Updates on the EU State Aid Control System for Fiscal Measures

A. General understanding of the reference tax regime

In this first step, the Commission or the National Court (as another State aid interpreter in domestic disputes involving Article 107(1) of the TFEU) should identify the reference tax regime.41 This first step establishes a benchmark for the objective and logic of the tax regime, allowing for an analysis of the circle of comparable taxpayers in the second step.42 The reference regime gives logic to the tax imposition and provides information about how the tax operates.43 As a result, it defines the logic of tax burden distribution, the identification of taxpayers, and other key aspects of tax imposition. An error in the reference regime assessment might undermine a State aid assessment entirely.44 Below, I raise some questions that could be helpful for this analysis.

1. What is the tax object and taxable event?

2. How is the tax formulated in terms of tax rates, tax base, and tax benefits applicable (e.g., exemptions and rebates)?

3. Who is the measure taxing? Identify the taxpayers.

4. Why are taxpayers being taxed this way? Identify the objective of the tax, including the objective of the tax benefits that give logic to the imposition.

These questions help in finding the reference regime. In the following section (B), I answer them using the Swedish income tax law as an example to clarify the nuances of this first step. Note that this is not a State aid analysis per se.

B. Example of a reference regime: The Swedish Income Tax Regime

The Swedish Income Tax Regime is determined in Law 1999:1229 (hereafter only ‘IL’). Chapter 1 of the IL defines what the law is about, i.e., tax on income (§ 1). It establishes which income individuals and legal persons must pay tax on. Hence, §§ 3–4 gives a partial answer to question (a) since more details of what the IL is taxing are found in other parts of that law.

How the tax on different incomes should be accounted for in the case of individuals are set out in Chapter 1, respectively in §§ 5–6, 8–11, 13, Chapter 3, Chapter 65, and others Chapters, and for corporate tax in Chapter 1 §§ 7–11, 15, Chapter 6, Chapter 65, and other Chapters. For instance, Chapter 8 establishes which income is tax-free. Chapter 9 determines which expenses are not deductible. Chapters 10 to 12 determine specific details of the tax regime concerning the income from services, while Chapters 13 to 40 determine specific details of the tax regime concerning the income from business activities. Income on capital is particularly governed by Chapters 41 to 55. Different types of tax benefits are mostly governed by Chapters 62 to 64 and 67. Consequently, a general answer to question (b) concerning the IL lies in the rules found in those mentioned Chapters.

The answer to question (c), i.e., who the IL is taxing are the taxpayers identified in different places of that law. Chapters 3, 4, 5–7 define different taxpayers covered by the IL.

The last question (d) can be trickier, i.e., why the IL is taxing this way. The objectives of the IL may not be necessarily found explicitly in its provisions. It could be more clearly defined in the preparatory work of the IL or implicit in the tax choice (a tax on income to generate revenues for the State). The logic of the tax regime (i.e., the why) is the State aid question. It is about what the tax regime is versus what it ought to be based on the objectives of the tax measure.

Consider a hypothetical situation where the IL excludes deceased estates from its tax imposition, meaning it does not reference them at all. From a tax law perspective grounded in the principle of legality, this omission could imply that deceased estates are lawfully outside the scope of the IL and, therefore, are not subject to income tax. However, from a State aid perspective, the EU Commission might view the IL as too narrow in scope.45 The Commission could interpret the IL’s inherent objectives—such as those outlined in preparatory works—to suggest that deceased estates should logically fall within its tax imposition. In such a case, the reference regime is not simply identified but re-determined based on what the tax law should encompass rather than what it currently does.46 That said, unless deceased estates qualify as economic activities, they will remain outside the scope of Article 107(1) of the TFEU. Thus, the first step involves not only determining the reference regime based on the principle of legality in tax law but also analyzing what the regime should ideally include, considering the law’s underlying objectives.

C. De facto reference regime

As the example above elucidates, while identifying the de jure reference regime is relatively straightforward and grounded in the principle of legality, determining the de facto reference regime is more difficult. A typical example arises when the tax law appears objective from a formal perspective, but in practice, the combination of rules results in a selective advantageous tax treatment that contradicts the law’s intended objectives–this was evident in the Gibraltar case, which benchmarked this view.47

Similarly, a tax regime with an overly narrow scope may seem objective upon formal analysis, yet in practice, it excludes taxpayers who should logically fall within its scope.48 In both instances, the de facto reference regime should align proportionally with the fundamental objectives of the law, meaning those excluded taxpayers should have been formally included in the tax imposition. Note that such conclusions about the reference regime only arise from interpreting the rule on State aid (i.e., Article 107(1) of the TFEU) in the context of national tax law.

D. Geographic reference regime

It could be that the reference tax regime is delimited by a geographic area–jurisdiction. A typical example is when regions of MS have total discretion on the issue being taxed (e.g., a state within a federal MS) or an overseas territory of a MS. In this case, the geographic tax law could be the reference regime instead of the one of the MS concerned, provided it fulfills three conditions, the so-called three-autonomy test developed in the Azores ruling.49 They are: (1) institutional, (2) procedural, and (3) financial autonomies. In my thesis, I explained the following view about each autonomy test:

“Institutional autonomy is the legal circumstance where the tax legislators have autonomous tax power, defined by the laws of the Member State in question, which grants them total discretion to decide politically, legally, economically, and administratively the design features of the regional tax law.

