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
It is remarkable what can be found when one starts digging….!
I’ve been talking to an ex-colleague, who recalls the Income Tax/Corporation Tax changes in the mid-1960s, ‘reminding’ me that it was the introduction of Corporation Tax by Dennis Healy in 1966 that brought about the blanket direct tax exemption for local authorities. Prior to that, both limited companies and local authorities had been liable to Income Tax on profits/surpluses accruing on ‘trading activities’.
Interestingly that also reminded me of Leicester’s ex-City treasurer, Don Grant, poking his head into my office a few months after I’d started there and querying whether we ‘still have to submit Income Tax returns’ and, when I looked blankly back, explaining this…!
The colleague referred to is Bill Smith, latterly of Birmingham City Council and one of the leading gurus on local authority taxation (certainly one of me ‘heroes’!) and he drew my (our!) attention to Section 66 of the Finance Act 1965 which introduced the change and which states –
“(1) A local authority in the United Kingdom shall after the year 1965-66 be exempt from all charge to income tax in respect of its income, and shall be exempt from corporation tax and capital gains tax, and is not included in the expression “company” as used in this Part of this Act; and this subsection shall apply to a local authority association as it applies to a local authority.”
It was thus the 1965 Finance Act that introduced Corporation Tax (and with it the exemption therefrom for local authorities) overriding the then extant position in the Income Tax Act 1952 until finally consolidated into the Income and Corporation Taxes Act 1970.
I imagine there are others too out there who remember the 1965/66 changes…
Another aside on the implications of the infraction proceedings is the extent to which local authorities do actually engage in economic activities and so are susceptible to the implications of those infraction proceedings…
George himself and his colleague at Monckton Chambers, Valentina Sloane, gave an excellent presentation last Autumn on the meaning of economic activity in the context of State Aid, competition law and VAT law (the latter being my particular interest!).
I’ve drafted an article on this that should shortly appear in the Charted Institute of Taxation’s ‘Indirect Tax Voice’ newsletter, the gist of which is that, if we start from the premise that EU State Aid, competition law and VAT law all originate from the common origins of the ‘Treaty of Rome’ – now incorporated into the Treaty on the Functioning of the European Union, the TFEU – the meaning of common terms, such as economic activity, ought to be inter-changeable.
Thus, it is argued, the definition of economic activity under competition law must be the same as that in VAT law.
Certainly I feel this justified by reference to the still fundamental rules of EU competition law in Articles 101 and 102 of the TFEU and the obligation in, now, the Treaty on European Union ‘to adopt provisions for the harmonisation of legislation concerning turnover taxes’.
Indeed the importation into EU VAT law of these fundamental principles of competition law can be seen from the preamble to the EC 1st VAT Directive [Directive67/227] that:
‘Having regard to the Treaty establishing the European Economic Community [the ‘Treaty of Rome’] and in particular Articles 99 and 100[sic]:
(1) Whereas the main object of the Treaty is to establish, within the framework of an economic union, a common market within which there is healthy competition and whose characteristics are similar to those of a domestic market.
(2) Whereas the attainment of this objective pre-supposes the prior application in Member States of legislation concerning turnover taxes such as will not distort conditions of competition or hinder the free movement of goods and services within the common market.
…’.
And these principles are now broadly replicated in the pre-amble to the EC Principal VAT Directive [Directive 2006/112].
It is then pertinent, I suggest, that Articles 101 and 102 – and indeed Article 107 on State Aid – rely on the concept of an ‘undertaking’, which case-law has established means ‘undertaking economic activity’.
As with VAT, economic activity is thus a key concept in competition law and, in determining whether an ‘undertaking’ is ‘undertaking economic activity’, it is established law that this means whether the ‘undertaker’ is acting in a market and under market conditions (see Höfner and Elser v Macrotron GmbH [C 41/90], the culmination of a number of early cases on this).
Not surprisingly, it is also settled case-law that an undertaking for competition law purposes means any entity engaged in economic activity, irrespective of its legal status and how financed, so a public body (or a charitable or third sector body) can be an undertaking subject to EU competition law.
