The Role of State Aid in the European Fiscal Integration 3030887340, 9783030887346

Table of contents :
Introduction and Work Plan
Contents
Chapter 1: The State Aid Framework Within the European System. Evolution of Legislation and Objectives
1.1 The Combination of the State and the Market in the Legal and Economic Development of the European Legal System
1.1.1 The Social Market Economy in the European Project
1.1.2 The Market and Competition. Mutual Instrumentality and Flexibility of the Notions
1.2 Competition Rules. State Aid
1.2.1 The Rules on State Aid in the Treaty. Framework
1.2.2 The Construction of the State Aid Framework. The Role of the European Commission
1.3 The Development of the State Aid Framework in European Policy. The Historical Phases
1.3.1 The Modernisation of the State Aid Framework
1.3.2 The State Aid Framework During the Covid-19 Emergency. The Current Phase
1.4 State Aid Prohibited Under Article 107(1) TFEU. Negative Integration
1.4.1 The Definition of Prohibited Aid
1.4.1.1 Notion of Undertaking and Economic Activity
1.4.1.2 State Origin
1.4.1.3 Advantage
1.4.1.4 Selectivity
1.4.1.5 The Effect on Trade Between Member States and the Distortion of Competition
1.5 Permitted Aid. Positive Integration
1.5.1 Aid Permitted de jure
1.5.2 Aid Allowed on a Discretionary Basis
1.5.3 Assessment of the Compatibility of the Aid. The Economic Method
1.5.4 Aid Permitted Without Prior Notification
1.5.4.1 Regional Aid
1.5.4.2 Sectoral and Horizontal Aid
1.5.4.3 De minimis Aid
1.6 The Implementation of the State Aid Framework and the Protection of Rights
1.6.1 The Development of the Procedural Framework. Public and Private Enforcement
1.6.2 The Stages and the General Principles
1.6.2.1 Monitoring of New and Existing State Aid
1.6.2.2 Recovery of Aid
1.6.2.3 The Protection of Rights
1.7 Concluding Remarks
Bibliography
Chapter 2: The State Aid Framework in European Fiscal Integration
2.1 European Integration in Tax Matters. The Development of European Tax Law
2.1.1 The Content
2.1.2 The Interplay Between Sources of Law
2.1.3 The Tax Function
2.2 Fiscal Policy in Indirect Taxation
2.2.1 The Customs Union and the Principle of Equal Treatment of Goods
2.2.2 The Principle of Tax Harmonisation
2.3 European Integration in the Field of Direct Taxation. The Role of State Aid. Coordination Policy
2.3.1 The Principle of Tax Non-discrimination and the Prohibition of Tax Restrictions
2.3.2 Restrictions on Economic Freedoms and Justifications for Taxation
2.3.3 Approximation of Direct Tax Matters. Article 115 TFEU Directives
2.3.4 Harmful Tax Competition and Aggressive Tax Planning. Definition
2.3.5 The International Approach
2.3.6 The European Approach. Developments
2.3.7 Convergence Between Harmful Tax Competition and the Prohibition of State Aid
2.4 Fiscal State Aid. General Characteristics
2.4.1 The Contention of Fiscal Function Crisis
2.4.2 The Definition of Guidelines for National Tax Policy on Selective Framework
2.4.3 The Function of General Support for the National Economy. Support in Economic and Social Emergencies
2.4.4 Regulation in a Common Area of the Principle of Non-discrimination in Taxation
2.4.5 Tackling Harmful Tax Competition
2.4.6 The Definition of the Promotional Function of Taxation
2.4.7 Empowering Territorial Autonomies and Fiscal Federalism Projects
2.5 Concluding Remarks
Bibliography
Chapter 3: The Prohibition of Fiscal State Aid. Negative Integration of National Laws
3.1 The Prohibition of State Aid Under Article 107(1) TFEU
3.1.1 Negative Integration of National Tax Systems
3.2 The Notion of Fiscal Aid
3.2.1 Advantage and Selectivity of Fiscal Aid. The Complexity of the Analysis and the Variety of Interpretations
3.3 Selectivity of Fiscal Aid. The Formal Legal Approach and the Substantive Economic Approach
3.3.1 Material Selectivity de jure. Justification in Light of the Nature or General Scheme of the Tax System
3.3.2 Material Selectivity de facto
3.3.3 Territorial Selectivity
3.3.4 Reflections on the National Framework of Fiscal Federalism
3.4 The Cases of Fiscal Aid. The Purpose of the Prohibition. The Problems of Adaptation
3.5 Tax Benefits: Analysis
3.5.1 The Most Significant Cases of State Aid Prohibited in Italy
3.5.1.1 Aid to Banking Foundations
3.5.1.2 Aid to the Banks
3.5.1.3 Tax Advantages for Public Companies
3.5.1.4 Tax Benefits for Cooperative Societies
3.5.1.5 Tax Benefits for Ecclesiastical Bodies
3.5.2 Developments in the National Notion of a Tax Benefit
3.6 Procedures for Determining Tax Credits
3.6.1 The Case of Tax Settlements
3.7 Cases Amounting to Harmful Tax Competition
3.7.1 Analysis of General Schemes Amounting to Harmful Tax Competition. The Gibraltar Case
3.7.2 The Control of Tax Rulings. Evolution
3.7.3 European Review of Tax Rulings. Summary of the Most Important Cases
3.7.3.1 The Apple Case
3.7.3.2 The Amazon Case
3.7.3.3 The Starbucks Case
3.7.3.4 The Fiat Case
3.7.4 The Principles Laid Down by the European Commission in Respect of Tax Rulings
3.7.5 The Position of European Jurisprudence
3.7.6 Reflections on the Application of the State Aid Framework to Tax Rulings
3.8 Concluding Remarks
Bibliography
Chapter 4: The Positive Integration of the State Aid Framework into Taxation Matters. Permitted Aid
4.1 Permitted Aid Under the State Aid Framework
4.1.1 The General Principles. Integration and Positive Harmonisation
4.2 Aid Permitted on an Individual Basis. De jure Aid and Aid Granted on a Discretionary Basis
4.3 Aid Permitted on a General Basis. The Legal Framework. Council Regulations
4.3.1 Commission Regulations (Cont´d). The Compatibility Criteria
4.3.2 The Categories of Permitted Aid and the Areas Concerned
4.4 The Function of Permitted Aid
4.4.1 The Relationship Between Fiscal Federalism and Permitted Aid. The Role of Territorial Entities in European Policy
4.5 Permitted Fiscal State Aid. Tax Law as a Vehicle for Development Policies at European Level
4.5.1 Implementation of Permitted Fiscal Aid
4.6 The Italian Experience. The Promotional Function of Tax Law
4.6.1 Environmental Aid
4.6.2 Aid for Culture
4.6.3 The Development of Degraded and Deprived Areas
4.6.4 Aid for Innovation. The Industry 4.0 Plan
4.6.5 Tax Relief Schemes in Favour of Innovation
4.7 Aid Allowed in Times of Economic and Social Emergency
4.7.1 The Measures Adopted in the Italian State in the Covid 19 Emergency
4.8 The Implementation of Permitted Aid by the State and Territorial Entities. Consequences and Liability
4.9 Concluding Remarks
Bibliography
Chapter 5: The Implementation of the State Aid Framework and the Protection of Rights in Tax Matters. The Italian Experience
5.1 The Implementation of the European State Aid Framework. General Principles and the Special Nature of Fiscal Aid
5.1.1 The European Principle of Effectiveness as a General Principle of Legal Integration
5.1.2 The Principle of Procedural Autonomy (Cont´d)
5.1.3 The Development of the Framework
5.2 State Aid Control and the Role of the European Commission
5.2.1 The Control of Compatibility by the European Commission
5.2.2 Review of Legality by the Courts. Cooperation Between the Courts and the European Bodies
5.2.3 National Obligations Prior to Notification of the Aid. The Italian Experience
5.2.4 Monitoring Fiscal Aid. Problematic Issues
5.3 Recovery of State Aid. General Principles
5.3.1 The European Commission Recovery Order
5.3.2 Recovery Decisions in the Field of Taxation. Problematic Issues
5.3.3 Exceptions to the Recovery Order
5.3.4 National Procedures for the Recovery of State Aid. General Background
5.3.5 National Procedures for the Recovery of Fiscal Aid. The Italian Experience
5.3.6 The National Procedure for Recovery of Incompatible aid (Cont´d). The Specific Nature of Tax Matter
5.3.7 The Exclusive Jurisdiction of the Administrative Court (Cont´d). Problems in Taxation
5.4 The Protection of Third Parties. The Principle of Compensation for Damage
5.4.1 State Liability for Breach of Community Obligations in the State Aid Framework
5.4.2 State Liability in Fiscal Aid. Problematic Issues
5.4.3 Non-contractual Liability Within the Aid Framework
5.5 Concluding Remarks
Bibliography
Chapter 6: Final Conclusions

Citation preview

Rossella Miceli

The Role of State Aid in the European Fiscal Integration

The Role of State Aid in the European Fiscal Integration

Rossella Miceli

The Role of State Aid in the European Fiscal Integration

Rossella Miceli Sapienza University of Rome Rome, Italy

ISBN 978-3-030-88734-6 ISBN 978-3-030-88735-3 https://doi.org/10.1007/978-3-030-88735-3

(eBook)

© Springer International Publishing Switzerland and G.Giappichelli Editore 2022 This book was published with the financial support of the University of Rome, La Sapienza Department of Law and economics of productive activities (Dipartimento di Diritto ed Economia delle attività produttive). This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To the Future of Europe To Pietro, Andrea and Luce my beloved ones

Introduction and Work Plan

The aim of this work is to analyse the role now played by the European State aid framework in the area of taxation in order to identify its prospects for innovation and its legal problems. The State aid rules are now contained in Articles 107, 108 and 109 of the Treaty on the Functioning of the European Union (TFEU) and in the secondary legislation that has been enacted in recent years on this subject. The current view is that the State aid rules have now taken on a central position in the area of taxation, becoming the most important instrument of European legal integration, especially in the area of direct taxation. This is the result of a very significant regulatory and interpretative evolution in State aid in the European context. In this framework, tax aid has assumed a certain level of autonomy and marked its own path driven by the general problems that tax matters are currently experiencing worldwide because of economic globalisation and the new economy. As regards its general purposes, fiscal aid has in fact gradually expanded its objectives and (accordingly) its scope of application, setting out on a very significant level of activity in both negative and positive integration of national tax systems. The robustness of the State aid framework is linked, first, to its important structural position within the European Treaty, which has enabled the European Commission and the Council to be very effectively involved in the legal and economic activity of the Member States. In addition to this, there is the undeniable importance of the content and the flexibility of the basic concepts of the rules that have led historically to an evolution of State aid which has constantly adapted to the times. In order to define the part played by the State aid framework in European integration and, specifically, in the area of taxation, the present work will analyse the following: – The general rules in their historical and legal evolution (Chap. 1). – Their role in European legal integration in tax matters (Chap. 2). vii

viii

Introduction and Work Plan

– Negative integration activity in tax matters (Chap. 3). – Positive integration activity in tax matters (Chap. 4). – The rules on the implementation and protection of rights (Chap. 5).

Contents

1

The State Aid Framework Within the European System. Evolution of Legislation and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 The Combination of the State and the Market in the Legal and Economic Development of the European Legal System . . . . . . . . . 1.1.1 The Social Market Economy in the European Project . . . . . 1.1.2 The Market and Competition. Mutual Instrumentality and Flexibility of the Notions . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Competition Rules. State Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.1 The Rules on State Aid in the Treaty. Framework . . . . . . . 1.2.2 The Construction of the State Aid Framework. The Role of the European Commission . . . . . . . . . . . . . . . . . . . . . . 1.3 The Development of the State Aid Framework in European Policy. The Historical Phases . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 The Modernisation of the State Aid Framework . . . . . . . . . 1.3.2 The State Aid Framework During the Covid-19 Emergency. The Current Phase . . . . . . . . . . . . . . . . . . . . . 1.4 State Aid Prohibited Under Article 107(1) TFEU. Negative Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1 The Definition of Prohibited Aid . . . . . . . . . . . . . . . . . . . . 1.5 Permitted Aid. Positive Integration . . . . . . . . . . . . . . . . . . . . . . . . 1.5.1 Aid Permitted de jure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.2 Aid Allowed on a Discretionary Basis . . . . . . . . . . . . . . . . 1.5.3 Assessment of the Compatibility of the Aid. The Economic Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.4 Aid Permitted Without Prior Notification . . . . . . . . . . . . . . 1.6 The Implementation of the State Aid Framework and the Protection of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6.1 The Development of the Procedural Framework. Public and Private Enforcement . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 8 10 12 13 16 19 22 23 24 36 38 39 40 41 45 47

ix

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1.6.2 The Stages and the General Principles . . . . . . . . . . . . . . . . 1.7 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49 52 53

The State Aid Framework in European Fiscal Integration . . . . . . . . 2.1 European Integration in Tax Matters. The Development of European Tax Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 The Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 The Interplay Between Sources of Law . . . . . . . . . . . . . . . 2.1.3 The Tax Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Fiscal Policy in Indirect Taxation . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 The Customs Union and the Principle of Equal Treatment of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 The Principle of Tax Harmonisation . . . . . . . . . . . . . . . . . 2.3 European Integration in the Field of Direct Taxation. The Role of State Aid. Coordination Policy . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 The Principle of Tax Non-discrimination and the Prohibition of Tax Restrictions . . . . . . . . . . . . . . . . . . . . . 2.3.2 Restrictions on Economic Freedoms and Justifications for Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 Approximation of Direct Tax Matters. Article 115 TFEU Directives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.4 Harmful Tax Competition and Aggressive Tax Planning. Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.5 The International Approach . . . . . . . . . . . . . . . . . . . . . . . 2.3.6 The European Approach. Developments . . . . . . . . . . . . . . 2.3.7 Convergence Between Harmful Tax Competition and the Prohibition of State Aid . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Fiscal State Aid. General Characteristics . . . . . . . . . . . . . . . . . . . 2.4.1 The Contention of Fiscal Function Crisis . . . . . . . . . . . . . . 2.4.2 The Definition of Guidelines for National Tax Policy on Selective Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.3 The Function of General Support for the National Economy. Support in Economic and Social Emergencies . . . 2.4.4 Regulation in a Common Area of the Principle of Non-discrimination in Taxation . . . . . . . . . . . . . . . . . . . . 2.4.5 Tackling Harmful Tax Competition . . . . . . . . . . . . . . . . . . 2.4.6 The Definition of the Promotional Function of Taxation . . . 2.4.7 Empowering Territorial Autonomies and Fiscal Federalism Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57 58 60 62 65 67 69 71 73 76 78 82 84 86 88 90 91 93 95 96 99 101 102 103 103 104

Contents

3

4

xi

The Prohibition of Fiscal State Aid. Negative Integration of National Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Prohibition of State Aid Under Article 107(1) TFEU . . . . . . . 3.1.1 Negative Integration of National Tax Systems . . . . . . . . . . 3.2 The Notion of Fiscal Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Advantage and Selectivity of Fiscal Aid. The Complexity of the Analysis and the Variety of Interpretations . . . . . . . . 3.3 Selectivity of Fiscal Aid. The Formal Legal Approach and the Substantive Economic Approach . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Material Selectivity de jure. Justification in Light of the Nature or General Scheme of the Tax System . . . . . . . . . . 3.3.2 Material Selectivity de facto . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 Territorial Selectivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.4 Reflections on the National Framework of Fiscal Federalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 The Cases of Fiscal Aid. The Purpose of the Prohibition. The Problems of Adaptation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Tax Benefits: Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 The Most Significant Cases of State Aid Prohibited in Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.2 Developments in the National Notion of a Tax Benefit . . . . 3.6 Procedures for Determining Tax Credits . . . . . . . . . . . . . . . . . . . . 3.6.1 The Case of Tax Settlements . . . . . . . . . . . . . . . . . . . . . . 3.7 Cases Amounting to Harmful Tax Competition . . . . . . . . . . . . . . . 3.7.1 Analysis of General Schemes Amounting to Harmful Tax Competition. The Gibraltar Case . . . . . . . . . . . . . . . . . . . 3.7.2 The Control of Tax Rulings. Evolution . . . . . . . . . . . . . . . 3.7.3 European Review of Tax Rulings. Summary of the Most Important Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.4 The Principles Laid Down by the European Commission in Respect of Tax Rulings . . . . . . . . . . . . . . . . . . . . . . . . 3.7.5 The Position of European Jurisprudence . . . . . . . . . . . . . . 3.7.6 Reflections on the Application of the State Aid Framework to Tax Rulings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Positive Integration of the State Aid Framework into Taxation Matters. Permitted Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Permitted Aid Under the State Aid Framework . . . . . . . . . . . . . . 4.1.1 The General Principles. Integration and Positive Harmonisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Aid Permitted on an Individual Basis. De jure Aid and Aid Granted on a Discretionary Basis . . . . . . . . . . . . . . . . . . . . . . . .

109 110 112 114 118 120 122 125 126 131 133 135 136 141 143 146 149 151 152 154 160 161 162 165 166

. 171 . 172 . 174 . 176

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4.3

Aid Permitted on a General Basis. The Legal Framework. Council Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Commission Regulations (Cont’d). The Compatibility Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 The Categories of Permitted Aid and the Areas Concerned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 The Function of Permitted Aid . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 The Relationship Between Fiscal Federalism and Permitted Aid. The Role of Territorial Entities in European Policy . . . 4.5 Permitted Fiscal State Aid. Tax Law as a Vehicle for Development Policies at European Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.1 Implementation of Permitted Fiscal Aid . . . . . . . . . . . . . . . 4.6 The Italian Experience. The Promotional Function of Tax Law . . . 4.6.1 Environmental Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.2 Aid for Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.3 The Development of Degraded and Deprived Areas . . . . . . 4.6.4 Aid for Innovation. The Industry 4.0 Plan . . . . . . . . . . . . . 4.6.5 Tax Relief Schemes in Favour of Innovation . . . . . . . . . . . 4.7 Aid Allowed in Times of Economic and Social Emergency . . . . . . 4.7.1 The Measures Adopted in the Italian State in the Covid 19 Emergency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 The Implementation of Permitted Aid by the State and Territorial Entities. Consequences and Liability . . . . . . . . . . . . . . . . . . . . . . 4.9 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5

The Implementation of the State Aid Framework and the Protection of Rights in Tax Matters. The Italian Experience . . . . . . . . . . . . . . . 5.1 The Implementation of the European State Aid Framework. General Principles and the Special Nature of Fiscal Aid . . . . . . . . 5.1.1 The European Principle of Effectiveness as a General Principle of Legal Integration . . . . . . . . . . . . . . . . . . . . . . 5.1.2 The Principle of Procedural Autonomy (Cont’d) . . . . . . . . 5.1.3 The Development of the Framework . . . . . . . . . . . . . . . . . 5.2 State Aid Control and the Role of the European Commission . . . . . 5.2.1 The Control of Compatibility by the European Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Review of Legality by the Courts. Cooperation Between the Courts and the European Bodies . . . . . . . . . . . . . . . . . 5.2.3 National Obligations Prior to Notification of the Aid. The Italian Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.4 Monitoring Fiscal Aid. Problematic Issues . . . . . . . . . . . . . 5.3 Recovery of State Aid. General Principles . . . . . . . . . . . . . . . . . . 5.3.1 The European Commission Recovery Order . . . . . . . . . . .

178 181 183 186 188 190 191 192 193 196 197 199 201 204 205 206 208 209 213 214 217 219 222 224 226 228 230 231 232 233

Contents

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5.3.2

Recovery Decisions in the Field of Taxation. Problematic Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.3 Exceptions to the Recovery Order . . . . . . . . . . . . . . . . . . . 5.3.4 National Procedures for the Recovery of State Aid. General Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.5 National Procedures for the Recovery of Fiscal Aid. The Italian Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.6 The National Procedure for Recovery of Incompatible aid (Cont’d). The Specific Nature of Tax Matter . . . . . . . . . . . 5.3.7 The Exclusive Jurisdiction of the Administrative Court (Cont’d). Problems in Taxation . . . . . . . . . . . . . . . . . . . . . 5.4 The Protection of Third Parties. The Principle of Compensation for Damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 State Liability for Breach of Community Obligations in the State Aid Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 State Liability in Fiscal Aid. Problematic Issues . . . . . . . . . 5.4.3 Non-contractual Liability Within the Aid Framework . . . . . 5.5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

235 236 239 240 242 244 246 247 251 252 254 255

Final Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

Chapter 1

The State Aid Framework Within the European System. Evolution of Legislation and Objectives

Contents 1.1 The Combination of the State and the Market in the Legal and Economic Development of the European Legal System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1 The Social Market Economy in the European Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.2 The Market and Competition. Mutual Instrumentality and Flexibility of the Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Competition Rules. State Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.1 The Rules on State Aid in the Treaty. Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.2 The Construction of the State Aid Framework. The Role of the European Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 The Development of the State Aid Framework in European Policy. The Historical Phases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 The Modernisation of the State Aid Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 The State Aid Framework During the Covid-19 Emergency. The Current Phase 1.4 State Aid Prohibited Under Article 107(1) TFEU. Negative Integration . . . . . . . . . . . . . . . . . 1.4.1 The Definition of Prohibited Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1.1 Notion of Undertaking and Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1.2 State Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1.3 Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1.4 Selectivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1.5 The Effect on Trade Between Member States and the Distortion of Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Permitted Aid. Positive Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.1 Aid Permitted de jure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.2 Aid Allowed on a Discretionary Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.3 Assessment of the Compatibility of the Aid. The Economic Method . . . . . . . . . . . . 1.5.4 Aid Permitted Without Prior Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.4.1 Regional Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.4.2 Sectoral and Horizontal Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.4.3 De minimis Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 The Implementation of the State Aid Framework and the Protection of Rights . . . . . . . . . . 1.6.1 The Development of the Procedural Framework. Public and Private Enforcement 1.6.2 The Stages and the General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6.2.1 Monitoring of New and Existing State Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6.2.2 Recovery of Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6.2.3 The Protection of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

© Springer International Publishing Switzerland and G.Giappichelli Editore 2022 R. Miceli, The Role of State Aid in the European Fiscal Integration, https://doi.org/10.1007/978-3-030-88735-3_1

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Abstract The essential characteristics of State aid legislation and its basic values are highlighted, shedding light on the fact that this legal framework is a fundamental meeting point between the two ideological components that lay at the foundation of the European Union: the liberal ideology and the ideology of the social market economy. The substantive and procedural aspects of the framework are analysed, thereby making clear the significant regulatory developments that have occurred in State aid and its central role in the economic policy of the Union and the Member States.

1.1

The Combination of the State and the Market in the Legal and Economic Development of the European Legal System

State aid consists of a bundle of rules and principles which have been influenced by the economic and legal development of the European system. This is an area which has changed its point of balance and the structure of its rules over time to become a legal framework which is always in step with the legislative changes and the lines of economic policy which the European Union has developed over time. In this respect, as will be shown, the development of State aid reflects the economic and legal evolution of the process of European integration. The State aid rules govern an area which is central to the EU economic project: the role of the State in the market or the relationship between the State and the market. The State-market equation contains important and fundamental considerations which have dictated the guidelines of economic policy and the relationship between the economy and the law during the last century. The term market generally refers to an economic area in which the rules and balances are decided independently by the operation of various factors involved in the production and distribution cycle. The term State, for its part, refers to the recognition of a more or less intensive role of public regulation allowing intervention in the market in order to direct choices and to protect certain legal values. The values that are historically considered to be a prerogative of the State (and therefore of regulation) and that emerge in the State-market equation are those social values understood as the primary rights of every individual and guaranteed in every democratic society. In the debate between the State and the market, liberal views argue that the State must not intervene in the market, the socialist argument favours a central role for the State as a market regulator in the interests of society at large, and holders of intermediate views recognise that there is a coordinating role between the State

1.1 The Combination of the State and the Market in the Legal and Economic. . .

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and the market of varying intensity depending on the various underlying theoretical approaches. In this regard, the field of State aid appears to be an immediate and coherent implementation of the guidelines laid down by European policy setting out directly the changes of perspective that the Union has decided to adopt in the development of the Community project. Understanding this path requires an analysis taking the birth of the European project as its starting point. The project of European integration began in the middle of the last century with the aim of creating a single market through economic cohesion and free trade. The direction taken by the initial European project was based on the classical principles of economic liberalism.1 The opening up of national markets and their interaction would lead to growth in the European economy, harmony between Countries and an improvement in the standard of living of Europeans. These values were to ensure peace and security between States, avoiding new armed conflicts in Europe. Europe would become stronger in comparison with other countries in the world by becoming a unified economic structure. From 1950 onwards, a project was put in motion to achieve those objectives, first with the signing of a Treaty covering limited economic sectors (ECSC Treaty2) and, subsequently, with the signing of further specific treaties and a general Treaty involving the whole European economy (the EEC Treaty in 19573). When the European Treaty was being signed, an important choice to be made arose: either to adopt a common social policy as a precondition for market integration or to implement only market integration, to the entire exclusion of a common social policy.4 The second approach was adopted, although the first option has always remained (albeit as a minor aspect) as part of the various stages of European policy. The basic approach of the EEC Treaty and of the first stage of European policy is therefore based on the principles of economic liberalism, within which the market must operate freely without the State imposing conditions.5 The choice in favour of the liberal approach was justified for many reasons.

1

The principles of economic liberalism are those expressed in the classical economy school of thought whose main exponents have been Smith A., Ricardo D. and Malthus T.R. See Barber (1988), passim; Denis (1990), Vol. 1 (from Plato to Ricardo). 2 The Treaty establishing the European Coal and Steel Community (ECSC) of 18 April 1951. 3 The Treaty establishing the European Atomic Energy Community (EURATOM) and the European Economic Community (EEC) both established by the Treaty of Rome of 25 March 1957. 4 See Giubboni (2009), p. 2. 5 The reference is to the principles of economic liberalism of the classical economy. See Bedeschi (2015), p. 113.

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The first reason was the fact that the European Community has a sectoral nature, since it was set up essentially for the creation of a single market governed by economic freedoms. The view was therefore taken, not least in order to avoid the emergence of new conflicts between States, that the best choice was to leave the market free to operate according to its own rules and mechanisms. Economic balance was to be found within the market itself in a natural and unregulated way. The European Community thus acquired its legitimacy as an economic system aimed at the free movement of inputs and the protection of competition independently of the democratic institutions of all the Member States.6 The second reason lies in the fact that the States themselves sought to retain full sovereignty over social and redistribution policies. The latter had to be reserved for national democratic political processes. In this regard, the Treaties establishing the European Community recognised the Member States as having full freedom of action in relation to social policies. It should also be borne in mind that social policies arose essentially in the period immediately following the Second World War; social policies were still therefore in an embryonic stage within the various European States and would only go on to develop at a later stage. After an initial phase when those principles were established, very difficult issues arose which required a rethink and encouraged greater expansion of the social policy approach from the position to which it had been relegated as being marginal to the initial project. The creation of a single market began to reach significant limits because of differences in economic development and the social situation between the various European areas. Failure to correct these inequalities would have resulted in a project based on inequality and poorly aligned with the principles of pure competition that had lain behind the Community project. Against this background, the principles of subsidiarity and economic cohesion were affirmed in the 1970s and some ‘functionalist’ regulations were enacted, especially in the field of labour law, aimed at ensuring a minimum of social standards in the protection of workers’ rights.7 There was a need to provide for Community action to correct all cases where the market threatens a crisis of social values. As a matter of fact, it was noted that the market itself was not in a position, on its own, to guarantee economic freedoms and healthy competition. At this stage, the European Union slowly embarked on a route to affirm social rights within it, and the social dimension began to take root in the common market.

6 7

See Jeorges (2004), p. 461; Giubboni (2009), p. 4. See D’Antona (1996), p. 22.

1.1 The Combination of the State and the Market in the Legal and Economic. . .

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The Single European Act marked the beginning of a new phase in which the regulation of social values was brought within the scope of EU action.8 That historic moment redefined the single market as a European social area within which to implement targeted coordination and convergence policies for the general improvement in living conditions.9 The Maastricht Treaty10 and the Treaty of Amsterdam11 strengthened the social dimension of the European Union and provided for economic and social cohesion, equality, solidarity, employment, health, the environment and public services as central elements of the European project. The Treaty of Lisbon represented the final step of particular significance of this historic process.12 Article 3(3) of the Treaty on the European Union provided that ‘[t]he Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment’. At the same time, Protocol No 27 on the internal market and competition (intended to complete Article 3(3)) defined the internal market as a system in which competition is pure and not distorted. A new legal framework was thus established, which is the one currently in force. The Treaty states that the internal market is based on the principles of the social market economy and the Protocols then state that the market is a system based purely on competition. The formula used to define the purpose of the market points to an important school of thought which corresponds to the minority socialist component proposed when finalising the Treaty establishing the European Economic Community. The concept of a social market economy therefore is at the base of the development of the regulation of the State of social values in the European Community.

1.1.1

The Social Market Economy in the European Project

The 2007 Treaty of Lisbon changed the way in which the objectives of the single market and competition were expressed.

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The Single European Act (SEA) was signed on 17 February 1986. See Barbera (2000), passim. 10 The Treaty of Maastricht on the European Union was signed on 7 February 1992. 11 The Treaty of Amsterdam was signed on 2 September 1997. 12 The Treaty of Lisbon was signed on 13 December 2007. After that date, the European Union succeeded to the European Community and the Treaties have been revised, resulting in the Treaty on the European Union (TEU), the Treaty on the Functioning of the European Union (TFEU). 9

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The market and competition remain linked in their definition in Protocol No 27 and Article 3(3) of the TEU. However, the market and competition are qualified according to the principles of the highly competitive social market economy which aims at full employment, social progress and a high level of protection of and improvement in the quality of the environment. The expression ‘social market economy’ is deemed to recall the significant minority socialist component which was involved in the drawing up of the Treaty establishing the EEC in 1957. The school of thought that played a role in the formation of the Community project originated in Germany in 1900 and was defined as Ordoliberalism of the Freiburg School.13 The creation of the European Community received wisdom from this school of thought and is in every sense part of the European historical background and tradition. This is in fact a philosophy that has slowly evolved within the Community until eventually being enshrined in the Treaty of Lisbon and being acknowledged with legal recognition. The current view is that the social market economy represents a founding value of the European Union.14 The social market economy is a model of development that guarantees market freedom and social justice. The premise of this view in the legal literature is that the full self-realisation of an individual and the social justice of a State cannot occur unless a free market is first guaranteed. According to such thinking, the market economy is the best way to ensure people’s economic well-being and freedom.15 The competitive market represents the most appropriate system for the economic and social development of peoples. The market, however, fails to achieve these objectives if it is left to itself; the market structurally tends to favour domination by the economically stronger players and to generate various forms of inequality. In general, in fact, the market (if it is not regulated) produces a result where oligopolistic forces prevail over economically weaker classes. It therefore appears necessary to develop instruments that mark out an approach to economic freedoms and build a sense of a community engaged in economic activity.

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This school had among its main exponents: Eucken W., Muller-Armack A., Erhard L., Ropke W.; Miksch L., Bohm F., GroBmann-Doert H. See Felice (2008); Forte et al. (2012); Various Authors (edited by P. Nemo & J. Petitot) (2006), passim. 14 See Somma (2009), p. 4. 15 See Libertini (2014), p. 32.

1.1 The Combination of the State and the Market in the Legal and Economic. . .

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The theory of the social market economy therefore considers it necessary to define a public power that guarantees the proper functioning of the market by protecting social values where they are absent or of low level. The public authority must perform a ‘framework’ or ‘systemic’ regulation function, namely it must lay down waypoints and guidelines. In other words, what is required is a regulatory power exercised from above that implements coordination policies without squeezing freedoms or making choices on behalf of undertakings. The most important issues that need to be addressed at a higher level are: – the guarantee of a regime based purely on competition, which means the need of: avoiding the formation of cartels or monopolistic structures, implementing a price control policy and creating efficient social structures for the protection of workers. Competition is defined by the co-existence of these factors. The co-existence of these factors qualifies a market as being in line with the principles of social economy; – the need for fiscal policy that guarantees a balanced budget and the redistribution of wealth; – a monetary policy controlled by the Central Bank. The doctrine of the social market economy also recognises a fundamental role for all levels of society on the basis of the general principle of subsidiarity. In that regard, the present line of thinking is at an intermediate point between markedly liberal theories and Catholic theories. The collective structures that are closest to the problems are those that are most capable of defining targeted policies and making efficient choices. Market correction must therefore take place on two levels: a higher level aimed at coordinating issues of greater importance and general social impact; and a lower level aimed at implementing solutions. In this way, a synthesis is delineated between the regulatory intervention of the State and the public authority and the responses originating from below in accordance with the principle of subsidiarity.16 In that regard, this doctrine disapproves of a choice being made midway between economic liberalism and State dirigism. The legal transposition of the social market economy therefore carries with it many consequences. The market complies with social principles of distributive justice which are intended to be implemented by the European Union and individual States. In this context, the market becomes a place of justice, since it is created by a social system to which the whole economy must conform. An analysis of the content of this economic doctrine shows that the social market economy is an important aspiration of the European Union, which in many respects has yet to be truly defined. However, one fact is undeniable.

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See Felice (2008), p. 75.

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Thanks to the approval of the Treaty of Lisbon, two directions have been followed for the initial implementation of the principles of the social market economy, beyond the policy of the third sector or social enterprise. The rules governing services of general economic interest are being strengthened and the framework for State aid is being reinforced. In fact, State aid represented the field in which the doctrine of the social market economy has been tested in recent years.

1.1.2

The Market and Competition. Mutual Instrumentality and Flexibility of the Notions

The modification of the initial theoretical approaches and the extension of the limits of the European project are factors that could have been achieved in the face of certain characteristics which were acknowledged to the two general concepts that underpin the Community architecture: market and competition. Market and competition are characterised by a relationship of mutual instrumentality and by a flexibility of content. As will be set out in more detail below, the content of these concepts has been defined on the basis of the stages of historical moments, existing legislation and, above all, their interpretation by the Court of Justice and their implementation by the European Commission. In the first phase of Community activity, the European project was based on two general objectives: the achievement of the single market and the implementation of a system of healthy competition in the single market. Those objectives defined the values of economic liberalism on the basis of which the market must compete on equal terms while observing economic freedoms and the rules of pure competition. Market and competition remained central also in subsequent historical stages and their importance was moreover confirmed by the transposition into law of the social market economy, enshrining the stable need to maintain a highly competitive market. It may therefore be clearly underlined that the objective of creating a single market has always been central to European policy, in every successive version of the Treaties. The single market is the engine of European integration17 and the various steps that have been taken over time have always brought about important progress in this regard. The single market project has remained the same but has adapted its content in line with changes over time, increasing its scope for action.

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See Daniele (2012), p. 7.

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The single market has acquired an ever-greater extension and an ever-deeper dimension, moving by dint of the evolution of European policy from a principally economic level to a one of legal integration and of social and environmental cohesion. Over the years, the concept of market has changed and this has had an effect on the single market project. The concept of market is still set to change and adapt to the times, while remaining at the heart and the objective of the European Union’s activity. This explains why a definition of market is never found in the various European Treaties. It is, in fact, as suggested above, a flexible concept destined to be defined in accordance with its historical context. The same considerations apply to the concept of competition. From the scheme underlying the Treaty establishing the European Community and all successive versions of the Treaties it emerges that the objective of the single market can be pursued through the recognition of economic freedoms and the guarantee of competition. Competition should be instrumental in the pursuit of the single market, but in many cases the relationship has been reversed as the discipline of the single market has become instrumental in the pursuit of healthy competition. Over time, a biunivocal relationship has thus been created: the single market and competition are an inseparable combination where the market operates on the basis of healthy competition and competition is the objective of the single market. This relationship has also been confirmed in terms of legislation in the latest versions of the Treaty: Article 3(1)(b) of the TFEU confers on the Union exclusive competence in the field of competition and, in particular, in ‘the establishing of the competition rules necessary for the functioning of the internal market’. The concept of competition—in the same way as that of market and for the same reasons—also has a flexibility of content. This concept adapts to the times, to legal regulations and to market requirements. In that regard, the concepts of market and competition offer a flexibility of content and mutual instrumentality: both concepts are destined to influence each other and to widen and enrich their content in step with the evolution of European policy. This consideration makes the activity of the Union and its objectives structurally inexhaustible, as they are based on flexible definitions and specific aims that will emerge and will become necessary during European economic integration. The flexibility of those concepts has made possible the significant growth that the field of State aid has achieved. The State aid regime is indeed a field which has come about as a means of protecting competition and with the aim of creating the single market. State aid has based its substantive rules and significant changes in interpretation on the concepts of competition and the market.

