover around EUR 700 million from the 55 beneficiaries listed in Annex 1 of its decision.
On 14 February 2019, the General Court annulled the Commission’s decision, considering that the Commission wrongly concluded that the excess profit exemption system constituted an "aid scheme" within the meaning of Article 1(d) of Council Regulation 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 TFEU.
The Court first recalled the three conditions for a state aid to be regarded as an "aid scheme": 1) the essential elements of the aid scheme must emerge from the provisions identified by the Commission as the basis for the scheme, 2) there is no margin of appreciation for the national authorities regarding these essential elements, meaning that no implementing measures are required, and 3) the basis acts must define the beneficiaries in a general and abstract manner.
Then the Court considered that none of these conditions was fulfilled because: 1) some essential elements, such as the two-step methodology for calculating the excess profit or the requirement of investments, creation of jobs and centralization or increase of activities in Belgium did not appear in the basis acts, 2) when issuing an advance ruling, the tax authorities carried out a qualitative and quantitative case-by-case assessment in the light of documents provided by the entity concerned, which means that they enjoyed a genuine margin of appreciation, and 3) further implementing measures had to be taken in order to define which companies fulfilled the required conditions and could therefore obtain an advance ruling.
In the absence of an "aid scheme", the Commission should have therefore carried out an individual analysis of each of the alleged aid granted to the 55 beneficiaries. If the Commission decides to re-open the case, this is what it will have to do.
This article was published in the Competition Law Newsletter of March 2019. Another article in this newsletter: