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Court Of First Instance Upholds Annulment Of Basque Tax Relief

by Lorys Charalambous, Tax-News.com, Cyprus

10 September 2009


In a September 9 statement, the European Court of First Instance delivered its ruling regarding tax relief granted by the territories Álava, Vizcaya and Guipúzcoa within the Basque region, upholding the European Commission’s decision that the measures were State aid incompatible with the common market.

Under Spanish legislation, the Territorios Históricos of Álava, Vizcaya and Guipúzcoa may, under certain conditions, have regional autonomy in organizing their respective tax systems with their territories.

In that context the Territorios Históricos adopted tax relief measures to benefit businesses, establishing a corporation tax exemption for certain newly established firms, a reduction in the tax base for corporation tax for newly established companies, and a tax credit of 45% of the amount of investments. The Commission held that those measures were State aid incompatible with the common market.

Having become aware, in 1996 and 1997, of the existence of the provisions establishing those tax measures, the Commission initiated a formal investigation procedure in 1999. By decisions of July 11, 2001, the Commission held that the tax credit measures and the reductions in the tax base were State aid incompatible with the common market. The Commission therefore instructed Spain to recover that aid from the beneficiaries. The Territorios Históricos of Álava, Vizcaya and Guipúzcoa and the Comunidad autónoma del País Vasco – Gobierno Vasco together with the Confederación Empresarial Vasca (Confebask) brought actions for the annulment of the six Commission decisions of July 11, 2001, or, failing that, for the annulment of the recovery measures that Spain was required to take.

Individual decisions by the Commission in relation to State aid, concerning the 45% tax credit and the reduction in the tax base for corporation tax, were the subject of judgments of the Court of First Instance on March 6, 2002. After appeals were brought before the Court of Justice against those judgments, proceedings in the present cases were stayed pending the outcome of the appeals. After the Court upheld those judgments of the Court of First Instance, the present proceedings were resumed.

In the most recent judgments, the Court of First Instance dismisses in their entirety the pleas in law relied upon by the applicants.

As regards the tax exemptions for certain newly-established firms, the Court of First Instance rejected the plea in law that those measures were existing aid which therefore could not be the subject of a decision to recover aid already paid but only, should the situation arise, of a decision of incompatibility producing effects for the future.

The Court of First Instance held that the applicants did not prove that there was any decision by the Commission that the measures at issue were not State aid when they came into force. Further, the applicants did not produce any decision whereby the Commission authorised the measures and considered them to be compatible with the common market.

Moreover, the Court of First Instance held that the Commission was correct to consider that the tax exemptions at issue, which free the beneficiary companies of charges which they would as a general rule have had to bear, constituted operating aid and could not be classified as investment or employment aid.

As regards the reductions in the tax base and the tax credits at issue, the Court of First Instance held that the Commission was correct to classify them as State aid prohibited by the EC Treaty.

Firstly, the Court of First Instance stated, the concept of aid embraces not only positive benefits, such as subsidies, but also measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, therefore, without being subsidies in the strict sense of the word, are similar in character and have the same effect.

Secondly, the CFI considered that, in the present case, the tax credit measures and the reductions in the tax base were such as to affect trade between Member States and to distort or threaten to distort competition.

Thirdly, the Court of First Instance considered that those tax measures amounted to a selective advantage, ‘in favour of certain undertakings’. The tax advantage of the tax credit was restricted to firms which had significant financial resources at their disposal, while the possible granting of a reduction in the tax base was limited to newly-established firms and, among them, to those with significant financial resources at their disposal, capable of making significant investments and generating substantial numbers of jobs.

Lastly, the Court of First Instance held that the tax credits and the reductions in the tax base cannot be held to be justified by the nature or overall structure of the tax system taken into consideration by the Commission.


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