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1.2

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Competition Rules. State Aid

Competition plays a central role in the general policy of the European Union and within the structure of the Treaties. The regulation of competition has always fallen under the exclusive competence of the European Union and is now regulated by Article 3(1)(b) of the TFEU. The provisions specifically dealing with competition in the Treaty on the European Union are currently found in Chapter I of Title VII of the TFEU which governs the ‘rules on competition’. Chapter I contains Articles 101–109 TFEU and consists of two sections: – Section 1, Rules Applying to undertakings (Article 101–106 TFEU); – Section 2, Aid Granted by States (Articles 107 to 109 TFEU). The first section contains rules aimed at undertakings that provide for significant means of prohibiting certain conduct. In general, these rules provide that undertakings and businessmen cannot unilaterally decide to alter market conditions through agreements, concerted practices and decisions by associations of undertakings. That section lays down a fundamental regulatory framework for the European competition regime, from the material standpoint. The need for an open market in which everyone can enter without barriers or discrimination is indeed a universal prerogative maintained by the European Union throughout its various historical stages and economic policy developments. These provisions represent the ‘private sector’ element of the TFEU provisions on free movement and aim to prevent undertakings behaviour altering market unity in the knowledge that both States and undertakings must behave in a sense that is compliant with the European project.18 Section II (Articles 107–109 of the TFEU19) contains the rules on public aid granted to undertakings, referred to as the guidelines on State aid for undertakings, which are the subject of this monograph. The State aid rules are addressed to the Member States and constitute an important focal point of European policy relating to the role of the State in the market economy. State intervention in the economy, as mentioned earlier, is a classic theme reflected in a large number of theoretical studies. In general terms, Article 345 TFEU mentions the principle of neutrality with respect to the rules in Member States governing the system of public and private property ownership in force, thus establishing the principle that State intervention in the economy is possible. To the contrary, any State intervention in economic activity and in the market capable of distorting competition and trade is prohibited.

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See Daniele (2012), passim. Formerly: Articles 87–89 of the Treaty of Nice; Articles 92–94 of the Treaty of Rome.

1.2 Competition Rules. State Aid

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In this regard, the European Union has adopted, in the first instance, a basic philosophy that the State must not influence the market by altering the rules of competition. The rules on State aid have been extensively applied by the European institutions and have been the subject of numerous academic studies, including in the area of taxation, in view of the growing importance they have always had in the process of European integration. State aid rules have, over time, taken on a general and decisive role in regulating competition on the basis of the lines of economic policy adopted by the European Union. More specifically, the State aid rules prohibit Member States from granting economic support to certain national undertakings or production of certain goods such as to have the effect of distorting competition and altering trade between Member States. The aim of those rules was intended to ban State aid to undertakings, thereby affirming the principle that undertakings must carry on business using their own resources.20 That principle stands in defence of national competition and provides protection for domestic and foreign undertakings in order to contribute, at any event, to competition in the European area as a whole. In fact, as shown by its historical evolution, the rules were put in place in order to counter the anti-competitive dynamics triggered by each State in order to favour national products and production of certain goods.21 The content of this principle is essentially interpreted under two aspects. To facilitate the survival of all undertakings on the market by ensuring pure and undistorted competition at national level. To that end, in general the State must not provide support to certain undertakings or economic sectors by altering competition at national level. To defend the possibility of foreign undertakings entering the domestic market. Supporting certain domestic undertakings would, in fact, amount to a protectionist policy that would prevent foreign undertakings from accessing the national market, thereby undermining the principle of competition. The State aid framework thus protect the proper allocation of economic resources at both national and European level, affirming the economic principles of free movement set out by the European Union. In this regard, it has always been held at European level that the role of competition rules, and in particular of State aid rules, must be to ensure pari passu conditions between undertakings in the European market. In this way, the State aid framework is aligned with the liberal values of the market economy inasmuch as it enables entrepreneurs to compete on equal terms

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See Brittan (1992), p. 5. See Triggiani (1989), p. 3; Plender (2005), p. 4; Quattrocchi (2020), p. 2.

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within the European territory, promoting pure competition that is not distorted by State intervention in favour of certain players. The aim of pure and undistorted competition is an objective which has been consistently pursued throughout the development of those rules and it continues to maintain its central role, including in respect of the principles of the social market economy.

1.2.1

The Rules on State Aid in the Treaty. Framework

Nowadays, the State aid framework is constituted by a powerful regulatory and interpretative apparatus consisting of TFEU provisions, Council and European Commission regulations, European Commission decisions, Court of Justice rulings, European Commission Communications and Guidelines, European general principles and national implementing regulations. It is possible to understand this apparatus by analysing the TFEU provisions which contain the general substantive and procedural rules of the framework. In particular, the legal basis for the rules on State aid to undertakings is set out in Articles 107, 108 and 109 TFEU. The rules cover all forms of economic aid granted by the State to undertakings or to the production of certain goods. Article 107(1) provides for the prohibition of State aid and defines the concept of prohibited aid. Article 107(2) and (3), on the other hand, identify aid which is allowed de jure and aid which may be discretionally granted, laying down the conditions which allow a State to introduce subsidy measures addressed to undertakings. These are provisions which, in the initial structure of the Treaty, introduced derogations from the general principle. The proper application of this framework is entrusted to the European Commission. In particular, the European Commission has exclusive competence in the prior assessment and authorisation of permitted aid. In exceptional circumstances, this competence may also be exercised by the Council.22 In this regard, Article 108 TFEU requires Member States to notify the European Commission in advance of newly introduced State aid, and such a notification is followed by a procedure for verifying its compatibility and the possibility of authorising it. The European Commission is also granted with (permanent) general competence to verify the compatibility of the aid existing at the date of the creation of the European Community.

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See Article 108 (2) TFEU.

1.2 Competition Rules. State Aid

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Article 108 TFEU provides for a monitoring procedure, the implementing rules for which are now laid down in Commission Regulation (EC) No 794/2004 of 21 April 2004.23 However, Article 109 enables the Council, on a proposal from the European Commission, to adopt regulations in order to lay down the conditions or categories of aid which are exempted from the authorisation or monitoring procedure. Furthermore, the Commission—on the basis of Article 108(4) TFEU—may adopt regulations relating to categories of aid exempted from authorisation based on what is provided for by the Council. On the basis of these latter Articles at the end of the 1990s important regulations were adopted—in view of the importance and centrality of the subject—which authorised the Commission to identify types of aid which were to be exempt from the obligation of prior notification. The Treaty thus laid down the fundamental lines of the framework which may be summarised as follows: – prohibition of State aid to undertakings (Article 107(1) TFEU); – possible derogation from the prohibition on State aid (Article 107(2) and (3) TFEU); – exclusive competence of the European Commission for the authorisation of permitted aid (Article 108 TFEU); – competence of the European Commission and the Council for the adoption of regulations identifying aid exempted from the obligation of prior notification (Articles 108 and 109 TFEU). It is based on that structure and by means of an impressive interpretative and legislative activity which has followed the line of development in European thinking that the powerful body of rules on State aid has been constructed over time.

1.2.2

The Construction of the State Aid Framework. The Role of the European Commission

The construction of the European State aid framework is the result, in particular, of a significant amount of legislative activity carried out by the Council and the European Commission, of an interpretative and implementing activity on the part of the European Commission, and of judicial activity carried out by the Court of First Instance and the Court of Justice. Those institutions have operated within the limits of their respective powers and functions and on the basis of the competences conferred on them under the Treaty.

23

Previously, that procedure had been governed by Council Regulation (EC) No 659/1999 of 22 March 1999.

14

1 The State Aid Framework Within the European System. Evolution of. . .

The framework thus includes: regulations, decisions of the European Commission, Communications and Guidelines of the European Commission, and judgments of the General Court and of the Court of Justice. While acknowledging the crucial importance that each European institution has had in establishing this regulatory framework, it must be pointed out that the European Commission has played a leading role in creating the current regime. In constantly pursuing a hermeneutical approach, the European Commission has taken on a fundamental role in its development over time and in the choice of economic policy objectives that have been implemented under the State aid rules. So far as the State aid provisions are concerned, in fact, the basic framework pursuant to the Treaty was established throughout the whole of the first phase of Community by indirect and secondary activity, as has also been the case, albeit to a lesser extent, in other competition-related provisions. The Treaty, as stated in the previous section, only provides the basic rules of State aid legislation. On this regulatory basis the European Commission has built detailed and complex rules making use mainly of Guidelines and Communications. The initial construction of the State aid framework was implemented through a soft law approach, or non-binding guidelines. The European Commission, in applying the rules, has pursued three main avenues: – the determination of prohibited aid; – the determination of permitted aid; – the procedures for implementing the rules, with particular emphasis on procedures to recover prohibited aid. In following that approach, the two positions of the Council expressed in Regulation (EC) No 994/98 of 7 May 1998 (on the scope of application of the prohibition on State aid) and Regulation (EC) No 659/1999 of 22 March 1999 (laying down detailed rules for the application of Article 108 TFEU on the procedure for the notification and recovery of State aid) constituted an important initial legislative definition of the State aid framework. In this way, the entire soft-law apparatus (enacted over 40 years of the European Commission’s enforcement of the rules) and the detailed legislation (which over the years had been enacted by the Council on some marginal aspects) have been incorporated into a more appropriate institutional framework. On the basis of those two Regulations, the Council has periodically expressed official positions and issued further legislative acts. The importance of these legislative acts of the Council does not put in question the central role of the European Commission in the construction of the State aid framework, and it is still, to date, deemed the institution entrusted with the interpretation and application of the State aid rules. The central role of the European Commission within the State aid framework highlights two important and mutually complementary considerations.

1.2 Competition Rules. State Aid

15

The process of implementing the State aid regime and, in particular, identifying the core values of European economic policy on State intervention in the economy has been mainly in the hands of a body which acts as the executive power of the European Union. It should be borne in mind that the European Commission, within the structure of the Treaty, is the executive body which is responsible for monitoring compliance with the Treaty and with all European acts. The Commission’s acts, which are an expression of soft law, which for years have provided a pervasive and timely body of rules in the field, have subsequently found their way into Council legislative acts, which very rarely deviated from the decisions taken by the European Commission. Doubts have therefore been raised as to the appropriateness of selection and choice of values underlying the State aid framework. That consideration has taken on greater significance not least in relation to the steady growth of the importance of State aid in the European balances.24 Moreover, from another point of view it is clear that this way of working has meant a rapid and successful adaptation of that field to regulatory, social and economic developments. In this way, the European Commission has contributed to the great success that the State aid framework has had in the European project, providing it with dynamism and keeping it in step with constant developments in the European Union. State aid has thus been able to fulfil its potential as far as possible, adapting itself to the needs of the times and to the needs of competition and the single market. Thus what developed in the first phase of European activity was a legal framework which took the form of administrative guidelines and case law, whose content was very effective in terms of its content and entirely consistent with the Union’s institutional legal framework and the role of the European Commission. This approach has remained largely unchanged, confirming the already consolidated structures. The Council issues regulations which are based on the European Commission’s interpretative and regulatory experience, which continues to play a central role in establishing the general structures for State aid. Over time, the three axes of the State aid framework—as derived from the interpretative activity of the Commission—have not changed, although they have expanded their boundaries and their content. In this regard there still remains a three-element split of the legal framework; such a split will also be followed in this chapter and in this monograph, and will be set out as follows: – the rules governing prohibited aid; – the rules governing permitted aid;

24

See Pistone (2018), p. 25.

16

1 The State Aid Framework Within the European System. Evolution of. . .

– the implementing rules (which include notification obligations, authorisation procedures and compatibility checks and recovery of State aid) and the protection of rights by the courts. These are three important elements which have been decisive in terms of the content of the framework.

1.3

The Development of the State Aid Framework in European Policy. The Historical Phases

The important role of the State aid framework is linked to the various historical stages of the European Union’s activity and to the gradual implementation of the objectives relating to the single market. The State aid framework has not always had that level of importance for European policy. Furthermore, it is underlined that the various elements of the rules themselves have had a different line of development over time, while always remaining linked to the needs of the market and to the political direction at the relevant historical moment. The central role played by the framework is an undeniable achievement of European policy over the last thirty years. During this period, State aid legislation has also gained increasing importance in tax matters. In that regard, authoritative academic writing identifies four important phases of the State aid framework in which the rules of the market and the legal regulation of social values have been combined in various ways, giving a different direction to the Community policy on aid to undertakings.25 The first phase was from 1957 to 1980. During this period, the application of the rules on State aid did not have a decisive effect on the European landscape. The European Union’s attention was focused on the establishment of the common market through the removal of customs borders, while within the various European States there was a strong need for economic recovery from the crisis resulting from the war. In this context, Europe’s focus was primarily on understanding the importance of the State aid framework and the obligation to notify the Commission of aid in advance. In that context, two opposing trends developed. Most of the work on State aid was mainly on the issue of prohibited aid and set the lines for the first phase of implementation of the rules. The European system was intended to counter State interventions in the economy in accordance with the liberal concepts on which the European Union is based. This

25

See Tosato (2011), p. 3.

1.3 The Development of the State Aid Framework in European Policy. The. . .

17

thus led to an initial major production of guidance instruments on the concept of prohibited aid. But this trend appears to have been held in check by the need to support state policies aimed at economic recovery in sectors that were very depressed and outside the market. State subsidies were introduced in this context, in respect of which the European Commission limited itself to providing some guidelines. This gave rise to the first common guidelines on sectoral aid and regional aid, providing a European position on the various policies implemented by the Member States to promote the national recovery of certain economic sectors. In view of the importance for there to be an economic recovery and the as-yet limited knowledge of the European rules on competition and aid, the European Commission was not particularly strict on the State aid front. In that period, the Member States were able to implement policies to support the economy and employment without any particular European opposition or constraints. The State aid arrangements began gradually, taking into account that the body of rules constituted a novel framework, one which the Member States had to be allowed to become used to. The period from 1980 to 1995 was an important first stage of the single market project, culminating in the Maastricht Treaty and the effective abolition of customs borders. In this context, it was crucial to defend the newly established market. State intervention in the economy thus began to be regulated more effectively. The place of State aid became more central, especially in the case of prohibited aid, on which the European Commission focussed its attention in that period. In this context, the need for any national aid to be compatible with European rules arises and the interests of protecting the market took precedence over individual national interests in the protection and defence of social values. In this stage, it was prohibition of aid, which was frequently applied by the European Commission, which amounted to an intense policy of opposing State intervention in the economy. This approach showed some rigidity and was too strict, especially when many eastern European countries joined the European Union and needed a targeted development policy to achieve a level of economic and social cohesion equal to that of the other European countries. European interests began gradually changing from an exclusively defensive approach to competition in the market through a policy of standing against aid to arrive at a position aimed at the instrumental use of permitted aid. The mechanism of permitted aid, thus preferred, began on its path of virtuous growth. The social dimension of Europe took on general importance and the social market economy is enshrined in law in the wording of Article 3 TEU. Cohesion between economic policy and social policy resulted in the promotion of very important values such as health, the environment, equality and employment.

18

1 The State Aid Framework Within the European System. Evolution of. . .

In that phase, the scope of the State aid legal framework was significantly readjusted. As discussed in Sect. 1.1 above, the basic premise of the social market economy is that the full self-realisation of an individual and the social justice of a State cannot occur unless a free market under pure competition conditions is first guaranteed. The market, however, fails to achieve these objectives if it is left to itself; the market structurally tends to favour domination by the economically stronger players and to generate various forms of inequality. In general, in fact, the market (if it is not regulated) produces a result where oligopolistic forces prevail over economically weaker classes. It therefore appears necessary to develop instruments that mark out an approach to economic freedoms and build a sense of a community engaged in economic activity. Abiding by the school of thought of the social market economy, competition is therefore a result which is achieved by removing relative economic and social inequalities in the various sectors or geographical areas of the market. In accordance with this ideology, competition becomes the result that can be achieved in the face of a planned policy of social and economic cohesion which is possible thanks to the instrumentalisation of permitted aid. In other words, social values may be promoted through the introduction of permitted aid which, according to that logic, becomes instrumental in safeguarding competition in the market. The category of permitted aid was firmly planted in the European scenario with the approval of block exemption regulations, which codified a general and homogeneous aid framework for economic and social development. The European Commission assessed the different requirements of aid more flexibly by balancing social interests and economic interests. The European Union's point of view was definitively changed and the State aid framework extended its horizons. The new function of the State aid rules thus consisted of prohibited aid and permitted aid kept in a state of balance decided by the European Union. At that moment, the two trends of European State aid policy were developed: negative harmonisation through prohibited aid and positive harmonisation through permitted aid. These are convergent policies aimed at achieving a unified objective: competition in the market. Permitted aid thus became a category complementing that of prohibited aid. The fourth phase of the development of the State aid framework was one which put the whole evolution of the European system on its mettle by testing the validity and effectiveness of this regulatory framework. The economic crisis that affected Europe from 2008 raised serious doubts about the State aid rules and also led some countries to consider the possibility of suspending the entire system. In this context, the State aid system has proved itself and has succeeded with some carefully targeted measures to safeguard the interests of society and the market.

1.3 The Development of the State Aid Framework in European Policy. The. . .

19

In the acute economic crisis, State aid became a key tool for resolving market failures and promoting economically virtuous behaviour. At that historic moment, the European Commission was joined by the Council, which played a very active role, supporting the new political trend that is currently underway, namely: the modernisation of State aid, or the policy of adapting it to the general objectives of the European Union. The role of State aid as a support framework to prevent market failures was confirmed during the Covid-19 emergency, as will be shown in the following sections. The implementing guidelines for State aid have also been modified during those historical stages. In that context, as will be discussed specifically in Section 6, a general philosophy of shared implementation of the State aid framework, referred to as public and private enforcement took over a model based on the monitoring of aid by the European Commission. Under public and private enforcement, both public bodies and private entities are called upon to monitor the lawfulness of State aid according to each of their roles in the Member State and in the market. This is also part of the modernisation of the State aid framework, and this is to be understood in light of the current importance of this issue.

1.3.1

The Modernisation of the State Aid Framework

The last frontier of the development of State aid framework is what is referred to as modernisation policy. This means action aimed at a comprehensive review of State aid in order to make it more efficient and more effective for the European context.26 It involves adapting State aid to become a project inspired by the social market economy, based on the acknowledgement of the central role of State aid in order to achieve the social and economic objectives of the European Union. The aims behind the modernisation policy are explained in a Communication of the European Commission, entitled ‘EU State Aid Modernisation’, which contains general considerations and realigns State aid to address the problems arising from the economic crisis.27 The aim of the policy is to review the State aid framework in order to make it fit for the current political and economic circumstances.

26

Nascimbene (2018), pp. 1–14. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: EU State Aid Modernisation (SAM), COM(2012) 209 final.

27

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1 The State Aid Framework Within the European System. Evolution of. . .

The Modernisation Plan aims to implement a smart, sustainable and inclusive economy in Europe through the achievement of a high level of employment, productivity and social cohesion. In this context, the European Commission acknowledges that State aid plays a fundamental role in protecting and strengthening the single market. The economic crisis which has been experienced in Europe in 2008/2010 put under the spotlight very serious problems: a significant economic and social disparity between Countries, the scarcity of State resources, and the need for these resources to be invested for social growth and budgetary consolidation. One of the most useful tools for States to pursue those objectives is aid, which allows direct expenditure or tax incentives to use public expenditure in line with social growth in order to create pure competition. What is therefore necessary is a policy which enables State aid to fulfil that function as the best option. The approach adopted by the European Commission also confirms the central role of fiscal issues in European State aid policy. In this regard, the modernisation policy makes clear the link between State aid and the economic and social problems of the European Union, describing State aid as a useful instrument for solving those problems and enhancing growth. State aid thus becomes an instrument which is physiologically intended to be used to deal with market problems. The modernisation of State aid began with the State Aid Action Plan 2005/200928 and involved the substantive framework and implementation.29 It may be said that the work of modernisation followed three important tenets: – transparency through the adoption of the economic method; – simplification of procedures; – strengthening public and private enforcement. The essential principle of this policy is to discourage States from according prohibited aid and to encourage them to distribute permitted aid. Innovation aid, aid for economic growth and environmental aid are considered central to the European project. The principle is that properly distributed aid is a means of achieving worthy objectives, while prohibited aid is seriously harmful to the market and to competition. That objective makes clear the reason for the choice of adopting an economic approach to the issue of aid. The economic method consists in the development of objective criteria for the precise assessment of the positive and negative effects of the aid on the market.

28

See State aid Action Plan. Less and better targeted state aid in a road map for State Aid reform 2005–2009, Brussels, 7 of June 2005. 29 Pesaresi and Peduzzi (2018), p. 17.

1.3 The Development of the State Aid Framework in European Policy. The. . .

21

This method ensures transparency in the criteria for assessing aid, predictability of European Commission decisions for undertakings, consistency with the principles of rule of law and of legal certainty.30 In other words, the introduction of the economic method has promoted the clarity, transparency and comprehensibility of the criteria underlying the rules on prohibited State aid and permitted aid. The economic approach has also contributed to the simplification of the legal framework. The European Commission has adopted both regulations to clarify the general criteria for justifying permitted aid (for example, regional aid) and soft law instruments to clarify further aspects of the rules for other permitted aid (for example, aid in the transport, energy, technology and communications sectors). There has also been modernisation with regard to the rules on the implementation of State aid and protection. In this context, notification procedures and authorisation procedures have been simplified. Modernisation has also led to a strengthening of public and private enforcement in the implementation of the State aid rules. This concept of public and private enforcement was intended to encourage an extension of the control of the legality of State aid to involve the European authorities, national courts and private entities. The underlying logic is to promote diffuse monitoring of the application of the State aid framework shared by both public authorities and private entities. The powers of the Community Institutions, the jurisdiction of the national courts (public enforcement) and the rights of the private entities involved in the State aid framework (private enforcement) have been defined in those regards. Public and private enforcement has become an essential core aspect of the State aid framework, capable of ensuring its effective application at different levels and from different perspectives. The modernisation policy has emphasised in particular the role of national courts, which have acquired a very important position in the field of State aid following a significant Communication of 2009.31 The whole area of State aid has therefore been adapted to the needs of the Union and the market, making it clear that it adheres to a social market economy philosophy.

30 31

See Braun and Kuhling (2008), p. 465. See Commission notice on the enforcement of State Aid law by National Courts, 2009/C 85/01.

22

1.3.2

1 The State Aid Framework Within the European System. Evolution of. . .

The State Aid Framework During the Covid-19 Emergency. The Current Phase

The modernisation of the State aid framework had to face a serious new problem that emerged in Europe at the beginning of 2020. That was the Covid-19 epidemic, which characterises the current historical phase. The spread of the Covid-19 epidemic has led to a serious and alarming global health emergency. The fact that so many States were engulfed by the epidemic, the rapid spread of the disease and the high number of infections have led in a short time to a state of serious danger mostly connected to the protection of health, but also to the economic stability of the various Countries involved. The lockdown measures adopted internally by States have blocked economies and production processes, with an inevitable impact on each country’s GDP. In a very short time, the world economy has entered a deep recession. The European Union has gradually developed measures to deal with the crisis. These measures have taken the shape of a temporary framework designed to act in two ways: the use of instruments aimed at a general European support policy; and the establishment of a common guideline for the national regimes that Member States may introduce. Gradually, the European Union has drawn up general measures to affect budgets, public accounts and the provision of financing and liquidity. This was a policy aimed at strengthening existing instruments and introducing some new instruments.32 A number of European guidelines for national policies were then drawn up. In that context, new guidelines on State aid have been established. As mentioned in the preceding section, this issue has, in recent years, taken on an important role in general European policy, that of allowing the Union to lay down the detailed rules for the intervention of the States at the most complex moments in history, as already happened in the context of the economic crisis of 2008. The European Union was confirmed in this role when it took action on State aid again on this occasion, by laying down the selective support measures that States may implement to support the economy in the crisis caused by Covid-19. The European Commission expressed its position on the issue of State aid in the context of the Covid-19 emergency through several successive communications in March and April 2020.33 These Communications set out the so-called ‘temporary framework’ designed to include the existing rules which remain applicable to all effects.

32

See Pepe (30.4.2020), p. 4; Miceli (30.5.2020), p. 2. See Communication from the Commission, 2020/C 91 ‘Temporary framework for State aid measures to support the economy in the current COVID-19 outbreak’. The authentic version of the Temporary Framework as adopted on 19 March 2020, 2020/C 1863 and its amendments 2020/C 2215 of 3 April 2020, 2020/C 3156 of 8 May 2020 and 2020/C 4509 of 29 June 2020 are those published in the Official Journal of the European Union. 33

1.4 State Aid Prohibited Under Article 107(1) TFEU. Negative Integration

23

In the first instance, the emergency led to the introduction of certain measures which are temporarily outwith the scope of the State aid framework. The Member States can therefore grant them freely without requiring the involvement of the European Commission in any way. Such measures involve the suspension of payment of corporation taxes and VAT. Essentially, this is a deferral of the tax obligations. Secondly, it is envisaged that there could be aid which must be notified to the European Commission to which the latter will respond very quickly following an accelerated procedure. This is aid authorised in accordance with Article 107(3) (b) TFEU or ‘aid . . . to remedy a serious disturbance in the economy of a Member State’. The European Commission requires the aid to be shown to be necessary, appropriate and proportionate, as indicated. In this context, measures could be used to compensate undertakings or to compensate for damage through the grant of aid de jure under Article 107(2)(b) of the TFEU. Under that framework, the European Union set out guidelines for support policies within States, balancing the principles of free competition against the social values of the market.

1.4

State Aid Prohibited Under Article 107(1) TFEU. Negative Integration

The first bloc of the State aid subject concerns prohibited aid. This is precisely the most important bloc since it is the original one from which the development of the whole system has been built up. It is also the element on which the European Commission has been most committed throughout the first and second stages of the European project, which was mainly aimed at establishing a ban on State aid. The prohibition of State aid in the creation of the European Union and the achievement of the single market in fact enshrines the principles of economic liberalism according to which the market must be free and must not be influenced by the State. Indeed, the ban on State aid was at the heart of the regime in the original structure of the European Union, and any provision made for permitted aid (de jure and on a discretionary basis) stood as a derogation from it. The establishment of the rules governing derogations was an important regulatory position for those who advocated for a social market economy and who, as noted in the earlier sections, participated, albeit with a minority voice, in the framing of the European Treaties.

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1 The State Aid Framework Within the European System. Evolution of. . .

The implementation of the rules on prohibited aid constituted an essentially negative integration of national legal systems aimed at eliminating selective advantageous measures introduced by the State for the benefit of national undertakings. The principle pursued was that the State must not intervene in the economy by distorting competition and the market. The prohibition on State aid has been of significance in many legislative areas. However, it should be noted that the most affected areas were administrative and commercial law in the first stage and tax law in the current stage. The prohibition has been of fundamental importance in the determination and provision of all public subsidies to undertakings and economic operators. Such subsidies have been redefined in the light of European principles and objectives. The prohibition was also central to the procedure of privatisation of areas of the public sector and to the delimitation of the role that the State may play in the market economy. The principle that has become established in such structures is that of the market economy private investor, i.e. a general principle that requires the State to behave in the market in the same way as a private entity.34 Having established this principle for all the economic sectors in which the State was operating, the scope of such prohibition has found expression above all in tax matters, where the principle is understood as that a tax waiver is equivalent to a direct grant of financial support. In tax matters, as will be seen in the chapters which follow, the prohibition on State aid has played a central role in the definition of all favourable selective treatments with regard to economic activity. Following a significant level of activity with regard to all the favourable measures, the last frontier of this prohibition is seen in the arena of international tax rulings involving undertakings and Member States. This field is currently the European Commission's largest front for action. Generally speaking, the prohibition of State aid is an area of EU competence reserved to it, which give it wide and indefinite limits in competition matters, which has essentially limited the general power of each Member State to implement favourable selective policies exclusively meeting State interests and which are not proportionate or necessary in terms of European objectives. Favourable selective policies were only permissible if they complied with the general principles of the European Union.

1.4.1

The Definition of Prohibited Aid

The rules governing prohibited aid are provided for by Article 107(1) TFEU, which contains the general prohibition on State aid.

34

See Plender R. (2005), p. 4.

1.4 State Aid Prohibited Under Article 107(1) TFEU. Negative Integration

25

This article provides for the negative integration of national legal systems, i.e. the removal of measures incompatible with competition and the market. Article 107(1) provides that, ‘[s]ave as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market’. The provision does not contain a general concept of State aid, but only of State aid which is prohibited. Aid is therefore prohibited where all the requirements of Article 107(1) TFEU occur simultaneously and cumulatively. This is an objective concept determined by the Treaty, in respect of which the European Commission does not have any discretion to decide what aid is prohibited aid. In other words, the European Commission can assess whether or not the various elements of prohibited aid exist but, where all the requirements are in place, it must declare the aid prohibited unless it is able to find the conditions and objectives to qualify it as eligible. The need to simplify and make transparent the work of characterising aid as prohibited aid has led over time to breaking down the various elements contained in Article 107(1) TFEU and defining them independently. The EU has been able to produce significant and copious legal instruments in relation to the characterisation of the individual requirements. The definition of each individual requirement is the result of historical development, which has placed aid within the context of the relevant phase of policy, thus demonstrating great potential for applying the provision at issue. The concept of prohibited aid and the requirements which make it up have shown a certain degree of flexibility and have gradually adapted to the needs of the times. According to legal academic writing, in fact, the concept of State aid has been capable of assessing numerous types of State measures over the years and the view is that new adaptations and new solutions are always possible.35 In fact, the concept is likely to remain relevant even as times change. The European Commission has recently returned to the issue of the definition of prohibited aid as part of its policy of modernising the State aid framework and has taken up the various relevant concepts in the light of legal and economic developments. In that regard, a Communication was issued clarifying that, on the basis of Article 107(1) TFEU, five elements have to be in place for aid to be declared prohibited.36 The elements at stake are:

35

See Orlandi (2018), p. 157. See Commission Notice on the Notion of State Aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union 2016/C 262/01 (in https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri¼CELEX%3A52016XC0719%2805%29).

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1 The State Aid Framework Within the European System. Evolution of. . .

26

– – – – –

existence of an economic activity; State origin of the measure; advantage; selectivity; effect on trade and likelihood of distorting competition.

The first two elements relate to the parties concerned by the prohibited aid. Aid is State aid only where it is distributed by the State and is addressed to the undertaking. A central role in the construction of the aid is therefore played by those involved in the legal process of supplying the aid, which must involve the State, on the one hand, and undertakings or the production of certain goods, on the other. The other three requirements, for their part, relate to the content of the aid, which must entail selective advantage elements such as to affect trade and distort competition. The current content of each of these requirements is therefore summarised below.

1.4.1.1

Notion of Undertaking and Economic Activity

State aid must be granted to an undertaking or to an economic activity offering goods or services on the market. This constitutes an important limitation to the prohibition at stake, which does not apply to aid granted to natural or legal persons that are not economic operators. Aid granted to entities other than economic activities, such as consumers, research entities and citizens, is not covered by this notion. Activities carried out in the exercise of public functions or in the exercise of official authority by the State are not covered.37 The economic nature of the activity and the existence of a market are conditions which must be verified from time to time in view of the political choices and economic organisation of each State.38 The legal work on this requirement has led to the adoption of an objective notion of undertaking to be understood exclusively in the European sense, which does not take account of the national characterisations of the activity or of the legal status of the body exercising it.

37

See Judgment of the Court of Justice of 16 June 1987, Commission of the European Communities v Italian Republic, C-118/85; Judgment of the Court of Justice of 19 January 1994, C-364/92, Sat v Eurocontrol; Judgment of the Court of Justice of 18 March 1997, C-343/95, Cali & figli v Servizi Ecologici Porto di Genova SpA. 38 See Judgment of the Court of Justice of 17 February 1993, Joined Cases C-159/91, C-160/91, Poucet v Assurances Générales de France and Caisse Mutuelle Régionale du LanguedocRoussillon; Pistre v Caisse Autonome Nationale de Compensation de l’ Assurance Vieillesse des Artisans.

1.4 State Aid Prohibited Under Article 107(1) TFEU. Negative Integration

27

This is a broad concept which includes public and private undertakings, irrespective of their legal nature, the purposes they pursue, the financing arrangements adopted or whether or not the institution carrying out the activity has a profitmaking purpose. According to the legal rules, also production may also be the recipient of the aid; production is understood as a process of combining inputs or of processing goods and services, irrespective of the subject owning the activity. The intention was thus to include in the prohibition of State aid those measures aimed directly at goods or services, rather than at undertakings. Separate criteria have been set down for entities that carry out health care, education and research activities and cultural and heritage conservation activities39 in view of the special nature of such functions.

1.4.1.2

State Origin

The prohibited aid must be economically imputable to the State or the State must bear the economic burden of the aid. Where the economic burden of the aid is borne by other undertakings or final consumers, the measure may not constitute State aid within the meaning of Article 107 TFEU.40 This requirement has two important components: the State origin of the measure and the use of State resources. The State origin of the measure refers to whether the aid is imputable to the State. The problem does not arise where the State or a territorial body distributes prohibited aid directly or indirectly, but only where public bodies or organisations are involved. In such cases, there are indications which may help in establishing whether or not the measures are imputable to the State.41 The second aspect concerns the use of State resources, that is to say resources from the public sector, since only aid granted directly or indirectly from State resources can constitute State aid. The use of public resources can be either direct or indirect. The grant is direct when the aid is granted directly by the Member States through transfers of funds or direct grants.42 Aid granted by waiving State revenue is aid granted indirectly. 39

See Commission Notice on the Notion of State Aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union 2016/C 262/01, paras. 2.4, 2.5, 2.6. 40 See Judgment of the Court of Justice of 30 November 1993, C-189/91, Kirshammer-Hack; Judgment of the Court of Justice of 7 May 1998, C-52/97, C-53/97 and C-54/97, Viscido and Others.; Judgment of the Court of Justice of 13 March 2001, C-379/98, Preussen v Elektra. 41 See Commission Notice on the Notion of State Aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union 2016/C 262/01, paras 3.1; 3.1.1; 3.1.2. 42 See Judgment of the Court of Justice of 16 May 2000, C-83/98, France v Ladbroke Racing Ltd & Commission.

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Under the system of State aid, waiving revenue is equivalent to the direct transfer of funds. This is a waiver that the State makes in respect of resources that should have contributed to the State budget. This important analysis was the basis for the involvement of the tax sector in the State aid framework. Any waiver by the State of taxes that are potentially due amounts to a measure of indirect transfer of State resources to the beneficiaries. The transfer may take place through various fiscal instruments: allowances, exemptions, exclusions.

1.4.1.3

Advantage

The aid must objectively confer an advantage on the market to the undertaking or to the production of certain goods to which it is addressed. The advantage must constitute an economic benefit which could not otherwise have been obtained under normal market conditions. In other words, the advantage can be obtained from any benefit that is likely directly or indirectly to favour an undertaking or the production of certain goods, including in terms of reduced costs and charges. The benefit must be free of charge and without anything expected in return. The benefit must not be related to previous costs incurred, or losses or damage suffered; therefore, the existence of an advantage in relation to the reimbursement of illegally levied taxes, the granting of compensation for damage, or the payment of compensation for expropriations is excluded.43 In particular, there is an important judgment of the Court of Justice in the Altmark case on compensation for costs incurred, which identified certain conditions where such cases are to be excluded from the State aid rules; the Altmark test is based upon the abovesaid conditions.44 The beneficial nature of a measure can be deduced from its regulatory or administrative regulation, which indicate the existence of a direct or indirect benefit for certain economic operators. The issue of the advantage becomes more complex to be examined in those cases where the State or public bodies act as economic operators on the market with regards to certain commercial cases. In other words, the greatest difficulties arise when the State or public bodies carry on activities of a private-sector nature. In such cases it is necessary to determine whether the other party to the contractual relationship has been directly or indirectly favoured by the State.

43 See Judgment of the Court of Justice of 27 March 1980, C-61/79, Amministrazione delle Finanze v Denkavit; Judgment of the Court of Justice of 27.9.1988, Joined Cases C-106/87 to C-120/87, Asteris AE and others v Hellenic Republic and European Economic Community. 44 See Judgment of the Court of Justice of 24 July 2003, C-280/00, Altmark and others v Nahverkehrsgesellschaft.

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In this respect, the European Commission has developed the market economy operator test, which has been increasingly refined over the years.45 The basic concept underlying this test is that the behaviour of the State or of a public body on the market must be similar to that of private economic operators.46 When applying that test, a comparison is made in order to determine whether a private investor who owns an undertaking, under conditions similar to the public undertaking and in the same market, would have made the same investment as that made by the State or the public body in the specific case. This requires a very accurate comparative assessment and must be carried out taking into account all the circumstances of the specific case: the type of operator, the type of transaction, the state of the market. This test makes it possible to show that the State or public body has granted an advantage to the undertaking which a private operator in the same market economy and under the same conditions would not have carried out in the economic operation at issue. No advantage is conferred where the economic operation is carried out on pari passu conditions by public entities and private operators and under a competitive, transparent, non-discriminatory and unconditional selection procedure.47

1.4.1.4

Selectivity

The decisive requirement qualifying the nature of aid as prohibited aid is ‘selectivity’, that is the fact that the benefit is directed at ‘certain undertakings or the production of certain goods’. To that end, selective measures are prohibited, while general measures are allowed. Indeed, by benefiting certain entities, selective measures discriminate against other national and European economic operators and damage competition and the market. The selectivity requirement has proved difficult to check due to the complexity of the distinction, in practice, between general measures and selective measures on the basis of their effects on the market. The European Commission has pointed out that the general character of a measure exists in cases where the measures benefit all economic operators, can be acquired by all undertakings and there are no elements that condition their access or their use. 45

See Judgment of the Court of Justice of 21 March 1990, C-142/87, Kingdom of Belgium v Commission of the European Communities; Judgment of the Court of Justice of 21 March 1991, C-305/89, Italian Republic v Commission of the European Communities. 46 See Commission Notice on the Notion of State Aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union 2016/C 262/01, para. 4.2.1. 47 See Judgment of the Court of Justice of 28 October 2013, joined cases C-214/12 P, C-215/12 P and C-223/12 P, Land Burgenland v European Commission.

