Commission Asks Italy To Recover EUR123mn Of Aid From Nine Privatised Banks

by Ulrika Lomas, for LawAndTax-News.com, Brussels

14 March 2008

The European Commission announced on Wednesday that it has closed its in-depth investigation under EC Treaty state aid rules into a provision of Italy’s 2004 Finance Law, which allowed former public-owned banks to release hidden capital gains matured during their privatisation by paying a nominal tax of 9% instead of the ordinary company tax of 37.25%.

The investigation, opened in May 2007, found that this tax scheme favoured a select group of Italian banks without objective justification under the tax system for company reorganisations in Italy.

To redress the distortion of competition caused by the unlawfully granted aid, the Italian Government has been asked to recover the aid from its beneficiaries.

On the basis of the circumstances of the case, the Commission has limited the recovery to the difference between the tax actually paid and the tax that the beneficiary banks would have had to pay, had they applied a general tax revaluation scheme provided for by the same Finance Law of 2004. The aid to recover is estimated to a total of EUR123mn among the nine beneficiaries.

Competition Commissioner Neelie Kroes explained that:

"When Member States set favourable tax rules for a select number of undertakings, they must be careful not to alter the level playing field between competitors. Illegal aid given to privatised banks must be recovered and returned to taxpayers."

Under Law 218/1990 on the privatization of the Italian banking system, a major reorganization of formerly state-owned banks took place in Italy in the 1990s. Article 2(26) of Law 350/2003 (Italy’s Finance Law for 2004) provided that hidden gains resulting from these privatizations, that had remained frozen as capital reserves, could be released by paying a 9% substitute tax on such gains, in lieu of the ordinary company tax of 37.25%.

This provided the banks concerned with an economic advantage, in particular by increasing their attractiveness and their economic value both for investors and corporate acquirers. Law 350/2003 also authorized the payment of the substitute tax in three instalments (50% in 2004, 25% in 2005 and 25% in 2006), without interest.

The Commission found that nine banking groups realigned the value of their assets to the underlying gains realized following the banking reorganisations, pursuant to the scheme. The global capital gains recognised amounted to more than EUR2bn.

The corresponding difference between the tax ordinarily payable and the tax actually paid, amounted to over EUR586m.

The Commission concluded that said difference provided an advantage in favour of these banks, which constitutes incompatible state aid. The Commission further found that the tax scheme was not justified by the principles on tax neutrality relating to company reorganizations.

Moreover, none of the exceptions invoked by Italy to gain state aid approval were applicable, as the tax scheme in review was evidently not aimed at promoting new business reorganizations, but solely at favouring a select number of banks resulting from prior reorganizations.

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