“Procedural autonomy” is the circumstance in which the central government does not have the power, i.e., legitimacy, to intervene in the tax directly.

Financial autonomy is the circumstance where the economic situation of the undertakings of the region means they cannot receive public benefits (whether tax exemptions or subsidies) from other areas, or from the central government of the Member State.”50

Hence, if the regional tax law fulfills these three levels, it is the reference tax regime.

E. The Objective and Logic of the Reference Tax Regime Is Found in the MS’s System

The Court of Justice’s latest rulings limited the Commission’s discretion in assessing the reference regime based on the previous section discussion (about the determination of a de facto reference regime). The Commission must make an objective assessment of the MS’s measure in question and start from the reference regime appointed by that MS,51 and base its assessment on the laws of the MS concerned.52 The Commission does not have the discretion to question the choice of instrument (e.g., a turnover tax) and its features (e.g., progressive rates) of the MS based on a different logic than that found in the tax system of the MS concerned. For instance, the fact that other MS have turnover taxes on a flat rate cannot be questioned by the Commission because such tax choices fall under the MS’ tax discretion.53 Consequently, MS tax systems are not comparable for assessing the selective advantage condition.

Only the laws of the MS under scrutiny are relevant for determining the reference regime. The Commission can only disregard the MS’s appointed reference regime if its practices, i.e., national case law and tax administration’s practice, show a different interpretation than the one informed by that MS.54 Consequently, this is an interpretation and application of the principle of legality within the State aid law, where it is only allowed to discuss a de facto reference regime when the objective of the tax regime and the practice of the MS concerned supports this view.55

A. General understanding

In this second step, the State aid interpreter must find that the tax advantage is conferred selectively benefiting certain taxpayers or tax objects while excluding others (explicitly or implicitly) who are in a comparable factual and legal situation.56 If the advantage is considered general (not selective), then the measure is deemed general and, consequently, does not qualify as State aid. However, before any selectivity effect can be assessed, the existence of a tax advantage must first be established. Note, however, that if the advantage sum is not over 300.000 euros per single undertaking and for up to three years, it is the case to assess whether the De Minimis Regulation applies, thereby automatically allowing the aid imposition.57

The analysis of advantages varies between direct and indirect taxation. Indirect taxes typically grant an advantage by either excluding certain undertakings from the tax scope or by applying some normal rate payment reduction (e.g., partial or full exemption) or other benefits (e.g., deferral, credit, etc.).58

In the context of direct taxes, especially for advantages not granted through typical tax reductions (i.e., through a tax deduction or credit), the analysis of the advantage becomes more complex, particularly when it involves a combination of rules that grants a de facto selective advantage.59 In recent case law, particularly regarding State aid granted to multinationals through advance tax rulings related to corporate income tax, the analysis of the advantage effect became extremely difficult because it requires an objective analysis of a combination of complex rules that lead to a de facto reduction of the corporate tax base.60 Such an analysis (concerning what the interpretation of such complex rules is or ought to be) is constricted to the MS laws and praxis.61

The identification of selective treatment requires a difficult examination of the principles of equality and proportionality,62 aiming to identify instances where comparable taxpayers are not taxed in the same way.63 In my view, answering one of the following questions can be particularly helpful in carrying out this part of the analysis:

1. Who should be the logical taxpayers of the normal tax burden and taxpayers-beneficiaries of the lower tax burden, based on the objective of the reference regime? This question is relevant in case the advantage is not granted through a combination of rules.

2. Based on the Member State’s reference regime and practice concerning the interpretation of those rules, is it possible to find a de facto selective treatment? This question is relevant in case the advantage is granted through a combination of rules.

A straightforward example of how the objective of the tax influences such types of taxpayers’ choices is the case of energy taxes. An energy tax commonly has a tax base measured in kilowatt-hour (kWh) of energy consumed. Its objective is to tax the consumption of electricity. From this perspective, any energy consumer is a taxpayer. Individuals and businesses consume energy for different purposes. They might be regarded as non-comparable by legislators since the purpose of their energy use differs, without raising State aid issues (individuals and businesses do not compete). However, differentiated tax treatment among businesses cannot escape the State aid classification as energy consumption is indifferent to who consumes energy per kWh (the tax base).64

Despite this, from a State aid law perspective, the energy tax cannot create differentiated values among economic activities and thereby have different sectors or industries paying a different price for the kWh of energy consumed. Article 107(1) of the TFEU does not cover individuals and households, only businesses of any kind, although an autonomous service provider individual can be an undertaking through that provision.65 Hence, it protects the functioning of the internal market from anticompetitive or protectionist measures affecting economic activities comparable based on the logic of the tax under scrutiny. If the energy tax would grant exemptions, reductions, and any other type of tax benefit to specific economic activities, it is likely State aid. However, if it reduces the tax burden based on the energy source because of their different climate impact, then this conclusion could differ, depending on the EU law on the subject, since such reduction would be aiming to protect the environment.66