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Indeed, it has been pointed out on several occasions that apparently general measures may in fact favour certain undertakings or production of certain goods; in order to be deemed a ‘general’ measure, it is necessary that any undertaking is able to benefit from it and it is not sufficient for a high number of undertakings operating in different sectors to benefit from it.48 Moreover, when a measure which is general in nature can be applied by the authorities according to discretionary parameters, it can be used to put some undertakings in a position of advantage over others.49 In its interpretation and implementation of the State aid framework, the European Commission has subdivided the concept of selectivity by distinguishing different levels of operation. The approach at stake has been taken up by the General Court and the Court of Justice. Selectivity is a key element in the qualification of fiscal State aid, which is why this issue will be dealt with more specifically in Chap. 3. It should be noted that most of the work on selectivity originated from fiscal aid. Selectivity may be material or territorial in nature. Material selectivity exists where the measure is applied only to the production of certain goods or to certain economic sectors (objective selectivity) or to certain undertakings (subjective selectivity). Material selectivity can be de jure or de facto; it can indeed result from the legal criteria defined by law for the granting of a measure (de jure selectivity) or from conditions and barriers preventing all entities from being able to benefit from the measure (de facto selectivity). Territorial selectivity operates when the benefit is applied only in a given territory within the State or Region. In order to demonstrate territorial selectivity, first, the territory of reference of the measure must be identified with respect to which it may be defined as selective: a measure can, in fact, be selective in respect of the State or selective in respect of the territory of a Region or of an infra-state body. The definition of territorial selectivity has undergone significant historical developments, and that has resulted in a change of the direction in interpretation and application. For a long time, the Community bodies considered all favourable measures to be selective where they were not implemented in the whole territory of each State but only in a part of it, and were thus operating—for the purposes of identifying prohibited State aid—with a certain amount of automatism in equating the territorially limited application of the measure to the selectivity of the measure itself.

48

See Judgment of the Court of Justice of 17 June 1999, C-75/97, Kingdom of Belgium v Commission of the European Communities; Judgment of the Court of Justice of 8 November 2001, C-143/99, Adria-Wien Pipeline. 49 See Judgment of the Court of Justice of 26 September 1996, C-241/94, French Republic v Commission of the European Communities, para. 23; Judgment of the Court of Justice of 29 June 1999, C-257/97, DM Transport, para. 27.

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Under these circumstances, it began to become clear that any favourable regime applicable in the territorial entity constituted a form of geographical (or territorial) selectivity with respect to the State, falling foul of the prohibition contained in Article 107(1) of the Treaty. It thus followed that the granting of differentiated tax regimes applied to geographically limited places were generally incompatible with Community law, since any territorially circumscribed favourable provision was caught by the prohibition in question.50 In this respect, only regional aid which fell within the eligible types of aid under Article 107(3)(a) and (c) was admissible. Subsequently, certain positions of the Commission and rulings of the Court of Justice went beyond this approach, holding that there was no automatic link between the application of a measure in a limited territorial context and its selective nature. A more careful reflection on the internal legal organisation of each State represented the way in which these principles became established. Settling this issue depends essentially on the rules on fiscal federalism that are applied within each State and on the consequent level of regulatory autonomy that can be devolved to the Region (or infra-state Body) within which the measure is applied. It is therefore an assessment which cannot be divorced from an analysis of the internal organisation of the State and of the powers that the Region actually holds. The aid will be imputable to the Region where the Region has itself introduced it to its territory in the exercise of the powers at its disposal. In such case, the aid is an expression of self-government within the territory of the Region itself. This is most commonly the case in asymmetric federalism. The European bodies have developed an autonomy test in order to check whether the measure may actually be attributed to the Region.51 The criteria of the autonomy test are: institutional autonomy, procedural autonomy and financial autonomy of the Local Entity.

50

See Commission Decision of 21 January 1998, 98/476/EC; Judgment of the Court of Justice of 19 September 2000, C-156/98, Federal Republic of Germany v Commission of the European Communities; Judgment of the Court of Justice of 14 October 1987, C-248/84, Federal Republic of Germany v Commission of the European Communities. 51 See Commission notice on the application of the State aid rules to measures relating to direct business taxation 98/C 384/03 which points out that the geographical nature of a measure does not entail its selectivity; Commission Notice on the Notion of State Aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union of 19 July 2016, 2016/C 262/01, par. 5.3. See Judgment of the Court of Justice of 6 September 2006, C-88/03, Portuguese Republic v Commission of the European Communities; Judgment of the Court of Justice of 11 September 2008, in Joined Cases C-428/06 to C-434/06, Union General de Trabajadores de La Rioja (UGT-Rioja) v Confederación Empresarial Vasca; Judgment of the Court of First Instance of 18 December 2008, in Cases T-211/04 and T-215/04, Government of Gibraltar (T-211/04) supported by United Kingdom of Great Britain and Northern Ireland (T-215/04) v Commission of the European Communities.

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The selective measure must have been adopted by a Local Entity with a political and administrative status distinct from that of the central Government, in the exercise of powers which are autonomous from those of the central Government (institutional autonomy). In other words, the Region must have political and administrative autonomy to enable it to adopt economic and financial measures. In this way the Authority is itself able to direct policy within the territory. The measure must have been decided by means of a procedure carried out by bodies subordinated to the Local Entity, since the latter must be endowed with procedural autonomy. Finally, there must be financial autonomy, which is the case when the economic measures introduced are not offset by grants or contributions transferred by the State or other regions, since the economic and financial consequences of the same measures fall exclusively on the infra-State Entity. As the Court of Justice has held, in order for the financial autonomy of an infraState Body to be recognised, there must not be a causal relationship between the measure adopted by the body and the financial transfers made by the State to that Body.52 Each smaller Local Entity that meets these requirements thus becomes an autonomous territorial area within which to assess the existence of the selectivity of the measure and the presence of all the other criteria that qualify it as prohibited aid. There may therefore be selective measures with respect to the State and selective measures with respect to the Regions or other Local Entities. Another extremely important issue for determining whether the measure is selective is the identification of a justification for such selectivity in the light of the legal system of reference within which the measure is situated. In that case, selectivity is only apparent rather than actual. This issue has also proved to be fundamental in tax matters, as will be the seen in the chapters which follow. A measure which at first appears selective will be rational and justified following a more thorough examination of the national system. The proper approach is to evaluate the measure in the context of the national legal framework of reference, analysing its various connections and relationships with other legal provisions. In the case of measures adopted by general regulatory provisions or measures contained within a comprehensive regulatory text, assessing the selectivity of a measure is very complicated and cannot be separated from a systematic examination of the measure itself. A three-step analysis was identified for such cases in order to assess whether the measure is actually selective and thus not justified inasmuch as it is compensated by

52

See Judgment of the Court of Justice of 11 September 2008, in Joined Cases C-428/06 to C-434/ 06, Union General de Trabajadores de La Rioja (UGT-Rioja) and others v Confederación Empresarial Vasca.

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other measures provided for in the legal system or is based on a specific general development implemented by the State or by the Region. The analysis to determine whether there is selectivity must, as suggested above, consist of three steps. First, a legal system of reference must be identified. It must consist of a consistent set of rules which apply to undertakings or the production of certain goods and which embody a general body of rules and the underlying values of the legal system. Secondly, it is necessary to assess whether the aid constitutes a derogation from the legal system of reference and therefore provides for a different (selective) treatment for certain entities. Thirdly, it is necessary to be established whether or not the measure is justified by the nature and the general scheme of the system of reference. In the latter case, the question is whether the derogation is an expression of the same underlying principles as the system of reference or is the result of mechanisms inherent to the system or necessary for its functioning.53 The analysis in the light of the nature and scheme of the legal system is a very important step in the identification of prohibited aid, which excludes all measures introduced by the State or the Region in line with the basic values of the legal system and with the policies accordingly applied. However, such a measure must be proportionate and necessary according to European benchmarks. The measure is thus justified through the admission of national values and principles that are circumscribed in accordance with the European benchmarks of necessity and proportionality.

1.4.1.5

The Effect on Trade Between Member States and the Distortion of Competition

Before it may be deemed incompatible with European law, aid must be capable of affecting trade between Member States and must be capable of distorting or threatening to distort competition. Those requirements have long been essential and have supported a view between academics that has held them to be decisive in determining the existence of prohibited aid. According to that view, Article 107(1) TFEU defines the general category of State aid as any mechanism designed to secure for a particular undertaking or a particular sector an advantage or benefit, the costs of which are borne by the public sector.

53

See Commission Notice on the Notion of State Aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union 2016/C 262/01, para. 5.

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In the context of that definition, prohibited aid is only that aid which is likely to distort competition and affect trade. In that regard, the demonstration of these two requirements was the dividing line between prohibited and allowed aid.54 However, the passage of time has devalued these requirements and reduced their scope of application.55 The devaluation of these requirements is the result of the need of an ex-ante assessment of all the requirements of the prohibited aid which the European Commission is required to carry out in accordance with the physiological and normal application of the State aid framework when it needs to authorise the aid. In any event, while it is possible to establish the other requirements laid down in Article 107(1) TFEU ex ante, the demonstration of the effect on trade and of the ability to distort competition should be carried out ex post, since it is a matter of verifying in concreto (rather than in the abstract) the effects that the aid has had on the market. The practice with regard not just to prohibited aid, but also to permitted aid, has instead resulted in those two requirements being typically assessed ex ante. Such assessment has taken the form of a prognosis as to the potential of the aid to distort competition and affect trade. Another effect of the devaluation of those requirements has been that they are assessed together. Although they are two different aspects, in practice they end up being analysed together and according to criteria that almost coincide. The wording of the legislation would suggest that demonstrating that trade has been affected should be a more rigorous piece of evidence than that of showing the ability to distort competition. Proving distortion of competition was based on showing evidence of acts ‘likely to distort or threaten to distort competition’; this was a simpler test which could also be carried out on the basis of a presumption that the aid could potentially affect competition. By contrast, the effect on trade must be demonstrated in concrete terms, as the literal wording of the provision does not allow for a presumption or potential assessment. The implementing experience of recent years has been that these requirements have been analysed jointly and according to an ex-ante prognostic assessment. The greater simplicity of the former demonstration (ability of distorting competition) has thus also overwhelmed the latter demonstration (effect on trade). Moreover, this assessment has acquired a certain level of automatic application which has led to a sort of presumption in current legislation that aid always produces distorting effects.56

54

See Leanza (1965), p. 176. See Orlandi (2018), p. 186. 56 See Tesauro (2013), p. 829. 55

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Even the Court of Justice has come to accept that this requirement must always be met in view of the fact that it cannot be ruled out that economic operators are in competition with each other.57 Both requirements, indeed, focus on demonstrating the existence of a competitive market for the undertaking benefiting from the aid, albeit with slight differences in approach. In order to satisfy the first requirement (the ability of distorting competition), the aid must improve the beneficiary's position on the market by relieving it from costs it would normally have had to bear.58 In order to prove that this requirement has been fulfilled, it is sufficient for the undertaking or the concerned sector to operate under a competitive regime. The only circumstances in which aid is not able to distort competition are those in which the recipient undertaking and the activity pursued (both) operated under a monopoly or in areas not open to competition.59 In order to assess the second requirement concerning the effect on trade of the prohibited aid, the European bodies have sought a higher level of analysis. The requirement in question is deemed to be met where the aid strengthens the position of an undertaking as compared with other undertakings competing in intraCommunity trade.60 This requirement is deemed to exist in all cases where the sector concerned has been liberalised at European level.61 Again in this case, therefore, the European Commission confines itself to establish that the sector is open to competition in order to show that the distortion exists. However, in demonstrating that trade has been affected, some additional attention has been given to the conditions of the activity benefiting from the aid. In particular, while accepting that it was not necessary to carry out an in-depth investigation of the market on which the undertaking or activity receiving the aid was active, in some cases it has been denied that the requirement in question was met in borderline cases where the size of the recipient undertaking was very small, the aid

57

See Judgment of the Court of Justice of 3 May 2005, C-172/03, Heiser v Innsbruck. See Judgment of the Court of Justice of 19 September 2000, C-156/98, Federal Republic of Germany v Commission of the European Communities; See Judgment of the Court of Justice of 20 March 2014, C-271/13, Rousse Industry v Commission of the European Communities. 59 See Judgment of the Court of Justice of 24 July 2003, C-280/00, Altmark Trans and Others; Commission Notice on the Notion of State Aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union, 216/C 262/1, para. 188. 60 See Judgment of the Court of Justice of 17 September 1980, C-730/79, Philip Morris v Commission of the European Communities; Judgment of the Court of Justice of 15 December 2005, C-148/2004, Unicredito Italiano v Agenzia delle Entrate; Judgment of the Court of Justice of 30 April 2009, C-494/06, Wam v Commission of the European Communities; Judgment of the Court of Justice of 21 December 2016, C-76/15, Vervloet v Ministerraad. 61 See Judgment of the Court of Justice of 10 January 2006, C-222/04, Cassa di risparmio di Firenze v Ministero dell’Economia e delle Finanze. 58

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intensity was low or the recipient undertaking was operating at a limited local level.62 In conclusion, it may be seen that both requirements are easily met in all cases of undertakings operating in the market under competitive conditions and there is a tendency, in demonstrating that trade is affected, to rule out cases of activities or operators which, because of their specific conditions, do not play a role in the European market. That latter assessment leads to the conclusion that there is a certain overlap between the concept of State aid and the concept of State aid prohibited under Article 107 TFEU. The rule provides for a definition of prohibited State aid which requires the combination of the five requirements analysed above, the last two requirements certainly being less important than the others. Although the initial approaches were therefore different and emphasised the requirement of an effect on trade and the ability of distorting competition, implementation of the framework has led to different results. Nowadays, the view is in fact that prohibited State aid is based on the first four elements, the recurrence of which in any specific case makes it possible to conclude that the measure (with the exception of certain borderline cases) is able to distort competition and affect trade.

1.5

Permitted Aid. Positive Integration

The rules on permitted aid grew from Articles 107, 108 and 109 TFEU and currently represent a fundamental European regulatory framework. That framework generated from the regulatory and interpretative activity with regard to derogations to the prohibition of State aid. This activity has been carried out by the European Commission through the adoption of Guidelines, Communications and Decisions and by the Council and the Commission itself through the adoption of Regulations. Relying on that framework, the States have been empowered to carry out support interventions within the market and to promote the growth and development of values considered worthwhile. This is a framework which has grown considerably over time and currently marks out a fundamental line of European economic policy. As mentioned above, this regulatory framework sets a balance, within the field of State aid, between a liberal component (laying down principles of economic liberalism) and a liberal socialist component (laying down principles of social market economy).

62

See Commission Notice on the Notion of State Aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union 2016/C 262/01, para. 197.

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In this way, the approach that for years considered that the matter of State aid concerned the prohibition of aid has been finally superseded. The subject of permitted aid cannot be considered a derogation or an exception to the prohibition (of State aid) in view of its scope and the importance it achieved within the general framework. Indeed, within this subject, in its current conformation, the section of prohibited aid and that of permitted aid are equivalent and of equal importance within the Community project. Prohibited aid and permitted aid thus constitute two balanced sections of the same legal framework which form a general structure of selective market-oriented schemes adopted by Member States.63 The subject of permitted aid is based on the general assessment that the aid supports market growth and contributes to the European project of pure competition. In that regard, in accordance with the principles of the social market economy, such aid enables certain economic sectors or operators to align themselves on European standards and to compete in the single market. This assessment was made clear by the Community Bodies with the use of two models: the principle of compensatory justification and the principle of transparency.64 These models constitute an important assessment that is essentially applied in all cases of permitted aid, albeit at varying intensity depending on the specific type of aid assessed (whether it is aid granted de jure, on a discretionary basis or without prior notification). The principle of compensatory justification enables an assessment of the aid to be made in relation to the advantages that the European Union obtains in respect of the attainment of its objectives as against the disadvantages that it entails in terms of market distortion. That comparison acknowledges that the achievement of important Community objectives justifies and offsets the distortion of competition and of the market. In other words, it is a question of balancing the positive and negative effects associated with the introduction of the aid. The principle of transparency requires clarity of the purposes of the aid and verifiability of its various components. In particular, it is a question of making the aid be subjectable to an assessment in order to check for the following: consistency, form, reasons for compatibility. The function which the framework of permitted aid fulfils is that of the positive integration of national systems in accordance with European principles. This form of integration reaches its maximum level with the rules on which permitted State aid does not require notification, in which a genuine level of European harmonisation is achieved.

63 64

See Miceli (2015), p. 31. See Evans (1997), p. 107.

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This is the approval of general acts which allow the adoption of the aid and which define the various requirements that the aid must practically fulfil and the limits that it must observe. These acts constitute the legal basis which guarantees a uniform framework within European States regulating permitted aid. The adopted aid will thus implement a form of regulatory harmonisation in a European context of the favourable rules addressed to undertakings within each State. Permitted aid is divided into three types: – de jure aid which is subject to authorisation; – discretionary aid which is subject to authorisation; – permitted aid which does not require authorisation. These categories pursue the same objective of promoting social values, but have different characteristics and are subject to a different European legal framework.

1.5.1

Aid Permitted de jure

Article 107(2) lists the aid which is de jure compatible with the market. These measures are subject to a mandatory system of prior authorisation by the European Commission. In other words, even for measures allowed de jure it is always necessary that the European Commission (in advance) authorise the introduction of the measure in the territory of the relevant State. The European Commission must authorise the aid if it meets the objective criteria laid down in the Treaty. The European Commission’s scope for assessment is closely circumscribed and is limited to a check against criteria laid down in the Treaty. The European Commission has no discretionary powers with regard to such aid. The aid includes: – aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; – aid to make good the damage caused by natural disasters or exceptional occurrences; – aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division. The first of the derogations (aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned) refers to grants accorded to particularly vulnerable social categories of consumers (such as the elderly or young people), and they can take the shape of preferential rates for the supply of goods considered essential (e.g. milk) or specific services (e.g. transport).

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For implementing such derogation it is required that the imported products must benefit from the same advantages as domestic products. That provision is considered to include any case which is already excluded from the scope of application of the prohibition of State aid because it is not a measure addressed to undertakings and is therefore not capable of falling within the notion of State aid. The second case—aid to make good the damage caused by natural disasters or exceptional occurrences—refers in particular to measures linked to unforeseeable events of a calamitous or social nature. This includes earthquakes, floods, epidemics, natural disasters, or social events of a warlike or terrorist nature. With regard to this aid, the European Commission has always required that the aid be linked to the exceptional occurrence and be proportionate to the damage suffered. It is therefore compensatory aid intended to make good the damage suffered. Firstly, the aid must be strictly linked in time to the disaster and no preventive measures can be accepted.65 Secondly, States must quantify the aid according to transparent criteria that show the extent of the damage and the contribution needed to repair it. As for the third measure, it has been repeatedly pointed out that this has become anachronistic since the reunification of Germany,66 but it has not been formally repealed.

1.5.2

Aid Allowed on a Discretionary Basis

Article 107(3) contains the list of aid which may be compatible with the market. Such aid is subject to a mandatory system of prior authorisation by the European Commission to assess its admissibility. The European Commission is therefore able to decide to admit these measures on the basis of its own assessments which have over time been made in the context of the principles of compensatory justification and the transparency of the aid. The European Commission therefore has broad powers in this area and can carry out discretionary assessments. The aid in question is identified in the following exhaustive list:

65

See Commission Decision of 25 July 1990 concerning aid provided for in Italian Law No 120/87 to assist certain areas of the Mezzogiorno affected by natural disasters. 66 See Judgment of the Court of Justice of 19 September 2000, C-156/98, Federal Republic of Germany v Commission of the European Communities; judgment of the Court of Justice of 28 January 2003, C-334/99, Germany v Commission; judgment of the Court of Justice of 30 September 2003, C-301/96, Germany v Commission.

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(a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of certain regions, in view of their structural, economic and social situation; (b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State; (c) aid to facilitate the development of certain economic activities or of certain economic areas; (d) aid to promote culture and the cultural heritage conservation; (e) other categories of aid as may be specified by decision of the Council on a proposal from the Commission. This provision has played a key role in the development of the policy on permitted aid. In fact, Article 107(3) constitutes the legal basis of the current framework for permitted State aid from the point of view of its content or the areas in which it may operate. Indeed, Article 107(3) provides both for aid which may be allowed on a discretionary basis and for categories of aid which may be admitted without prior notification, having regard to their content. It is on the basis of that provision that the categories of aid (horizontal, regional, cross-cutting and de minimis aid) have been created and which are now formally admitted without prior notification. The values expressed by this rule are thus the social values promoted by the framework on admitted State aid. This provision is also one which supports the intervention of the European Union where there are serious economic and social problems, making the rules on State aid a valid and effective instrument for laying down guidelines for of State policies in times of crisis. In particular, a fundamental role is played by Article 107(3)(b) TFEU, which provides that aid may be authorised if it is intended to remedy a serious disturbance in the economy of a Member State. Article 107(3)(b) has been deployed, in particular, to enable some Member States to deal with the crisis that hit the banking sector in 2008 by allowing aid to be granted to banks. That same provision has also been used to face the current Covid-19 pandemic.

1.5.3

Assessment of the Compatibility of the Aid. The Economic Method

The prior control on the compatibility of State aid by the European Commission has followed methods that have changed and evolved according to the historical period and the importance of the State aid framework.

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At present, after the assessment of the compensatory justification and the principle of transparency, the economic approach is applied. The analysis based on the economic approach is now shaped as a check that the structure of the aid is efficient and coherent, and the procedure followed for its distribution in the case of permitted aid is appropriate. The assessment of aid by the European Commission is the result of an analysis of discretionary nature, the exercise of which involves economic and social assessments. These are complex assessments that must be made having regard to European values. The Commission's decision remains, however, subject to review of its legality by the General Court and the Court of Justice, in accordance with the ordinary means of redress under European law. The permitted aid must, in the first instance, be justified by one of the objectives laid down in Article 107(3) TFEU. These objectives are imperative and meet the social objectives of the Union’s policy, which must be assessed and promoted on the market. In addition, the aid will have to fulfil certain general criteria showing that it is structured in accordance with European directives, compliance with which should result in limited and bearable damage to the market and competition. To that end, the aid must be: – – – –

necessary for the achievement of the objective; proportionate to the problem to be solved; granted in a transparent manner; non-discriminatory.

The purpose of the aid should be to support the undertaking's growth on the market rather than to help it to physiologically operate. The assessments underlying the examination of State aid lead the Commission to make economic policy choices that affect the policy direction of each Member State. The Commission therefore has a function—in this subject—which goes beyond its institutional powers and which has a strong impact on national legislation and on European economic and social policy.

1.5.4

Aid Permitted Without Prior Notification

The creation of a framework for permitted aid without prior notification is now the result of a significant amount of interpretative activity carried out by the European Commission, which has now found a legal recognition by regulations of the Council and the European Commission. That legislative activity was based on Articles 108 and 109 TFEU. Article 108(4) TFEU provides that the Commission may adopt regulations relating to the categories of State aid that the Council has, pursuant to Article

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109, determined may be exempted from the prior notification procedure (‘The Commission may adopt regulations relating to the categories of State aid that the Council has, pursuant to Article 109, determined may be exempted from the procedure provided for by paragraph 3 of this Article’). In its turn, Article 109 reads as follows ‘The Council, on a proposal from the Commission and after consulting the European Parliament, may make any appropriate regulations for the application of Articles 107 and 108 and may in particular determine the conditions in which Article 108(3) shall apply and the categories of aid exempted from this procedure’. In particular, the Council has enacted two important successive regulations, laying down the conditions under which the Commission may exercise its power to identify block exemptions.67 The European Commission, for its part, has enacted several regulations which have defined these conditions in detail for different types and categories of aid. The first general block exemption regulation was then issued in 2008 by the European Commission.68 The General Block Exemption Regulation marked an important historical step. The European legal system has acknowledged the existence of numerous derogations and has felt the need to take an important step towards the systematic regulation of these cases through an activity of uniform codification. In this manner, two important objectives were achieved. The first objective was to identify general principles, common to all cases, which would justify, first, derogations from the prohibition on State aid and, secondly, the existence of an autonomous regulatory framework section. The second objective was to reorganise under a single regulation all the types of aid allowed, making it easier to understand and find European sources. Both objectives have contributed to the achievement of a general transparency of European state aid rules. The General Block Exemption Regulation therefore constitutes a general legal text with an exhaustive list of the various types of aid allowed, consistent with a general approach of the European Commission. Only de minimis aid, which is based on different principles and has a different status in the system, is not covered by the rules.

67

Those regulations are Council Regulation (EU) 2015/1588 of 13 July 2015 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid (codification) and Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid. 68 See Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation).

1.5 Permitted Aid. Positive Integration

43

In line with this approach, the European Commission issued a subsequent block exemption regulation in 2014, which is the one currently in force.69 The categories of aid permitted without need of a prior notification are now listed as follows: – – – –

regional aid; horizontal aid; cross-sectoral aid; de minimis aid; The individual categories are therefore defined below.

1.5.4.1

Regional Aid

Regional aid is an expression of a fundamental European need, that of aid targeted on certain geographical areas to improve socio-economic conditions. Regional aid is an intervention measure which may be introduced under either Article 107(3)(a) or (c) TFEU, depending on whether the geographical area concerned qualifies as 'disadvantaged' in relation to the European average or the national average. By issuing regulations, the European Commission has standardised the framework for regional aid, which has always been a very important area of intervention. The European Commission draws up periodically, in cooperation with the Member States, a ‘Regional Map’ highlighting the areas in which the aid referred to in Article 107(3)(a) or (c) TFEU is considered eligible, the types of aid admitted, and the intensity of such aid. In order to be declared compatible with the system laid down in the Treaty, and in particular with the provisions of Article 107(3)(c) TFEU, regional aid must form part of a coherent policy of the Member State, compatible with the structural funds, and contribute to the social and economic development of the region concerned. Such aid must form part of a development or restructuring plan which will produce positive effects for the undertaking and the Region concerned over an extended period, thereby offsetting the distortive effects on competition. In general, regional aid is tied to being expressly aimed at promoting productive investment and job creation. Aid that increases the growth of the undertaking (investment aid) is allowed and aid that allows the undertaking to survive (operating aid), in other words, aid granted to non-viable undertakings that can survive in the market only through public support, is normally refused.70

69

See Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty. 70 See Judgment of the Court of Justice of 14 September 1994, Case C-42/93, Kingdom of Spain v Commission of the European Communities.

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Only in exceptional cases, and where in presence of areas that are covered by Article 107(3)(a), may ‘operating’ aid be authorised.

1.5.4.2

Sectoral and Horizontal Aid

Sectoral aid is aid intended for a specific intervention addressed to an individual undertaking or a specific industrial sector. Such aid are granted on the basis of the circumstances mentioned in Article 107(3) TFEU: (b) where it aims ‘to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State’; (c) where it is intended ‘to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’; (d) where the aid is granted with the aim ‘to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Union to an extent that is contrary to the common interest’. On many occasions, entire sectors of the economy have been afflicted by common problems. In such cases, the need for coherence and consistency led to the development of sectoral policies coordinating interventions on the basis of Article 107(3)(b), (c) and (d). Such aid has been defined as cross-sectoral as it is intended for application to different economic sectors. The principles of reference which the European Commission applies in this context are those of aid aimed at the restructuring and recovery of the sector. From time to time, depending on the sector involved, specific Communications, Guidelines and Frameworks have been enacted. Horizontal aid, on the other hand, is not specifically referred to in Article 107(3) TFEU. They are a form of aid without regional or sectoral specificity. Horizontal aid pursues specific European objectives set out in Article 107(3) and covers all sectors of economic activity. Aid to small and medium-sized enterprises, aid for research and development, environmental aid and training aid are considered horizontal aid.

1.5.4.3

De minimis Aid

De minimis aid is a type of aid involving modest amounts (hence the term de minimis) intended for small and medium-sized enterprises and usually managed at territorial level.

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45

The condition for allowing such aid is that it does not exceed a certain amount, which is set as a maximum limit. If that limit is exceeded, indeed, the aid is no longer automatically permitted. The reason for the exclusion of such aid from the prohibition is that the amount of its value is essentially small and therefore is not such as to affect the market significantly, thereby distorting competition. There have been several successive regulations on de minimis aid.71 Currently, the regulation in force is Regulation No 1407/2013, which sets the maximum applicable amount at EUR 200,000 over three financial years. That amount constitutes the maximum amount of permitted aid that a single undertaking can obtain under the de minimis rule for the period concerned.

1.6

The Implementation of the State Aid Framework and the Protection of Rights

The procedural aspect has been increasingly important in the development of the State aid framework. In that regard, the implementing rules have developed hand-in-hand with the substantive rules and have consistently ensured its effective application, becoming a fundamental element of such growth. Without an effective procedural framework, the whole area of State aid could not have developed as it has done. Implementation of the State aid rules is also a very complex area and has developed significantly. Moreover, unlike the two aforementioned approaches (for prohibited aid and for permitted aid), in this context a regulatory framework was created which more closely combines European and national rules. The framework governing the implementation of the aid are based on principles which are in line with the aid scheme, the general principles of European-level procedure and the procedures and treatment under national law. In that regard, the sources for that approach are based on European law and national law and are: – Treaty provisions laying down a regulatory framework; – European regulatory and interpretative acts;

71

In particular, General Regulations Council Regulation (EC) No 994/98 of 7 May 1998 and Council Regulation (EU) No 2015/1588 of 13 July 2015 set out the legal basis. The specific framework was laid down by the Commission in: Commission Regulation (EC) No 1998/2006 of 15 December 2006; Communication from the Commission to the Council of 26 November 2008, COM(2008) 800 final in which it set out the economic plan; Commission Regulation (EU) No 1407/ 2013 of 18 December 2013.

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– General European principle of procedural autonomy; – national rules. These levels have been incorporated in different ways into the evolution of the legal framework. The regulatory starting point is the Treaty, which lays down the procedural basis by defining a very important general principle. In particular, Article 108 of the Treaty establishes the general competence of the European Commission to authorise new aid and to verify whether existing aid complies with the Treaty. Competence is also conferred, in exceptional cases, on the Council to monitor State aid. The Treaty therefore lays down the general principle of prior monitoring of new aid and subsequent review of existing aid, responsibility for which lies with the European Commission (and, exceptionally, with the Council). The European Commission is therefore given a central role in the implementation of State aid rules, as it is the European Institution responsible for the general assessment of the compatibility of (new or existing) aid with the market. In that regard, the European bodies have exclusive competence in assessing the compatibility of the aid with the market, in classifying the individual aid allowed (whether it be de jure or discretionary), and in determining exemption regulations. In other words, therefore, the assessment of the compatibility of the aid is an exclusive European competence and cannot be carried out by the Member State; it is an assessment that takes into account only the values of the market and in no way can the Member State intervene. Thus, over time, the framework for the implementation of State aid have been established, having regard to the abovementioned general principle laid down by the Treaty. In any event, conferring such an important role on the European bodies (namely, the European Commission and the Council) has given the framework considerable strength. This strength has further contributed to the significant expansion of the substantive elements of the field of State aid by supporting the broadening of its scope and the integration of the values underlying the framework itself. Devolving responsibility on the European Commission for an important step of the implementation of the framework has been a decisive element not least for the growth of the field of fiscal State aid. By comparison with the other rules of the Treaty relating to tax matters, the State aid framework is the most comprehensive from a procedural point of view. This has encouraged a constant use of this framework by the European Union since the 1990s. The Treaty, however, only lays down the general principle for monitoring new and existing aid which, although it is a very important aspect in the field of State aid, does not end the implementation phase. It is silent on the consequences of introducing prohibited aid and the legal protection of the parties involved.

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The procedural section of the State aid framework has also had to develop these additional aspects, which today constitute two further important phases of the framework. Therefore, it can be stressed how the procedural section of State aid has developed over time three important strands, namely: – monitoring of new and existing aid; – recovery of incompatible aid; – protection of the legal positions of the parties concerned. The development and construction of these important phases have been at different rates, as will be analysed below.

1.6.1

The Development of the Procedural Framework. Public and Private Enforcement

As noted in the previous section, the State aid procedural framework has evolved over time, reflecting the importance which the substantive framework has taken on and the growth of European procedural law. In the first phase of its application, after the establishment of the European Community, the State aid framework focused on the full implementation of the principle of prior monitoring in accordance with a unilateral model. The unilateral model provided exclusively for the competence of the European Commission in assessing, ex ante or ex post, the compatibility and the lawfulness of State aid. The Treaty framework required Member States to submit new aid and existing aid to the monitoring of the European Commission by means of the notification obligation. Monitoring by the European Commission was the soul of State aid framework, which was focused on the prohibition of State aid.72 During the 1980s and the 1990s, important interpretations of the Court of Justice changed this approach, making room for the bilateral model of monitoring on the compatibility of State aid. That marked the move from the unilateral model to the bilateral model. Applying this model has led to a role for national courts in the State aid monitoring phase. This was an important step toward raising awareness among States and undertakings of the national application of the State aid framework. In this way, judicial review on lawfulness by national courts has been associated with the European Commission's monitoring on compatibility.

72

See Simonsson (2006), p. 233.

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Without prejudice to the exclusive competence of the European Commission for the assessment of the permitted aid (either de jure or on a discretionary basis), the direct applicability of the rule containing the obligation to notify State aid in advance has been established. This has thus enabled any undertaking to have recourse to national courts in the event an unlawful aid was distributed, and the jurisdiction of national courts has been acknowledged to classify a State aid as prohibited because it was adopted without complying with the prior notification obligation or because it was in breach of the European Commission’s decision. The national judges were also granted jurisdiction to order the aid to be reimbursed when it was found that it was unlawful. It thus also became possible to review the lawfulness of the aid at national level by dint of the individual economic operators being able to seise judges. During the same period, the European Commission also began a major effort to support Member States’ understanding of the State aid framework. A number of soft law acts have been issued which contain the guidelines for the substantive State aid framework. At the end of the 1990s, there was a further evolution of the bilateral model, which then went on to become a cooperative model. A complementary model of protection was created in which European bodies and national bodies cooperated in the application of the State aid framework within the limits of their powers and responsibilities. In this context, the European Commission continued to have substantial power to determine the legal system governing aid and to maintain exclusive competence for the assessment of permitted aid. The national jurisdictions cooperated with the European Commission on these latter objectives. In contrast, exclusively national procedural and trial systems are called upon to ensure the monitoring on the lawfulness of aid, the recovery of incompatible aid and to protect the affected legal positions of concerned parties. National administrative and judicial bodies took on a leading role in relation to these two latter objectives. Thus, the European Commission and the judges play complementary roles, cooperating in the overall objective of the proper maintenance and enforcement of State aid rules. The cooperative model (as defined) has then been the subject of the current modernisation policy, which has led to a simplification and rationalisation of procedures and a strengthening of shared monitoring. Thus began the strengthening of public and private enforcement. This phase focused mainly on the preventive monitoring of all aid, according to two important objectives: strengthening and reinforcement. Preventive monitoring has been strengthened, involving public administrations and other national bodies in this procedure. The latter are required to know the State aid framework and to carry out preliminary assessments of the aid measures adopted in the Member States, ensuring prior notification of all aid.

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The current model for the implementation of the State aid framework therefore provides for shared monitoring whether it be ex ante or ex post. The monitoring can be carried out at European or national level; this monitoring can be carried out both by public bodies (European Commission, Public Administrations or national jurisdictions) and by private entities (national undertakings). The principle of public and private enforcement, which is typical of the competition sector and embody horizontal and vertical subsidiarity, is thus rendered effective.

1.6.2

The Stages and the General Principles

At present, as mentioned above, the legal framework for State aid implementation and protection identify three important stages. Those stages contribute in equal but different ways to the objective of ensuring the effective implementation of the framework. Although these stages are interlinked, they have developed their own specificity and in each case have an autonomous function within the macro objective of applying the aid framework. A brief description of these stages follows, focussing on the general principles and underlying objectives. A more detailed analysis, with reference to tax matters and Italian legislation, will be carried out in Chap. 5 of this book.

1.6.2.1

Monitoring of New and Existing State Aid

The whole State aid framework is based on the European Commission’s obligation to monitor new and existing aid. The European bodies play a central role in this phase, as the European Commission is legally obliged to authorise new and existing aid through the development of a procedure. In recent years, the European Commission has worked hard on improving and simplifying the authorisation procedures which have become more streamlined and efficient. In that regard, the time required for prior notification has been reduced and the number of formalities has been lessened. At this stage, there has been a major review of the matter in respect of the transparency of the criteria defining the aid. First, by virtue of the principle of transparency, the criteria used when authorising aid have been increasingly clarified by the European Commission and, secondly, the Member States have for their part demanded ever more transparency on the criteria for classifying the aid.

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Although the authorisation element of aid remains an exclusively European competence, the role of the States in this phase has been enhanced. The Member States cooperate with the European Union in the monitoring of aid by setting up procedures and internal controls on the measures that are introduced at State level; these procedures are intended to act as a filter ahead of European procedures. Furthermore, as it has been stated, national jurisdictions may, at the request of any citizen, carry out a monitoring on State aid and, if aid is found to be unnotified or contrary to the European framework, they may declare it unlawful and order the aid to be reimbursed.

