CJEU confirms Spanish tax measure for goodwill is unlawful state aid

By Ana Garutti, Senior Tax Advisor, Orange Spain, Madrid

The Court of Justice of the European Union (CJEU) dealt a new blow to Spain in an October 6 judgment that the country’s aid for investments in foreign entities, through a measure allowing amortization of goodwill, is discriminatory.

In the judgment, which consolidated several cases, the CJEU ruled that the aid is selective aid, within the meaning of Article 107 of the Treaty on the Functioning of the European Union, and it is the aid’s selective nature, according to the Court, that renders it unlawful.

This is undoubtedly one of the issues that have generated the most interest at the European level in the last decade. This is true not just for the entities that have participated in this judicial process (Banco Santander, Axa, or Prosegur), but also for other entities that have benefited from this tax measure and for the several other European countries involved.

But what is the origin of this legal battle? The Spanish government had introduced a measure in the corporate tax legislation whereby, when an investment of at least 5% of the capital is made in a foreign company and remains in that position for more than one year, the goodwill resulting from that investment may be deductible over 20 years as amortization.

In 2009, the European Commission ruled that this measure was unlawful for foreign entities resident in the European Union (the first contested decision). In 2011, it extended this illegality to investments in foreign companies not resident in the European Union (the second contested decision). The second contested decision also ordered the repayment of sums received by the companies as part of the aid since December 2007.

In 2016, the European Court of Justice annulled these two judgments (joined cases C 20/15 P and C 21/15 P), asking the General Court to prove the “selectivity” of these measures, which is a prerequisite for defining the bonus as state aid. After a further analysis by the General Court, which had already ruled on this matter in 2016, it confirmed the Commission’s decision in 2018.

A number of stakeholders and the Spanish government itself brought appeals on the grounds that the selectivity criterion had been misinterpreted. 

The CJEU has now confirmed that the aid was selective in that undertakings with investments in nonresident entities would be in a “legal and factual” situation different from those which had made similar investments in resident entities.

There remains a point not yet settled in the judgment relating to state aid resulting from indirect takeovers by foreign holding companies, for which we must await a third Commission decision.

—Ana Garutti is a Senior Tax Advisor with Orange Spain, Madrid.