Without extending the discussion, the objectives of the tax law and the MS’s interpretation of the reference regime’s objectives are critical to determining who is comparable and should be paying equal levels of tax, thereby assessing possible breach of the principle of equality from an EU law perspective.67

Unlike the free movement provisions and Article 110 of the TFEU, the principle of proportionality is not a legal mechanism to justify when the measure breaches the principle of equality. In the interpretation of Article 107(1) of the TFEU, the principle of proportionality is a balancing between the measure’s objectives and the taxpayers’ tax treatment. Consequently, the principle of proportionality functions as a coherence test of the breach or respect to the principle of equality.68 It serves to assess whether the measure grants a selective advantageous tax treatment in the first place. Together, the principles of equality and proportionality establish the logic and coherence of the tax, particularly how the tax burden is distributed among taxpayers based on the objective it pursues.69

B. The selectivity of differentiated rates (e.g., progressive or two flat rates)

Since MS have the discretion to choose the fiscal instruments they deem appropriate to address the objectives of their taxes–– including the tax features and instrumental aspects–– assessing the selectivity of differentiated rates can be challenging, particularly when their discretion has not been limited by EU law.70 Progressive rates and two different flat rates are not advantages per Article 107(1) of the TFEU unless they are granted selectively, i.e., discriminatorily. In this case of selectivity, the objective (aim) of the tax cannot always justify the thresholds that objectively determine the imposition of lower or higher rates.71

For instance, a flight tax on passengers should not present differentiated tax rates for those flying to different destinations within the EU if it only aims to raise revenues.72 This logic would change if the tax was imposed with the main objective of protecting the environment by taxing emissions generated by flights that contribute to climate change. In this case, progressive rates would be more logical and coherent with that objective than a flat rate, which would not internalize the heavier emissions longer destinations flights reproduce.73

C. Selectivity of tax benefits (e.g., exemptions)

Another common feature of tax systems is the provision of tax benefits. Deductions, reductions, exemptions, deferrals, credits, rebates, and other types of tax benefits are a normal part of tax systems, a priori, not State aid. However, the State aid interpreter must find that there is a selective treatment for the granting of such tax benefits to classify the fiscal measure as State aid.

In this context, even two sectors that do not directly compete could be comparable undertakings. In the case of energy taxes, all business activities are comparable undertakings based on the objective of taxing energy consumption.74 Consequently, if industries of one sector are relieved from the normal tax burden of energy taxation, this relief is selective. Moreover, if only one undertaking receives the tax benefits, it also suffices to meet the condition.75

D. Selectivity in corporate income taxation through advance tax rulings

After the Court of Justice issued several judgments on advance tax rulings decided by tax authorities for multinational companies—rulings which the Commission perceived as State aid but were overturned by the Court—two key reflections are pertinent to this discussion.76 First, the fact that advance tax rulings are issued by tax authorities on an individual basis—specifically to the company seeking such decisions, providing legal certainty and predictability regarding its corporate income tax in a particular country—does not necessarily mean they constitute individual aid.77 Second, unless the tax law was formally and clearly written to benefit specific economic activities, the tax rulings interpreting them into a concrete case should not be considered a case of individual aid. The Commission must show that the tax ruling grants a lower tax burden than other companies received in a similar legal and factual situation. This is a clear conclusion after the Fiat Group and Engie Group tax rulings disputed as State aid.78

The Commission spurred the discussion and, thereby, the construction of general parameters to classifying tax rulings as State aid, even though in the Fiat and Engie cases, the Commission failed to prove the selective tax treatment of these measures. The lessons I draw from these cases is that the Commission must request the MS concerned to provide information about its administrative practice (other tax rulings, guidelines, etc.) and case law on the interpretation of the relevant laws upon which the tax ruling is based.79 It is likely that the Commission must request the MS to provide other tax rulings to analyze whether the relevant tax laws were interpreted differently, incoherently and disproportionately, thereby granting a selective tax treatment.

E. Selective tax treatment when not applying anti-abuse rules in tax law

In the Engie case, the question of whether failing to apply an anti-abuse law could constitute State aid was addressed for the first time.80 The Court of Justice did not dismiss the possibility that omitting an anti-abuse provision in a corporate income tax ruling could result in a selectively advantageous tax treatment.81 However, due to the Commission’s incorrect conclusion about the reference tax regime, the legal basis for its selectivity analysis in this part was flawed and, therefore, could not be validated by the Court of Justice (as the General Court wrongfully did).82 Nonetheless, it is a benefit to not have anti-abuse rules applied on a concrete case, but in this example, like the previous one discussed in section D, the Commission would need to see in the MS practice that it deviated from its usual interpretation, thereby granting a selective advantageous tax treatment.83 The same rationale also applies to other similar rules in tax law, such as Controlled Foreign Corporation (‘CFC’) rules.84