1.6.2.2

Recovery of Aid

The recovery phase arose out of the application of State aid framework and was regulated by secondary sources of European law. This is a fundamental phase the purpose of which is to restore market balance and healthy competition. Once the aid has been found to be contrary to European law, it is necessary to enforce its recovery. In other words, steps must be taken vis-a-vis the recipient to ensure the aid is reimbursed. In the light of the legislative and interpretative development of European principles, recovery can now be ordered either by a decision qualifying the aid as unlawful taken either by the European Commission or by a national court. The recovery order is generally linked to the unlawfulness of the aid paid (for failure to comply with the procedure) or its incompatibility (fulfilling the requirements of Article 107(1) TFEU). The powers of the Commission to recover aid are subject to a limitation period of 10 years. After this period, the aid is deemed to be existing aid (and therefore subject to the relevant rules). This is a limitation period which lays down the maximum time within which the Commission may exercise the power to order recovery, in accordance with Article 16 of Regulation 2015/1589 intended to ensure legal certainty. The Commission’s decision is immediately binding and mandatory as to its content in the national legal system of the Member States. With regard to recovery, Member States must establish internal procedures in accordance with the European principles of procedural autonomy. The recovery procedure is governed by the abovementioned Regulation 2015/ 1589 of 13 July 2015. For the purposes of this work, it is hereby confirmed that: – the aid must always be recovered unless recovery is contrary to a general principle; – the aid is to be recovered including interest;

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– recovery must be effected in the Member State in accordance with national procedures which must allow the immediate and effective execution of the Commission’s decision.73 The State is therefore bound to necessarily enforce the Commission's decisions. The only limitation in the choice of procedures to be applied is that the principle of effectiveness must be observed. The State must therefore choose the procedure which ensures the greatest certainty and speed (and thus effectiveness) in the enforcement of the decision, assessing whether it is preferable to establish a specific procedure or to use the already existing general procedures for equivalent cases.

1.6.2.3

The Protection of Rights

It is still possible, in the field of State aid, for general actions to be adopted under European law provided that specific requirements are met. In particular, infringement procedures may be brought (under Articles 258 to 260 TFEU) against the State where it has infringed the State aid framework by failing to comply with the notification obligation or by failing to recover the aid declared as incompatible. Similarly, a reference may be made to the Court of Justice (under Article 267 TFEU) for a preliminary ruling in cases where the national court, in a case which is pending before it, is in doubt as to the interpretation and application of the general framework on State aid. This also includes the general matter of claims for damages in the field of State aid. This is a very important area which concerns the general issue of the protection of the legal position of subjects that have been affected by the implementation of State aid. In this context, there is somewhat less protection and, in any event, it is subject to the recurrence of specific conditions. The possibility for the beneficiary of the aid or the entity harmed by the payment of the aid bringing an action for damages should be seen as a final resort. Indeed, in this regard, there is a general interest of the European Union with regard to legal certainty which tends to prevail over the legitimate expectations of the taxpayer.

On that point, there has been an important Notice from the Commission, 2007/C 272/05 ‘Towards an effective implementation of Commission decisions ordering Member States to recover unlawful and incompatible State aid’. 73

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1 The State Aid Framework Within the European System. Evolution of. . .

Concluding Remarks

The analysis set out in this chapter has shown the importance that the matter of State aid now holds for European legal integration policy. The important role of State aid is linked to the various historical stages of the European Union’s activity and to the gradual implementation of the objectives relating to the single market. The aid legal framework has not always been so important in European policy. Furthermore, the various sections of the framework themselves have developed along different lines over time while remaining anchored in the needs of the market and to the political direction at various historical moments. The centrality of State aid is unquestionably the result of the European policy of the last thirty years in which the requirements of the market have been combined with social needs, striking a balance between the principles of the liberal economy and the principles of the social market economy. In that sense, State aid has been able to balance those principles and fulfil its primary role. The elements that have allowed this process to take place are, as has been shown, to be seen in a number of essential characteristics. State aid is a field showing both a liberal economy component and a significant social market economy component. The State aid framework is based on concepts which are fundamental to the European project (competition and market) which are characterised by a flexibility of content and a constant ability to meet the needs of the time and to meet market objectives. Furthermore, the matter at hand is intended to be implemented by the European Commission while at the same time involving other European bodies (Council and Court of Justice) and national bodies (national courts and administrations) in its application. The final fundamental factor is the position of this field within the gamut of European competence. The field of State aid concerns competition, an area which falls within the exclusive competence of the European Union. However, through the protection of competition, it manages to penetrate all other legal fields in which policies of favourable selective policies are regulated, and even reaches sectors which are, in principle, outwith the area of European competence. It is thus defined a framework which has no actual limits, but rather possesses inexhaustible potential.

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Chapter 2

The State Aid Framework in European Fiscal Integration

Contents 2.1 European Integration in Tax Matters. The Development of European Tax Law . . . . . . . . 2.1.1 The Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 The Interplay Between Sources of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.3 The Tax Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Fiscal Policy in Indirect Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 The Customs Union and the Principle of Equal Treatment of Goods . . . . . . . . . . . 2.2.2 The Principle of Tax Harmonisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 European Integration in the Field of Direct Taxation. The Role of State Aid. Coordination Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 The Principle of Tax Non-discrimination and the Prohibition of Tax Restrictions 2.3.2 Restrictions on Economic Freedoms and Justifications for Taxation . . . . . . . . . . . . 2.3.3 Approximation of Direct Tax Matters. Article 115 TFEU Directives . . . . . . . . . . . 2.3.4 Harmful Tax Competition and Aggressive Tax Planning. Definition . . . . . . . . . . . 2.3.5 The International Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.6 The European Approach. Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.7 Convergence Between Harmful Tax Competition and the Prohibition of State Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Fiscal State Aid. General Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 The Contention of Fiscal Function Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.2 The Definition of Guidelines for National Tax Policy on Selective Framework 2.4.3 The Function of General Support for the National Economy. Support in Economic and Social Emergencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.4 Regulation in a Common Area of the Principle of Non-discrimination in Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.5 Tackling Harmful Tax Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.6 The Definition of the Promotional Function of Taxation . . . . . . . . . . . . . . . . . . . . . . . . 2.4.7 Empowering Territorial Autonomies and Fiscal Federalism Projects . . . . . . . . . . . 2.5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

58 60 62 65 67 69 71 73 76 78 82 84 86 88 90 91 93 95 96 99 101 102 103 103 104

Abstract The significance of the State aid framework for tax matters may be proved from an analysis of the path European tax law has followed in its development. Faced with the limitations of early European tax policy, State aid has gradually become the general instrument of integration in respect of direct taxes.

© Springer International Publishing Switzerland and G.Giappichelli Editore 2022 R. Miceli, The Role of State Aid in the European Fiscal Integration, https://doi.org/10.1007/978-3-030-88735-3_2

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Fiscal aid has adopted two objectives: the removal of selective national frameworks and the fight against harmful tax competition. In doing so, fiscal aid has exceeded its original purpose, adopting specific and very important objectives. Aid is intended to operate within the fiscal framework which has always essentially been a prerogative of the sovereignty of each State and the foundation for every form of support and development policy. In that regard, aid has contained the current fiscal crisis, obtaining positive effects in economic terms at the expense of a major sacrifice in terms of State sovereignty. While operating within the market and competition areas, fiscal aid is intended: to combat unfair tax competition, to lay down the guidelines of national tax policies, to establish taxation as a way of awarding certain behaviour, and to support States in times of economic crisis and social emergency. Fiscal aid is regarded as an autonomous category of aid in terms of its structure and function.

2.1

European Integration in Tax Matters. The Development of European Tax Law

The State aid framework has become a fully-fledged part of European fiscal legislative integration, going on to be an area of considerable historical importance and undisputed relevance today. State aid is now one of the main instruments of European fiscal policy. This chapter is therefore devoted to the analysis of European tax integration in order to highlight the role it plays within the State aid framework. The basic premise is that European tax integration is a complex phenomenon that has followed an autonomous rather than a pre-defined approach. This is a phenomenon which has given rise to a compelling and complex legal framework that does not fit into ordinary patterns.1 Moreover, integration is a topic that is constantly evolving and growing. The current structure of fiscal policy in Europe is the result of a significant process of historical evolution and ideological development, during which the Union has addressed important legal and economic issues to arrive at the current framework. This process began with the establishment of the European Union and has intensified as it has evolved. Although the main objectives of the Union did not seem to relate directly to tax matters, taxation has, from the outset, proved to be fundamental to the process of development of European law. Tax law has thus been directly concerned in the activity of the European Union.2 1 2

See Ingrosso (2009), p. 4. See Sacchetto (2001), p. 3; Maisto (2006), p. 865.

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Important judgments of the Court of Justice,3 delivered in step with the process of legal integration, have involved tax matters, making explicit the central role that it played in the achievement of European objectives. The European tax project has evolved along a path that has gone through very important stages and has gradually achieved both negative and positive legal integration.4 The guidelines for this process were laid down in the 1957 Treaty of Rome and formed the basis for the construction of European tax law. Secondary legislation, judgments of the Court of Justice and Commission Decisions implementing European law have played a central role over time.5 Legal integration in tax matters has followed a growing pattern, justified not least by the increasing importance that tax matters have assumed in the international landscape on account of the close relationship between the regulation of the economy and the tax matters of the Member States. The result of this evolutionary process has been the creation of an autonomous subject area, namely European tax law, a legal framework with an increasingly wide reach, destined to play a fundamental role in the completion of the single market.6 This is a field which delimits the areas of taxation in the Member States which are currently reserved in an exclusive or shared manner to the European Union.7 It is, therefore, a field of law characterised by autonomous principles and rules. European tax law is considered to be a body of rules enacted by the Community institutions (or by national institutions in accordance with Community provisions) designed to provide a framework for taxation that is intended to achieve European objectives.8 In particular, it defines sources, principles and rules which are functionally linked to each other and constitutes a systematic whole which may be presented as an autonomous field of law. According to Italian legal academic literature, there is a jus commune of European scope that is relevant only to tax matters.9 The key elements in the definition of European tax law are that: – the content and the matters regulated; – the sources of law; – the function of the tax.

3 By way of example, Judgment of the Court of Justice of 5 December 1976, Case 87/75, Conceria Bresciani; and Judgment of the Court of Justice of 15 December 1976, C-35/76, Simmenthal. 4 See Cnossen (2000), p. 466; Bolkerstein (2000), p. 78. 5 See Melis (2016), p. 23; Vanistendael (1996), p. 14. 6 See Boria (2017), p. XVII. 7 See Terra and Wattel (2012), passim. 8 See Sacchetto (2016), p. 16. 9 See Boria (2017), p. XX; Ingrosso (2009), p. 19.

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European integration has, in fact, been implemented through the interaction of sources that varies according to the subject under consideration and is based on a notion of tax that is different from the one recognised in the legal traditions of the States. It is therefore necessary to focus on these important elements in order to understand better the process of European integration in tax matters.

2.1.1

The Content

The current content of European tax law is the result of regulatory activity which has focused on different areas: customs duties, indirect taxation, direct taxation, and process and procedure in the implementation of European rules. The foregoing themes, as will be shown in this work, start from different points in the European project and may be distinguished for having a separate development. The original tax policy, as set out in the Treaty of Rome,10 was aimed at objectives instrumental to the creation of the single market; those objectives were contained in the principles governing: – the abolition of customs duties within the Union and the establishment of a European Common Customs Tariff; – the harmonisation of indirect taxation. At the same time, in an indirect and less explicit manner, another line of EU tax law activity was launched involving direct tax rules that could have a negative impact on competition and the single market. To that end, general provisions contained in the Treaty and whose aim was other than taxation, such as the principle of non-discrimination and the prohibition of State aid, were used. These provisions have been gradually applied to tax matters through an intense interpretative activity on the part of the Court of Justice and the Commission in the areas of competition. In this way, European attitude has also filtered through into direct taxation, starting a trend that has become increasingly pervasive.11 There has also been regulatory activity in relation to direct taxes, based on the principle of approximation currently contained in Article 115 TFEU.12 In this way, European tax law has also regulated areas that were not initially included within the scope of Community action and were not deemed to fall within the different categories of competences laid down in the Treaties.13

10

Treaty establishing the European Economic Community (EEC) on 25 March 1957. See Lang et al. (2016), passim. 12 See Pistone (2018), p. 28. 13 See Orlandi (2018), p. 31. 11

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This creeping extension has always provoked widespread criticism from legal academics and raised the issue of the constant erosion by the Union of areas of national competence in tax matters. Legislative developments have now led to a consolidation of indirect taxation objectives and an increasing focus on direct taxation measures. This latter field of interest has become of paramount importance and is at the centre of political debates.14 The economic crisis that Europe has gone through in the last twenty years, together with the globalisation of the economy, have called for a review of some European policies and undeniably established the centrality of taxation. The full involvement of taxation in these issues has marked out a new historical phase in which the aim is to try to identify the appropriate instrument to achieve a proper regulation of the market through various possible system means.15 In this context, as will be shown, the State aid framework is used as a means of encouraging many important measures in this area. The procedures and processes for implementing the rules have thus developed independently. This was a key area because it was directly linked to the practical application of Community law within the Member States. This aspect, although autonomous, is in fact instrumental to the effectiveness of the substantive framework. In the tax field, the implementation of European law has had a significant impact on national systems, bringing about a substantial revision of administrative and judicial legal principles.16 Implementation in respect of tax matters is a legal area which has been built on the basis of general principles laid down by the interpretative activity of the Court of Justice since, in general, the Treaties have not provided for executive or judicial powers for the Union except in strictly defined matters. In this respect, the only aspect which has been even partly regulated so far as implementation is concerned with reference to taxation is State aid. In this regard, as seen in the previous chapter, the European Union has provided for important implementing powers for the Commission and has issued regulations aimed at the correct application of measures in the Member States.17 The importance of State aid within the European project, the flexibility of the concepts and its substantive and procedural structure are the factors that have resulted in its impressive application in tax law.

14

See Lang et al. (2016), passim. See Weber (2010), p. 28. 16 See Del Federico (2010), passim; Miceli (2009), passim. 17 See Bacon (2017), p. 439. 15

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2.1.2

The Interplay Between Sources of Law

The sources of European tax law are of particular importance in this area inasmuch as they determine: – the extent to which the framework is complete; – the degree of pervasiveness; – enforceability. In that regard, European tax law generally lies in the following sources: – – – – –

rules contained in the Treaty; secondary legislation; interpretative judgments of the Court of Justice; Commission Decisions issued as part of the implementation of European law; European general principles.

An independent role is also played by soft law acts, which are no more than non-binding guidance aimed at directing the behaviour of the States.18 Soft law acts have been deployed in tax areas that are relevant to the European Union but where it was not possible nor was it appropriate to introduce more far-reaching rules. These acts have played a central role in tax matters, constituting an instrument for providing meta-legal rules that have gradually taken on increasing importance until eventually being transposed into legislative acts.19 The work of creating European law involves first and foremost an interplay of sources linked to the regulatory framework of the Treaty, the significance of the problems, the resistance of national Governments, the needs of the market and social demands. According to this view, the Union has, over time and in order to regulate the issues that have arisen from time to time, used the sources which it was entitled to use and which were most effective in regulating the relevant matters. In some cases, the integration process has been implemented through the creation of general principles or by adopting a soft law approach. The Treaty confers exclusive competence on the Union in customs matters and shared competence in indirect taxation, modulated through the paradigm of tax harmonisation. The most solid basis of European law has been built on these principles, inasmuch as it is supported by the direct conferral of competences. By contrast, regulatory activity in the field of direct taxation has relied on a general provision, that of the approximation of the laws functional to the governance of the market (under Article 115 TFEU).

18 19

See Sacchetto (2016), p. 8. See Pistone (2018), p. 33.

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On the other hand, this activity has been more sporadic and has produced more limited results in regulatory terms. Regulatory activity in tax matters over the years has taken the form mainly of directives (harmonisation directives under Article 113 TFEU and approximation directives under Article 115 TFEU) issued by the European Union. Secondary tax legislation has been characterised by the use of a special legislative procedure. The importance of the Community's objectives in the field of taxation has made it necessary to enact detailed legislation to clarify the rules put in place within the framework of the European project. Article 113 of the TFEU (tax harmonisation) does not identify the instrument with which to carry out tax harmonisation but provides for a procedure of unanimous approval of the regulatory act (and therefore the agreement of all representatives of the Member States); Article 115 TFEU (approximation of laws) indicates a preference for the directive as the most suitable instrument for the approximation of national laws.20 On the basis of this regulatory framework, the enactment of secondary legislation on tax matters has preferentially used the instrument of the directive, i.e. the regulatory instrument on the basis of which the guidelines laid down for a particular field are typically set out, leaving the Member State to apply the rules within a period of two years.21 Directives in the field of taxation typically had very detailed content which went far beyond the guidelines.22 The importance of the tax objectives and the need for them to be pursued in a similar way by all Member States has favoured the creation of detailed legislation, which has often been very analytical, and therefore directly applicable at national level when the deadline for transposition expired. These were, in fact, acts which were directives in form but regulations in substance.23 There are many reasons for the use of this regulatory instrument. Member States need a certain amount of time to adapt their national legislation to the changes required by European law. This is not only a technical timeframe but, above all, a political timeframe aimed at getting the Member States used to the fiscal changes required by the European framework.

20

See Pistone (2018), p. 31. See Article 288 TFEU. See Schütze (2018), p. 95. 22 See Granelli (1979), p. 301; Selicato (1990), p. 66; Bosello (1997), p. 605. 23 See Article 288 TFEU which defines regulations. According to that Article, regulations are regulatory acts addressed to all European citizens that contain the regulation governing a matter and are binding from the moment of their adoption. 21

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In that respect, the directive, as a regulatory instrument addressed to the States and not immediately applicable to citizens, has proved to be the most appropriate instrument for striking a balance between political and legal requirements. Another very important instrument in the process of legal integration has been that of general principles.24 These principles have taken on a regulatory function and have gradually become a general source of European law and a reference for interpretation in national law. The general principles have been laid down and elaborated on the basis of the interpretation of the rules of the Treaty by the Court of Justice and also covered matters not falling within European competence. The Commission has played a major role in laying down general competition principles by having constantly to interpret and implement the State aid framework. In that respect, the Court of Justice has often implemented and applied the principles developed by the Commission. The interpretation of European law carried out by those institutions has led to the establishment of principles shared by the States and having the value of general rules of the European Union.25 The role of general principles in legal integration in tax matters is undisputed, as they have filled in the gaps in the Treaties and laid down a path to be followed in line with the needs of the field and with general European principles. The general principles have, over time, guided the course of economic integration in tax matters, making a decisive contribution not only to the creation of European law but above all to the consolidation of European law in national legal systems.26 The importance of general principles has increased over time, as has their effectiveness in tax matters in relation to the new frontiers of European taxation, which are constantly being defined by case law. Those principles have in fact guaranteed the unity of European tax law, ensuring a systematic and coherent vision of the field that has entirely overcome the initial fragmentary competences in tax matters. In tax matters, there has been a shift from explicit to implicit powers on the basis of general principles.27 In the course of European integration, many principles have been transformed from European principles into general principles of the domestic law of the States, being the expression of a new legal system shared by all the members of the European community. In the field of taxation, the general principle that has defined the path to integration is that of non-discrimination in taxation.28

24

See Horspool et al. (2018), p. 137. See Tridimas (2006), passim. 26 See Di Pietro (2013), p. XVII. 27 See Di Pietro (2013), p. XVIII. 28 See Bizioli (2013), p. 191; Melis (2000), p. 1161; Amatucci (1998), passim. 25

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This principle, as will be seen, has been decisive in the integration policy on direct taxation, including with reference to the State aid rules.

2.1.3

The Tax Function

In order to identify how taxation works within the European framework, it is first necessary to understand that the Union has no fiscal function of its own. The Treaties have not laid down any general principles relating to taxation for the European Union and have not assigned taxation a role in the European project. Therefore, the European Union's own taxation has always been structured in a very basic way, as it has been limited to the provision of a simple contribution system, aimed at covering the costs of running the Institutions. Taxation as such has taken the form of direct payments by the States to the Union and revenue transfers (again from the States to the European Union) involving customs duties, shares in VAT revenue and agricultural levies. The European Union has set up a fiscal system that is intended merely to cover costs, not to perform a tax function in the traditional sense. It is therefore a commonly held view that the Union has no fiscal function of its own, in the sense used by the established legal traditions of modern States, namely a fiscal function with the inevitable redistributive component, as part of a policy with criteria for allocating public expenditure on the basis of the principles of social solidarity. The reason for having made this choice is twofold. The Union was created for the express economic purpose of protecting competition and the market, and in view of that, laying down a fiscal function is outwith its objectives. This choice is also linked to the fact that the Union, despite being a community of law, has not generally provided for an administrative and judicial function. In fact, the European Union exercises regulatory functions in general and implementation and judicial functions in only limited and tightly circumscribed cases. The organisational costs are therefore low compared to those of a State in the traditional sense. The regulation of taxes and the regulation of the fiscal function of the Member States in accordance with European principles is, however, a completely different matter. In that context, taxes are not defined in the Treaty and are considered to be regulated according to a new perspective.29 Taxation is regarded in its economic function and not in its financial function.30

29 30

See Selicato et al. (2007), p. 103. See Di Pietro (2013), p. XXIII.

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Taxation is not an instrument to carry out a redistribution of wealth and pursue a general social end but is, rather, intended as an instrument to pursue specific economic policy objectives. Taxes are therefore calculated on the basis of the effects on the market; those effects must be regulated in relation to the specific aims of a sectoral structure. Taxes become instrumental to the objectives of the Union and as such are subject to the requirements of the market. Taxation may be used as a positive or negative instrument acting on the market. The consequence of all this is the emergence of positive integration or negative integration policies. Where taxes constitute an obstacle to European objectives, they must be constrained or removed. In such cases taxes act as an obstruction to European policy and define a negative integration policy. Negative integration is achieved by the removal of tax rules that are obstructive to European freedoms through the direct application of the Treaty rules having direct effect, judgments of the Court of Justice (ruling on interpretation or finding failure to fulfil obligations), and the Decisions of the European Commission. Taxes can also play a positive role in achieving European objectives. When that is the case, taxes are used as a positive instrument to pursue purposes consistent with the economic or social aims of the market. Initially, positive integration took place through regulatory harmonisation and approximation that led to the creation of secondary legislation, putting into effect, mainly, the principle of fiscal neutrality in the market. During that period, in deference to the liberalist ideology, the principle of fiscal neutrality was established in indirect taxation and in some aspects of direct taxation. At a later stage, positive integration became more incisive and taxation became instrumental in promoting market-related social values in accordance with the ideology of the social market economy.31 Positive integration was mainly effected through the fiscal State aid framework. European tax law has been built on the basis of that theory, which analyses national taxation as either negative or positive, depending on the requirements of the market and the effects sought in order to achieve European objectives. This subverts the traditional way of looking at the role of taxation in the State, where the general principles of solidarity and redistribution of wealth take precedence over specific needs. In the European context, on the other hand, the effects of taxes on the market are assessed and these effects are modulated according to the objectives to be pursued. Taxation becomes an instrument of economic policy that must be directed to certain purposes. The aims to be pursued are economic and social, balanced in accordance with the principles of economic liberalism and the social market economy.

31 See Felice (2008), passim; Forte et al. (2012), passim; VV.AA. (edited by Nemo P. & Petitot J.) (2006), passim; Somma (2009), p. 1; See Chap. 1, Sect. 1.1.

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These are important objectives that are also to be found in national legal traditions, but those objectives are qualified in accordance with two different points of view: – in a sectoral manner, i.e. with a specific purpose; – in relation to the market viewed as an expression of general social and human growth. Having set out these general premises and framed the qualifying elements of European tax policy, it is now possible to understand the role that the State aid framework plays in European legal integration by analysing the topic of fiscal policy in indirect and direct taxation.

2.2

Fiscal Policy in Indirect Taxation

Fiscal policy in indirect taxation is the most comprehensive area of European tax law to date. What has developed in this field is an organic framework which establishes the important general principles of fiscal neutrality in the movement of goods and services on the market and of taxing consumption. The State aid framework is fully applicable in this area but has played a marginal role as it has been limited to correcting cases of selective tax schemes which were not covered by other established principles or frameworks.32 It is important to analyse the development of fiscal policy in indirect taxation as it makes it possible to understand how it has operated in the presence of frameworks and principles provided for by the Treaty. The European Union, according to the Treaty of Rome,33 was created in order to achieve two fundamental aims: the elimination of customs barriers in Europe and the establishment of competition in the market. These aims, in the first period of European activity, were expressed in the creation of the Customs Union between the States. The aim of the European Union's activities in this first phase was in fact above all to create a common European free-market area where healthy competition was guaranteed, in other words, an area without frontiers between States in which the recognition of economic freedoms (free movement of goods, freedom of movement of persons, free movement of services and free movement of capital) was ensured. In the Treaty establishing the EEC, taxation was not included among the competences of the European Community, but its importance emerged as an instrument to the achievement of European objectives.

32 33

See Swinkels (2013), p. 311; Montanari (2013), p. 53. See Treaty of Rome establishing the EEC signed on 25 March 1957.

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In that respect, the EEC Treaty provided for the principle of abolishing customs duties and charges having equivalent effect and for a chapter (CHAPTER VI) relating to tax provisions, the most important of which were: – the prohibition of discriminatory and protectionist taxation; – the principle of harmonisation of indirect taxation. The focus of the tax legislation of the first phase of the European Union was on the implementation of those provisions. Those provisions represent an important point in European legislative activity and have never lost their relevance. These are, moreover, still the only provisions of the Treaty expressly aimed at taxation, since they have been confirmed in the same terms in successive versions of the Treaty. The policy that emerged at this stage was that of promoting fiscal neutrality in respect of trade by meeting market needs. The abolition of customs duties, the prohibition of discriminatory and protectionist charges and the principle of harmonisation of indirect taxes are, in fact, aimed at the establishment of fiscal neutrality, in order to achieve an economic area in which taxes are not able to influence the choices of economic operators and consumers. In this context, therefore, non-neutral taxes were removed and a general principle of neutrality in trade and consumption taxation was established. Consumption is the moment at which a good or service leaves the market production cycle and enters the stage in which it is destined to be used for private purposes (i.e. outside the market). The European Union thus embarked upon a negative integration activity (involving the elimination of non-neutral taxes) and a positive integration activity (through a general effort to provide for tax rules which were trade-neutral and aimed at consumption). Positive integration has above all served the needs of a neutral market, but in certain aspects of the rules of individual taxes on consumption (VAT and excise duties) there are also provisions that express different values and that can be traced back to the establishment of social values in the market.34 To that end, there follow some reflections on those individual aspects.

34

See Montanari (2013), p. 74.

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2.2.1

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The Customs Union and the Principle of Equal Treatment of Goods

The European Union's fundamental objective of abolishing customs between Member States was completed in 1992 with the Maastricht Treaty35 and the adoption of the Community Customs Code.36 Currently, Article 28 of the TFEU states that ‘the Union shall comprise a customs union which shall cover all trade in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect.’ It also provides for the adoption of a common customs tariff in relations with third Countries. This latter provision implies an implicit prohibition on all Member States to regulate their customs relations with non-EU countries independently. The prohibition of customs duties and charges having equivalent effect is contained in Article 30 TFEU; this provision establishes such prohibition both in relation to the movement of goods within Community territory and in relation to those to third Countries. The provision contains precepts which are decisive for European fiscal policy in that they are linked to its primary objectives of abolishing borders and establishing free competition and—at the same time—introduces a strict limit on the power of States to tax circulating goods. Customs duties of a fiscal nature are part of the broader genus of customs duties, the latter being qualified as charges of a pecuniary nature payable upon crossing a border. So far as concerns taxation specifically, the prohibition on the imposition of customs duties and charges having equivalent effect expressly prohibits the imposition of charges on goods by reason of the (presumed) fact that they cross a border between the territories of the Member States (a customs charge), as well as charges which—even if levied at a later date, with respect to the crossing of the border between the territories of the Member States—have the same effect as a customs duty, affecting goods intended for (or coming from) another State (a charge having equivalent effect). A charge having equivalent effect is therefore any pecuniary charge directly or indirectly connected with the movement of the good and of a nature such as to raise its cost.37

35

See the Maastricht Treaty on the European Union, signed on 7 February 1992. See Council Regulation No 2913/92 of 12 October 1992. 37 See Judgment of the Court of Justice of 26 February 1975, C-63/74, Cadsky S.p.A.; Judgment of the Court of Justice of 25 January 1977, C-46/76, Bauhuis; Judgment of the Court of Justice of 9 March 1978, C-106/77, Simmenthal; Judgment of the Court of Justice of 31 May 1979, C-132/78, Denkavit Loire. 36

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In that regard, this prohibition is the necessary complement to the prohibition on customs duties.38 In absolute terms, the crossing of a border cannot be the basis for a pecuniary charge, neither at the time of such crossing, nor at a later date. In this respect, a general principle is considered to exist today in the fiscal field of the freedom of transit of goods in the territory of the Member State.39 The prohibition does not apply in the case of charges which can be characterised as payment for a service provided to the operator (consideration) at the time when the goods cross the border; in fact, the existence of a consideration justifies the price paid by the economic operator, which therefore does not constitute a duty or a charge having equivalent effect (prohibited by the Treaty), but consideration for a service provided under a free-market system.40 This framework is further integrated by the prohibition contained in Article 110 TFEU of discriminatory and protectionist taxation. The provision in question is the logical complement to the prohibition of charges having equivalent effect; as a general rule, in fact, it prohibits discrimination against goods from other Member States through forms of taxation having a different structure from charges having equivalent effect, but capable of achieving the same effects as the latter.41 What protectionist and discriminatory taxes have in common is the fact that they do not affect goods by reason of the fact that they cross a border (such as charges having equivalent effect); however, both have the effect of discriminating against non-domestic goods for tax purposes in relation to domestic goods at a point in time after they cross a territorial border. Discriminatory taxes operate on similar products, while protectionist taxes operate on products that are in a competitive relationship (‘competing products’). The latter concept is much broader than that of ‘similar products’, so that discriminatory taxes are considered to be a species of protective taxes.42 The set of provisions analysed above, when taken together, constitute a fiscal principle of equal treatment of goods throughout the European territory and a general

38

See Judgment of the Court of Justice of 14 September 1995, C-485/93, C-486/93, Maria Simitzi. To that effect, see Judgment of the Court of Justice of 16 March 1983, C-266/81, Società Italiana per l’oleodotto transalpino (SIOT). 40 See Judgment of the Court of Justice of 25 January 1977, C-46/76, Bauhuis; Judgment of the Court of Justice of 1 of January 1969, C-24/68, Commission of the European Communities against Italian Republic; Judgment of the Court of Justice of 12 July 1977, C-89/76, Commission of the European Communities v Kingdom of the Netherlands; Judgment of the Court of Justice of 31 January 1984, C-1/83, IFG. 41 See Judgment of the Court of Justice of 27 July 1980, C-169/78, Commission of the European Communities v Italian Republic. 42 See Judgment of the Court of Justice of 27 February 1980, C-171/78, Commission of the European Communities v Kingdom of Denmark; Judgment of the Court of Justice of 17 June 1999, C-166/98, Socridis. See Bizioli (2013), p. 191. 39

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prohibition of tax discrimination in respect of the same goods on the basis of their origin. It should be noted that the prohibition of discriminatory taxation, contained in Article 110 TFEU, is a provision that has been of significant importance in the evolutionary process of European tax law. This provision is the regulatory reference which made it possible to apply the principle of non-discrimination to tax matters at a time when the development of the principle was still at an embryonic stage.43 In the field of taxation, in fact, the principle of non-discrimination of goods marks out an important area which has been constructed independently and at a stage prior to that of the general principle of non-discrimination.

2.2.2

The Principle of Tax Harmonisation

The harmonisation of indirect taxation is governed by Article 113 TFEU, according to which ‘The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition’. This action has been a fundamental objective of the European Union since the entry into force of the Treaty. Harmonisation is the legislative process through which a homogeneous organic structure is achieved in respect of the fiscal rules of States in the field of indirect taxation. Harmonisation is the gradual shift towards adhering to common models, including through the elimination of differences and dissonance between individual systems.44 The reason for the decision to opt for tax harmonisation can be understood by virtue of the important functional link existing between the main Community objectives (abolition of customs duties and achievement of the free movement of goods, persons, services and capital) and indirect taxation; in this sense, a common fiscal policy, concerning the taxation of goods and services intended to circulate in the Community market, appeared essential for the effective realisation of European projects. In the process of harmonising indirect taxation, Community action has essentially followed two routes:

43

See Boria (2017), p. 171; Bizioli (2013), p. 195; La Scala (2005), p. 134. See Cosciani (1958), p. 63; Stammati (1965), p. 781; Sacchetto (1989), p. 564; Russo and Cordeiro Guerra (1990), p. 629; Adonnino (1999), p. 77. 44

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– the adoption of a uniform taxation model for the main tax, which is designed to regulate the movement of goods and services within Europe. This led to the establishment of value added tax (the VAT), which is characterised as a non-cumulative multi-step tax structure and is in the nature of a consumption tax;45 – the reduction of differences and the implementation of a uniform framework for manufacturing and consumption taxes (excise duties) and taxation on capital movements. In accordance with these guidelines, excise duties have been harmonised over time46 and the Directive on the raising of capital has been adopted.47 In the context of all the foregoing, the European Union has concentrated its effort above all on VAT and excise duties, through the regulation of which it has sought to implement the general project of an organic and harmonised consumption tax.48 Thus, a form of taxation has been gradually implemented on consumption and on the movement of goods and services that is both uniform and consistent with European tax models and reference principles. The principle of fiscal neutrality in economic activity has thus been applied in deference to the European liberal approach. VAT is by nature a tax whose structure does not affect economic operators and is intended to affect only the stage of consumption of goods or services. Excise duty is constructed according to the same approach. Fiscal policy with regard to direct taxation has thus been directed towards the creation of a neutral market in which choices must not be influenced by tax legal framework. Taxation must be neutral with respect to the conduct of economic activities and affect only final consumption. As mentioned above, the VAT and excise duty rules set out wide-ranging but detailed methods giving relief from the tax burden, through which social values are promoted in pursuit of the interests laid down by the Treaty pursuing the ideological aspect of the social market economy. Under the VAT rules there is a wide range of exempt transactions in which the ordinary mechanism for applying the tax is departed from and the tax is not applied at the stage of consumption of the goods or services. Providing an exemption for certain transactions promotes values such as health, culture and heritage.49 The rules governing excise duties show clear regard for the importance of the environment in the setting of tax concessions. In this case, there is a derogation from 45

See Comelli (2000), passim; Cordeiro Guerra (1996), p. 332. See Fichera (1997), p. 216. 47 See Council Directive of 17 July 1969 concerning indirect taxes on the raising of capital (69/335/ EEC), now Council Directive 2008/7/EC of 12 February 2008. 48 See Basilavecchia (2009), p. 367. 49 See Montanari (2013), p. 74. 46

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the interests of fiscal neutrality created by tax concessions to promote virtuous behaviour in terms of health and the environment.50 Social values have also been introduced as part of the implementation of a neutral taxation project. In these areas, the State aid framework has often been applied to analyse the appropriateness of the choices made and the compatibility of the structure of the derogating rules with the principles established for the various sectors.51

2.3

European Integration in the Field of Direct Taxation. The Role of State Aid. Coordination Policy

The evolution of European policy has shown there is a need to lay down common principles also in the area of direct taxation, as a number of issues emerged that were of crucial importance for the achievement of European objectives. Direct taxation traditionally constitutes a fundamental prerogative of the sovereignty of each State. Direct taxation, in fact, defines the essential guidelines of any political programme and establishes the identity of any tax system. For those reasons, States are generally very reluctant to accept limitations on direct taxation, and no such rules have been provided for in the European Treaties. This arrangement continued, in the face of many difficulties, until the European project focused on the abolition of customs duties and the harmonisation of indirect taxes. Once having achieved those objectives, it became necessary to broaden the scope. The scale of the problems that gradually emerged in the Community policy was the factor that encouraged integration in the field of direct taxation in the absence of competences expressly conferred on the European Union.52 It is for that reason that European integration has taken place in areas of competence not expressly conferred on the European Union.53 As mentioned earlier,54 the route followed has been very fragmented and has been characterised by the use of a range of regulatory and interpretative tools. A policy was thus established with principles of its own and which may be described as having caused an important depletion of fiscal power at State level. In this area, too, there has been positive and negative integration, which has gone through various phases.55 50

See Puri (2014), p. 309; Verrigni (2018), p. 151. See Montanari (2013), p. 53. 52 See Pistone and Szudoczky (2020), p. 27. 53 See Weber (2006), passim. 54 See Sect. 2.1.1 of this Chapter. 55 See Pistone and Szudoczky (2020), p. 29. 51

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In the first phase of European activity, the fundamental objective that encouraged this approach was the elimination of tax discrimination and restrictions (i.e. restrictions arising from tax legislation) and the establishment of the principles of fiscal neutrality in the context of certain transborder situations involving economic activities. It involved the application of fiscal principles which expressed a liberal economy philosophy. In this context, in addition to issuing specific directives, the principle of non-discrimination in taxation and the prohibition of restrictions, developed through the case law of the Court of Justice, have been the fundamental driving force behind this evolution.56 At the same time, the phenomenon of harmful tax competition between States, which was already showing very serious effects on the market and on competition at the end of the last century, was acknowledged at the European level. The European Union has also tried with the instruments at its disposal to address this problem. Generally with regard to combating harmful tax competition, it came to be accepted that State aid could be applied to taxation and gradually became a major plank of European policy. At this point, a bit of shoehorning took place: State aid was deployed as an instrument for purposes for which it was not originally intended and applied in a field that was clearly not within the scope of its original purpose. It is thus that opens the history of fiscal State aid which, while it gave rise to significant problems concerning its interpretation, was nevertheless able to provide a fundamental and innovative possibility for legal integration. The application of the State aid rules to fiscal matters has in fact initiated a process of negative and positive integration of the national tax system which is still ongoing. With regard to negative integration, the function of fiscal aid has from the outset exhibited certain differences from the other fields of law. The principle of non-discrimination and the prohibition of State aid have established an important guideline for European fiscal policy aimed at the general elimination of any unjustified tax treatment likely to affect the objectives of the single market and competition. In this context, fiscal aid has followed two different models:57 – the defence of competition within the State, according to the traditional model; – the fight against unfair tax competition, according to a model which is both new and outside the original State aid guidelines. These aims, as shall be seen, have an impact on European law, on international balances and on the fiscal function of each individual State, constituting a mix of extremely important values that the fiscal State aid regime is intended to regulate. 56 57

See Lyal (2003), p. 68; Gammie (2003), p. 86. See Boccaccio (2016a, 2016b), p. 4.

