In the midst of a flood of significant judgments on a number of areas of EU law handed down today, the CJEU has given judgment on two important State aid cases. In each case, the Commission won its appeal against an adverse finding of the General Court.
In Joined Cases C‑164/15 P and C‑165/15 P Commission v Aer Lingus and Ryanair, (http://curia.europa.eu/juris/document/document.jsf?text=&docid=186499&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=561536) the Court of Justice restored the orthodox position that the amount of aid to be recovered is the amount of aid given (plus interest), not the amount by which the beneficiary has economically benefited from the aid.
Those amounts can be very different. For example, if a company is given €10m to build a factory in a remote location rather than in a convenient location, the grant may do no more than overcome the additional costs of locating in that area. If that grant is found to be unlawful State aid and ordered to be recovered, the company can be left well out of pocket: it does not have the €10m, and has a factory in a remote location rather than a convenient one.
In the Aer Lingus case, the aid came in the form of a lower rate of Irish air transport tax for very short flights. The tax was a fixed amount per passenger, and was passed onto the passenger in the form of higher ticket prices. The Commission’s decision ordered Ireland to recover from the beneficiary airlines the difference between the lower and higher rates. The airlines argued that that failed to reflect the fact that the benefit of the lower rate was effectively passed onto the passengers and could not be recovered from the passengers: so the effect of that recovery was to put the beneficiary airlines in a worse position than the airlines who paid higher rate tax (because those airlines, too, had simply passed the duty on).
The General Court agreed with the airlines, and limited recovery to the amount by which the airlines could be said to have gained business as a result of paying a lesser rate.
The CJEU overturned the General Court and agreed with the Commission. At §92, the CJEU summarises the position:
recovery of [unlawful] aid entails the restitution of the advantage procured by the aid for the recipient, not the restitution of any economic benefit the recipient may have enjoyed as a result of exploiting the advantage. That benefit may not be the same as the advantage constituting the aid and there may indeed be no such benefit, but that cannot justify any failure to recover that aid or the recovery of a different sum from that constituting the advantage procured by the unlawful aid in question.
That is a clear restoration of the orthodox dogma.
Those who adopt a questioning attitude to the dogmas of State aid may, however, find that statement unsatisfying. What principle underlies the distinction between the “advantage” (the crude “cash value” of the aid) and the “benefit” (the amount by which the beneficiary actually benefited)? Without a satisfactory justification in principle, the fact that a beneficiary can end up having to “repay” far more than it ever actually benefited begins to look penal (particularly as it is not the beneficiary that has breached the rules, but the Member State).
It is, in the present writer’s view, hard to discern a coherent principle behind the dogma. The CJEU notes (at §89) that the aim of a recovery order is “to restore the situation as it was before the aid was granted”: but that ignores the point that (in the present case as well as in the case of the factory example above) the effect of the recovery order is to leave the beneficiary very significantly worse off than it was before the aid was given. More telling, perhaps, is the Court’s observation at §91 that “the recovery of unlawful aid with a view to re-establishing the status quo ante does not imply reconstructing past events differently on the basis of hypothetical elements such as the choices, often numerous, which could have been made by the operators concerned, since the choices actually made with the aid might prove to be irreversible”: that is, in the present writer’s view, a fancy way of saying that, because it can be difficult to establish economic benefit (since it will to some extent involve establishing a counterfactual) the effort should not even be made. That is not principle: it is expediency.
Another interesting aspect of the case – although one on which the CJEU upheld the General Court – is that the difference in treatment was also attacked as contrary to Article 56 TFEU (freedom to provide services) on the basis that it subjected higher rate flights – more likely to be between Ireland and other Member States – to a higher tax than that applied to flights likely to be within Ireland. The beneficiary airlines pointed out that, if that was right, the airlines that paid higher rate would be entitled to a refund of unlawfully levied tax under the well-known San Giorgio principle. If that happened, the tax difference that was the substance of the State aid would vanish.
The CJEU dismissed that argument. It pointed out that it was for the national courts to enforce san Giorgio rights and that, at the time of the decision, there had been no successful claim. The Commission had to proceed on the basis of matters as they stood.
Again, that approach appears artificial: it appears to leave open the very unattractive prospect that the beneficiary airlines will find themselves having to bear the burden of the higher rate duty when those airlines on which it was actually imposed obtain San Giorgio refunds. Matters may, though, not be quite that simple: the Irish tax authorities may well (given the fact that the tax was passed on) have an “unjust enrichment” defence to the San Giorgio claims: and to the extent that those claims succeed, there would seem to be no reason in principle why the beneficiary airlines (who are now, in effect, required to pay the higher rate tax) should not also be able to make such claims. It will be for the Irish courts to deal with those matters.
Ms Vestager’s other victory today is in Joined Cases C‑20/15 P and C‑21/15 P Commission v World Duty Free (formerly Autogrill España) and Banco de Santander (http://curia.europa.eu/juris/document/document.jsf?text=&docid=186482&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=561536). That case concerns a Spanish tax rule that provides that, in the event that an undertaking taxable in Spain acquires a shareholding in a “foreign company” equal to at least 5% of that company’s capital and retains that shareholding for an uninterrupted period of at least one year, the goodwill resulting from that shareholding, as recorded in the undertaking’s accounts as a separate intangible asset, may be deducted, in the form of an amortisation, from the basis of assessment for the corporation tax for which the undertaking is liable. The measure at issue states that, to be classified as a ‘foreign company’, a company must be liable to pay a tax that is identical to the tax applicable in Spain and its income must derive mainly from business activities carried out abroad. The Commission found that that rule gave a selective advantage to Spanish companies that met the “foreign company” condition, and hence was unlawful State aid to such companies.
The General Court annulled that decision, essentially on the basis that the advantage created by the measure was accessible to any undertaking and was directed not to a particular category of undertakings, which would have been the only undertakings favoured by that measure, but to a category of economic transactions. Put another way, because, in principle, any Spanish company could acquire a qualifying interest in a foreign company the measure was, like the Ritz hotel, open to all and not selective.
The CJEU disagreed with the General Court. It held that the selectivity condition was met as long as the Commission could show that some undertakings qualified for the advantage and that others, in a similar legal and factual situation, did not. In the present case, the mere holding of a qualifying interest in a foreign company did not place an undertaking in a different factual and legal situation from one that did not (that assessment being made having regard to the objectives of Spanish corporation tax): and it was irrelevant that one could not pin down a specific category of undertakings (eg undertakings supplying particular goods or services) that did not satisfy the condition over and above the mere fact of failing to satisfy it.
The Banco de Santander judgment is particularly significant because of its overlap with the controversial Commission decisions in the “tax ruling” cases (Apple, Starbucks etc.). The controversy in those cases centres on the Commission’s approach to selectivity. There are differences between the cases: but the CJEU’s wide approach to the concept of selectivity is likely to be seized on by the Commission as it seeks to defend its decisions in the ongoing appeals.
GEORGE PERETZ QC