Monday, 15 June 2015

Fiscal State Aid in the EU


30 second take-away:

1. State aid rules are there to prevent unfair competition in the EU

2. In certain instances, if a tax authority gives a particular advantage, benefit or concession to an individual taxpayer, that can be unlawful state aid.  

3. You can expect there to be significant changes in preferential tax schemes for intellectual property in the EU, called “patent boxes”.


The European Commission defines State Aid as:

- any aid granted by a member state or using state resources 
- in any form at all
- that distorts or threatens to distort competition 
- favours certain undertakings or the production of certain goods
- affects trade between member states 
- becomes incompatible with the internal market.

Traditionally, the European Commission has looked at direct funding of projects.  One recent example might be Hinkley power station in the UK. The project needed the European Commission’s approval before the government could provide any funds.

More recently, the Commission has used State Aid law to review agreements between revenue authorities and multinationals. Ireland and Luxembourg have been particularly under the spotlight. They are accused of providing State Aid to Apple and Amazon, through forgone tax revenues.   

Draft Notice on State Aid referring to Article 107(1) The Functioning of the European Union

In 2014, The European Commission issued a Draft Notice on State Aid relating to Article 107(1) TFEU. 

In that, the Commission made clear when member states could give State Aid to individuals and organisations. 

The important sections are:

-  the existence of an undertaking 

This part clarifies who the recipient of State Aid is. In other words, the “undertaking” is an entity that carries out an economic activity.  

Here are certain cases where the Commission would not consider you recipient of State Aid:

* If you hold shares, even a majority shareholder in such an undertaking
* If the State supplies public goods and services - in particular Health, Education, Research and Infrastructure
* If the State administers Solidarity schemes. These relate to welfare and social security contributions.

-  the imputability of the measure to the State

This explains how a State grants a benefit to an undertaking. For example, it could be direct funding from a regional development agency to a business.  

- its financing through State resources

Alternatively, this could include indirect use of state’s resources. You might have state aid if a public education authority provides free start up advice for new businesses or social enterprises.
- the grant of an advantage

This is when an undertaking receives an economic benefit outside of normal market conditions.  For example, you have a private train operator that receives a state subsidy to compensate for regulated ticket prices.  Because the private train operator does not control the ticket pricing policy, it can receive this subsidy and it would not be against EU State Aid rules.  

- the selectivity of the measure

In this part, if a State provides support and it favours only certain companies in a business sector, that would be unlawful  This section also addresses Fiscal State Aid.  I will discuss this more detail later.  

- its potential effect on competition and trade within the Union.

Governments must ensure that if they provide state assistance, all undertakings in the Common Market operate on an equal footing. 


The Draft Notice highlights nine particular areas which give rise to State Aid under EU legislation:

1. Cooperative societies
2. Undertakings for Collective Investment 
3. Tax amnesties 
4. Tax settlements 
5. Administrative tax rulings 
6. Depreciation/amortisation rules 
7. Flat-rate tax regime for specific activities 
8. Anti-abuse rules 
9. Excise duties

From that, we conclude that Fiscal State Aid is when a government establishes a tax scheme or relief. By doing this, it gives a particular advantage or concession to an individual taxpayer.  


The Draft Notice does not cover every single tax measure that EU member states provide.  However, it does give general guidance in paragraph 157:

“Member States are free to decide on the economic policy which they consider most appropriate and, in particular, to spread the tax burden as they see fit across the various factors of production. Nonetheless, Member States must exercise this competence consistently with Union law.”

It refers to the case C-182/08 of Glaxo vs Munich tax authority at the European Court of Justice. German law had set a limit on a non-resident shareholder’s right to deduct a loss in value of shares.  

The court ruled that German tax law was not against the principle of free movement of capital and freedom of establishment. 

While this case law is useful, it doesn't help when you consider specific tax relief schemes.  In fact, if a government wants to introduce any new tax measures, it now requires permission from the European Commission. The approval process can take up to 2 years. 

For existing schemes, the Commission has to notify the member state. The member state replies and if the Commission does not accept the findings, then the Commission will begin a formal investigation procedure.

If State Aid is judged unlawful, then the recipients must repay all the tax assistance received with interest. 


In 2008, the Commission wrote to the Spanish Department of Foreign Affairs about the country’s Patent Box scheme.  The Commission took no further action.  This was because the Spanish tax authority provided information that the tax incentive was:

- open to all Spanish corporate taxpayers
- beneficial to the economy since businesses could spend more money on research
- not a selective advantage
- working alongside General Anti-Abuse Provisions.

As a result, the Spanish Patent Box scheme did not constitute Fiscal State Aid.

However, in December 2013, ECOFIN, the body of economic and finance ministers asked the EU Code of Conduct Group for Business Taxation to look into the patent box schemes in EU states. 

The issue was whether the schemes were consistently equal across member states. 

The Group reported back in December 2014. They considered whether the Intellectual Property schemes in the EU went against criterion 3 of the Code of Conduct. 

That is, was the scheme a tax incentive which produced no real economic activity or substantial economic presence?  

To assess this, they adopted a “modified nexus approach” in line with BEPS action 5 - Counter harmful tax practices. Germany and the UK proposed this approach in November 2013.  

In effect, multinationals will use the costs to create the Intellectual Property to define the extent of income generated from that Intellectual Property.  

The Group found that the member states’ IP schemes did not comply with this approach. They recommended that:

- member states should modify their patent box schemes
- close their existing schemes to new entrants by 30 June 2016
- taxpayers in current schemes should move over to the new schemes by 31 June 2021.


If I could give some advice to the Commission, that would be:

- Devolve the power to EU member states to approve State Aid for new schemes. 

The current system is clearly taking too long. Unemployment is still high in EU member states. They need to introduce tax incentives now for entrepreneurs to create jobs.  The Commission could still monitor how member states approve new schemes through a committee.  

- If existing schemes are judged against State Aid rules, limit any tax repayments to 3 years only.  

Taxpayers have asked for rulings from tax authorities before they planned their tax activities.  At the time, they believed that these schemes were legitimate.
Companies do need legal certainty.  And three years would also be consistent with assessment periods for tax audits in the EU.

Sure, you could improve the way the EU looks into cases of state aid.  In the end, I believe the Commission is right to use State Aid rules to investigate preferential regimes and address aggressive tax avoidance.  


News - State Aid Approval for UK power plant
Tax Policy Bulletin - PWC - EU Fiscal State aid – a briefing document - 15 October 2014

COMMUNICATION FROM THE COMMISSION - Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU

Competition: State aid procedures (EU) -


11124/14 PRESSE 352 PR CO 36 - PRESS RELEASE 3324th Council meeting Economic and Financial Affairs Luxembourg, 20 June 2014

16100/14 LIMITE FISC 216 ECOFIN 1105 REPORT - 28 November 2014 - Code of Conduct (Business Taxation) Draft Report to the Council

CONCLUSIONS OF THE ECOFIN COUNCIL MEETING on 1 December 1997 concerning taxation policy

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