02 Chief Stands Firm Over Deutsche Telekom Tax Challenge

by Ulrika Lomas, Tax-News.com, Brussels

17 November 2005

German telecommunications firm Deutsche Telekom is understood to be keen to go ahead with a challenge to Spanish tax law under the European Union's state aid rules, after claiming that Spain's Telefonica will be able to write off millions of euros in tax payments through its acquisition of the mobile phone group O2.

Deutsche Telekom recently stated that it is unhappy that favourable Spanish tax legislation has helped Telefonica to mount a massive GBP17.7 billion (EUR26.1 billion) cash bid for O2, therefore giving the firm an unfair competitive advantage.

Under Spanish tax law, Telefonica will be able to write off the goodwill involved in the deal against its own tax bill and according to Deutsche Telekom, which owns T-Mobile, this will allow Telefonica to reduce its tax payment to the Spanish government by EUR4 billion over the next decade.

European state aid rules prevent EU member states from giving certain companies or industries assistance with special tax breaks or subsidies. However, since the law applies across the board in Spain, it is thought unlikely that the takeover can be successfully challenged.

Peter Erskine, O2's chief executive, was quoted by the Guardian as commenting with regard to the deal that: "If that's the rule then Telefonica have played to that [strength] and that feels fine."

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