By Davide Anghileri, University of Lausanne
The European Court of Justice (ECJ) on 25 July ruled that the Spanish tax lease system constitutes State aid in case C-128/16 P (Commission v Spain and others), overturning a ruling of the EU General Court.
The Spanish tax lease system allowed maritime shipping companies to benefit from a 20–30 percent price reduction when purchasing ships constructed by Spanish shipyards, to the detriment of the shipyards of other Member States.
In 2013, the EU Commission declared the law partially incompatible with the internal market as three of the five fiscal measures provided by the system constituted illegal State aid to economic interest companies (EIGs) and their investors and because the law had been unlawfully implemented by Spain since 1 January 2002.
The Commission ordered the recovery of the aid from investors and did not permit them to transfer the burden of recovery to other persons.
In particular, the Spanish system worked on an ad hoc legal and financial structure organised by a bank, which acted as an intermediary between a maritime shipping company (buyer) and a shipyard (seller).
When a ship was sold, a leasing company and an EIG set up by the bank was interposed by the bank. Then, the bank sold to investors shares in the EIG which took a lease out on the ship from a leasing company as soon as construction began and in turn leased it to the shipping company under a bareboat charter.
The aim of the arrangement was to generate tax advantages for the investors in the EIG and to transfer part of those advantages (between 85 percent and 90 percent) to the maritime shipping company in the form of a rebate on the price of the vessel, the investors retaining the other advantages as a return on their investment (between 10 percent and 15 percent).
The aim of the arrangement was to generate tax advantages for the investors in the EIG and to transfer part of those advantages (between 85 percent and 90 percent) to the maritime shipping company in the form of a rebate on the price of the vessel, the investors retaining the other advantages as a return on their investment
The tax advantages are derived from five fiscal measures applicable to finance leases (accelerated depreciation and — with authorisation — early depreciation of certain goods), incentives to EIGs (fiscal transparency) and to maritime shipping activities (special regime of tonnage taxation).
The decision was appealed before the General Court. By its judgment of 17 December 2015, the General Court annulled the Commission’s decision. The EU Commission then applied to the Court of Justice to set aside the judgment of the General Court.
The European Court of Justice set aside the General Court’s judgment and hence the case was referred back to the General Court.
The ECJ’s opinion
The ECJ noted that the General Court concluded that the EIGs could not be the beneficiaries of State aid on the ground that, as a result of the tax transparency of those groupings, it was the investors, and not the EIGs, who had benefited from the tax and economic advantages resulting from those measures.
The ECJ pointed out that this conclusion incorrectly applied Article 107(1) TFEU on prohibited State aid and contradicted the finding in paragraph 116 of the General Court’s judgment that the EIGs had benefited from the three tax measures.
Those advantages favoured the activity of acquiring vessels through leasing contracts, in particular with a view to their bareboat chartering and subsequent resale, carried on by the EIGs, the ECJ said.
Thus, the ECJ stated that the General Court failed to take into account the case-law providing that the classification of a measure as ‘State aid’ cannot depend on the legal status of the undertakings concerned or the techniques used when it held that the EIGs could not be the beneficiaries of State aid solely because of their legal form and the relevant rules on the taxation of profits.
Additionally, the ECJ affirmed that the General Court’s analysis in its judgment is based on the incorrect premises that only the investors, and not the EIGs, could be regarded as the beneficiaries of the advantages arising from the tax measures at issue. Consequently, the condition relating to selectivity was incorrectly examined by reference to the investors, and not the EIGs.
Furthermore, the ECJ stated that the General Court committed an error of law in holding that the advantages obtained by the investors which participated in the STL operations could not be regarded as selective, since those operations were available, on the same terms, to any undertaking, without distinction, without ascertaining. In fact, the ECJ pointed out, the Commission had established that the tax measures at stake, by their practical effects, introduced differentiated treatment of operators, where the operators which benefited from the tax advantages and those which were excluded from it, were, in view of the objective pursued by that tax system, in a comparable factual and legal situation
Finally, the Court of Justice declared that, contrary to what the General Court concluded, the Commission’s decision is not vitiated by a failure to state reasons or by contradictory reasoning. Hence the decision of the General Court must be set aside.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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