EU State Aid and Tax Law: European Court finds that Spanish tax rules were not unlawful state aid because they did not give a “selective advantage”

Sullivan & Cromwell LLP - 2 December 2014

In two recent cases on fiscal state aid, the General Court of the European Union found that certain aspects of the Spanish tax system did not constitute “state aid” within the meaning of the Treaty on the Functioning of the European Union.  The General Court found that the European Commission had failed to show that the fiscal measures at issue gave rise to a “selective advantage” for a particular category of undertakings. Absent this element of selectivity, the particular Spanish tax rules did not constitute unlawful state aid, and the Commission had erred in characterising them as state aid.

Alleged state aid in relation to tax law and practice has hit the headlines several times in 2014, most notably in relation to advance tax rulings and transfer pricing. The Commission has opened investigations into advance tax rulings/advance pricing agreements obtained by Apple in Ireland; Starbucks in the Netherlands; and Fiat Finance and Trade and Amazon in Luxembourg. There is a natural tension between advantageous features of a tax system that have eligibility criteria and the EU state aid rules, which prohibit EU Member States from giving advantages financed by State resources that could distort competition.

The recent cases on the Spanish regime demonstrate that whether fiscal measures are “selective” is likely to be the key question in state aid investigations into tax measures. Moreover, the two cases show that it may be difficult for the Commission to establish the “selectivity” of fiscal measures that apply generally, rather than to specific goods or undertakings.