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The State aid framework has also been responsible for a policy of positive integration that has none the less modified certain national fiscal frameworks in a European direction, starting them on a virtuous path supporting social values for growth and market improvement. The various steps taken in European tax policy with regard to direct taxation have been referred to as a coordination policy because of the synergy of the intervention instruments used and the results achieved.58 Put briefly, the instruments that determined the tax policy of direct taxation and carried out such coordination were: – the principle of tax non-discrimination and the prohibition of restrictions; – directives in pursuance of the principle of approximation of laws under Article 115 TFEU; – soft law initiatives on unfair tax competition; – the State aid rules. The main feature of the tax co-ordination policy is the fact that it represents a form of Community integration activity based on convergence that established European values within national tax disciplines.59 It is therefore less intrusive than harmonisation, but it is equally effective in the process of European integration in tax matters. Coordination has not, in fact, been aimed at eliminating national policies, but only at aligning them at a European level and ensuring that important values of European general principles are included in them. The State aid framework has played a key role in this process, providing the instrument of greatest pervasiveness in fiscal matters among the various instruments of integration. As will be shown, State aid represents an important point of convergence between the principle of non-discrimination and harmful tax competition policy. The reasons fiscal State aid is located as part of the wider State aid framework are many and have been made clear several times. In fact, State aid has a solid and detailed body of rules, officially recognised in the Treaty, which expressly provides for European competences in the implementation of those rules. Furthermore, the potential breadth of the contents of that framework—as evidenced by the flexibility of its concepts and the intense activity of the European Commission60—stands behind an important area of intervention within the field for which it is intended.

58

See Pistone and Szudoczky (2020), p. 29. See Basilavecchia (2009), p. 361. Cipollina (2004), p. 93; Melis (2007), ad vocem; Gallo (2000), p. 725. 60 See Chap. 1, Sects. 1.2.1 and 1.2.2. 59

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It is therefore clear that at the very moment when the applicability of this legislation to tax matters was recognised, a new course was set for European tax policy in the field of direct taxation. With that in mind, the instruments that have established the coordination policy shall be analysed by turns, finishing with the State aid framework.

2.3.1

The Principle of Tax Non-discrimination and the Prohibition of Tax Restrictions

The principle of non-discrimination and the prohibition of restrictions have been of decisive importance in the process of Community legal integration, since they have provided a general vehicle for European law in the Member States, even in matters not specifically falling within Community competence. These principles have influenced the development of tax matters by establishing a way of thinking according to which unjustified restrictions of European freedoms on natural and legal persons are prohibited. The combined work of the two principles has consolidated the most important general value of European legal development. This is the principle of equality and equal treatment in taxation legal frameworks, which includes a general prohibition on restricting economic freedoms through taxation. The principle of non-discrimination and the prohibition of restrictions have different origins and regulate different situations but are complementary in the common role they play in the European context. Both principles, in fact, aim at establishing economic freedoms and guaranteeing the functioning of the market and have been developed by the Court of Justice through significant interpretative case law.61 The principle of non-discrimination and the prohibition of restrictions are not to be found as such in the European Treaty, which contains a general rule on the prohibition of discrimination on the basis of nationality62 and specific provisions establishing and governing the four economic freedoms (free movement of goods, free movement of persons, free movement of services and free movement of capital).63 These are general provisions that have constituted the theoretical basis for the construction of a nucleus of principles that today applies to a wide swathe of fields of law, including taxation.64

61

See van Thiel (2002), passim; Gammie (2003), p. 86. The current legal point of reference for this principle is Article 18 TFEU. 63 See Article 30 et seq. of the TFEU; Article 45 et seq. of the TFEU; Article 56 et seq. of the TFEU; Article 63 et seq. of the TFEU. 64 See Englmair (2020), p. 55. 62

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The application of the principle of non-discrimination to tax matters has not been particularly problematic since, as already noted, the Treaty contains a specific provision prohibiting discriminatory taxes and representing, in that regard, a general value of non-discrimination in taxation of goods. A policy to establish non-discrimination of goods for tax purposes has therefore been in place since the beginning of the Community’s activity and has been an important element in the design of customs rules and the free movement of goods.65 On the basis of those premises, the principle of non-discrimination relating to other European freedoms has been applied to the area of taxation by way of interpretation.66 The principle of non-discrimination requires that there should be no different and unreasonable (discriminatory) legal treatment between individuals on the basis of nationality. The article in question has been applied in order to compare, by way of a combined assessment, the treatment of the resident to that of the non-resident in relation to one of the fundamental freedoms laid down in the Treaty.67 According to the principle of non-discrimination, there must be general equality of treatment between a State’s own nationals and those of other Member States and direct or indirect discrimination, or the appearance of discrimination, of non-residents must be avoided. The principle of non-discrimination has been applied to the area of direct taxation; this has become more evident when States have established tax regulations that are contrary to or restrictive of the Community freedoms in respect of non-residents. The principle of non-discrimination has been used above all for the purpose of assessing European cases with elements of transnationality, with regard to both natural and legal persons. The Court of Justice has thus developed a large body of case law aimed at identifying the discriminatory effect in the field of direct taxation.68 The prohibition of restrictions arose by extrapolation from the individual provisions of the Treaty which protect the European freedoms of movement of goods, persons, services and capital. This principle requires that there should be no unreasonable or unjustified restrictions on European freedoms. This principle established a general prohibition on the implementation of restrictions on European freedoms through fiscal rules.

65

See Boria (2017), p. 171; Bizioli (2013), p. 195. See Lyal (2003), p. 68. 67 See Pistone (2018), p. 154. 68 See Judgment of the Court of Justice of 28 January 1986, Case C-270/83, Avoir fiscal; Judgment of the Court of Justice of 26 January 1993, C-112/91, Hans Werner; Judgment of the Court of Justice of 17 July 1997, C-28/95, Leur -Bloem; Judgment of the Court of Justice of 13 July 1993, C-330/91, Commerzbank AG, Judgment of the Court of Justice of 27 June 1996, C-107/94, P.H. Asscher. 66

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The Court of Justice has followed both approaches—that of non-discrimination and that of the prohibition of restrictions—and adopted, on each occasion, the one most appropriate to determine the legal question submitted for its analysis. The Court’s interventions have become more and more incisive, progressively moving from the principle of non-discrimination to the prohibition of restrictions, the latter also being considered an effective tool for the removal of obstacles to the achievement of the common market.69 Both principles have played an important role in the negative integration of national systems.70 Those principles have in fact eliminated national tax provisions that prevented or restricted the exercise of European freedoms. The synergy of those principles has ensured over time the establishment of the European freedoms, countering discriminatory treatment and unjustified restrictions. In this context, the principle of non-discrimination has taken on a new and more evolved form, aimed at shaping national taxation towards, above all, denying the exercise of States’ powers in taxation in a way that obstructs the fundamental economic freedoms of the Community legal order.71 This activity has also resulted in an attenuated form of positive integration. The Member States have interpreted the existing rules from a European point of view, encouraging—including through the use of taxation—the promotion and protection of the Community freedoms.

2.3.2

Restrictions on Economic Freedoms and Justifications for Taxation

The principle of non-discrimination and the prohibition of restrictions allow for derogations which have been developed by the Community system.72 These are situations in which the discrimination or restriction are justified by other interests or values of equal importance to that being restricted; in that regard, there is no discrimination or restriction and the measures may be deemed to be ‘justified’. The analysis of these derogations is of some importance in the present work in view of the common conceptual basis underlying the values of non-discrimination and the State aid regime.

69

See Judgment of the Court of Justice of 21 September 1999, C-307/97, Compagnie de SaintGobain; Judgment of the Court of Justice of 6 June 2000, C-35/98, Verkooijen; Judgment of the Court of Justice of 8 March 2001, C-397/98 and C-410/98, Metallgesellchaft Ltd and Others. 70 See Melis (2000), p. 1161. 71 See Basilavecchia (2009), p. 383. 72 See Pistone (2018), p. 164.

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The justifications are defined by the Treaty or have been laid down by the interpretative activity of the Court of Justice. In view of the importance that the principle of non-discrimination and the prohibition of restrictions have assumed in tax matters, the Court of Justice has developed specific justifications applicable to the field of taxation.73 In tax matters, the justifications accepted by the Court of Justice are: – – – –

fiscal cohesion; the balanced distribution of powers of taxation (also the principle of territoriality); the need to prevent tax avoidance and abusive behaviour; the need to ensure effective fiscal controls and revenue collection.

The principle of fiscal cohesion is very important and is expressed in the relationships between different tax areas.74 The concept of fiscal cohesion was developed by the Court of Justice in the 1990s75 and has three levels of application: the national level, the Community level and the international level. At the national level, fiscal cohesion has been assessed as the reasonableness of the discrimination or restriction in strictly economic terms and on the basis of the legislative system of the State concerned. The assessment (of the existence) of cohesion has never extended to a reflection on the principles of the national system as a whole; such an assessment has— rather—been substantially limited to the consideration of segments of the regime pertaining to a tax or to the relationship between two taxes. With regard to those aspects, cohesion has been held to exist where there is a correlation between the rule giving rise to a restriction or discrimination and another rule allowing a benefit or favourable treatment. The offsetting of the advantage to be derived from one provision against the benefit to be derived from another rule, or the link between the waiver of taxation (under one rule) and the taxation (under another rule), may make discrimination or restriction consistent with European principles, in so far as they are justified by a correlation of provisions which corresponds to the logic of a unified system. Cohesion is thus intended to prevent the recognition of a European fundamental freedom from upsetting the balance of national legislation concerning the individual taxpayer or the tax system.

73

See Judgment of the Court of Justice 20 February 1979, C-120/78, Cassis de Dijon case. See Melis (2009), p. 610. 74 See Mondini (2007), p. 52. 75 See Judgment of the Court of Justice of 28 January 1992, C-204/90, Bachmann case; Judgment of the Court of Justice of 11 August 1995, C-80/94, Wielockx; Judgment of the Court of Justice of 16 July 1998, C-264/96, Imperial Chemical Industries; Judgment of the Court of Justice of 3 October 2002, C-136/00, Danner; Judgment of the Court of Justice of 23 October 2008, C-157/ 07, Krankenheim Ruhesitz.

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The international level of cohesion, however, requires an assessment of the relationship between the domestic rule that contains the potential discrimination or restriction and the provisions contained in international Conventions.76 A national tax treatment is, according to the Court of Justice, cohesive (and therefore justifiable) if it is reasonable and if it is supported by conditions of reciprocity in relation to the other Contracting State. The Community level of cohesion, however, concerns the discrimination or restriction contained in a national rule, introduced by the State in exercise of its taxation powers. It is precisely the establishment of this latter aspect of cohesion that has gradually led to the acceptance—in case law—of another justification ground, which has thus become autonomous from the original principle of fiscal cohesion. It is indeed the need to ensure the effective exercise of taxation powers, also known as the principle of territoriality, which justifies cases in which a Member State applies certain provisions only to persons and activities located or established within its own territory or applies certain rules only to residents or non-residents.77 The need to exercise taxation power in an effective and direct manner to achieve European objectives may in fact justify asymmetrical choices regarding taxation. In that regard, the issues that have been central to the application of this justification have concerned, in particular, the importance at national level of losses of non-resident undertakings, the possibility of deducting at home negative income generated abroad and whether the tax was admissible at the time of the taxpayer’s transfer abroad. The principle of territoriality—understood as the coherent exercise of taxation powers within the Member State—therefore admits discriminations or restrictions of Community freedoms as the result of a rational tax policy of the State, in the substantive conviction that restrictions may in any event be necessary to ensure effective taxation in the national territory. On the other hand, the requirement not to misuse the Community freedoms in order to obtain tax advantages or treatments that do not comply with national rules is what underpins the justification relating to the need to limit avoidance and misconduct. The aim here is to avoid misuse of the Community freedoms, which is what happens when the intention is to use those freedoms for a purpose other than that for which they were provided for and recognised by the European system.

76

In particular, Judgment of the Court of Justice of 11 August 1995, C-80/94, Wielockx. See Judgment of the Court of Justice of 15 May 1997, C-250/95, Futura; Judgment of the Court of Justice of 7 April 2005, C-446/03, Marks & Spencer; Judgment of the Court of Justice of 15 May 2008, C-414/06, Lidl Belgium; Judgment of the Court of Justice of 25 February 2010, C-337/08, X Holding BV. 77

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Anti-abuse rules are subject to a reasonableness test and are justified when they restrict or fetter a Community freedom in order to counter fraudulent behaviour, in accordance with the requirements of proportionality and effectiveness.78 The need to ensure the effectiveness of tax controls and tax collection means that supervisory measures or requirements aimed at preventing tax evasion, which affect non-residents differently from residents, must be accepted. It emerges from the case law of the Court of Justice relating to this justification ground, in particular, that restrictions or discrimination cannot in any event go so far as to disallow tax benefits or differentiated taxation based solely on the assumption that it is difficult for non-resident individuals to find evidence. In this regard, the Court of Justice has in fact pointed out that Community harmonisation in taxation and the rules on the exchange of information constitute a valid tool for States to acquire data and information from each other in order to carry out a proper and effective assessment. It should be noted, therefore, that measures restricting the freedom of the individual may be admitted where they are justified by the need to achieve and ensure effective control and collection; such measures may consist exclusively of formalities, charges imposed on non-residents, and different methods of collection, but must never result in discriminatory taxation compared with those applied to residents. With regard to these permissible measures, the principle of proportionality plays an essential role when assessing their justification.79 In view of the importance of assuring a proper collection of taxes, for which the effectiveness of the controls is the best guarantee, it is necessary that such controls or the duties of cooperation or the statutory obligations imposed on the taxpayer do not appear excessively burdensome or restrictive in relation to the purpose for which they are intended, namely, to ensure the proper fulfilment of tax obligations.80 It is clear that an examination of the justification grounds is essential to understand the area in which discrimination is not at issue because there exists a justification. This area shows significant convergence with the justification ground in the field of State aid, in view of the similarities in the values shared by them (the principle of non-discrimination and the rules on State aid).

78

See, Judgment of the Court of Justice of 9 March 1999, C-212/97, Centros Ltd; Judgment of the Court of Justice of 29 March 2012, C-417/10, 3M Italia; Judgment of the Court of Justice of 12 September 2006, C-196/04, Cadbury Schweppes. 79 See Judgment of the Court of Justice of 28 January 1992, C-204/90, Bachmann; Judgment of the Court of Justice of 15 May 1997, C-250/95, Futura; Judgment of the Court of Justice of 11 October 2007, C-451/05, Europeenne et Luxembourgeoise d’investissements. 80 See Englmair (2020), p. 89.

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2.3.3

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Approximation of Direct Tax Matters. Article 115 TFEU Directives

Regulatory activity on direct taxes has been carried out on the basis of the principle of approximation contained in the current Article 115 TFEU. This is a general provision which enables the enactment of directives, approved unanimously, in matters where an approximation of legislative frameworks is necessary to achieve European objectives. On the basis of this provision, some approximation of some tax rules in the area of direct taxation has been implemented. Directives have therefore been adopted, which have regulated important issues relating to cross-border aspects of tax policy which are of considerable relevance to the effective pursuit of European objectives. Approximation constituted a first step towards the general regulatory coordination activity planned for the field of direct taxes. Early instances of approximation resulted in the approval of directives on: – transnational corporate operations;81 – dividend regime applicable to parent companies and subsidiaries located in different Member States;82 – double corporate taxation of profits of associated enterprises;83 – taxation of savings income in the form of interest payments.84 Recently, the ‘ATAD Directive’—Anti Tax Avoidance Directive85—which regulates tax avoidance practices directly affecting the functioning of the internal market, as part of the ‘anti-tax avoidance package’ was added to this framework.86 This directive was subsequently amended by the ‘ATAD 2’ Directive87 concerning the rules relating to hybrid mismatches.88 81

See Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States, repealed by Council Directive 2009/133/EC of 19 October 2009. 82 See Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, amended by Council Directive 2003/123/EC of 22 December 2003 amending Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States. 83 See Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of profits of associated enterprises. 84 See Council Directive 2003/48/EC of 3 June 2003 and Council Directive 2003/49/CE of 3 June 2003. 85 See Council Directive 2016/1164/EU of 12 July 2016. 86 See European Commission legislative proposal 2016/0011 of 28 January 2016. 87 See Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries. 88 See Traversa and Flamini (2015), p. 396; Lyons (2014), p. 219.

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After a phase during which general principles were drawn up at international level, and following the preparation by the OECD of the well-known BEPS (Base Erosion and Profit Shifting)89 project, the European Union adopted the international approach and relied on approximation directives to lay down certain clear lines for the Member States to protect the market and competition. This is therefore an issue in which there has been a shift from guideline regulation through soft law instruments to the issuing of approximation directives. To that end, the European Union has adopted provisions to combat the phenomenon of aggressive tax planning, aligning itself with the positions taken at international level. The aim of those directives is to combat tax avoidance by providing greater protection for Member States against aggressive tax planning practices that could undermine the balances of the European single market. As will be discussed in more detail in the following sections, aggressive tax planning and tax competition between States are central problems in the legal landscape of recent years that have involved international and European organizations on the front line. In that context, the ATAD Directives (I and II) lay down rules aimed at strengthening the average level of protection against aggressive tax planning in the internal market in line with international tax policies establishing the general principle that tax should be paid where value is generated. Both Directives contain general rules to be implemented within the Member States in the following areas: – – – – –

limits on the deductibility of interest expenses; exit taxation; introduction of the general anti-abuse rule; rules on controlled foreign companies—CFC; rules on hybrid misalignments.

The work carried out by the approximation directives has been important in European policy, but they have been very sporadic and unsystematic. In general, the arrangements set up by these interventions has been partial and has not achieved a continuous organic policy. There have been projects aimed at establishing the systematic intervention of the European Union in the area of direct taxation, but these projects have not yet seen the light of day. Approximation directives are undoubtedly the most powerful instrument of tax policy in the field of direct taxation. Their use is currently limited to cases where the problems to be solved have reached a certain level of importance, are perceived as very serious by the States and a consolidated position on the regulatory solutions to be adopted has been agreed.

89

OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing, https://www. oecd.org/ctp/BEPSActionPlan.pdf.

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As has been pointed out, in fact, such directives can only be adopted unanimously, which means that their approval is the result of a unanimous consensus developed and consolidated over time by all the Member States.

2.3.4

Harmful Tax Competition and Aggressive Tax Planning. Definition

Harmul tax competition between States is an extremely important issue, and interest in it has grown considerably with the economic changes that have taken place over the last century. The issue intersects (and sometimes overlaps) with another very important problem in the international context, that of aggressive tax planning by taxpayers. Both issues (tax competition between States and aggressive tax planning) have become central to European integration in the area of direct taxation. It is therefore essential to define ‘unfair tax competition’ and ‘aggressive tax planning’ and to examine the main trends that have led to a direct involvement of State aid rules in combating these phenomena. Generally speaking, unfair tax competition is to be found when a State develops protectionist tax policies aimed at attracting productive activities and capital to its territory. Protectionist tax policies are those that are implemented through the provision of favourable frameworks aimed at certain types of economic activity, such as capital or general business income. The creation of particularly favourable tax policies constitutes an attraction for all economic operators, thereby establishing an area of legal frameworks which in different ways alter a worldwide tax balance.90 Each activity will gravitate towards locating in countries with lower tax pressure as common sense (which governs all business decisions) dictates, seeking to reduce costs and maximise profits. Similarly, every investor will tend to allocate their earnings to states that set a lower taxation on savings and investments in order to increase their earnings. The effect of such policies will be to attract activities and investments to locate in those States that offer the best tax conditions.91 Aggressive tax planning takes place whenever a taxpayer locates its registered office or place of business and directs its profits towards the countries that offer the best tax conditions, or reorganises and splits up its business in order to reduce its tax burden to the lowest level possible. This latter form of planning can reach extreme levels when, using international tax law instruments (such as permanent establishment, tax residence or transfer 90 91

See Boria (2019), p. 8; Perrone (2019), passim; Pepe (2020), passim. See Boria (2019), p. 8.

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price), activities are located in territories that are completely unrelated to the process of wealth production, thus completely separating the production of income from its taxation. In this way, wealth is extracted from the context of the country of source or residence (where it would have a natural connection) and shifted to other countries that offer optimal taxation conditions. Aggressive tax planning can be linked to unfair competition but can also be a stand-alone phenomenon. Harmful tax competition refers to the conduct of a state, whereas aggressive tax planning refers to the behaviour of taxpayers which can also take advantage of protectionist policies developed by States but can still operate in the absence of the latter condition. Both problems are central to the European and international scene today. In particular, unfair tax competition produces several very negative effects, including: – affecting the wealth of individual states; – changing in the fiscal function of individual states; – consolidating leading positions in the market, thereby infringing the general principles of competition. A State which applies favourable policies and behaves in a way such as to amount to unfair competition is showing a preference for implementing forms of fiscal incentive over the ordinary taxation on wealth produced within the state; that state is pursuing, through its taxes, objectives that diverge from the ordinary fiscal function, which is aimed at the redistribution of wealth and growth for its citizens. The tax lever is in fact being used to attract capital and wealth and to generate socio-economic advantages in the territory such as: greater employment, greater bank liquidity and more services. At the same time, the state where the wealth was produced is being deprived of important fiscal resources for the community and for the pursuit of social objectives in its own territory. The latter State will lose revenue and resources which would have been used for its political programmes, thus increasing pockets of poverty and the gap between rich and poor. In that regard, unfair tax competition refers to a behaviour that affects the fair distribution of taxable income at world level, with important repercussions on social policies and the world of work within States.92 Aggressive tax planning, for its part, operates at the market level, with important spillover effects on States. Undertakings which pursue an aggressive planning policy tend to register higher profits than those they are entitled to, giving themselves a significant advantage over all other economic operators that are not able to perform the same operations.

92

See Boria (2019), p. 8.

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Indeed, aggressive tax planning takes advantage of globalisation and the digital economy and can be easily implemented by the business giants of our age that will become increasingly wealthy by consolidating a position of power or dominance. The problems of unfair tax competition and aggressive tax planning have been addressed both at international and European level, where rules of conduct have mainly been laid down through the adoption of soft law instruments. Our discussion focuses, in particular, on the issue of tax competition between States, which is what has given the State aid framework its right to enter the field of taxation. The problem of harmful tax competition may concern either the tax policies generally implemented by States or the conditions of taxation granted by States to individual taxpayers through procedural instruments establishing the tax. So far as concerns the policies implemented by the States, European and international action has long been concentrated on combating low taxation Countries, referred to also as ‘tax havens’. Generally speaking, tax havens are countries that have a very weak tax policy that does not implement any redistributive plan and does not provide social benefits, thus defining a very low tax burden. Tax havens are in fact Countries with very low taxes, a very low population density and a high level of wealth per capita. Currently, the fight against harmful tax competition is being carried out in all States (and not just to tax havens). It addresses individual frameworks within developed and structured tax systems where such frameworks exhibit the characteristics of harmful tax competition. With regard to the second point, European and international action has concerned the fight against tax rulings issued in individual countries. The significance of the issue of unfair tax competition has marked an important path in the international and European context. That path has been conditioned by the historical evolution that this topic has undergone and by its growing importance since the end of the last century. In this latest historical phase, the two parallel (international and European) paths have in some respects converged.93 A number of considerations now need to be made on those paths.

2.3.5

The International Approach

Since the end of the last century, tax competition between States and aggressive tax planning by companies have become fundamental aspects of tax law at the international level, and is likely to overtake the traditional topic of (international) double taxation.

93

See Easson (1998), p. 1.

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Much important work has been done by the OECD in this area to combat such phenomena.94 In 1998, the OECD published its first report on unfair competition, which defined the phenomenon on an international basis and laid down an initial policy to oppose it.95 At that stage, the fight was against tax havens that attracted foreign investment and capital with forms of tax relief which do not fit with any taxation system. Since 2000, further important documents were published periodically. They identified tax havens and put in place forms of administrative cooperation to reduce such fiscal policies. From 2011, a second phase was launched which—in step with developments in the new economy—laid down an international guideline to discourage aggressive corporate planning. A more detailed and less general policy was drawn up which carefully analysed the various tax systems in the Member States which could lend themselves to being used to engage in harmful tax competition practices.96 In this context, common models of taxation were established which were to be adopted into international tax law in order to ensure a fair and balanced distribution of taxable income between States. A new way of framing the issue was established which set out the conceptual basis for the subsequent policy based on BEPS, that is to say the Base Erosion and Profit Shifting report.97 This term was applied to all national policies and tax techniques that can lead to an erosion of the tax base and a diversion of taxes from the tax authorities through a transfer of profits to Countries that adopt favourable policies. The principles in question were intended for States and aim to reduce protectionist policies but above all to combat aggressive tax planning. Gradually, a policy of convergence was agreed at international level, pursuing a soft law approach by addressing general guidance to States so that they could implement them in their internal taxation systems. The most important principles relate to the taxation of multinationals operating globally and relying on a high level of technology and innovation. In fact, multinationals are the subjects that best manage to escape State regimes by separating taxation from the sources that generated the wealth.

OECD, ‘Harmful tax competition: an emerging global issue’, 1998; OECD, The OECD’s Project on Harmful Tax Practices: the 2001 Progress Report, Paris, 2001; OECD ‘Promoting transparency and exchange of information for tax purposes’, 19 January 2010; OECD, BEPS Project Explanatory Statement 2015 final report; OECD, Model Tax Convention on income and on capital, 2017; OECD, ‘Tax Challenges Arising from Digitalisation – Interim Report 2018’, 2018. 95 OECD, ‘Tax Challenges Arising from Digitalisation – Interim Report 2018’, 2018. 96 See Pepe (2020), p. 151. 97 See OECD, Addressing Base Erosion and Profit Shifting, Paris, 2013; Id., Action Plan on Base Erosion and Profit Shifting, Paris, 2013; Id., Explanatory Statement 2015. Final Reports, Paris, 2015 at http://www.oecd.org/tax/beps. 94

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To that end, States are given guidance to: – – – –

regulate taxation of the digital economy; secure the link between wealth and the source of production for tax purposes; ensure transparency of international activities; ensure regulation of transnational activities;

Some of the principles contained in the BEPS have been transposed into Member States' legislation and a common thread of homogeneous taxation principles has begun to emerge. In particular, on the basis of this development, innovative national regulations have been introduced in relation to permanent establishments, controlled foreign companies (CFCs) and transfer prices.

2.3.6

The European Approach. Developments

The aims of the European Union approach to the fight against unfair tax competition is different to the international approach. Tax competition becomes harmful when a State implements selective advantageous tax policies. These policies locate activities and wealth in a way that runs counter to the values of competition and the market.98 The European Union concentrates on the serious danger to the single market and competition in relation to which the issue of the correct distribution of taxable income is relegated to secondary place. With this in mind, the Union began a serious attempt to combat harmful tax competition but, in the absence of explicit competences, it has mainly resorted to soft law instruments followed, at a later stage, by approximation directives.99 Essential milestones along the way were: – the adoption of the ‘Monti Package’;100 – the Commission notice of 10 December 1998 on the application of the State aid rules to measures relating to direct business taxation; – adoption of the ‘Code of Conduct’, following the agreements reached at the ECOFIN meeting.

98

See Schön (2003), passim; Pinto (2003), passim. See Sects. 2.1.1 and 2.3.2. 100 Communication from the Commission to the Council, 01.10.1997 COM (97) 495 final ‘Towards tax co-ordination in the European Union. A package to tackle harmful tax competition’. See Gallo (1999), p. 970. 99

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The ‘Monti Package’ envisaged several measures to be implemented in the field of taxation, including the approval of a Code of Conduct on business taxation consisting of non-legally binding provisions for the Member States. Its provisions nevertheless included a political commitment by States to respect the principles of fair tax competition and to refrain from conduct amounting to unfair tax competition. The ‘Code of Conduct’ was adopted in 2003, implementing the Decision taken by the Council on 1 December 1997, as part of the Monti Package.101 In this context, the main European objective was the gradual elimination of existing favourable regimes where they were likely to produce unfair tax competition between States. The main aim of the European Code of Conduct is to prevent the location of business activities in Countries with a more favourable tax regime. Regulations which give rise to unfair competition are those that condition the location of business activities and have a selective character. The evidence of their selective character is shown by a very low level of taxation compared to the general level of taxation in the Member State. This level of taxation may be as a result of the rate applied, the rules governing the tax base or other aspects of the tax. In addition, other elements that allow a measure to be described as ‘unfair competition’ include: – the fact that the rules apply only to non-residents; – the fact that the rules apply to economic actors even in the absence of an actual economic activity or economic presence in the State; – the lack of transparency of the measures applied, including with regard to administrative measures.102 Specifically, in the Code of Conduct, some categories of potentially harmful frameworks are identified and are related, above all, to direct taxations. They are: – – – –

regulation of intra-group services; regulation of financial services; regulation of offshore companies; sector-specific schemes and regional tax incentives.

With the adoption of the Code of Conduct, the principles on unfair tax competition—in the areas that did not fall within the frameworks expressly regulated by the European Union—have become more concrete and clearly defined at European level, as they are thus contained in a fundamental document governing the field. The Code of Conduct represented the culmination of series of stages in the area of taxation based exclusively on a soft law approach.

101 102

The Code of Conduct was adopted by the Ecofin Council on 7 March 2003. See Kronthaler and Tzubery (2020), p. 95.

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However, in the context of Commission Communication 98/C 384/03, the Monti Package and the Code of Conduct, a fundamental principle was being laid down which would change the fate of European legal integration. The prohibition of State aid was expressly brought to bear on tax matters, setting it up as the European framework for combating instances of unfair tax competition. Until then, State aid rules had not been particularly relevant in tax matters. With the adoption of the Monti Package, the European Commission took a step towards making clear the applicability of the State aid regime to tax matters. The European Commission honoured this commitment by issuing Communication 98/C 384/03, in which it sets out more clearly the principles linking taxation to the rules on State aid, and subsequently to the Code of Conduct.103 This was a forced step that extended that framework to apply in a new context, bending it to the problems of international tax law.

2.3.7

Convergence Between Harmful Tax Competition and the Prohibition of State Aid

Until the 1990s, State aid had not had wide application to tax measures. The case law was sporadic and not especially significant in this regard. That changed with the adoption of the Monti Package and Council Communication 98/C 384/03, which acknowledged the need for a policy to tackle harmful tax competition and identified the State aid rules as the most appropriate instrument for doing so. This was the first step towards the creation of the fiscal State aid rules. The European Commission realised that selective tax regimes can distort competition and affect the functioning of the market. The prohibition of State aid should therefore contribute to the elimination of measures that hinder competition and the market. It is worth noting that the fiscal nature of the aid is irrelevant since the general (State aid) framework is aimed at aid granted ‘in any form whatsoever’. In this Communication, the European Commission therefore expressly set out how unfair tax competition can be tackled through the State aid rules and that those rules are generally applicable to tax matters.104 There is a natural convergence between the policy of eliminating unfair competition and the rules on State aid. Both aim to eliminate selective tax disciplines that distort competition in the market. In that regard, conduct that is contrary to the principles contained in the Code of Conduct is bound to have European relevance if it impinges on the prohibition of State aid, as governed by Article 107 of the TFEU. 103 104

See Roccatagliata (2006), p. 11. See Fantozzi (2003), p. 121.

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This assessment is an essential part of this essay. European policy on inter-State tax competition has been achieved through significant soft law guidance. However, the only instrument capable of acting more effectively against obstructive policies has been identified as State aid. This connection has become essential with the increase in unfair competition between States that has been a result of the economic and social changes of the last twenty years. In this context, the fight against harmful tax competition has become an important aspect of the State aid regime in Europe, which has thus become the guarantor of an area of principles previously defined by a complex of soft law acts. Subsequently, approximation directives were issued to cover certain aspects, thereby enshrining in law the guidelines expressed in soft law acts and the experience of fiscal aid.

2.4

Fiscal State Aid. General Characteristics

There has been a natural convergence of European actions in the field of taxation in respect of State aid provisions. That convergence has led to an important enhancement of the State aid field, which has gradually become the focus of fiscal legal integration in the field of direct taxation. That convergence has been with regard to the prohibition of State aid. Gradually, taxation has also been absorbed into the regulation of permitted aid. The provisions on State aid which are now contained in Articles 107 to 109 TFEU are worded in exactly the same way as in all previous versions of the European Treaty. These are general rules, not related to taxation and fundamental to the achievement of European objectives. The purpose of these rules is to regulate, at a general level, the conditions under which selective frameworks aimed at economic activities may be allowed in the single market. As shown already, in the first phase of the European Union’s activity State aid had no significant application in the area of taxation. There were very few rulings on the matter. That is mainly due to the fact that the European project has essentially focused on indirect taxation. At the same time, State aid also went through an initial phase in which it did not play a central role in European policy105 as that policy focused mainly on other issues such as the abolition of borders and the completion of the single market.

105

See Chap. 1.

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The completion of the single market, through the customs Union brought about in 1992 by the Maastricht Treaty, established a European economic and legal framework in which new problems have emerged. The fundamental need of the European Union became that of establishing a legal area where there is no discrimination in accessing and remaining within the single market. In this arrangement, the principle of fiscal non-discrimination and the prohibition of restrictions produce the need to ensure economic freedoms in the market, but all that activity was not sufficient, in particular because of the absence of a structured framework at European level that would allow compliance with those requirements to be consistently checked. It became clear that there was a need for a binding and more structured framework at European level to identify and remove tax discrimination.106 In this respect, State aid control entered the taxation field, where it gradually laid down a more complete regulation of tax discrimination in economic activities. The application of the State aid rules to taxation comes at a time when they have reached a high degree of completion and been road tested in the European context. For that reason, once the link (between the ban on State aid and taxation) had been made explicit, an important synergy began to develop, which quickly established the importance of the rules on State aid in the field of taxation.107 Adaptation of the State aid rules to taxation has not been straightforward. It has thrown up numerous difficulties that have not yet been resolved. Difficulties were encountered with regard to the structural definition of aid, evidence, and function. Taxation is very different to other areas of law which have had a significant impact on the construction of the rules on fiscal aid. The difference in the form which aid takes (which never consists in the granting of an actual sum of money but in the waiving of revenue by the State) is the first significant difference which is then reflected in general terms in all the steps involved in implementing State aid control. The importance of the subject in global and European dynamics then took another important step that made positions on fiscal aid extremely relevant in international politics. In addition, there was the realisation that fiscal aid has not only performed the traditional function assigned to it (namely, the defence of competition in the State) but was also used for a further purpose: to combat unfair tax competition. These factors have led to the establishment of a self-standing framework—that of fiscal aid—which, in my view, has special characteristics in terms of the interests pursued and the structural differences of the aid, which distinguishes it from the general field of State aid.

106 107

See Quigley (2005), p. 208. See Quigley (2015), p. 2105.

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The rules concerned are thus intended to have an effect on national taxation and on the balances of international taxation, introducing general principles and guidance on development into those structures. The view is also that aid has brought important elements of balance to taxation at a time of serious crisis and the emergence of new development trends, establishing a line of growth affecting important issues.108 The policy was one of positive integration and negative integration of national tax rules following a circular pattern rotating between the two strands of the framework (that of prohibited aid and that of permitted aid). Next, there follows a summary of the current features of fiscal State aid, highlighting its potential, innovative features, development prospects and its autonomy as a body of rules.

2.4.1

The Contention of Fiscal Function Crisis

The first mission of fiscal aid was to combat unfair tax competition, as it shall be set out below. In this respect, as suggested above, the aid framework stands at the crossroads of important issues concerning taxation at national and international level. Within the phenomenon of unfair tax competition lies a larger problem, generally described as the crisis of the fiscal function. In that regard, the fiscal aid framework is designed to combat unfair tax competition indirectly by fulfilling the role of protecting the fiscal function. Globalization and the new economy have weakened the sovereignty of States, which have had some difficulty in exercising their fiscal function in the traditional sense.109 These phenomena have favoured the total mobility of productive activities, investments and economic subjects. The European project and, in general, all international economic law (within which international tax law is located) has driven a liberalisation of the markets, eliminating barriers and obstacles to international trade.110 As noted earlier, it has been possible to implement market liberalisation in the absence of uniform tax legal frameworks among States. The effect of all these factors together has been to make it possible to have free circulation in the market and to determine where to produce or locate one’s wealth, while at the same time choosing the most convenient form of taxation. In other words, the traditional taxation-taxpayer relationship has been reversed.

