By Dragos Dancau, Group Tax Manager – Transfer Pricing, Ericsson
On January 25, 2022, the European Court of Justice made public its judgment in the case Commission v European Food SA and Others.
It ruled that the European Commission had competence to examine under state aid rules the compensation Romania made following an arbitral award linked to the Sweden-Romania bilateral investment treaty. The compensation was made after Romania adhered to the European Union, with the Sweden-Romania bilateral investment treaty being in force before the country’s adherence to the European Union. Based on this, the European Court of Justice referred the case back to the General Court of the European Union, which previously held the opposite position.
The European Court of Justice did not rule if the compensation as such can be seen as state aid or not – it just ruled on the European Commission’s competence.
Separately, on February 9, 2022, the European Commission referred the United Kingdom to the European Court of Justice because on February 19, 2020 the UK Supreme Court allowed enforcement of the arbitral award despite the European Commission’s previous decision finding that the compensation infringed on EU state aid rules.
The background
In 2002 Sweden and Romania signed a bilateral investment treaty aiming for the fair and equitable treatment of the investments made by investors of the other contracting state. An arbitral tribunal was to settle disputes between investors and contracting states.
By the time of the bilateral investment treaty, Romania had in force certain tax incentives granting investors in disadvantaged regions (who had obtained permanent investor certificates), a series of tax benefits, such as an exemption from customs duties and value added tax for machinery, reimbursement of customs duties for raw materials, and an exemption from the payment of profit tax. These benefits applied for as long as the relevant area was designated a disadvantaged region.
As of the year 2000, certain Swedish citizens residing in Romania, and their companies, started to invest in a disadvantaged region deemed as such for 10 years, beginning in 1999.
In 2005, Romania then repealed these tax incentive schemes following its negotiations to enter the European Union. As a result, the Swedish citizens residing in Romania looked for compensation for the termination of the tax incentives before the 10-year initial period, under the bilateral investment treaty. The arbitral tribunal in 2013 then awarded the investors damages of around EUR 180 million in compensation from the Romanian state (actually about EUR 395 million as of 2019 with added interest and penalties).
In 2015, the European Commission adopted a decision finding that Romania’s implementation of the arbitral award constituted unlawful and incompatible state aid because it entailed the payment of compensation for forgone state aid. In particular, the Commission found that by paying the compensation awarded to the claimants, Romania would grant them advantages equivalent to those provided for by the incompatible repealed aid scheme. The Commission’s decision prohibited Romania from paying out any compensation under the arbitral award and it required Romania to recover any amount already paid.
The investors went to enforce the arbitral award recognition in the United Kingdom, which, after several steps, was granted by the UK Supreme Court in February 2019. They also challenged the European Commission’s decision before the General Court of the European Union, which, in turn, favored them in June 2019. Thus, the General Court of the European Union agreed with the claimants and annulled the previous decision, finding that the European Commission was not competent to examine, under state aid rules, the compensation for damages due to premature withdrawal of the tax incentives and that the compensation was not state aid.
European Court of Justice decision
In discrepancy with the initial position of the General Court of the European Union, the European Court of Justice ruled in favor of the Commission’s competence to adopt the state aid decision, referring the case back to the General Court.
It reasoned that it was only at the conclusion of the arbitral award date, in 2013 (when Romania was already a member of the European Union), that the investors were able to obtain actual compensation, even if the award was intended to compensate for damages suffered before Romania’s accession to the European Union. As such, the discussion should not be related just to a period before Romania’s accession to the European Union. In fact, it was only upon the conclusion of that arbitration procedure that the investors were able to obtain actual payment of compensation in a quantifiable value.
The actual question of whether the compensation should be seen as state aid or not was outside of the case at hand presented to the European Court of Justice.
As stated, the European Commission has now decided in February 2022 to refer the United Kingdom to the Court of Justice of the European Union in relation to a judgment of its Supreme Court of February 19, 2020, allowing enforcement of an arbitral award ordering Romania to pay compensation to investors, despite a Commission decision having found that the compensation infringed EU state aid rules.
Lessons learned
Even if the case seems far from over, some insights can already be observed, at least from a tax perspective.
First, because of interest and penalties, the amounts under dispute have been rising significantly. In fact, it is not only a one-sided problem with Romania potentially having to pay an increased amount. Because Romania paid part of the awarded amount by offsetting it against taxes the investor companies ’owed it, this may result in a significant hit at the end of the day for their operations.
Second, the case highlights the complexity of dealing with the interaction between European Union state aid rules, tax incentives schemes, and bilateral investment treaties. The complexity is enhanced by the involvement of the UK Supreme Court, now with the United Kingdom being outside of the European Union.
Third, it highlights the path used by some investors to solve tax or tax-related disputes by reference to bilateral investment treaties. Even though the details are specific, similar to other cases around the world, some of the Romanian state companies had their accounts seized until payment was made under the arbitration award.
Finally, it emphasizes the significant tool that the European Commission has under the sphere of state aid rules and its continuous aim of employing it in a wide range of cases.
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Dragos Dancau, Group Tax Manager – Transfer Pricing, Ericsson
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