In a press release issued on 21 January (http://europa.eu/rapid/press-release_IP-16-124_en.htm) the Commission announced that it objected under the State aid rules to a provision of Dutch corporation tax law that exempted six named Dutch seaports, run by public undertakings, from tax. The measure was existing aid, so the decision simply ordered removal of the exemption.
The background to this may however cause some wider concerns about the position generally in relation to exemptions for public bodies from corporation tax (for example, s.984(1) of the Corporation Tax Act 2010, which baldly provides that “A local authority in the United Kingdom is not liable to corporation tax”).
The background is that the Commission started off by looking at a far more general exemption in Dutch law for public undertakings, and scored an initial victory by getting the Dutch Government to remove the exemption (except for the six ports – which the Commission finally had to deal with by decision). The previous Dutch law (the Wet Vpb) to which the Commission objected is described in the opening decision (SA.25338) as follows: –
(19) Public undertakings are subject to special corporate tax rules laid down in Articles 2(1), 2(3) and 2(7) of the Wet Vpb.[fn – see below].
(20) The Wet Vpb distinguishes between direct and indirect public undertakings. A direct public undertaking (“direct overheidsbedrijf”) forms part of a legal person governed by public law (“publiekrechtelijke rechtspersoon”). Examples of direct public undertakings are a division of a municipality that is active in real estate development (“gemeentelijk ontwikkelingsbedrijf”), a unit of the municipality that collects waste etc.
(21) An indirect public undertaking is a private law company (usually an NV, BV or stichting) that is under the control of a public institution. This is the case where
(a) the Dutch public institutions are the only shareholders of the undertaking or
(b) in the case of other private law entities, whose capital is not divided into shares (foundations and associations), the directors can be appointed and dismissed only by public institutions and the assets are exclusively assigned only to public institutions in case of liquidation.
(22) According to Article 2(1)(g) of the Wet Vpb undertakings of public legal entities (“ondernemingen van publiekrechtelijke rechtspersonen”) are only subject to corporate tax insofar as they carry out one of the activities listed in Article 2(3) of the Wet Vpb. This exhaustive list comprises:
(1) farms (“landbouwbedrijven”);
(2) industrial Undertakings (“nijverheidsbedrijven”), unless they supply only water or little else than water;
(3) mining undertakings (“mijnbouwbedrijven”);
(4) commercial undertakings (“handelsbedrijven”) that do not deal exclusively or nearly exclusively in real estate or rights related to real estate;
(5) transport undertakings, with the exception of undertakings dealing exclusively or nearly exclusively with the transport of passengers within a municipality;
(6) building societies (“bouwkassen”).
(23) The list of activities in Article 2(3) Wet Vpb has remained basically unaltered since the introduction of the Wet Vpb in 1969, which inherited corporate tax rules existing since 1956. Notably, the list does not cover public undertakings that provide services. For example, public undertakings active in waste management services, catering services, municipal credit institutions, ports, airports and the foundation involved in the exploitation of casinos (Holland Casino) are exempted from corporate tax according to Article 2(1)(g).
(24) Direct and indirect public undertakings are subject to the Dutch corporate income tax if the criteria of Article 2(1)(g) in conjunction with Article 2(3) Wet Vpb are fulfilled.
The footnote says:
It is noted that Articles 5 and 6 of the Wet Vpb, in combination with Uitvoeringsbesluit Vennootschapsbelasting 1971, have exonerated certain bodies that pursue a social purpose or are of a non-profit nature or have a limited profit-generation aim, from corporate tax. Exonerated are for example hospitals, care for the elderly, funeral services and libraries. As the Commission already noted in its Article 17 letter, since under EU competition law, profit-making is not a criterion to be taken into account when deciding whether or not an entity is an undertaking, the exonerations in Article 5 and 6 Wet Vpb could in certain cases also constitute state aid. These provisions are however not further examined in this decision, which is confined to the exemption of corporate tax for public undertakings contained in Articles 2(1), Article 2(3) and Article 2(7) Wet Vpb.
The Commission then said in its opening decision that this was State aid to the public undertakings (direct and indirect) and it was selective because: –
(40) The list of activities in Article 2(3) Wet Vpb has not been materially changed since 1956. The list does not take into account that since 1956 (direct and indirect) public undertakings have increasingly offered goods and services on the market, in competition with private companies which are liable to corporate tax. In particular, there is a discrepancy between the activities that are listed in Article 2(3) Wet Vpb and made liable to tax and the notion of economic activity within the meaning of EU law. The current law allows a substantial number of public undertakings that are involved in economic activities to be tax exempt, while they are in the same factual position as privately owned undertakings.
(41) The fact that the Dutch authorities have, on a case-by-case basis, decided to make certain limited indirect public undertakings liable to corporate tax, does not remove the selective nature of the present tax scheme. The Dutch authorities acknowledge that this case-by-case approach does not guarantee that all public undertakings that carry out economic activities will also be liable to corporate tax. The present law clearly favours public undertakings that carry out economic activities and which are not included in the list.
(42) Hence, a large range of public undertakings – that compete with private undertakings – are corporate tax exempt. This constitutes a derogation from the general corporate tax system applicable in the Netherlands and grants a selective advantage to public undertakings which carry out economic activities.
So it looks as if the Commission was objecting to the fact that the Netherlands generally (and subject to inadequate exceptions) exempted not just publicly owned companies but also public authorities carrying on economic activity in their own right (“direct public undertakings”) from Dutch corporation tax.
How would this play in the UK? The first point to make is that since the s.984 exemption dates from the mid-1960s it would, if State aid, be existing aid and therefore lawfully implemented unless and until the Commission took action. So no need for panic. But to the extent that local authorities and other public bodies carry on economic activity in their own right it must raise the issue of whether that exemption from corporation tax is State aid. One possible argument might be that the logic of corporation tax is that it does not cover public bodies such as local authorities. But the fact that s.984 looks like a carve-out provision is not entirely helpful here: it might indicate that the provision is necessary precisely because the logic of the tax would otherwise catch local authorities (although of course it might also be argued to be a “for the avoidance of doubt” provision).
The footnote that I cited above also raises a question mark over any exemptions for non-profitmaking bodies.
All interesting stuff: and it illustrates (if further illustration were needed) the need for all tax lawyers to become State-aid literate.
GEORGE PERETZ QC