108

See Quigley (2015), p. 2105. See Gallo (2015), p. 599; Fregni (2017), p. 51; as well as various contributions published in Del Federico and Ricci (2015), passim. 110 See Pepe (2020), p. 45. 109

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The taxpayer is no longer subject to a pre-established tax regime but can choose the most convenient tax regime for his activities. In this context, there has been an increase in aggressive tax planning policies with a significant loss of revenue for States that implemented redistributive tax policies.111 National taxation has thus entered a crisis as the ability to support social growth and implement effective development programmes has been restricted. Thus, central taxation issues have been discussed in transnational fora in order to recover the flow of taxation and to defend the revenue of each State by implementing an appropriate distribution of taxable income and taxes. At the present stage, there are many international and European efforts on these aspects and there are important contributions from national legal literature putting forward different systemic solutions to overcome the problem. In that context, there are two types of solutions: systemic structural solutions and those that immediately counteract behaviour or conduct amounting to unfair tax competition. Structural solutions show the need for general principles, shared by all States and aimed at regulating direct taxation.112 The basic idea is that it is necessary to harmonise the way in which activities are directly taxed and to regulate certain tax institutions uniformly through systemic structural systems. This objective is currently being achieved through soft law methods and approximation directives. A more stable solution will take time to mature politically and ideologically. The law enforcement solution is designed to suppress the anti-competitive discipline or conduct. For a number of years now, the fiscal aid regime has come to be the preferred European instrument for combating discriminatory tax frameworks, making up for the lack of adequate tax harmonisation in direct taxation.113 At European level, the fiscal aid framework has been considered the most appropriate instrument at present to tackle anti-competitive tax behaviour and to bring a European solution to the above-mentioned tax crisis. In fact, in recent years, the fiscal State aid regime has been deployed to assess forms of unfair tax competition implemented in Europe and tax discrimination, setting an important limit between what is allowed and what is not. At the same time, the fiscal State aid frameworks have found an important balance, which has confirmed, in my opinion, the European will not to give ground on a social and redistributive component of the tax, albeit only from the point of view of its effects on the market and on competition.

111

See Perrone (2019), passim. See Selicato (2009), p. 45. 113 See Quigley (2005), p. 205. 112

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In the field of State aid, a balance was struck between the general principles of competition (which expressed the idea of fiscal neutrality for the market) and the social values expressed by the social market economy (which represented, for their part, the idea of taxation as a way of promoting certain social values). Important values specific to the fiscal aspect have been protected by such regulatory activity. Taxation has thus become an instrument of economic policy, expressing the economic and social values that must be promoted in the marketplace.114 Thus, there is now liberal fiscal policy in place which, nevertheless, also extends greater protection of social values within the market, in deference to the basic idea that a market must grow in a healthy way through constant integration of the social values necessary for its proper functioning. The fiscal State aid framework has thus made it possible to defend the fiscal function.115 Generally speaking, this process has brought about a clear shrinking of the sovereignty of States in tax matters coupled with the establishment of the European dimension of the tax.116 Through the State aid framework and in the light of the steps outlined above, a form of harmonisation of direct taxation has taken place in an area where there was no competence expressly provided for.

2.4.2

The Definition of Guidelines for National Tax Policy on Selective Framework

The most important function of the fiscal aid framework is to provide guidelines for national tax policy. It is widely acknowledged that in tax matters, selective frameworks are of decisive importance in determining growth and development programmes. Taxation physiologically operates by the use of selective frameworks that take the form of concessions. The fiscal aid framework now provides the detailed rules and the terms in which selective advantageous frameworks aimed at economic activities may be introduced.117 This activity constitutes the very function of the State aid framework, namely, that of protecting selective schemes operating at national level to safeguard competition within the Member State.

114

See Sect. 2.1.3. See Felice (2008), p. 84; Forte et al. (2012), passim; VV.AA. (edited by Nemo P. & Petitot J.) (2006), passim. See Chap. 1, Sect. 1.1. 116 See Quigley (2005), p. 208. 117 See Schön (2016), p. 23. 115

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In this context, a substantial admission of national objectives that are consistent with the domestic tax system is set out; in fact, measures that are consistent with the nature and structure of the tax system and that are at the same time proportional and necessary to the purpose to be achieved are justified and therefore allowed. In this framework, the admission of cohesion with the nature and structure of the national system is important for the enhancement of State needs and the defence of the identity of each Member State. However, the assessment as to proportionality and necessity should be made strictly in European terms and according to the rules as consolidated thanks to the interpretation by the Court of Justice. It is thus clear that limits to the admission of frameworks which represent national values should in any event be in accordance exclusively with European parameters assessing the proportionality and necessity of the measure with respect to the market. At the same time, all selective frameworks that respond to an economic and social value of the European Union are justified, as expressed in the powerful legislative and interpretative framework which emerged by way of implementation of Article 107(2) and (3) of the TFEU. Those provisions contain the values by which the aid allowed under the European approach may be legitimated and express the consistent need to provide aid with the aim to save and restore competition and the market. That aim arises from the tendency of a system towards providing aid in support of the operation and improvement of trade in which aid for the maintenance of trade is an exception which must comply with the requirements of Article 107(2) TFEU. This is thus an aim which seeks the consistent coordination of a selective advantage tax system which balances domestic and European policy in accordance with European parameters. In that respect, the framework on fiscal aid undoubtedly constitute a significant impingement on the sovereignty of States in the field of taxation.118

2.4.3

The Function of General Support for the National Economy. Support in Economic and Social Emergencies

The environmental conditions for the use of the State aid framework change in an emergency where, as can be seen from the events of recent years, the framework has taken on a central role. In view of that, the fiscal aid framework currently determines what tax intervention approach is compatible with the European Union that may be activated in an emergency which, depending on the specific circumstances, derogates from the principles and rules applicable in the ordinary way. 118

See Quigley (2005), p. 208.

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From the economic crisis of 2008 to the COVID-19 health emergency, it can be noted that there were circumstances that led the European Union to lay down within the framework of State aid the arrangements that States could put in place and the conditions which the European Commission required. During the 2008 crisis, it was not possible to apply the State Aid framework fully, but they nevertheless set an important guideline for States. Each Member State had its own response to the crisis, but only in accordance with the guidance provided by the European Commission. The European Commission issued several Communications addressed to the Member States119 and there were very quick decisions in response to the various requests from States for authorisation of aid. The most important action has been on the de minimis aid front, on the support measures for banks and credit institutions, on support for businesses through the provision of temporary horizontal aid, and on support for small and medium-sized enterprises (SMEs), considered to be Europe’s real economic driver. In the COVID-19 health emergency, a general framework has been established which derogates from the general body of rules and is aimed at helping States with European instruments and shared values. This is an important aid for the Member States, that now have a European toolbox at their disposal with which to design emergency fiscal policies. The role of supporting States is one that has become inherent or automatic over the past decade. It is, indeed, undeniable that Europe (and some States in particular) have experienced years of recession following the 2008 crisis, characterised by a deep economic and social crisis. The growing importance of the rules governing fiscal State aid is certainly linked to the inevitable enhanced use of fiscal instruments at this stage in connection with the abovementioned economic crisis. In these circumstances, it was crucial to understand the manner in which the tax lever should be used in order, on the one hand, to avoid protectionist and discriminatory measures that would have had negative consequences for the States and, on the other hand, to promote an economic development of the market according to shared social values.

119

See Recovery Plan, Communication from the Commission to the Council of 26 November 2008, A European Economic Recovery Plan; Communication from the Commission, The application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis, 2008/C 270/02 of 13 October 2008, OJ C 270; Communication from the Commission, Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis of 17 December 2008, C-2009/C 83/01; Communication from the Commission, The recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition, 2009/C 10/03 of 15 January 2009.

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The existence of a general European measure on budget balance and public debt reduction has led further towards a natural convergence on the principles flowing from the State aid framework.120 The European Union has supported this function, using the State aid regime to lay down economic policy guidelines to set a general policy in order to restructure and restore public finances. Despite the criticism that has been levelled at the work of the European Commission over time, it is undeniable that it has taken on an unquestionable role of supporting the economies of the Member States. As the European Commission itself has in fact pointed out, public intervention in the national economy, if carried out in accordance with the general criteria of the State aid framework, is essential to correct bankruptcies and ensure market recovery.121 In other words, the State aid framework has ensured a form of public intervention in the national economy which supports and balances the markets. Although such guidance was provided by way of soft law instruments, the guidance in those acts was essentially binding in that it allowed Member States to understand to what extent Europe would allow or authorise support measures. The line adopted in providing support during the economic crisis thus confirmed that State intervention in the economy through the State aid framework is a general principle aimed at ensuring competition and market stability. Such intervention must be carried out in a proportionate and necessary manner. Although it has had some criticism, the validity of the State aid framework model has been confirmed. It is a model of economic and social integration, based on the institutional mechanisms of integration at European level founded on the defence and reaffirmation of the principles of competition. This model was confirmed by the

120 See Treaty on Stability, Coordination and Governance in the Economic and Monetary Union 2.03.2012 (Fiscal compact) and Regulation 1175/2011 amending Regulation 1466/97: On the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies; Regulation 1177/2011 amending Regulation 1467/97: On speeding up and clarifying the implementation of the excessive deficit procedure; Regulation 1173/2011: On the effective enforcement of budgetary surveillance in the Euro area; Directive 2011/85/EU: On requirements for budgetary frameworks of the Member States; The directive was to be implemented by all EU Member States no later than 31 December 2013; Regulation 1176/2011: On the prevention and correction of macroeconomic imbalances; The regulation lays out the details of the macroeconomic imbalance surveillance procedure and covers all EU Member States; Regulation 1174/2011: On enforcement action to correct excessive macroeconomic imbalances in the Euro area. The regulation only applies to the Eurozone Member States and focuses on the possibility of sanctions and other procedures to enforce the requisite ‘corrective action plan’, to satisfy the EIP recommendation from the Council (Six pack). 121 See State Aid Action Plan 2005–2009, 7 June 2005.

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2012 Communication on the modernisation of State aid, which led to the admission of all social interventions aimed at ensuring market integrity.122 The framework at stake has therefore had a role in supporting national economies and providing guidance for fiscal policies to be implemented within States. There is, however, an opposing point of view: the function performed today by the State aid framework further undermines the fiscal sovereignty of the Member States. Even in an emergency or crisis, Member States will have to answer to the European Union for the measures to be taken and risk incurring liability if they introduce measures that are not compatible with European guidelines.

2.4.4

Regulation in a Common Area of the Principle of Non-discrimination in Taxation

As mentioned above, fiscal aid has played a fundamental role in relation to the defence of the principle of non-discrimination in the field of taxation. The principle of fiscal non-discrimination, as analysed in Sect. 2.3.1, was initially limited to economic freedoms and aimed at treating national cases and transnational cases equally. This principle has since evolved as European law has developed and has taken on a general scope that is no longer restricted to economic freedoms. The view today is that there is a common general principle of law shared by the Member States and the European Union that calls for equal treatment and prohibits discriminatory treatment. Although the principle of fiscal non-discrimination has an undeniable legal status, it has always suffered from the absence of a system at European level of implementation and adjudication to oversee its correct application. Breaches of the principle of non-discrimination in taxation are bound to be detected at State level and in some cases are the subject of rulings adopted after the interpretation of the Court of Justice. Application of the law in specific cases is therefore left to the procedural autonomy of the Member States and the only possible action is for infringement (or for failure to fulfil obligations) under Article 258 TFEU against the Member State when that is appropriate where the conditions established by the Treaty are met.123 The area of tax discrimination is therefore essentially devolved to each individual State for their review.

122

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: EU State Aid Modernisation (SAM) COM(2012) 209 final. 123 See Orlandi (2018), p. 14; Miceli (2015), p. 34.

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Because of this, many cases of tax discrimination have been dealt with under the aegis of the State aid framework, with which the principle of non-discrimination shares an area of intervention and general objectives. There are many similarities and some differences in the relationship between the State aid framework and the principle of non-discrimination in taxation. The framework of fiscal aid and the principle of non-discrimination in tax matters share the objective of establishing a market where economic freedoms are guaranteed. Structurally, the two areas aim to ensure that comparable situations are treated equally while avoiding discrimination. The two legal frameworks provide a structure in which discrimination is prevented from two different but complementary points of view. The principle of non-discrimination protects whoever is discriminated against, i.e. those whose freedoms are restricted, while the State aid framework tilts against whoever is benefiting from such discrimination i.e. those to whom the favourable rules apply. Where the scope of both principles overlaps, non-discrimination may be protected under State aid framework if the discriminated party submits a complaint to the European Commission. The area of tax discrimination has thus drawn a common thread between the two principles by gradually implementing a process of drawing cases of tax non-discrimination into the fiscal aid framework. The differences between the two principles lie in their scope of application and subjective application. The principle of non-discrimination is aimed at all European subjects and not only at economic activities, which is why its reach may be seen as broad and its value as universal. The principle of non-discrimination also governs both access to the market and how it functions. In contrast, the prohibition on State aid regulates only the functioning of the market. It is therefore clear why the principle of non-discrimination in taxation remains today the only appropriate instrument to protect against tax discrimination of individuals and tax discrimination in market access. In overlapping cases, which in any event are at the heart of the market and of competition, the prohibition of State aid has gradually also assumed a central role in guaranteeing non-discrimination in taxation. The protection of tax discrimination through the State aid framework has further widened the scope of intervention in tax matters, attracting significant criticism in the legal literature on the current application scope of the matter.124

124

See Schön (2016), p. 3; Jaeger (2016), p. 39.

2.4 Fiscal State Aid. General Characteristics

2.4.5

101

Tackling Harmful Tax Competition

The issue of State aid is inextricably linked to the issue of unfair tax competition between States, as it is the only instrument within the European Union that is actually used to combat protectionist or discriminatory policies developed by States to attract foreign business and capital. The need to combat unfair tax competition was the first objective laid down in the fiscal aid framework. The European and international context has since changed, and the objective considered here has become increasingly important in the European State aid action carried out in the field of taxation. As has been pointed out at several instances, the issue of unfair competition has become more acute with the new economy, becoming a general problem of international tax law.125 Through this action, the State aid legislation has pursued a function that was not properly its own, namely, to combat State policies aimed at attracting foreign taxable material. In such a context, as pointed out in Sect. 2.4.1 above, we are witnessing a crisis of the general models that had governed taxation at a worldwide level and had until then guaranteed a balanced distribution of taxable income between States. The new economy reflects the emergence of industrial giants, made up of multinationals that use the computerisation or digitalisation of production processes in order to locate themselves anywhere in the world. At this stage, the notions of ‘residence’, ‘source of wealth production’ and ‘taxing State’ are no longer relevant as it is no longer possible to link productive activities to a State on the basis of traditional criteria, which are inadequate for the realities of the digital economy. The companies or firms in question are in a position to locate anywhere without cost or expense, thus avoiding taxation in the State of the source of wealth or of residence. As will be seen in the next chapter, the subject of fiscal aid has found itself fighting an unprecedented battle involving the world’s biggest giants. The issue of unfair tax competition in the European context takes on a different perspective from international tax law. While at the international level the issue of the proper distribution of taxable income between States emerges as a fundamental value of the policy to combat harmful tax competition, at the European level what is central is the defence of the market, within which it is necessary to maintain the values of pure competition. In light of the principle of free competition, the fight against unfair tax competition has been carried out mainly through the deployment of the rules governing State aid.

125

See Pepe (2020), p. 45.

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This incisive activity showed the extent to which the European Commission had obtained powers in areas normally within the discretion and governance of the Member States.126 Combating unfair tax competition through fiscal aid is a very effective policy from a media point of view but is less effective from a legal point of view. As will be shown in Chap. 3, it has become clear that the State aid instrument has in fact too many limitations for it to be an effective tool in the fight against such a complex phenomenon.

2.4.6

The Definition of the Promotional Function of Taxation

A key role in the definition of national tax policy guidelines is played by admitted aid, i.e. State aid which may be granted on the basis of block exemption regulations. In particular, fiscal aid is recognised as admitted aid. This is aid paid through taxation acting as a tool of government within the territory of the Member States which the European Union offers by means of the State aid framework. The block exemption regulations lay down the requirements that different types of aid must meet in order to comply with European law. In this regard, such aid is a legal instrument available to Member States to implement policies for economic and social growth. By means of admitted aid, an important policy of development of the Member States has been launched, affecting various areas such as: economic and technological development, social growth in disadvantaged areas, the promotion of cultural heritage, and the protection of the environment. Member States have used these possibilities differently and on the basis of specific needs. In any event, the concept of admitted aid has put in motion a shared development movement whereby all States have been enabled to implement economic and social support measures for development in a European manner. The policy of permitted aid with reference to fiscal aid has stressed the promotional function of taxation as an instrument for implementing development policies. In this way, taxation has garnered in the Member States a function to aid economic development, which has increasingly complemented its traditional function as an instrument for allocating public expenditure and redistributing wealth, a function that is currently in serious crisis in the Member States because of the problems arising from harmful tax competition.

126

See Chesaites (2017), p. 253.

2.5 Concluding Remarks

2.4.7

103

Empowering Territorial Autonomies and Fiscal Federalism Projects

The State aid framework have highlighted the internal territorial Entities of the Member States under the banners of the principles of subsidiarity, autonomy, responsibility and economic and social growth. As will be shown in the following chapters, in fact, the territorial entities of Member States have received a significant level of attention in the State aid framework, especially so far as the regime regards taxation. The guideline for this development operated on both the negative and positive integration sides. Relying on Article 107(1) TFEU at the territorial level, the principle has been established that territorial entities, where they have autonomous government power, are subject to the prohibition of State aid and therefore cannot introduce tax measures that conflict with that prohibition. The principles of free competition were thus also established at territorial level. By contrast, an important territorial policy of differentiation has been implemented on the basis of the provisions of Article 107 TFEU as a whole, which has led to a separate evaluation of the various regional and local territories. Each territory has different economic and social conditions which have to be assessed independently in light of the State aid framework. That framework can be the means to overcome such differences and enable the Regions to grow in a European sense. This has led to significant territorial development based on regional aid and free zones. The model of government based on autonomy and differentiation has naturally led States to establish territorial growth policies in accordance with European requirements. At the same time, the same policy has led to the granting of greater autonomy of government to the Regions on the basis of the European principle of subsidiarity. This has led to a gradual opening up of national policies to fiscal federalism projects that are mainly characterised by a conferral of autonomous government to the Regions and local Authorities.127

2.5

Concluding Remarks

State aid has resulted in significant innovative policy without precedent in the field of taxation.

127

See Miceli (2014), p. 331.

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Indeed, it has enabled intervention in national tax schemes in areas of government outwith European competence but at risk of facing serious problems due to globalisation and the new economy. Those problems could not be resolved at national level and that is why the intervention of the European Union was a positive element (from the author’s point of view) for all Member States. Fiscal State aid has two branches of action: – defending national competition through the elimination of selective legal frameworks that conflict with European law; – defending the European market from behaviour that amounts to unfair tax competition. In this process, the importance of taxation and the prominence of the issues that have been addressed have resulted in the fiscal aid framework becoming more important. That framework has become central in national, European and international tax law. The field of fiscal aid has developed an autonomous character in relation to the general framework. As may be noted, it makes no difference to the European Union by what means State aid has been granted, and so fiscal State aid is no different from any other form of State aid. This consideration should be reviewed, at least, by acknowledging the need for specific regulation of a phenomenon that currently suffers from a general vagueness, as will be detailed in the following chapters.

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Chapter 3

The Prohibition of Fiscal State Aid. Negative Integration of National Laws

Contents 3.1 The Prohibition of State Aid Under Article 107(1) TFEU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 Negative Integration of National Tax Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Notion of Fiscal Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Advantage and Selectivity of Fiscal Aid. The Complexity of the Analysis and the Variety of Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Selectivity of Fiscal Aid. The Formal Legal Approach and the Substantive Economic Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Material Selectivity de jure. Justification in Light of the Nature or General Scheme of the Tax System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Material Selectivity de facto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 Territorial Selectivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.4 Reflections on the National Framework of Fiscal Federalism . . . . . . . . . . . . . . . . . . . 3.4 The Cases of Fiscal Aid. The Purpose of the Prohibition. The Problems of Adaptation 3.5 Tax Benefits: Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 The Most Significant Cases of State Aid Prohibited in Italy . . . . . . . . . . . . . . . . . . . . . 3.5.1.1 Aid to Banking Foundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1.2 Aid to the Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1.3 Tax Advantages for Public Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1.4 Tax Benefits for Cooperative Societies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1.5 Tax Benefits for Ecclesiastical Bodies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.2 Developments in the National Notion of a Tax Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Procedures for Determining Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.1 The Case of Tax Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 Cases Amounting to Harmful Tax Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.1 Analysis of General Schemes Amounting to Harmful Tax Competition. The Gibraltar Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.2 The Control of Tax Rulings. Evolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.3 European Review of Tax Rulings. Summary of the Most Important Cases . . . . . 3.7.3.1 The Apple Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.3.2 The Amazon Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.3.3 The Starbucks Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.3.4 The Fiat Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.4 The Principles Laid Down by the European Commission in Respect of Tax Rulings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3.7.5 The Position of European Jurisprudence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.6 Reflections on the Application of the State Aid Framework to Tax Rulings . . . . 3.8 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

161 162 165 166

Abstract The development of the prohibition of State aid in fiscal matters is analysed. The application of Article 107(1) TFEU has been of fundamental importance in the rules governing taxation, operating in two different directions. First, this prohibition has been applied in its traditional sense, namely that of eliminating selective advantageous treatment of undertakings in order to ensure healthy competition in the national market. Secondly, the prohibition of State aid has been applied as a measure to counteract behaviour amounting to unfair tax competition between States in order to ensure a fair distribution of tax revenue and to defend competition in the European market. This is a peculiarity of the field of taxation which has used this prohibition for purposes other than those originally envisaged. In that regard, Article 107(1) TFEU has been an essential vehicle for European legal integration in direct taxation (in general) and with regard to unfair tax competition (in particular), gradually putting in place an important and essential framework for taxation. Those developments have resulted in a concept of prohibited aid that is autonomous and governed by its own principles, thus confirming the special nature of fiscal aid.

3.1

The Prohibition of State Aid Under Article 107(1) TFEU

The main and most significant activity of the State aid framework is that relating to the negative integration of national legislative systems by means of Article 107(1) TFEU. Article 107(1) prohibits Member States from granting economic support to certain national undertakings or the production of certain goods such as to have the effect of distorting competition and affecting trade between Member States. Although the subsequent provisions (Article 107(2) and (3) TFEU) provide for exceptions, the rules are formulated in terms of a prohibition and clearly set a limit for the States. The European Union has therefore focused on the application of this provision with a level of determination that has increased over time. The general prohibition of State aid plays a central role in European policy in relation to competition in the market.

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This prohibition is in fact the embodiment of a general principle of liberal economics according to which the State must not intervene in the market and all economic operators must act using their own resources.1 The aim of this prohibition is to prevent the State from affecting trade within the national territory by favouring undertakings and economic activities through protectionist policies. Public financial support enhances the competitiveness of certain domestic undertakings by distorting competition within the Member State. At the same time, this support has repercussions in the European market by making it more difficult and costly for foreign undertakings to penetrate the domestic market and by facilitating exports by domestic undertakings to the international market. The prohibition on State aid thus represents the implementation of the liberal values of the market economy inasmuch as it enables undertakings to compete on equal terms, promoting pure competition that is not distorted by State intervention in favour of certain players. The defence of pure and undistorted competition is the main objective of the rules throughout the economic and regulatory evolution of the European Union and maintains its centrality, even while affirming the principles of the social market economy.2 As European policy evolves, the prohibition of State aid is constantly being redefined and its scope extended. To that end, it pursues objectives in new areas of law, among which taxation is of particular importance. As mentioned above, a result of the prohibition of State aid is the negative integration of legal systems. Generally speaking, the term ‘negative integration’ refers to the European policy of establishing unconditional prohibitions as a means of achieving the fundamental aims of Community action. It is, thus, a regulatory approach based on the idea of obligations ‘to desist’ from certain actions, addressed to the Member States.3 Integration may be described as ‘negative’ where it merely removes from the legal system those rules which are in conflict with general European principles by implementing certain specific prohibitions. The prohibition on State aid thus limits, in a negative sense, the autonomous legislative and implementing powers of the Member States, which are required not to introduce selective measures aimed at economic activities that are likely to distort competition and the market. The consequence of a breach of the prohibition of State aid is to remove the prohibited measure and thus the restoration of competition and the market.

1

See Brittan (1992), p. 5. See Felice (2008), passim; Forte et al. (2012), passim; VV.AA. (edited by Nemo P. & Petitot J.) (2006), passim; Somma (2009), p. 3. 3 See Boria (2014), p. 219. 2

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The prohibition of State aid—like the other Treaty provisions containing prohibitions—thus implements European principles by removing all incompatible or contrary provisions from national rules.

3.1.1

Negative Integration of National Tax Systems

The prohibition of State aid has come to be of increasing importance in tax matters, rising to its greatest level in the last twenty years, providing support in major objectives of the legal integration process. As already mentioned, the first phase of European legal integration in tax matters was based on a policy of substantial negative integration aimed at eliminating customs duties and charges having equivalent effect and on establishing the principle of non-discrimination in taxation.4 At that stage, taxation was regarded as constituting an obstacle to the establishment of pure competition in the market which had to be adjusted or removed if there was to be a free market.5 In accordance with this approach, taxation was cast in a negative light. It is well known that, in the European Union, tax was regarded in its economic function and not in its financial function.6 Taxation is not an instrument to carry out a redistribution of wealth and pursue a general social end, but is rather intended as an instrument to pursue specific economic policy objectives. Thus, taxation is considered on the basis of the effects on the market; those effects must be regulated in relation to the specific aims of a sectoral structure. Tax becomes instrumental to the objectives of the European Union and as such is subject to the dynamics required by the market. Tax may be used as a positive or negative instrument acting on the market. The consequence is the emergence of both positive integration and negative integration policies at a European level. In the first phase of fiscal legal integration, taxation was an obstacle to European objectives and encouraged negative integration policies. Negative integration was achieved with the removal of tax rules that stood in the way of European freedoms through the direct application of the Treaty rules having direct effect, judgments of the Court of Justice (ruling on interpretation or finding failure to fulfil obligations), and the Decisions of the European Commission. Negative integration, implemented through the State aid framework, has applied the same model, entirely consistent with the general policy of tax integration in hand,

4

See Chap. 2, Sect. 2.1. See Boria (2004), passim. 6 See Di Pietro (2013), p. XXIII. See Chap. 2, Sect. 2.1.3. 5

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which aims to remove tax frameworks that are contrary to the principles of competition and the market. In the context of the prohibition of State aid, in fact, taxation has become a negative instrument and has been used to promote vigorous negative integration. The first phase of the fiscal aid regime has thus been characterised as mainly negative integration of national systems and the second phase has been one in which negative integration has been accompanied by significant positive integration. For the sake of completeness, it should be pointed out that positive integration occurs when European policy formulates complete bodies of rules, enshrining shared values, to be applied within the Member States. Positive integration is based on obligations to take a particular course of action and involves the implementation or application of European rules embodying shared values, which positively complement national rules within Member States. The State aid framework has also achieved an intense positive integration of national tax systems, using taxation as an instrument to promote shared social values. Positive integration through the fiscal aid framework will be analysed in the next chapter. However, this chapter is intended to examine the negative integration refined thanks to the ban on fiscal state aid. Negative integration through the application of Article 107(1) TFEU took the shape of eliminating selective favourable tax schemes aimed at affecting trade and competition. The application of the prohibition on State aid in tax matters has been at the base of a very significant activity of the European Commission. In fact, that legislation has been used to achieve goals that are very important to the European project and which could not have been achieved in any other way, since these are areas in which the European Union is not expressly vested with any competence. In that regard, Article 107(1) TFEU has been an essential vehicle for European legal integration in direct taxation and with regard to unfair tax competition, gradually putting in place an essential framework for taxation matters. While in later stages the enforcement of the prohibition was complemented by the application of the framework on allowed State aid, it has always maintained a considerable profile in the context of the general State aid framework, supporting the negative integration policy. An analysis of this approach must begin with the definition of prohibited aid in the field of taxation. This is a concept which, as will be shown, has its own special features. In a later section, we will look at the cases that over time have shaped the policy of legal integration in tax matters on the basis of Article 107(1) TFEU.

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The Notion of Fiscal Aid

Any examination of the implementation of the prohibition of State aid with respect to taxation—or to put it another way, the implementation of a negative integration policy—must first deal with a fundamental element: the notion of prohibited aid. As already noted, the subject of State aid is general and not specifically tax related. The reference to tax matters has been made, by way of interpretation, through some older judgments of the Court of Justice7 and, subsequently, in a Communication of the European Commission.8 This latter Communication laid down a set of general criteria applying to taxation, which gave rise to the fiscal aid framework.9 In particular, the European Commission explained that the rules on State aid are applicable to tax matters as the European framework contained in Article 107 TFEU (formerly Article 92) refers to aid in any form; therefore, that formula also includes aid granted through taxation. In the same Communication, the European Commission also clarified the applicability of the notion of State aid to direct business taxation measures, making it possible to have a negative integration policy in that area. The European Commission went on to make clear the link between the notion of fiscal aid and the area of harmful tax competition. The content of that Communication has been of decisive importance for the definition of fiscal aid since it has been used in all subsequent decisions of the European Commission and in decisions of the Court of Justice. As already stated, the European Commission set out a notion of fiscal aid in the field of direct taxation, stressing that direct taxation is the main field in which the notion of fiscal State aid is to be applied. The European Commission then revisited the notion of fiscal aid in 201410 and in the General Communication on the notion of State aid in 2016.11 European production has never accepted the autonomy or specificity of the concept of fiscal aid in view of the structure and content of European law, which assesses cases on the basis of the effects they have on the market and does not attach any importance to formal legal definitions. 7

See Court of Justice of 2 July 1974, C-173/73, Italian Government v Commission of the European Communities, Application for the annulment of the Commission Decision of 25 July 1973, taken on the basis of Article 93, first subparagraph, and of the EEC Treaty, on Article 20 of Italian Law No 1101 of 1 December 1971 on the restructuring, reorganization and conversion of the textile industry. 8 At issue was the Commission notice on the application of the State aid rules to measures relating to direct business taxation 98/C 384/03 of 10 December 1998. 9 See Wattel (2016), p. 59. 10 Draft Commission notice on the notion of State aid pursuant to Article 107 TFEU. 11 See Commission Notice on the notion of State aid as referred to in Article 107 of the Treaty on the Functioning of the European Union (2016/C 262/01) of 19 July 2016.

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In that regard, fiscal aid is a form of aid which affects competition and the market in the same way as any other form of State aid. The autonomy of the notion and its particular nature are, on the other hand, features that can be clearly identified by contrast with national laws which are, for their part, based more on formal legal classifications according to criteria of generality and abstractness. In this respect, the need to determine fiscal aid requires an acknowledgement of specific features in the general framework on aid. In other words, the notion has special features compared to the general notion. That is also confirmed by the fact that the Commission Communication on the notion of State aid within the meaning of Article 107 TFEU12 devotes a separate section to the specific issues of taxation. The separate nature of the notion of fiscal aid stems from its material configuration. Aid never takes the form of a direct grant of a sum of money to undertakings or the production of certain goods. Fiscal aid is physiologically granted through a non-imposition of a tax on an undertaking, which amounts to a loss of revenue for the Treasury. Thus, non-collection of tax equates to a cost borne by the State, since a loss of revenue is equivalent to the consumption of State resources in the form of fiscal expenditure. Such an approach is based on the economic theory of tax expenditures13 according to which any scheme that avoids a tax obligation is tantamount in practice to a disbursement of expenditure for any State, which will thus have to bear costs that it would not otherwise have had to. The European Union thus adopted the theory of tax expenditures which was established by international bodies. In particular, that theory has been applied both within the OECD, where tax expenditures are defined as the transfer of public resources through the reduction of tax obligations, and within the International Monetary Fund, for whom tax expenditures are revenues waived by the State by virtue of annual provisions that are enacted on a yearly basis.14 As regards the definition of fiscal aid, the Commission’s 1998 Communication pointed out that in the field of direct taxation, fiscal aid is any measure which confers a selective advantage on taxpayers operating in the market.15

12

See Commission Notice on the notion of State aid as referred to in Article 107 of the Treaty on the Functioning of the European Union (2016/C 262/01) of 19 July 2016. 13 See Surrey and McDaniel (1985), passim. 14 See OECD, Journal on Budgeting, Vol. IV, No 1, 2004, 130 and IMF, Manual on Fiscal Transparency 2007, 76. 15 Commission notice on the application of the State aid rules to measures relating to direct business taxation (98/C 384/03).

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Prohibited fiscal aid may therefore be defined as a measure which fulfils all the conditions of Article 107(1) TFEU and which relates to the national tax system because it is introduced by a national (tax) rule or the implementation of a national (tax) framework. Those aspects require some explanation. As previously stated, there are five elements which go to make up the notion of State aid:16 • • • • •

an economic activity; State origin of the measure; advantage; selectivity; effect on trade and likelihood of distorting competition.

As regards the first element (economic activity), it should be recalled that State aid must be granted to an undertaking or the production of certain goods or an activity of an economic nature offering goods or services on the market. Fiscal aid is therefore merely aid directed at economic activities. This requirement also constitutes an important barrier to the prohibition at stake also in the tax field since the prohibition is not intended to apply to aid granted to natural or legal persons that are not economic operators or to entities that are not involved in the production of certain goods. Therefore, advantageous measures aimed at natural or legal persons not operating on the market will not be covered by the State aid framework. The notion of economic activity is very broad. The legal development on this requirement has led to the adoption of an objective notion of ‘undertaking’ to be understood exclusively in a European sense, which does not take account of the national characterisations of the activity or of the legal status of the entity exercising it. This is a concept which includes public and private undertakings, irrespective of their legal nature, the purposes pursued, the financing arrangements adopted or whether or not the institution carrying out the activity has a profit-making purpose.17 In the field of fiscal aid, it is particularly easy to define the subjective element, i.e. the origin of the measure and whether it is imputable to the State. The fiscal function is by nature exercised by the State or by national Territorial Entities with powers of taxation. Thus, the inquiry into the state origin of the measure does not need to be pursued any further inasmuch as the tax measure has by definition a state or infra-State origin. European Union case law has shown a substantive approach to the notion of State, accepting that the concept of the State also included Regions and Local Authorities as well as all public bodies attributable to the State.

16 17

See Chap. 1, Sect. 1.4.1. See Chap. 1, Sect. 1.4.1.

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Thus, the term ‘State’ is understood to include every Territorial and Functional Body of the State itself.18 Any Taxing Authority may grant State aid through legislative, regulatory or administrative frameworks. In relation to the imputability of the measure to the State or to the circumstance that the State bears its economic burden, it should be noted that, according to the theory of tax expenditures, the failure to collect a tax is equivalent to a cost borne by the State, since a loss of revenue is equivalent to the consumption of State resources in the form of fiscal expenditure. In that regard, the Court of Justice has also always held that waived tax revenues constitute advantages granted through State resources.19 Before it may be deemed incompatible with European law, aid must be capable of affecting trade between Member States and must be capable of distorting or threatening to distort competition. As mentioned earlier,20 the experience of recent years has been that these requirements have been analysed jointly and according to an ex-ante prognostic assessment. This assessment has also acquired a certain automatism which has led to the view that in the day-to-day application of the law there is something like a presumption that State aid always has distortionary effects. Also in the field of taxation, therefore, both requirements focus on demonstrating the existence of a competitive market for the undertaking receiving the aid. Again in the field of taxation, there has been a tendency towards the automatic assessment of these requirements, since the Court of Justice has always highlighted how the tax advantage measure actually relieves the undertaking of charges borne by it and amounts to an advantage for the latter on the market and a distortion of competition.21 The mostly complex elements characterising the notion of fiscal aid are those of advantage and selectivity. In this sense, the tax measure must favour certain undertakings or the production of certain goods. A number of particular reflections have been made on these latter aspects, which deserve a more specific and thorough examination.