But that case-law reaffirms that acting as an undertaking means participating in a market, ie a public (or charitable) body can be an undertaking subject to competition law but only if it undertakes economic activity in a market in which private undertakings offer (or could offer) similar services (see ‘Höfner and Elser’ as well as Italy v EC [C-41/83], Poucet v Assurances Générales de France and Pistre v Assurances Générales de France [joined cases C-159/91 and C-160/91], Aéroports de Paris v EC [C-82/01], Motosykletistiki Omospondia Ellados NPID (MOTOE) v Greece [C-49/07], AG2R Prévoyance v Beaudout Père et Fils SARL [C-437/09]).
Thus activities that fall exclusively within the exercise by a public body of the powers of public authority are not economic and so fall outside the scope of EU competition law, as held in the seminal judgment on this, SAT Fluggesellchaft v European Organization for the Safety of Air Navigation (Eurocontrol) [C 364/92] and reiterated more recently in another dispute with Eurocontrol, SELEX Sistemi Integrati SpA v EC &another [C-113/07] (the ‘other’ being Eurocontrol).
Cross-referancing this to VAT law, in Institute of Chartered Accountants in England and Wales [(1999) House of Lords], the House of Lords – former Advocate-General Lord Slynn of Hadley delivering the lead judgment – held that undertaking a public regulatory activity on behalf of the State is not an economic activity.
In arriving at this conclusion, reference was made to Diego Cali e Figli Srl v Servizi Ecologici Porto di Genova SpA [C 343/95], a competition law decision that checking pollution levels is not an economic activity but rather a public regulatory or public interest function.
This was also pertinent in Hutchison 3G UK Ltd &others [C 369/04], in which the ECJ emphasised that the UK Government was merely auctioning licences to use the electro-magnetic spectrum to mobile phone providers and not itself participating in a market for mobile phone use. Put simply, the UK Government was regulating access to the market in the public interest per ‘ICAEW’, not exploiting property in order to obtain income therefrom (to quote Article 9(1) of ‘the VAT Directive’).
Again reference was made by the Court to ‘Diego Cali’ thereby rejecting the Opinion of Advocate-General Kokott that the VAT definition of economic activity is ‘wider than its corresponding term under competition law’.
So the receipt of remuneration is not enough for there to be economic activity; it is necessary to have regard to the nature or status of the activity.
This was at the heart of the key ECJ Judgment on this in EC v Finland [C-246/08], that economic activity is a very wide concept and that motive is irrelevant, as is that an activity consists of the performance of statutory duties or powers, carried out in the public interest without any business or commercial objective. But the fundamental requirements of VAT law – that economic activity requires there be a supply made in return for consideration – and competition law – that economic activity implies participatuion in a market – must nevertheless be met.
Pertinently in this respect, EC v Finland reiterates that remuneration is not necessarily consideration; the receipt of payment does not in itself mean an activity is economic if there is not a direct link between that remuneration and what is provided ‘in return’ (see Staatssecretaris van Financiën v Coöperatieve Aardappelenbewaarplaats [C 154/80], Apple and Pear Development Council [C 102/86] and Tolsma v Inspecteur der Omzetbelasting Leeuwarden [C 16/93]).
This direct link was broken in EC v Finland as the recipients of legal aid in that case were required to pay a contribution towards the costs but based on their ability to pay rather than the economic value of what was supplied. The ECJ thus held that the Finnish public legal aid office was not engaging in economic activity.
The UK Upper Tribunal has recently endorsed this principle in Wakefield College ([2016] UKUT0019(TCC)) though stopping short of holding that the activities of the College generally are not econmic activities due to the public subsidy of course tuition fees.
But, ‘Wakefield College’ was heard before Advocate-General Kokott gave her Opinion in Gemeente Borsele v Staatssecretaris van Financiën [C-520/14], which was that a heavily subsidised public service is not an economic activity.
If followed by the Court, given that few fee-paying local authority activities are not subject to some degree of subsidy from public funds, very little of what UK local authorities do are economic activity and the infraction proceedings launched agaimnst The Netherlands therefore of potentially little impact.
Ian M Harris BA(Hons) FIIT CTA MAAT
VAT and Taxation Advice Office
Leicester City Council