UK and International Tax news

CJEU Sets Aside General Court Decision In State Aid Case

Thursday 10th November 2022

The CJEU has set aside the 2019 judgment of the General Court in the joined cases of Luxembourg and Fiat Chrysler Finance Europe v Commission and annulled the 2015 decision of the Commission on State aid granted by Luxembourg to Fiat.

In 2015, following State aid investigations into Fiat, formerly Fiat Finance and Trade Ltd [FFT], the EC decided that Luxembourg had granted selective tax advantages to the company which were illegal under EU state aid rules. The EC ordered Luxembourg to recover the unpaid tax from FFT in order to remove the unfair competitive advantage it had enjoyed and to restore equal treatment with other companies in similar situations.

Luxembourg and FFT each brought actions before the EU General Court for annulment of the EC decision, and in particular criticised the EC for:

  • having adopted an analysis leading to tax harmonisation in disguise;
  • having found that the tax ruling at issue conferred an advantage, notably on the ground that it did not comply with the arm’s length principle, contrary to Article107 TFEU and to the obligation to state reasons and in breach of the principles of legal certainty and protection of legitimate expectations;
  • having found that the advantage was selective, contrary to Art 107 TFEU;
  • having found that the measure restricted competition and distorted trade between Member States, contrary to Article107 TFEU and to the obligation to state reasons.

The General Court dismissed the actions and confirmed the validity of the EC decision and specifically rejected the contention that it was engaged in tax harmonisation but exercised the power conferred on it by EU law by verifying that the tax ruling conferred on its beneficiary an advantage as compared to ‘normal taxation’.

The Court also confirmed that the EC was entitled to apply the arm’s length principle to ascertain whether the ruling under review granted an advantage to its beneficiary. It had examined whether the adjustments to the taxable base endorsed by the ruling were justified and concluded that the amount of capital to be remunerated at the level of the Luxembourg subsidiary had been underestimated, thereby giving a tax advantage to the group.

The Court endorsed EC findings that the contested ruling gave a selective and unjustified advantage to the taxpayer, likely to distort competition within the EU.

On appeal, the CJEU held that the classification of a national measure as State aid required four conditions to be met in determining whether there has been a selective advantage, being

  • there must be an intervention by the State or through State resources,
  • the intervention must be liable to affect trade between Member States,
  • it must confer a selective advantage on the beneficiary, and
  • it must distort or threaten to distort competition.

As a first step, it was necessary to identify the reference system being the ‘normal’ tax system applicable in the Member State concerned. Secondly, it was necessary to demonstrate that the tax measure at issue was a derogation from that reference system in that it differentiates between operators in a comparable factual and legal position.

In assessing the selective nature of a tax measure, it was necessary that the common tax regime or the reference system applicable in the Member State concerned be correctly identified in the Commission’s decision and examined by the court hearing a dispute concerning that identification. In that regard, the CJEU concluded that, except for areas where EU tax law had been harmonised, only the national law applicable in the Member State concerned should be taken into account in order to identify the reference system for direct taxation.

The CJEU held that General Court was wrong in applying an arm’s length principle different from that defined by Luxembourg law.  By accepting that the Commission may rely on rules which were not part of Luxembourg law, the General Court infringed the provisions of the FEU Treaty relating to the adoption by the EU of measures for the approximation of Member State legislation relating to direct taxation.

The CJEU concluded that the grounds of the judgment under appeal relating to the examination of the Commission’s principal line of reasoning, erred by not taking into account the arm’s length principle as provided for in Article 164(3) of the Luxembourg Tax Code and specified in the related Circular No 164/2, when defining the reference system as part of the examination carried out under Article 107(1) TFEU for the purposes of determining whether the tax ruling at issue confers a selective advantage on its beneficiary.

The CJEU set aside the judgment under appeal and annulled the decision in so far as the error committed by the Commission in determining the rules actually applicable under the relevant national law and in identifying the ‘normal’ taxation in the light of which the tax ruling at issue had to be assessed invalidated the entirety of the reasoning relating to the existence of an advantage.

This CJEU judgment is significant given it is a final judgment and it could weaken the Commission’s position in other pending cases [Apple, Amazon, and Engie] as well as ongoing investigations [Huhtamaki, IKEA and Nike].

For more detail on the above, please contact Keith Rushen on 0207 486 2378.

 

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