18

See Fransoni (2007), p. 17; Traversa (2010), passim; Miceli (2014), passim. See Judgment of the Court of Justice of 22 June 2006, C-182/03 and C-217/03, Kingdom of Belgium v Commission of the European Communities. 20 See Chap. 1, Sect. 1.4.1. 21 See Judgment of the Court of Justice of 3 March 2005, C172/03, Wolfgang Heiser v Finanzamt Innsbruck, paragraph 35; Judgment of the Court of Justice of 30 April 2009, C494/06, Commission v Italy and Wam, paragraph 51. 19

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Advantage and Selectivity of Fiscal Aid. The Complexity of the Analysis and the Variety of Interpretations

Demonstrating the requirement regarding the advantage and that regarding the selectivity of the measure have become very important aspects in the field of taxation, with the argument being made over time that the concept of fiscal aid was essentially exclusively demonstrable by the ‘selective advantage’, to the detriment of all the other requirements of Article 107(1) TFEU which were relegated to second place.22 In this respect, the European Commission and the European Court of Justice have in fact made numerous reflections on the demonstration of such requirements in the context of fiscal aid. These are complex reflections that need to be analysed here and taken as a whole they enable a number of systematic assessments of a general nature to be made. The premise is that the grant of State aid through taxation presents some problems that are different from those found in other fields of law which thus makes determining its nature more complicated. The tax system is a structurally detailed regulatory framework in which selective treatments are in fact granted to taxpayers through the instrument of tax advantages that cover a broad subject, as a reflection of the economic and social policy objectives pursued by the State. Taxation therefore consistently covers a wide range of selective measures that potentially fall within the scope of the prohibition of State aid. The classification of a measure as a prohibited measure must therefore analyse and thoroughly examine a range of matters. Changes over time have meant that such an analysis cannot simply be reduced to a single general model.23 For this reason, the examination of selectivity has, over time, adopted a number of categories, which have been divided into: • material selectivity de jure; • material selectivity de facto; • territorial selectivity. Where aid is granted by individual measures, as we shall see below, selectivity overlaps with the benefit, thus calling for a unitary assessment. Generally speaking, in tax matters, the ascertainment of the benefit and that of selectivity have been found to be connected and difficult to define individually; the broadening of the former reduces the breadth of the latter and vice versa, demonstrating a constant relationship between the two notions.24

22

See Federico (2018), p. 13. See Monsenego (2018), passim. 24 See Orlandi (2018a, 2018b, 2018c), p. 222; Jaeger (2016), p. 39. 23

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In other words, when demonstrating the existence of the advantage it is necessary to prove the benefit the measure affords to the taxpayer; the selectivity requirement, on the other hand, must show the advantage afforded, without justification, to only some taxpayers but not to others who have the same position on the market. However, in practice, proving advantage without making any form of comparison with other taxpayers may be clear but it is ineffective evidence. Hence, the test of advantage has for several years necessarily been a comparative test. The advantage test therefore still calls for a comparison to be made between the beneficiaries and other taxpayers, thus encroaching on the selectivity test, which is based precisely on a comparison between beneficiaries and those excluded from the aid. It is therefore clear that there is an unambiguous relationship between these two requirements, which must be proven together, first by demonstrating the existence of an advantage and then by demonstrating the selective nature of that advantage which discriminates against economic operators that are in the same position on the market. Thus, at present, in order to demonstrate an advantage, it must clearly be shown that the aid benefits the taxpayer in relation to its competitors, which makes a comparison necessary. The selectivity test, on the other hand, was heavily influenced by the type of fiscal aid that was to be assessed. With regard to aid in the traditional sense, the test has essentially coincided with a more accurate analysis of the benefit by comparison with domestic competitors. So far as concerns unfair tax competition, the selectivity test measures the discriminatory nature of the aid; the selectivity test has shifted its focus from the benefit itself to discrimination because every form of aid results in an advantaged party and a party which has been discriminated against or, in other words, an advantage and a discrimination.25 The comparison between the position of the beneficiary and that of the other competitors should reveal the discriminatory effect of payment of the aid on the other competitors. A discriminatory effect is deemed to have been shown to exist when no justification for the selective provision is found. This confirms that fiscal aid has been sharing a common area with the principle of non-discrimination in European tax policy. In short, therefore, advantage and selectivity will have to be proven when determining general fiscal aid measures. The following sections will be devoted to selectivity. Proof that there is an advantage will depend on the assessment as to the benefit received by the taxpayer. There is a tax benefit where a regulatory treatment in any way alleviates the burden normally borne by undertakings.

25

See Orlandi (2018a, 2018b, 2018c), p. 17.

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The Court of Justice has consistently held that a provision granting tax advantages places its beneficiaries in a more advantageous position than others and therefore gives them an advantage.26 In order to assess the existence of an advantage, a comparison is necessary between those that receive the advantage and those that, although in the same position, do not receive it. The existence of an advantage over other economic operators must then be assessed in the light of the various general principles which have come to be applied to selectivity over time. The notion of selectivity gives rise to a further special feature of fiscal aid which requires closer study.

3.3

Selectivity of Fiscal Aid. The Formal Legal Approach and the Substantive Economic Approach

The requirement of selectivity is the key element when seeking to demonstrate the existence of fiscal State aid. As pointed out in the foregoing sections and as borne out by the legal literature, as part of the concept of fiscal aid, the selectivity test is very complex and detailed compared to the other requirements of prohibited aid, which are for their part easier to demonstrate.27 The selectivity requirement is what shows whether State aid introduces an unjustified tax treatment in the market. The evidence for that must be sought by carrying out a comparison. Carrying out a comparison is already necessary for the demonstration of advantage but, where selectivity is concerned, the comparison must take on a more technical character, since it must show that the different treatment is unjustified. Absence of justification gradually came to be taken as evidence of the discriminatory nature of the aid, especially in relation to cases involving unfair tax competition. Selectivity shines a light on the potential of the notion of fiscal aid and the breadth of its content.

26 See Judgment of the Court of Justice of 22 June 2006, C-182/03 and C-217/03, ASBL; Judgment of the Court of Justice of 8 September 2015, C-105/14, IVO Taricco and Others; Judgment of the Court of Justice of 15 November 2011, C-106/09 and C-107/09, European Commission v Government of Gibraltar. 27 See Bartosch (2009), p. 234; Lefevre (2012), p. 237.

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Developments in interpretation have demonstrated the difficulty of applying a single paradigm. Thus, a significant amount of case-law has developed over time that has highlighted different types of selectivity applicable to taxation.28 The different types of selectivity therefore call for different reference frameworks when assessing fiscal aid that it is necessary to identify. The broadening of the criteria for defining selectivity has given rise to much criticism in view of the fact that the possibility of making a finding of prohibited State aid in the field of taxation has been greatly enlarged, even in cases where it does not meet the traditional notion of selectivity. This has cast an extremely large amount of doubt and uncertainty on the concept of fiscal aid.29 Traditionally—as seen in Chap. 1—there are two types of selectivity: material selectivity and geographical or territorial selectivity. Material selectivity is where the different tax treatment of certain undertakings or the production of certain goods is found within a single territory, where undertakings or the production of certain goods are favoured over others. Selectivity, therefore, does not concern a territory but rather a type of undertaking or of production of certain goods. There is territorial selectivity, on the other hand, when the differentiated treatment of the measure derives from the fact that it is applied only in a (geographically specific) part of a single territory. The prohibited discrimination arises, therefore, from the fact that the differentiated measure applies in only part of that single territory. These cases are examples of an ordinary approach to the issue of selectivity which has been described as a formal legal approach. Classic cases of tax concessions were examined following this approach, which found selectivity in both a formal and a substantive sense. The need to counter certain policies amounting to harmful tax competition has led to a substantive economic approach being taken to the issue of selectivity, based on examining the effects produced by it. This has given rise to the concept of de facto material selectivity, which is applied when assessing, in particular, harmful tax competition.30 Through this paradigm, there is a broadening of the notion of fiscal aid, as will be seen below.

28 See Monsenego (2018), passim; Bousin and Piernas (2005), p. 645; da Cruz Vilaça (2009), p. 449. 29 See Biondi (2018), p. 206. 30 See Boccaccio (2016a, 2016b), p. 3.

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Material Selectivity de jure. Justification in Light of the Nature or General Scheme of the Tax System

The most significant and frequent form of selectivity is de jure material selectivity. This form of selectivity occurs when the support measure is addressed in the legislation setting it up only to certain undertakings or the production of certain goods. Material selectivity constitutes, in fact, a form of benefit granted by way of a tax provision to certain taxpayers through a specific preferential instrument (exemption, exclusion, tax credit). In such cases, the analysis of the selectivity of the measure involves evaluating the effects of the specific legislative provision granting the benefit. That provision must be analysed in the light of the national legal system to which it belongs in order to understand whether or not it introduces a prohibited selective measure in relation to that same system. The analysis to check the existence of material selectivity in taxation has been developed by the European Commission and the Court of Justice,31 which have established a three-step analysis for assessing whether a measure as introduced implements aid prohibited by European law. The three-step analysis consists of the following: • identification of the general system of reference; • classification of the measure as a derogation from the system; • lack of a justification based on the nature and general scheme of the system. The general reference system constitutes a coherent set of rules that apply to undertakings. It must be a general and complete regime, which contains the fundamental values of the legal system. Defining the reference system is an essential step in classifying the aid as it provides the context against which the consistency and proportionality of the measure must be assessed. In general, the reference system refers to the body of rules which governs all the relevant taxes. Where advantages exemptions in particular are concerned, the system within which the aid should be analysed is the positive regulation of the tax in the context of which the tax concessions are provided.

31

See Judgment of the Court of Justice of 6 September 2006, Portugal v Commission; Judgment of the Court of Justice of 8 September 2011, C-78/08 to C-80/08, Paint Graphos and Others; Judgment of the Court of Justice of 21 December 2016, C-20/15 P and C-21/15 P, World Duty Free Group SA; Commission Notice on the notion of State aid as referred to in Article 107 of the Treaty on the Functioning of the European Union (2016/C 262/01) of 19 July 2016, para. 5.

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Secondly, it is necessary to assess whether the measure establishes a derogation from the reference system, i.e. whether it introduces a different treatment from the general one. In other words, it is necessary to show that the concessionary provision introduces a different treatment from the one addressed to economic entities which are in a de jure and de facto situation in the Member State comparable to the one governed by the concessionary provision. A positive outcome of this second analysis would prove the derogatory nature (compared to the general system) of the aid measure. Thirdly, it is necessary to ascertain whether or not the measure is justified in relation to the nature and general scheme of the reference system. This refers to the general issue of justification, highlighted in the judgments of the Court of Justice and in the Communications of the European Commission,32 where the existence of a justification means the aid is no longer of a selective nature. The question is whether the derogation is an expression of the same underlying principles as the system of reference or is the result of mechanisms inherent to the system or necessary for its functioning.33 Where it is ascertained that there is a justification, the measure would be entirely lawful under EU law; indeed, that would make the measure compatible with the system of European values, inasmuch as it is the expression of fundamental general principles of the national legal systems. In taxation, those requirements are determined on the basis of an assessment of the consistency and rationality of the measures introduced with the principles of the relevant State’s system. Therefore, the prohibition of State aid in the field of taxation does not operate in a general way, but only in relation to selective treatment that appears extra ordinem, i.e. in a way that does not represent the expression of a principle characterising the system itself.34 There are two types of principles that can justify aid: one extrinsic to the tax system and another inherent to it.35 The former are the general principles of the legal system, such as: social objectives, justice, environmental protection. The latter are principles aimed at achieving taxation objectives, such as, for example, the principle of progressiveness or the prohibition of double taxation.36

32

In particular, Commission Communication C(2003) 4582 of 1 December 2003; Judgment of the Court of Justice of 18 July 2013, C-6/12, P Oy; Judgment of the Court of Justice of 15 December 2005, C-148/04, Unicredito Italiano SpA v Agenzia delle Entrate. 33 See Commission Notice on the notion of State aid as referred to in Article 107 of the Treaty on the Functioning of the European Union (2016/C 262/01) of 19 July 2016, para. 5. 34 See Bizioli (2008), p. 172. 35 See Judgment of the Court of Justice of 6 September 2006, C-88/03, Portugal v Commission [paragraph 81]. 36 See Federico (2018), p. 13.

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Thus, potentially unjustified tax treatment is justified where it results directly from a basic or guiding principle of the State system or is necessary to its functioning. Consequently, it has been held that apparently selective tax measures can be justified if they are aimed at implementing: the principle of progressiveness, the principle of simplification of taxation for particular economic sectors or the facilitation of activities in responses to values of constitutional importance. Procedural principles aimed at ensuring the functioning of the tax system have also become of significance in justifying the selective treatment. In particular, the need to justify derogatory treatments has frequently arisen in order to: • • • •

implement control and oversight procedures; enforce accounting rules; ensure sound administrative management; optimise the recovery of tax debts.

Another aspect of considerable importance concerns the limits within which the recognition of the justification at issue is permitted. Notwithstanding the recognition of the principles of State tax systems, the European legal system reserves to itself a significant level of authority with regard to their application. Indeed, in applying these principles, certain general European provisions must be respected. Derogatory measures must be necessary to the objective and proportionate to the aims pursued.37 Therefore, excessive or disproportionate measures in relation to the objectives cannot be justified in any case where the same objective could be achieved by less far-reaching regulations. This justification therefore allows Member States to introduce selective tax treatment, provided that it is in line with the European principles of necessity and proportionality. Thus, the European Union recognises the general value of the principles and objectives of national tax systems, making it possible to defend and support them with respect to the aims of the European market, but within well-defined limits. National values must conform to the requirements of the European principles of necessity and proportionality which constitute a significant barrier to the ways in which States are free to implement their own policies.

37

Those principles are set out in Judgment of the Court of Justice of 8 September 2011, C-78/08 to C-80/08, Paint Graphos Soc. coop. a r.l. and Others.

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Material Selectivity de facto

The substantive economic approach, that is the approach based solely on the effects of the measure, came about in terms of assessing fiscal aid in order to counter general legal regimes which had selective substantive economic effects. In such cases, proving selectivity starts by proving the discriminatory effect of the measure, thus moving away from considering benefits that lack justification to prohibited discrimination; the latter—as in the previous case—is deemed to be proved in the absence of a justification. The economic approach establishes the core of the prohibition solely on the basis of the effects produced. This approach has expanded the scope of fiscal aid exponentially. The method of investigation developed for de jure material selectivity has made it possible to identify selective treatments regulated within the framework of the regulation of a tax. Such an inquiry was effective until the fiscal aid framework focused on the analysis of tax benefits contained within the rules of a single tax. When the investigation was required to assess the effects of a system of taxes on individual taxpayers, an alternative approach had to be developed. With the judgment in the Gibraltar case, the European analysis also went so far as to assess the consistency of the national tax rules in relation to the boundaries and limits of the system of reference.38 This approach has then been confirmed in subsequent judgments in which it has been accepted that the selective advantage may also derive from a combination of various tax rules resulting in de facto differentiated and discriminatory taxation as between companies in a similar situation.39 In this context, generalising the selectivity investigation in the terms set out in the three-step analysis (identification of the general system of reference—classification of the derogation—assessment of the justification on the basis of the nature and scheme of the legal system) limits the concept of selectivity to the result of a specific regulatory technique, with the consequence that many national cases escape State aid control. The alternative approach thus came about in order to assess the selective advantage produced by the combination of rules in a legal system. There is a de facto material selectivity where the legal effects of the combination of different tax provisions results in an arrangement which has the appearance of being general but is, de facto, a selective arrangement benefiting certain taxpayers.

38

See Judgment of the Court of Justice of 15 November 2011, C-106/09 P and C-107/09 P, European Commission, Kingdom of Spain v Government of Gibraltar and United Kingdom of Great Britain and Northern Ireland. See Temple Lang (2012), p. 805. 39 See Judgment of the Court of Justice of 21 December 2016, C-20/15 P and C-21/15, World Duty Free Group SA; Judgment of the Court of Justice of 30 June 2016, C-270/05, Belgium v European Commission.

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It should be noted that the selectivity of a tax measure can be determined even if the tax measure does not constitute an exception to the tax system but is an integral part of it. It is therefore possible to classify a measure as being de facto selective despite the general nature of the individual provisions providing for it, by demonstrating that the measure in question derogates from the ordinary tax regime applicable in the Member State. Such a measure has in fact effects which result in differential treatment between operators that are in a comparable de facto and de jure situation according to the objective pursued by the legal system. In this case, the reference point for comparison must be the ordinary taxation system generally applicable to undertakings in the Member State. The advantage measure may be classified as selective by the fact that undertakings in the same de facto or de jure situation are treated differently in law without any justification, which is a form of prohibited discrimination. The concept of de facto selectivity broadened the horizons of the field of fiscal aid to include cases that produced effects of discrimination that were not evident in the system.40 In such cases, an assessment is made as to whether the boundaries of the Member State’s tax system are consistent rather than arbitrary on the basis of the European principles of non-discrimination in taxation and equal treatment, which may lead to a review of individual rules laid down by the Member States. This approach has also been sporadically used in relation to derogatory rules relating to the framework governing a single tax when it was suspected that the very boundaries of the general framework (of the tax) amounted to de facto selectivity. Even the regulation of a tax may not be consistent and may lead to discriminations when it conflicts with the general objectives of the measure itself. An analysis of the general framework may lead to a review of those boundaries.41 With this step, selectivity has greatly expanded the possibilities of reviewing national discriminatory measures, allowing the Commission to review individual national tax systems as well. This thus established a much more aggressive and targeted approach to tax and unfair competition practices.

3.3.3

Territorial Selectivity

The issue of selectivity of fiscal aid has helped frame important principles with reference to regional and local contexts.

40

See Boccaccio (2016a, 2016b), p. 6. See Judgment of the Court of Justice of 22 November 2001, C-53/00, Ferring SA and Agence centrale des organismes de sécurité sociale (ACOSS).

41

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Equally within this framework taxation has led to conclusions which have acquired general significance in the context of the State aid framework. As pointed out earlier, there is territorial selectivity when the differentiated treatment of the measure derives from the fact that it is applied only in a (geographically specific) part of a single territory. The prohibited selective advantage arises, therefore, from the fact that the differentiated measure applies in only part of that single territory. There has been significant development in the approach to interpretation of those aspects involving the field of taxation, analysed to some extent already in Chap. 1. For a long time, the Community bodies considered all favourable measures to be selective where they were not implemented in the whole territory of each State but only in a part of it, and were thus operating—for the purposes of identifying prohibited State aid—with a certain amount of automatism in equating the territorially limited application of the measure to the selectivity of the measure itself. Under this framework, it began to become clear that any preferential regime applicable within the territory of a region constituted a form of geographical (or territorial) selectivity, falling foul of the prohibition contained in Article 107(1) TFEU. It thus followed that differentiated tax regimes applied to geographically limited places were generally incompatible with Community law, since any territorially circumscribed favourable provision was caught by the prohibition in question.42 Subsequently, certain positions of the European Commission and rulings of the Court of Justice went beyond this approach, arguing that there was no automatic link between the application of a measure in a limited territorial context and the selective nature of the measure. This has led to the establishment of new principles and the gradual redefinition of the principles of State aid with reference to Regional and Local Entities. The way to establish those principles followed a more accurate reflection on the characteristics of the geographical area of reference for the evaluation of the selectivity of the measure. In this phase, the importance that Local Entities have in European law has been made clear, thereby indirectly confirming that all the principles referring to the State when they exercise taxation powers also apply to local and regional authorities themselves. Three different scenarios thus help to provide a certain amount of definition to the question.43

42 See Commission Decision of 21 January 1998 on tax concessions under § 52 of the German Income Tax Act (notified under document number C (1998) 231) C-476/98; Judgment of the Court of Justice of 19 September 2000, C-156/1998, Federal Republic of Germany v Commission of the European Communities; Judgment of the Court of Justice of 14 October 1987, C-248/84, Federal Republic of Germany v Commission of the European Communities. 43 See Commission Notice on the notion of State aid as referred to in Article 107 of the Treaty on the Functioning of the European Union (2016/C 262/01) of 19 July 2016, para. 5(3).

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• The first scenario is that of regional fiscal aid, i.e. tax measures applied by the State within a region or a defined territory. Such measures, as previously referred to, do not automatically qualify as State aid as it is necessary to assess the presence of all the elements classifying it as prohibited aid and to establish whether it is justified by the nature and general system of reference. As will also be seen in the following Chapter,44 for many years now regional aid has been a specific type of aid that has been allowed and is the subject of specific guidelines laid down by the European bodies. This assessment confirms the importance that territorially differentiated policies gained at European level. • For their part, the second and third scenarios concern tax provisions applied by the Region within its territory in the implementation of powers of selfgovernment exercised on the basis of State-specific regulations with regard to fiscal federalism. In this context, the situations in which the selective measure is implemented on the basis of a fiscal framework based on the symmetrical decentralisation of State powers (second scenario) has been differentiated from the situations in which the differentiated measure is implemented on the basis of a fiscal framework based on the asymmetrical decentralisation of fiscal powers (third scenario). The second scenario derives from symmetrical decentralisation, that is to say, an arrangement in which all the Territorial Entities exercise the same power that has been devolved to them by the State, and it is on the basis of that power that a differentiated measure is provided for. That therefore rules out the possibility of applying the framework on State aid in relation to measures introduced in the territory of the Region on the basis of a power which is the expression of a type of symmetrical federalism, that is, of a specific power of taxation devolved in the same way to all the Regions (or Territorial Entities) in equal measure and intensity. In such cases, in fact, it is considered that it is not possible to find a general reference model on the basis of which to make the comparison, and consequently it is not possible to assess whether the requirements of advantage and selectivity have been fulfilled. This was the argument in a case concerning the Italian Imposta Regionale Attività Produttive (IRAP—Italian Regional Trade Tax), which is a tax established and regulated essentially by the State but intended to be applied by and in the Regions. In the case of this tax, all Italian Regions are given specific areas of government in equal measure and intensity. This scheme was analysed by the European Commission45 which found that certain regulatory powers that the Regions may or may not exercise cannot constitute territorial selectivity since the tax regime is applied symmetrically in

44 45

See Chap. 4. See Commission Decision C (2005) 4675 of 7 December 2005.

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this way. If the Regions act within the scope of their autonomy, there can be no regional selectivity. In particular, reference is made to the possibility to decide elements of taxation (e.g. rates) at territorial level in relation to charges whose general rules are established by the State. In such cases, the provisions on State aid do not apply as it is not possible to define a general reference system. Each Region, in fact, sets its own rate independently and on the basis of guidelines set by the State. The principle in question also appeared in a well-known European judgment on regional autonomy in the field of State aid,46 in which the Court of Justice held that the symmetrical distribution of taxation powers rules out a finding of territorial selectivity in relation to a specific geographical area. • The State aid framework may well be applied, on the other hand, in the third scenario, that is to say, in relation to powers exercised within a model of asymmetric federalism, in other words, powers that the Regions can autonomously exercise in their own territory on the basis of specific competences devolved by the State. These are thus cases in which a Region or Territorial Entity, consistently with the framework laid down by the State, exercises taxation powers within its own territory. In such cases, the State aid framework is applicable, but under a different reference system. The Territorial Entity has a degree of autonomy such that it becomes an independent territory with respect to the State to which it belongs. In the latter case, the Territorial Entity is the general reference system within which the selectivity of the measure is to be assessed. In order to understand whether the Territorial Entity can constitute an autonomous general system of reference (with respect to the State), the Court of Justice has developed the so-called autonomy test.47 This test requires that, in order to qualify as an autonomous reference system, the Entity must have: – institutional autonomy; – procedural autonomy; – financial autonomy. 46

See Judgment of the Court of Justice 6 September 2006, C-88/03, Portugal v Commission. See Commission Notice on the notion of State Aid as referred to in Article 107 of the Treaty on the Functioning of the European Union (2016/C 262/01) of 19 July 2016, para. 5(3); Commission notice on the application of the State aid rules to measures relating to direct business taxation, (98/C 384/03). See Judgment of the Court of Justice of 6 September 2006, C-88/03, Portugal v European Commission; Judgment of the Court of Justice of 11 September 2008, C-428/06, C-434/ 06, Union General de Trabajadores de La Rioja (UGT-Rioja) and Others v Juntas Generales del Territorio Histórico de Vizcaya and Others; Judgment of the Court of First Instance of 18 December 2008, T-211/04 and T-215/04, Government of Gibraltar (T-211/04) and United Kingdom of Great Britain and Northern Ireland (T-215/04) v Commission of the European Communities.

47

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Institutional autonomy measures the degree of self-government devolved on the Territorial Entity. There is such autonomy where the beneficial measure has been adopted by a Territorial Entity with a political and administrative status distinct from that of the State, in the exercise of powers autonomous from those of the central Government. In other words, the Territorial Entity must have political and administrative autonomy to enable it to adopt economic and financial measures and to decide the political orientation for the territory. Procedural autonomy exists if the aid has been decided upon by a procedure carried out by bodies belonging to the Territorial Entity and the final decision is taken exclusively by the Territorial Entity. One may still speak about procedural autonomy where that authority must respect, within its own areas of government, guidelines or general principles determined by the State. Financial autonomy is where the Entity has financial responsibility for the measures introduced and bears the economic consequences. As the Court of Justice has held, in order for the financial autonomy of an infraState Entity to be recognised, there must not be a causal relationship between the measure introduced by the Entity and the financial transfers made by the State to that Entity.48 Each such Region that meets these requirements thus becomes an autonomous territorial system within which to assess the existence of the selectivity of the measure and the presence of all the other requirements that qualify it as prohibited aid.49 Moreover, as regards the justification relating to the nature and scheme of the system of reference, it should be noted that the selective measures applied within territorial authorities will not be found incompatible with the Community system (and will therefore be justified) if they are consistent with the nature and the scheme of the territorial system. All measures which enshrine the general principles of the territorial system or which are necessary for its functioning will therefore be compatible with the Community system. Therefore, within each territorial jurisdiction, an analysis of the general and structural principles that characterise it, is necessary in order to distinguish the measures that are capable of generating market distortion from those that, instead, are simply the expression of a territorial value system. However, even at the territorial level and with regard to the Regions, it is still possible to use the assessment of de facto material selectivity, as demonstrated by the

48

Judgment of the Court of Justice of 11 September 2008, C428/06, C-434/06, Unión General de Trabajadores de La Rioja (UGT-Rioja) (C-428/06), Comunidad Autónoma de La Rioja (C-429/06) v Juntas Generales del Territorio Histórico de Vizcaya and Others. 49 See Lindsay Poulsen (2008), p. 43; Fransoni (2006), p. 249; Ficari (2007), p. 319; Traversa (2010), passim; Miceli (2014), Chap. 3.

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well-known precedent of the judgment in the Gibraltar case.50 Such cases concern regimes of asymmetric federalism. In the abovementioned cases, the analysis was carried out in two stages: ascertainment of a discriminatory tax effect compared to the ordinary tax treatment of economic entities in the same de facto and de jure position; absence of a justifying cause.

3.3.4

Reflections on the National Framework of Fiscal Federalism

Any reflection on territorial autonomy with regard to State aid leads to some very important principles that affect the issue of national fiscal federalism.51 As an example, it should be made clear that the expression ‘fiscal federalism’ is considered to have a broad and general value; this term defines the relations between the levels of government of a State and groups together different legal solutions, united by an organisational philosophy based on self-government, decentralisation and financial autonomy. Thus, the internal organisation of Member States is not without relevance for the purposes of the State aid framework.52 In that regard, each Territorial Entity—where it has institutional autonomy, procedural autonomy and financial autonomy (according to the European models identified in the aforementioned judgments of the Court of Justice53 and subsequently applied by the European Commission54)—can potentially pass the autonomy test and be caught by the prohibition on State aid when it exercises powers of government. Experience shows that it is not difficult to meet the autonomy test.55

50

See Judgment of the Court of Justice of 15 November 2011, C-106/09 P and C-107/09 P, European Commission and Kingdom of Spain v Government of Gibraltar and United Kingdom of Great Britain and Northern Ireland. See Temple Lang (2012), p. 805. 51 See Carinci (2006), p. 1783; Miceli (2014), passim; Buccico (2009), p. 221; Gonzales Pineiro (2010), p. 885. 52 See Fantozzi (2008), p. 1037; Miceli (2014), passim. 53 See Judgment of the Court of Justice 6 September 2006, C-88/03, Portugal v Commission; Judgment of the Court of Justice of 11 September 2008, C-428/06, C-434/06, Unión General de Trabajadores de La Rioja (UGT-Rioja) (C-428/06), Comunidad Autónoma de La Rioja (C-429/06) v Juntas Generales del Territorio Histórico de Vizcaya and Others; Judgment of the Court of First Instance 18 December 2008, T-211/04 and T-215/04, Government of Gibraltar (T-211/04) and United Kingdom of Great Britain and Northern Ireland (T-215/04) v Commission of the European Communities. 54 Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union (2016/C 262/01). 55 See Fransoni (2007), p. 19; Coppola (2016), passim; Miceli (2014), passim.

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This conclusion follows from some general considerations. The autonomy test—as developed by the Court of Justice—essentially identifies certain conditions that attest to the decisional independence of the Territorial Entity (with respect to the State to which it belongs) with regard to the introduction of advantageous measures and the full imputability to its territory of the economic impact of the measure itself. The autonomy test, in fact, lays down—within the requirements of institutional autonomy, procedural autonomy and financial autonomy—minimum conditions that make a measure logically ascribable to the Entity and more specifically to its territory. As may also be deduced from the clarifications that the Court of Justice has made in relation to the requirements of (institutional, procedural and financial) autonomy, the value of the latter is substantial and applies in so far as the Entity exercises—in relation to a given measure—actual power on the territory which is not neutralised by powers ascribable to the central Government. Another factor in support of this view concerns the way in which the autonomy test is implemented. The test must not be applied to the set of powers which, under the federal structure in force, are devolved on the smaller Territorial Entity, but must be applied to the particular power of the Entity that led to the introduction of the (individual) selective measure in the territory. In that regard, even if the federal state structure (taken as a whole) does not confer large areas of self-government to Territorial Entities in tax matters, it is undeniable that important aspects of fiscal autonomy currently exist at all territorial levels across the vast majority of the Member States. Several territorial authorities may pass the test in relation to such segments of fiscal autonomy, thus becoming, together, the territorial reference for the assessment of the selective nature of the measure. That view is confirmed by the experience in Italy. It is well known that in the Italian State there is no particularly autonomist form of federalism since the State holds the most important governmental powers and decides the guidelines for the exercise of the devolved powers. National federalism is, in fact, cooperative and based on coordination. On the basis of the above considerations, each Italian Region is able to pass the (autonomy) test set by the Court of Justice.56 This applies to both special statute Regions and those with ordinary powers, as well as to the Autonomous Provinces. The setting of a tax by such an infra-State authority constitutes, in fact, an unarguable exercise of fiscal autonomy on the part of the Region, since the latter: identifies the taxation assumptions related to its territory, develops the entire body of rules governing that tax and procures the revenue from the collection of the tax itself.

56

See Fransoni (2006), p. 259.

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Thus, by the exercise of these powers, institutional autonomy, procedural autonomy and financial autonomy are achieved in the terms laid down by the Court of Justice in the autonomy test. Confirmation of this approach comes from a well-known judgment of the Court of Justice when it ruled on whether taxes on luxury goods introduced by the Region of Sardinia where compatible with Community law.57 In that case, the Court of Justice assessed the State aid nature of the regional tax levied in respect of stopovers or tourist and recreational craft on natural and legal persons whose tax domicile is outside the territory of that Region, in accordance with Article 4 of Regional Law No 4/2006. In that context, it was acknowledged that the Region of Sardinia is an infra-state body with autonomous powers conferred on it by a statute vis-à-vis the central Government. As to the exercise of taxing power by the Region, it was held that the requirements regarding autonomy developed by the Court of Justice were fulfilled. In conclusion, at the European level, the Regions (or equivalent Territorial Entities) in particular possess the level of autonomy required by the Court of Justice and are therefore fully subject to the prohibition on State aid. This confirms that there is an important limit to the taxing powers of the Regions and highlights the gradual extension of the European principles to the areas of regional and local government in order to include the values of competition and the market in those areas.

3.4

The Cases of Fiscal Aid. The Purpose of the Prohibition. The Problems of Adaptation

The State aid framework apply to the field of taxation in a wide range of cases. With the link between the State aid framework and tax matters having been expressly laid out by the European Commission in the abovementioned Communication of 1998,58 a new route was embarked on, characterised by a wide-ranging application of the prohibition in tax matters. The prohibition of State aid has been used as a constraint in various legal cases and has led to the establishment of important general principles. Many authors have, indeed, pointed out that European legal integration has been implemented in the field of direct taxes through the prohibition of State aid, generating a form of tax harmonisation in areas removed from express Community competences.

57

See Judgment of the Court of Justice of 17 November 2009, C-169/08, Presidente del Consiglio dei Ministri v Regione Sardegna. See Carinci (2010), p. 278. 58 See Commission Notice on the application of the State aid rules to measures relating to direct business taxation of 10 December 1998 (98/C 384/03).

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As referred to in part above, there have been two lines of development in the application of the prohibition in tax matters, but they are, none the less, interconnected. One of them has followed a rather traditional line—and is more akin to the general area of State aid—focussing on the analysis of selective national tax schemes. Those regimes have been identified both in the national tax frameworks and in the procedural institutions intended to regulate the implementation of the tax. In those cases, the State aid framework has been used in its traditional manner as a way to protect competition and the market within States in order to counter protectionist policies in favour of certain undertakings or national production of certain goods. The second line of development is the one that has contributed to the fight against unfair tax competition and has distanced itself from the traditional approaches to the subject.59 In accordance with that line, the State aid rules have been aimed at national provisions that create selective advantages for non-residents in order to attract capital and wealth to their territory. In the latter circumstances, the main purpose of the State aid framework has been to defend competition and the market from national policies aimed at setting up selective advantages towards foreign activities or production of certain goods. In that regard, the scope of that framework has changed, switching away from protectionist policies and the defence of competition within the State to competition and the market across European territory as a whole. State aid is no longer seen as being in support of national undertakings and domestic production in order to accord them an advantage in the internal market. State aid has become a means of direct support for procuring business income and foreign capital in order to obtain wealth and advantages for the State. Fiscal aid has therefore developed two parallel paths, following a line of application aimed at different objectives. The adaptation of the State aid framework to fiscal aid in pursuit of both objectives has been a very complex process60 which has led to problems that have yet to be resolved. There are significant differences between taxation and other fields at both the structural and the functional level. Looking back at some of the issues, it is clear that taxation selectively uses certain frameworks in order to pursue economic and social support programmes; those frameworks could all potentially be contrary to the prohibition of State aid if no clear criteria are established to classify them as incompatible. Moreover, the objectives that this field aims to pursue are of extreme importance in terms of national policy (the system of tax advantages) and international policy

59 60

See Boccaccio (2016a, 2016b), p. 6. See Chap. 2, Sect. 2.4.

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(the fight against harmful tax competition) and have an impact on an issue that is currently of extreme importance in the legal debate: the resistance of national sovereignty in tax matters in a time of economic globalisation and the new economy.61 In light of all the foregoing, fiscal aid represents a new legal framework of absolute importance in national, European and global balances.

3.5

Tax Benefits: Analysis

The prohibition of State aid has been used to deal with tax benefits structures within the framework of the regulation of individual taxes. This prohibition has focused on the examination of selective national tax treatments that affect the market and lead to a distortion of competition either by removing economic actors (or activities) from the scope of taxation or by reducing their liability. Tax benefits have been considered to be a favourable tax treatment which is liable to result in circumstances caught by the prohibition of State aid and thus give rise to the distortion of competition. This term (tax benefits or tax advantages) refers to all legal situations which derogate in various ways from the general rules of the tax. Tax advantages are a normal instrument in the context of the definition of a tax policy, generally used in all Member States. In that sense, the Court of Justice has assessed advantages to be fiscal State aid. In this context, several tax schemes which specifically concerned advantages granted to certain economic activities in the field of direct and indirect taxation were found to be unlawful. The analysis of tax benefit in the light of the prohibition of State aid is what is known as the formal legal approach. In such cases, in fact, the provision at issue provides for a different treatment compared to the general tax framework. In other words, a derogation is provided for in the legislation. The formal legal approach follows the indications laid down by the Court of Justice62 through the three-step procedure in order to assess the selectivity of the aid. The model adopted was therefore as follows:

61

See Jansen (2010), Chapter 9. See Judgment of the Court of Justice 6 September 2006, C-88/03, Portugal v Commission; Judgment of the Court of Justice of 8 September 2011, C-78/08 to C-80/08, Paint Graphos and Others, Judgment of the Court of Justice of 21 December 2016, C-20/15 P and C-21/15 P, European Commission v World Duty Free Group SA; Commission Notice on the Notion of State Aid as referred to in Article 107 of the Treaty on the Functioning of the European Union (2016/C 262/01) of 19 July 2016, para. 5. 62

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• framing of the general reference system; • identification of the derogating provision; • lack of justification in relation to the nature and general scheme of the regulatory system. The general framework of reference is that relating to the tax. The benefit constitutes a derogation from the taxation rules. The absence of a justification on the basis of the nature and general scheme of the national regulatory system renders the concession at issue a form of prohibited aid. Numerous tax advantages have been found unlawful by this means, including within the national territory. Indeed, in Italy there have been significant cases which have been the subject of intense legal debate within the country and which will be analysed in the following section. The cases concerned involved the application of the concept of the prohibition of State aid in its traditional sense, excluding unlawful certain tax rules within Italy that conferred a selective advantage on certain economic activities or the production of certain goods in order to protect competition and the market within the national territory. The view taken was that prohibition of State aid was designed to protect the national market in order to allow foreign economic operators to penetrate it.

3.5.1

The Most Significant Cases of State Aid Prohibited in Italy

In Italy, there have been important cases where the prohibition on fiscal State aid has been applied which have fuelled the national debate and led to the steps highlighted in the following section. For the sake of completeness, the most important issues raised are analysed here.

3.5.1.1

Aid to Banking Foundations

One of the most relevant issues in the field of State aid is the one that concerned the tax scheme applied to banking foundations. The main issue was as to the ‘commercial nature’ of such bodies because, in Italy, banking foundations were granted a favourable tax treatment because they were regarded as non-commercial bodies. If this classification had been correct, the foundations would have been excluded from the scope of the State aid framework; on the other hand, if this classification had been wrong and the foundations had been of a commercial nature, the favourable tax scheme could well have constituted prohibited aid.

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Banking foundations arose as the result of a number of complex regulatory decisions. The creation of banking foundations is to be seen as part of the broader context of banking sector privatization,63 which had started a process of transforming public banks into banking companies limited by shares. This provided for the original banks to transfer the banking business (or its branches) to newly established or already existing companies limited by shares. By virtue of that move, the transferring institutions became banking foundations whose aim was to pursue social and public-interest objectives and to administer their holdings in the transferee banking companies, without being able to carry on banking business directly or acquire controlling interests in other banking companies. Banking foundations thus became non-profit legal persons, with full managerial autonomy, which pursue exclusively social benefit purposes and the promotion of economic development. In the light of that legislative policy, banking foundations were classified as non-commercial entities entitled to tax benefits that exempted them from withholding tax on dividends distributed by companies64 and a 50% reduction in corporation tax.65 When considering the tax advantages in respect of the income of banking foundations, the European authorities took a very different approach to the tax authorities in national tax disputes with regard to the commercial or non-commercial nature of the entities in question. Until 2003, the national courts upheld the non-commercial nature of banking foundations on the ground that the activity of managing holdings was merely the production of income, necessary to find the financial means to fulfil the social and cultural aims of the organisation, and always confirmed the application of the advantages. The European Commission also came to this conclusion,66 stating that the activities carried out by the foundations in question were not to be considered of a commercial nature and their entrepreneurial nature should be disregarded.

