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French EIG Tax Scheme Is State Aid, Says EC

by Ulrika Lomas,, Brussels

21 December 2006

Following an in-depth investigation opened in December 2004, the European Commission announced on Wednesday that it has come to the conclusion that the French tax scheme for financing assets leased by an economic interest grouping (EIG) constitutes state aid within the meaning of the EC Treaty’s rules on such aid.

The EC argued that the scheme, which has mainly benefited the maritime transport sector, constitutes state aid owing to the selective advantage it confers on certain sectors and to the discretionary nature of its conditions of grant.

It has therefore stated that the scheme is incompatible with the common market, with the exception of the aid to facilitate the development of rail transport (Article 87(3)(c) of the Treaty) and of such other aid measures as may be compatible under sectoral or regional rules.

For reasons of legal certainty, the recovery of the unlawful, incompatible aid is limited to aid granted since the decision to open the formal investigation procedure was published. France must now amend the fiscal EIG scheme to bring it into line with the state aid rules.

Under French tax rules, the tax deductible depreciation of assets leased by an economic interest grouping (EIG) – a fiscally transparent structure - may not exceed the amount received by way of rent. Article 39 CA of the French tax code, however, provides for an exception to this rule, subject to prior ministerial approval, in that operations involving assets depreciable over a period of more than eight years are not subject to the above restriction.

Besides removal of the depreciation ceiling, the operations in question also benefit from a one-point increase in the depreciation coefficient normally applicable to the asset concerned and, where appropriate, from exemption from capital gains tax in the event of the asset being sold by the EIG to its user.

In a statement, the EC announced that:

"The Commission considers that these advantages clearly favour certain economic sectors, including primarily that of transport, in which assets depreciable over more than eight years are used (ships, aircraft, trains, etc.)."

"An analysis of the parliamentary proceedings leading up to the tax scheme’s adoption bears out this assessment of the selective nature of the scheme. The French authorities clearly intended to promote maritime investment, following the example of the “quirat”, or share, scheme previously in force. The conditions of grant of ministerial approval were, moreover, discretionary."

"Apart from the users of the assets concerned, the members of the EIG - financial institutions for the most part – also benefit from the aid at issue in that they receive a share of the benefit of the tax advantages."

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