The Spanish goodwill case, a long saga about to end

By Patricia Lampreave


State aid is defined as an advantage, in any form whatsoever, conferred on a selective basis to undertakings by national public authorities. Therefore, subsidies granted to individuals or general measures open to all enterprises are not covered by this prohibition and do not constitute State aid.

In order to be considered as State aid, a measure needs to have these features: (i) the aid must be granted to an undertaking performing an economic activity; (ii) there must be an intervention by the State or through State resources which can take a variety of forms (e.g. grants, interest and tax reliefs, guarantees, government holdings of all or part of a company, or providing goods and services on preferential terms, etc.); (iii) the intervention must give the recipient an advantage (positive or negative) on a selective basis, for example to specific companies or industry sectors, or to companies located in specific regions; (iv) competition has to  or may be distorted; and (v) the intervention must be able to affect trade between Member States.

The focus of the assessment in fiscal aid cases lies on the analysis of whether the measures are selective. Selectivity means that a Member state applies more lenient tax rules to a particular company or to companies of a particular sector, of a particular size (e.g. only large companies), of a particular legal form (e.g. only public undertakings), or located in a particular area.

The European Union Courts have developed a three-step framework to assess whether a fiscal measure is selective: first, it is necessary to determine the tax reference framework; the next question is whether the tax system provides any derogation leading to a different treatment for companies in a comparable legal and factual situation; finally, even if there is a deviation of the reference tax framework, it should be determined if it could be justified by principles inherent to the respective tax system.

A relevant issue in the justification analysis is to verify whether these measures are proportional and do not exceed what is necessary to achieve the pursued objective. However, the differences on the interpretation of the notion of selectivity established by the CJEU (court of justice of the European Union) and by the EGC (general court of the European Union) have been remarkable.

A clear example of the abovementioned  could be observed in respect of the Spanish tax amortization regime  of financial goodwill for the acquisition of foreign shares. This tax measure (12.5 TRLIS) recognized that an undertaking liable for CIT which acquired at least 5% of the shares in a company which was not tax resident in Spain (and held them without interruption for at least a year), could benefit from a deduction (in the form of an amortisation) of the resulting ‘financial’ goodwill, based on the assessment for the corporate tax payable by said undertaking.

The Commission considered that this measure was incompatible with the internal market. A first Decision (2009) was related to shareholding acquisitions in the EU and a second Decision (2011) was related to acquisitions outside the EU. There was also a third Decision (2014) related to indirect acquisitions through holding companies.

Certain Spanish undertakings requested the EGC to override the first and the second Decisions of the Commission, which the EGC did by judgment of 7 November 2014. The EGC held then that the Spanish regime did not exclude any category of undertakings from taking advantage of the regime, since it was aimed at a category of economic transactions and not at any concrete category of undertakings. Therefore, the EGC found that the Commission had failed to demonstrate that the measure at issue was selective, because it did not identify a category of undertakings which were exclusively favoured by it. According to the EGC, the identification of such a category of beneficiaries would be a prerequisite for recognizing the existence of State aid. The mere finding of a derogation from the common tax regime should not give rise to selectivity where such derogation is available to all undertakings.

On 21 December 2016, the CJEU set aside the two EGC judgments and referred the cases back to the EGC. The CJEU then adopted a broader approach on the notion of selectivity of a fiscal measure, by which the key aspect for determining the selective nature of a measure is whether it produces the effect of placing the beneficiaries in an advantageous position as compared to other companies in a comparable factual and legal position. According to the CJEU, a measure may be selective even where the resulting difference in treatment is based on the fact that certain undertakings carry out certain transactions that other undertakings choose not to (and not on the distinction between the undertakings from the perspective of their specific characteristics).

On 15 November 2018, the EGC adopted the wider approach of the EC and the CJEU. The GCE now upholds the decisions of the Commission, classifying the tax measure as incompatible State aid. The EGC concludes that the measure at issue is selective, even though the provided advantage is accessible to all undertakings liable for corporation tax in Spain. In this respect, the EGC has observed in particular that undertakings liable for corporation tax in Spain, where they acquire shareholdings in companies tax resident in Spain, may not obtain the benefit which the deduction arrangement in question provides for in respect of those transactions, unlike undertakings acquiring shareholdings abroad. The EGC thus infers that a national tax measures such as the one at issue, which grants an advantage upon satisfaction of the condition that an economic transaction is performed, may be selective including where, having regard to the characteristics of the transaction concerned, any undertaking may freely choose whether to perform that transaction. In finding this tax measure selective, the EGC concludes, in line with the Commission, that it introduces differences in treatment between undertakings in a similar legal and factual situation — differences that are not justified by the nature or general structure of the Spanish system for taxing goodwill.

This broader interpretation of selectivity could be more in line with the purpose of Article 107 of the TFEU, but it also gives the Commission more leeway in State aid investigations of tax measures. It is still early to state the consequences of this judgement, but we will soon know if the jurisprudence of the CJEU and EGC is unified and the wider approach is consolidated — which will undoubtedly affect other pending cases and “on-hold” state aid investigations. Nevertheless, this Spanish measure should be treated as an aid scheme and not as an individual aid measure (like some of the most publicized tax ruling cases).

As a conclusion, it is obvious that each  state aid investigations initiated against the tax legislation of a Member state represents a serious setback for companies that have benefited from the tax incentive, which ultimately affects the economy of that State. Therefore, it would be desirable for any member states , notify any type of potentially selective fiscal measure to the Commission before its adoption. This, on the other hand, would result in a clear reduction of its fiscal sovereignty, and it would also delay the approval of the tax measure until the decision of the Commission. However, it is undoubtedly more harmful for a company to benefit from a tax incentive with the legitimate expectation of acting in strict compliance with what is stipulated by the tax regulations during some exercises and ex post to carry out a recovery of the alleged aid. These tax adjustments cause a serious economic damage to the companies (without mentioning the administrative burden) and also create a sort of legal uncertainty that should not be ignored.