63

That line of legislation began in 1990 with the adoption of Law No 218 of 30 July 1990 (the Amato-Carli Law), and its subsequent Legislative Decree No 356/1990. Subsequently, there was a second round of legislation concerning the banking system through Delegated Law No 461 of 1998 (the Ciampi-Amato Law), followed by Legislative Decree No 153/1999. 64 See Article 10 bis of Law No 1745 of 29 December 1962, which provided for the exemption from corporation tax for public entities and foundations whose object exclusively concerned charity, education, study and scientific research. 65 See Article 6 of D.P.R. (Decree of the President of the Italian Republic) No 60 of 29 September 1973. 66 See Commission Decision of 22 August 2002 on the tax measures for banking foundations implemented by Italy C 54/2000/EC (ex NN 70/2000).

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Consequently, in the Commission’s view, the advantage scheme did not qualify as State aid incompatible with the common market. The Court of Cassation hearing and determining the issue had doubts concerning the lawfulness of the scheme67 and so referred the matter to the Court of Justice for a preliminary ruling.68 The Court of Justice ruled that the non-commercial nature of banking foundations could not be held to be de jure and that that assessment should be made on a case-bycase basis, analysing the activity actually carried out.69 In this way, a substantive legal approach was established, replacing the formal legal approach. On the basis of the Community judicature’s judgment, the long-standing issue has been resolved, conditionally promoting the beneficial measure concerned. This left room for interpretation by national courts, which will have to assess the legal nature of the specific foundations and, accordingly, whether the tax concession scheme should be applied.

3.5.1.2

Aid to the Banks

As part of the same national plan to reorganise the banking sector, a law was enacted to provide for favourable tax treatment for banks carrying out certain restructuring operations.70 In particular, there was to be a reduction in the income tax rate. In this regard, the European Commission initiated a formal investigation procedure aimed at verifying the compatibility of this beneficial measure with the common market; the investigation concluded that the aforementioned scheme was a form of prohibited aid as it constituted a direct concession aimed at improving the competitiveness of only those banks participating in certain transactions, thereby affecting trade and distorting competition.71 Consequently, the European Commission asked the Italian Government to recover the aid granted together with interest. The Court of Justice confirmed the position of the European Commission, pointing out the incompatibility with Community law of the tax advantage scheme72 67

See Laroma Jezzi and Russo (2002), p. 1031. See Judgment of the Court of Justice of 10 January 2006, C-222/04, Ministero dell’Economia e delle Finanze v Cassa di Risparmio di Firenze SpA, Fondazione Cassa di Risparmio di San Miniato, Cassa di Risparmio di San Miniato SpA. 69 See Gallo (2004), p. 1159; Del Federico (2004), p. 574; Ficari (2008), p. 211. 70 See Law No 461/1998 and its implementing decree No 153/1999. 71 See Commission Decision 2002/581/EC of 11 December 2001 on the tax measures for banks and banking foundations implemented by Italy. 72 See Judgment of the Court of Justice of 15 December 2005, C-66/02, Italian Republic v European Commission; Judgment of the Court of Justice of 15 December 2005, C-148/04, Unicredito Italiano SpA v Agenzia delle Entrate. 68

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as that measure benefited the competitiveness of Italian operators, strengthening their position on the internal market. As a result of these judgments, those national taxpayers were required to repay the fiscal aid they had previously received.

3.5.1.3

Tax Advantages for Public Companies

An important national law73 transferred local public services, which had always been managed by the Local Municipal Authorities, to now being managed by special companies (outwith the municipal administration) and by public companies or limited liability companies with a majority public capital holding. Further provisions74 then sanctioned the application of concessionary regimes that provided for the exemption from corporate income tax for the new special companies and limited liability companies with a majority public shareholding and gave an exemption from all transfer taxes. This concessionary scheme remained in force until 2000. The European Commission classified the tax measures in question as State aid incompatible with the common market in relation to all companies with a majority public capital holding that constituted genuine companies open to the market and accordingly ordered the Italian Government to recover the unlawful aid.75 That decision was later upheld by the Court of Justice.76 The Italian State implemented the ruling of the Court of Justice through Law Decree No 10 of 2007, converted into Law No 46/2007, providing for the issue of a recovery order, to be qualified, according to the standpoint of the Agenzia delle Entrate (Italian tax authority) as a step of the collection procedure.77 There was then much discussion on this issue concerning the procedures for recovering unlawful State aid which led to numerous regulatory changes until Law No 234/2012 was eventually adopted.78

73

See Law No 142/1990. See Article 66, paragraph 14, of Law Decree No 331/1993; Article 3, paragraphs 69 and 70 of Law No 549/1995. 75 See Commission Decision of 5 June 2002 on State Aid granted by Italy in the form of tax exemptions and subsidised loans to public utilities with a majority public capital holding (2003/193/ EC). 76 See Judgment of the Court of Justice of 1 June 2006, C-207/05, European Commission v Italian Republic. 77 See Miceli (2006), p. 796. 78 See Chap. 5, Sect. 5.3. 74

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Tax Benefits for Cooperative Societies

The national tax regulations governing cooperative societies are characterised by a number of special concessionary measures on the basis of their social and economic function.79 The question of the compatibility of this favourable tax regime for cooperative societies80 with the framework on State aid engaged the European authorities. In this context, the Court of Justice has taken a position very similar to that adopted in relation to banking foundations.81 The Court ruled that tax benefit granted to cooperatives could be classified as ‘State aid’ only if they were addressed to undertakings operating on the market and fulfilled all the conditions laid down in Article 107 TFEU. However, it is not possible to make this assessment as a general rule for all cooperative societies in view of the particular nature of specific situations.82 It thus held that it was for the Italian courts to determine whether a tax treatment constitutes prohibited aid. This will be the case whenever the cooperative society is a market-oriented undertaking in a way indistinguishable from other economic activities.

3.5.1.5

Tax Benefits for Ecclesiastical Bodies

In 1992, the municipal tax on real property (Imposta comunale sugli immobili—‘the ICI’) was introduced in Italy as a tax on real estate from which buildings owned by the Holy See and buildings owned and used by non-commercial entities for religious purposes were exempt. To that end, the ICI exemption was to apply to the real estate of entities regardless of the commercial nature of the activities carried out within them.83 The scheme was the subject of a formal investigation by the European Commission. During this period, the ICI was replaced by the single municipal tax (imposta municipale unica or propria—‘the IMU’) in 2011;84 on that occasion, it was envisaged that the exemption for properties belonging to non-commercial entities would only be applied to the parts of units in which non-commercial activities were carried out.

79

See Pepe (2009), passim. See Articles 11–14, Decree of the President of the Italian Republic No 601/1973. 81 See Judgment of the Court of Justice of 8 September 2011, Joined Cases C-78/08 to C-80/08, Agenzia delle Entrate v Paint Graphos Soc. coop. a r.l. (C-78/08) and Others. 82 See Pepe (2008), p. 1705; Quattrocchi (2008), p. 1111. 83 See Art. 7(2-Bis) of Decree Law No 203 of 30 September 2005, amended and converted into Law No 248 of 2 December 2005. 84 See Legislative Decree No 23 of 14 March 2011. 80

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The European Commission85 took the view that the IMU exemption did not constitute State aid, but it nonetheless decided that the ICI exemption constituted prohibited aid in all cases where it was applied to commercial undertakings inasmuch as it amounted to a selective measure capable of distorting competition and the market. Furthermore, the European Commission found, exceptionally in accordance with general principles, that it was therefore in that case absolutely impossible for Italy to recover the aid granted. Accordingly, it did not order the recovery of the aid. That decision then led to subsequent litigation based on the general argument that such a choice benefited those who had enjoyed the unlawful aid. While the General Court endorsed the position of the European Commission,86 the Court of Justice did not, underlining that, where the European Commission identifies incompatible aid, it always has the duty to proceed to recovery, with the sole exception of cases where the latter is contrary to a general principle of Community law.87 In that respect, recovery of incompatible aid can only be regarded as impossible if the Commission is able to establish that the two conditions laid down are fulfilled: the existence of genuine impediments and the absence of alternative methods of recovery. The question of the recovery of such aid has, to date, still not been settled.

3.5.2

Developments in the National Notion of a Tax Benefit

In the light of important European precedents and of the complex experience in Italy over the restitution of prohibited fiscal aid, it may be said that an important cultural shift has begun to take place which has gradually led to a change in the notion of tax benefit (o tax advantage) at national level. In particular, since the end of the last century, the latter notion has been affected by the European framework on State aid which has had to be taken into account in legal literature and in all subsequent positive regimes. At present, therefore, any national tax relief for economic activities is also assessed with regard to its compatibility with the European value system, as the

85

Commission Decision of 19 December 2012 on State aid SA.20829 (C 26/2010, ex NN 43/2010 (ex CP 71/2006)) Scheme concerning the municipal real estate tax exemption granted to real estate used by non-commercial entities for specific purposes implemented by Italy (2013/284/EU). 86 Judgment of the General Court of 15 September 2016, Scuola Elementare Maria Montessori Srl v European Commission (T-220/13), and Ferracci v European Commission (T-219/13). 87 See Judgment of the Court of Justice of 6 November 2018, C-622/16 P, Scuola Elementare Maria Montessori Srl v European Commission; C-623/16, European Commission v Scuola Elementare Maria Montessori Srl; C-624/16 P, European Commission v Ferracci. See Orlandi (2018a, 2018b, 2018c), p. 771.

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framework on State aid has become the basis of the structure of any business-related concessionary aid. In other words, any tax scheme set up in derogation of the general system aimed at economic activities must—prior to its introduction—be shown to be compatible in respect of the European prohibition of State aid if it is to be maintained in the domestic system. Italian legal literature has—in fact—claimed that the structural elements of the notion of aid are now an integral part of the assessment that the national legislator is called upon to make when planning the aid, just as much as in terms of Italian constitutional legitimacy. Any fiscal advantage which is considered lawful in internal Italian terms is also one which does not undermine the values protected by the framework governing State aid.88 At the national level, therefore, any tax benefits that are introduced must always be assessed for prior compatibility with European law and at the same time will have to be aligned with both European and national principles. At the same time, as will be seen in the next Chapter, the proliferation of aid allowed without prior notification has confirmed this approach. The various States are now aiming at introducing within their territories aid measures which are in line with the models common across the European Union. This approach applies to all newly introduced aid, even if in relation to these cases, as well, it appears too difficult to comply with all the procedures set out in the State aid guidelines—as will be examined below. On the other hand, the situation is completely different with regard to benefits already present in the tax system. As has been pointed out several times here, concessions are structural elements of taxation designed, together with taxes proper, to deploy the tax lever and to pursue the economic and social objectives of the system. The benefits, however, take different forms in terms of methods and rules (exemptions, exclusions, reduced rates, deductible charges, deductions). Tax law is full of different forms of benefits, all of which could potentially run counter to the prohibition on State aid. It cannot therefore be ruled out that there are currently tax advantages that are contrary to the prohibition on State aid, but which have not yet been examined from a European perspective. That calls for further consideration. The policy of providing aid to economic activities is today in part removed from State sovereignty. Fiscal aid is an expression of certain values which cannot be ignored, and which significantly affect national taxation power.

88

See, in particular, Basilavecchia (2009), p. 380.

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In this regard, the only values which are acceptable in support of aid are only European values, and national policies can only introduce derogations within the limits of the European principles of necessity and proportionality. This precludes unnecessary or disproportionate sectoral policies with respect to European models, thus unquestionably taking away from States a fundamental prerogative of national fiscal policy.

3.6

Procedures for Determining Tax Credits

The prohibition of State aid has been applied in another important area of taxation, namely the procedure to determine tax liability at national level. In this context, the prohibition has been applied both to the regulations governing procedures and to the acts issued as a result of certain procedures. With regard to the regulations governing the procedures, the State aid framework dealt with amnesties, that is all the regulations that provide in general for the payment of tax liabilities and related tax penalties which reduce either the taxes due or the penalties. In general, such schemes have not been classified as prohibited State aid as they are general measures applicable to all taxpayers. However, the European Commission has laid down certain conditions that such schemes must meet in order to comply with the State aid framework.89 It was thus specified that the procedures must be effectively open to all taxpayers within the same time limits and under the same conditions. In that regard, the Public Administration must not have any discretion in the allocation or intensity of the measure but must limit itself to administering the implementation of the measure. An amnesty can never entail a waiver from verification on the part of the Tax Authorities, which must in any event retain the power to check the correct application of the rules and the correct assessment of the taxes due. On the other hand, different assessments have been made with regard to measures enacted as a result of a specific procedure. In those contexts, a general principle—namely that of the normal private creditor—has been established, which must inform the conduct of the tax authorities in deciding which outstanding tax claims to collect. The principle in question is applicable to all the procedures aimed at collecting taxes in which a technical-discretionary assessment is made by the Tax Authorities (or other public bodies responsible for assessing or collecting taxes) where there is some uncertainty about the amounts to be paid, non-compliance or a declared business crisis.

89

See Commission Notice on the Notion of State Aid as referred to in Article 107 of the Treaty on the Functioning of the European Union (2016/C 262/01) of 19 July 2016, para. 5.4.3.

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These are, in fact, tax settlement procedures. The area of tax collection procedure is a broad and detailed field. In fact, each State provides for different procedures and rules. In the cases examined by the European Commission, it is not the rules providing for such arrangements that are contrary to the prohibition on State aid. The potential infringement of the prohibition of State aid concerns the result of the procedure, that is to say, the final act. Such an act may constitute State aid if it meets the requirements of Article 107(1) TFEU. The principles laid down by the European Commission and the Court of Justice on this point have therefore highlighted how the final act of a tax settlement procedure can constitute prohibited aid where it constitutes a selective advantageous treatment. The principle governing this assessment is, precisely, that of the normal private creditor. That principle requires an assessment of the credit terms granted by the Public Administration and whether a private creditor would have accepted the same terms in a negotiation between private parties. In other words, it is a question of ascertaining whether the Tax Administration has done everything possible to collect its claims, applying the principles for the maximisation of profit.90 The analysis is carried out on the basis of comparative investigations aimed at ascertaining whether the beneficiary undertaking would have obtained the same advantage under normal market conditions. If the answer is ‘no’, the sum amounts to selective aid. This criterion is similar to the general private investor test, which is used (again in the context of the State aid framework) with reference to the State when it invests in private activities; this test requires that the State behave like a prudent private investor when it makes financial investments, capital loans or contributions of money in business activities.91 Under both principles (private investor and private creditor), the State must behave in a manner similar to what a private party (investor or creditor) would have done in the same market situation, i.e. behave in such a way as to maximise the return on its economic interests.

That principle was first set out in Judgment of the Court of Justice of 29 April 1999, C-342/96, Tubacex, Kingdom of Spain v Commission of the European Communities. In that respect, the most significant judgments have been: Judgment of the Court of Justice of 29 June 1999, C-256/1997, DM Transport v European Commission; Judgment of the Court of Justice of 20 March 2014, C-271/13, Rousse Industry v European Commission; Judgment of the Court of Justice of 24 January 2013, C-73/11, Frucona I v European Commission; Judgment of the Court of Justice of 20 September 2017, C-300/13, Frucona II v European Commission; Judgment of the Court of Justice of 21 March 2013, C-405/11, Buczek v European Commission. 91 See Orlandi (2017), p. 147. 90

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This analysis therefore entails an important economic and legal assessment with reference to both the amounts to be disbursed and the amounts to be collected. In relation to claims, according to the private creditor test, the State has to assess a number of elements and decide according to economic convenience and expediency. In this regard, various factors must be considered, such as: the amount due, repayment schedules, guarantees of solvency, the costs of the procedure and the differences between the various procedures available to the Administration to recover the credit. In such circumstances, maximising one’s own economic interests may not coincide with acquiring the largest possible sum, in view of the periods of payment or the complexity of procedures. The purpose of the test in question is therefore to strike a balance between the various factors and to classify as complying with the rules on aid those decisions in which the Tax Administration has assessed all the elements of the specific case and decided in the same way as a private creditor. Classification of a decision as State aid has to be adequately reasoned and proven, explaining why the use of a procedure or the establishment of an amount of credit due constitutes State aid, contrary to the private creditor principle. As shall be seen in the next section, the Court of Justice has provided clear guidance on the matter of evidence. Thus, the burden is on the European Commission to prove that the conduct of the Tax Administration was not in keeping with the private creditor test and that the credit granted constitutes prohibited State aid. When making such an assessment, it is necessary to take into account all the relevant factors in the instant case that would allow an assessment of whether the undertaking would have obtained the same credit with a private creditor.92 Where the European Commission is able to show such evidence, it is for the national Administration to show why it waived certain claims and why an entrepreneur in the same situation would have acted in the same way. The private creditor test has been the subject of significant criticism in the legal literature.93 This test subjects administrative actions to complex and detailed assessments that are often beyond the competence of the decision-making bodies. Furthermore, it should be noted that the national Authority itself is often unable to carry out in-depth technical evaluations such as those required by the European Commission, and this leads to weighing down procedures that were created precisely to help undertakings in crisis or to recover monies owed from defaulting parties.

92

See Judgment of the Court of Justice of 20 September 2017, C-300/16 P, Frucona II v European Commission; Judgment of the Court of Justice of 21 March 2013, C-405/11, Buczek v European Commission. 93 See Schön (2016), p. 3.

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Finally, it must be borne in mind that the Public Administration should act in the public interest to acquire unascertained financial resources from insolvent debtors and this activity should not be influenced by market rules. It should be noted that on the subject of tax settlements, the European Commission also intervened by way of the 2016 Communication on the notion of State aid,94 where it pointed out that reduction of the tax due without justification or in a disproportionate manner constitutes aid. This can occur where the findings should have resulted in a different quantification of the tax due on the basis of the rules in force. That position would appear to have left the statutory regime shorn of that principle despite the fact that the case-law of the Court of Justice would appear to go in the opposite direction, as will be seen in the following section.

3.6.1

The Case of Tax Settlements

A very important role was played in the context of issues relating to the review of procedures for the settlement of tax debts by a case concerning tax settlements: the Frucona Košice case.95 This issue set a precedent in relation to the legal conditions that any settlement proposal must observe in order to avoid being classified as State aid. Many States provide in fact for such kind of procedures. In Italy, for example, tax settlements (‘transazione fiscale’96), governed by Article 182ter of Royal Decree No 267/42 (‘the Bankruptcy Law’) are one form of remedy which may be used to resolve a business crisis under specific procedures. According to the regulations currently in force, the debtor may propose to his creditors the partial or deferred payment of tax and social security debts, subject to a series of conditions strictly identified by law. In order to allow the undertaking to reorganise itself, this scheme requires, where the proposal made by the taxpayer is accepted, an extension of payment or the waiver of part of the tax by the Tax Administration. In the latter case, that is to say, where part of the amount claimed by the Tax Agencies is waived, the arrangement was subject to the conditions laid down in the Community framework on State aid.

94

Commission Notice on the notion of State Aid as referred to in Article 107 of the Treaty on the Functioning of the European Union (2016/C 262/01) of 19 July 2016, para. 5.4.4.2. 95 See Judgment of the General Court of 16 March 2016, Frucona v European Commission, T-103/ 14; Judgment of the Court of Justice of 20 September 2017, European Commission v Frucona, C-300/16 P. 96 It is now referred to as ‘trattamento dei crediti fiscali e contributivi’ (treatment of tax and social security credits) following the amendments introduced by Law No 232/2016, ‘the 2017 Budget Law.’

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In the Frucona Košice case97 there was a long and complex procedure in which both the European Commission, the General Court and the Court of Justice became involved. The legal proceedings arose from a proposal for an arrangement with creditors submitted by Frucona Košice, an undertaking incorporated under Slovak law, to the local Tax Administration. In particular, the Slovak undertaking, which operated in the alcohol production sector, in the tax years 2002 and 2003, in order to cope with significant financial difficulties, took advantage of extended payment terms for tax debts, relying on the granting of adequate financial guarantees in favour of the Tax Administration. However, due to increasing economic difficulties, the taxpaying company was unable to meet its obligations and did not meet the requirements to benefit from further payment extensions. In order to deal with the financial crisis described above, Frucona filed an application for the initiation of an arrangement procedure before the relevant Court, proposing to its creditors to pay each of them 35% of the amount of the sum that it owed to them. In that way, the Tax Administration waived 65% of the tax owed. At a gathering of the creditors, the abovementioned proposal was accepted by the Administration and confirmed by the Court, in accordance with national law. The European Commission ruled that the measure granted by the Slovak State was incompatible with the common market,98 so Frucona Košice brought an action before the General Court for annulment of that decision. The action was dismissed as unfounded; however, the Court of Justice upheld an appeal against it in which it found that the European Commission’s decision had not adequately assessed the circumstances in which the Tax Administration would have benefited more from the arrangement than from the liquidation of assets.99 Specifically, the Court of Justice found that the European Commission’s decision was not adequately reasoned as regards the application of the private creditor test and the duration of any bankruptcy procedure. Following this judgment, the European Commission issued a new decision100 in which it sought to make good the shortcomings found by the Court of Justice in the earlier decision by making it clear that the liquidation proceedings or tax execution were more favourable than the proposed arrangement and that therefore the ‘private creditor test’ was not met.

97

See Judgment of the General Court of 16 March 2016, T-103/14, Frucona v European Commission; Judgment of the Court of Justice of 20 September 2017, C-300/16 P, European Commission v Frucona. 98 See Commission Decision 2007/254/EC. 99 See Judgment of the General Court of 16 March 2016, T-103/14, Frucona v European Commission; Judgment of the Court of Justice of 20 September 2017, C-300/16 P, European Commission v Frucona. 100 See Commission Decision of 16 October 2013 (2014/342/EU).

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Indeed, the Commission has stated that the application of the private creditor test presupposes that the Member State (which has adopted the measure qualifiable as aid) has acted iure privatorum (rather than iure imperii) and has demonstrated on the basis of objective and verifiable evidence that the measure implemented could be equated to that of a private operator in a market economy.101 In other words, the Commission maintained that the remission of the debt by the Tax Authorities was contrary to the State aid framework laid down in Article 107(1) TFEU. That decision was followed by a further appeal before the General Court, which upheld the taxpayer’s action and annulled the decision of the European Commission. That decision was subsequently upheld by the Court of Justice.102 An important framework of principles was thus laid down in those cases and in the light of the earlier case law. First, it confirmed the use of the private creditor test for the assessment of the proposal resulting from the settlement procedure. The private creditor test must be regarded as an essential prerequisite for the assessment which the European Commission is called upon to carry out in order to verify the existence of State aid. However, it was made clear that proof as to whether the test has been passed is entirely for the European Commission to decide on the basis of a full body of evidence. Indeed, it was pointed out that the European Commission bears the burden of making an overall assessment of the specific case and assessing all the circumstances that a creditor might take into consideration. This investigation must be carried out not only on the basis of the documentation and information provided by the Member State (which granted the disputed measure) but also on the basis of any other useful information brought to light through the use of investigative powers. Ultimately, the case law of the Court of Justice has shown that the Commission must assess all the information that a prudent and diligent private creditor, finding itself in a similar situation to that of the Tax Authorities, would certainly have considered. The issues set out above in relation to the adoption of the private creditor test are in part alleviated by the requirements with regard to evidence laid down in European case law, which calls for a certain rigour in the assessment of the evidence and places the burden of proof entirely on the European Commission to demonstrate any breach of Article 107 TFEU.

101

See Judgment of the Court of Justice of 5 June 2012, C-124/10, European Commission v EDF. See Judgment of the General Court of 16 March 2016, T-103/14, Frucona v European Commission. 102

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Cases Amounting to Harmful Tax Competition

The State aid framework as applied in tax matters has been brought to bear in the fight against unfair tax competition, developing—as already suggested in the previous sections—along lines bringing an altogether fresh approach to the issue. In order to fully understand this line of action, it is necessary to briefly recall some essential features of the problem of unfair tax competition, in part already analysed in Chap. 2.103 The problem of inter-State tax competition has been keenly felt in the early years of the twenty-first century. The globalisation of the economy and technological development have led to a major change in production processes. In this context, it has become easy to move wealth and activities to countries other than those where the wealth is structurally produced and the activities located. These processes have been facilitated above all in the European context, where the elimination of borders and the establishment of economic freedoms (free movement of goods, freedom of movement of persons, free movement of services and free movement of capital) have created a territory without physical or material barriers. Tax competition occurs when a State uses tax leverage in order to attract activities and capital to its territory.104 Tax competition becomes harmful when the State pursues the aforementioned objectives through tax policies that call for the localisation of activities according to dynamics that are contrary to the general principles that govern taxation at a national and global level, upsetting the balanced distribution of taxable income among States. These values are expressed in the general principles of taxation in the country of source and in the country of residence, which implement a taxation logically linked to the territory of production of wealth.105 Unfair tax competition takes wealth away from some States in favour of others, with taxes being paid in countries other than those in which the wealth was produced resulting in significant asymmetry between the production of wealth and its taxation to the detriment of certain States and to the advantage of others.106 Harmful tax competition thus has serious repercussions on social policies and the world of work because it undermines the resources normally available to States.107

103

See Chap. 2, Sect. 2.2.3. See Ceriani (2009), p. 2. 105 See Carpentieri (2018), p. 351. 106 See Boria (2018), p. 5. 107 See Perrone (2019a, 2019b), passim. 104

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The fight against this phenomenon has been carried out at international level by the OECD through the adoption of soft law acts108 which have gradually taken the shape of general principles and sets of rules addressed to the States.109 The OECD has come a long way over the years until eventually endorsing the BEPS project.110 The overall objective of OECD policy is for countries to slowly adjust to shared legal principles and rules in order to overcome the most serious problems created by harmful tax competition.111 In the European context, the phenomenon of unfair tax competition came to the attention of the institutions after the Maastricht Treaty of 1992112 which confirmed the economic and monetary union between the European States and established a good level of harmonisation in the field of indirect taxation. At the same time, in the same period, the plan for harmonisation in the field of direct taxation came to a sudden halt due to the rejection of the 1992 Ruding report.113 The lack of harmonisation of direct taxes has been the main cause of the growth of unfair tax competition practices in Europe and the reason for the need to find solutions to counter such behaviour. As mentioned above, in fact, the various fiscal regimes (in terms of direct taxes between individual Member States) and ‘new economy’ instruments have given rise to an economic context in which it has been very easy to move tax liabilities towards those States with the most advantageous fiscal regimes. This has led, at the present historical juncture, to the rise of the European soft law acts.114 The provisions contained in soft law acts are not binding by nature; the principles concerning unfair tax competition constitute recommendations and guidelines on the tax behaviour that States must adopt in certain matters and do not have the same degree of binding force as matters regulated by Community legislation.

108

See OECD, Harmful Tax Competition. An emerging global issue, Paris 1998; Weiner and Hault (1998), p. 4. 109 See Framework for a Collective Memorandum of Understanding on Eliminating Harmful Tax Practices (2000) and the Progress Report (2001, 2002, 2004, 2012), PAC/COM/NEWS(2000)123, Paris, 24 November 2000, at http://www.oecd.org/. 110 See OECD, Addressing Base Erosion and Profit Shifting, Paris, 2013; Id., Action Plan on Base Erosion and Profit Shifting, Paris, 2013; Id., Explanatory Statement 2015. Final Reports, Paris, 2015 at http://www.oecd.org/tax/beps. 111 See Saint Amans and Russo (2016), No 4; Traversa and Flamini (2015), p. 3. 112 See Schön (2000), passim. 113 See Boccaccio (2016a, 2016b), p. 6. 114 See Code of Conduct, adopted by the Ecofin Council on 7 March 2003, implementing the Decision of 1 December 1997, adopted by the Council in the context of ‘the Monti Package’ (Communication of the Council No 495/1997: ‘Towards tax co-ordination in the European Union A package to tackle harmful tax competition’). See Gallo (1999), p. 970.

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In this context, the link is made between State aid and the framework on harmful tax competition, opening a new chapter in the history of fiscal aid.115 The European Commission aims to strengthen the enforcement of the State aid framework in order to reduce distortions of competition in the single market116 and clarifies how unfair tax competition can be tackled through the State aid framework where the conditions required by Article 107(1) TFEU are met. The State which grants favourable measures to taxpayers which breach the principles contained in soft law acts or in the Code of Conduct may thereby incur in an infringement of Article 107 TFEU. This change in policy has led to an important adaptation of the State aid framework to the objectives of unfair competition, particularly in terms of conditions and effects. Frameworks contrary to the Code of Conduct and amounting to unfair tax competition, which may be challenged under the State aid framework, have been found in selective advantage policies in: • general national frameworks; • tax rulings granted by Member States to individual taxpayers.

3.7.1

Analysis of General Schemes Amounting to Harmful Tax Competition. The Gibraltar Case

A landmark ruling by the Court of Justice marked the start of the deployment of the fiscal State aid framework against instances of unfair tax competition. The shift in question, which already underlay some of the Court’s earlier cases,117 was in fact confirmed in the judgment in the Gibraltar case.118 In that judgment, the European institutions examined a set of taxes approved by a Region that substantially discriminated between resident undertakings that generated income within the Region and the same undertakings that generated income abroad (offshore companies). This case, as analysed in Sect. 3.2, also represents a significant step forward in terms of selectivity by laying down a criterion that makes it possible to verify selectivity on the basis of the effects of a tax or set of taxes on the market without the need to find a general reference framework. 115

See Commission notice on the application of the State Aid rules to measures relating to direct business taxation of 10 December 1998 (98/C 384/03). See Monti (1999), p. 208. 116 See Fantozzi (2003), p. 121. 117 See Judgment of the Court of Justice of 17 November 2009, C-169/08, Presidente del Consiglio dei Ministri v Regione Sardegna. 118 See Judgment of the Court of Justice of 15 November 2011, C-106/09; C-107/09, European Commission and Kingdom of Spain v Government of Gibraltar and United Kingdom of Great Britain and Northern Ireland.

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In the Gibraltar judgment, the regulatory system within that Region, which met the requirements of ‘territorial autonomy’, was found to be discriminatory and contrary to the prohibition of State aid in that it favoured offshore companies over those making profits within the territory of the same Region. In this judgment, the requirements of advantage and selectivity are demonstrated by comparing the tax rules for residents with those for non-residents, as is typically the case when assessing cases of tax competition between States. The effect of the distortion of competition (which is typical of State aid) is no longer assessed in relation to an exclusively national market but within the European market. The assessment of selectivity coincides with evidence of a discriminatory effect of the regime towards resident entities. This is a typical analysis of the general principle of non-discrimination (between residents and non-residents) and of unfair competition cases. In that context, the focus of the State aid framework is on taxation rules, taxes, and set of taxes that may potentially fulfil all the requirements of the case and produce a selective, discriminatory or anti-competitive effect.

3.7.2

The Control of Tax Rulings. Evolution

The review of tax rulings is an important frontier for the fiscal State aid framework. In order to understand the issue, it is necessary to define the concept and to examine thoroughly the context and the objectives which led to the link with the State aid framework. Tax rulings or tax agreements are taxation mechanisms implemented by means of individual administrative measures and entered into by State administrations with taxpayers having an international nature.119 Every State has special regulations governing the content and procedure for international tax rulings. International tax rulings are implemented in various States on the basis of guidelines laid down by the OECD and the European Union and represent a tax policy characterised by transparency, collaboration and the need to avoid tax disputes. In Italy, international rulings are regulated by Article 31ter of Decree of the President of the Italian Republic No 600/1973. Tax rulings represent a policy of compliance between multinational companies and Member States: these instruments have become very popular in recent years in connection with the globalisation of the market and the rise of the digital economy in order to regulate certain extremely complex tax cases.

119

See Adonnino (2004), p. 57.

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In fact, multinational companies—which are designed to create tax obligation conditions in different national jurisdictions—are able to approach the Tax Authorities of the State where they produce wealth in order to reach agreement on the definition of the activity taking place within the territory and the relevant tax treatment. Those agreements deal with general issues, such as: • • • • •

the residence of the companies in the territory of the State; the existence of a permanent establishment; the size of the permanent establishment; general methods for defining the transfer price; the criteria for quantifying the taxes due.

Advance Pricing Agreements (APAs) play an important role in the context of admitted rulings. APAs are tax instruments, widely used within the OECD, designed to agree, in advance and for a certain period of time, the methods for calculating the price of goods and services transferred between companies belonging to the same group (otherwise referred to as the transfer price).120 The agreement reached in a tax ruling binds the parties, giving the tax relationship legal certainty and stability as regards the criteria, the agreed procedures and the taxes to be paid, which will not be the subject of discussion again for the entire duration of the agreement. Tax rulings are an instrument created to put an end to uncertainty and establish the predictability and stability of taxation in the various States, avoiding the need for assessments and procedures to settle tax situations that are particularly complex because they involve the territories of different States. In that regard, if a tax agreement takes account of the global aspects of an arrangement where the allocation of assets and the distribution of taxable income is shared across States, it does not give rise to any problems since it contributes to maintaining the general tax balance in proper order. Although the objective of these two instruments is different, tax agreements have slowly shown a tendency to become instruments of unfair tax competition. The problems begin when a tax agreement alters the taxation principles by arriving at a greatly beneficial level of taxation, leading to a series of consequences. Tax agreements are indeed often drawn up between the Member State and multinational companies which hold an important economic position on the world stage. In this context, it has emerged that each State might tend to provide very favourable tax conditions to companies in order to acquire, with a level of certainty, the relevant taxes which—in view of the importance of the activities—will accrue to a high taxable base.

120

See Trivellin (2018), p. 7; Petruzzi (2016), Chap. 3.

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This tendency of the State to grant particular tax advantages could then be followed by that of the undertaking to carry out aggressive tax planning, moving registered offices and activities to the States that grant the greatest tax advantages. This reasoning is the basis of the so-called Vestager doctrine121 on fiscal State aid, which has focused her activity on the review of tax rulings. This doctrine took account of the unfair conduct of many European States that granted personalised rulings to large multinational companies and caused a serious loss of revenue for other States. This doctrine thus elaborated—on the basis of Article 107 TFEU—the arm’s length principle that must be respected by all States when executing tax agreements with undertakings having an international nature. According to this principle, the tax conditions granted in a tax ruling should be the general conditions that any other operator in the market in the same position would enjoy.122 Numerous rulings made by the Member States have been the subject of investigations on the basis of that principle.

3.7.3

European Review of Tax Rulings. Summary of the Most Important Cases

The European Commission has focussed more on tax rulings over the years. Beginning in 2013, the European Commission began to carry out a series of checks on tax rulings. Each Member State was asked to provide information about the national rules for making tax rulings, as well as a list of rulings adopted in the previous two years. In addition, a special task force was set up to carry out constant monitoring, which in certain cases led to formal investigations.123 In addition to fuelling the international debate,124 some cases have led to decisions of great importance by the European Commission, which drew up relevant guidelines on tax competition for the determination of the relationship between tax rulings and the prohibition of State aid. In particular, in 2014, three major investigations were opened relating to tax rulings granted by Ireland to Apple, Luxembourg to FIAT and the Netherlands to Starbucks. In the author’s view, the analysis of the main issues and their evolution is very important in order to highlight the characteristics of these cases.

121

This doctrine was named after Margrethe Vestager, European Commissioner from 2014 to 2019. See Pepe (2017), p. 3. 123 See Boccaccio (2016a, 2016b), p. 5. 124 See Marino (2018), p. 393. 122

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155

In particular, it is very clear that in such cases the behaviour of the State is challenged for having breached the prohibition of State aid, but this behaviour is always associated with a form of aggressive tax planning on the part of the taxpayer. It is clear, therefore, that the prohibition of State aid is designed to counteract both unfair competition on the part of the State and tax evasion on the part of taxpayers. There has, therefore, been a further structural change in the State aid framework, which is aimed at cases in which new elements are detected. In that regard, there is some difficulty in adapting a regulatory scheme aimed exclusively at the behaviour of the State, especially in relation to the conditions of selectivity and advantage. Moreover, although the State aid framework provides for the consequences for the taxpayer that may be called upon to reimburse the taxes saved, it is however not capable of making good the damage caused by the conduct of the State and the taxpayers, which involves all the other various States that have suffered a loss of taxable income and taxes. In that respect, it is deemed that the use of such legislation may be useful from a strategic point of view, but it is ineffective from a legal point of view. Furthermore, in terms of procedure and evidence, the State aid framework contain significant shortcomings which do not permit consistent justice in this respect. These assessments will be clearer once the most important cases that have helped shape these aspects have been examined. There follows a brief examination of the best-known issues relating to the multinationals Apple, Starbucks, Amazon and Fiat.125

3.7.3.1

The Apple Case

The Apple case concerned two tax rulings granted by Ireland in January 1991 and subsequently in May 2007 in favour of Apple Sales International (ASI) and Apple Operations Europe (AOE), two undertakings established under the laws of Ireland, controlled by Apple. Following an in-depth investigation, the Commission established that, thanks to the two tax rulings, the multinational undertaking (Apple Inc.) benefited from a substantial artificial tax reduction made possible by the method employed to determine the taxable income of its subsidiaries Apple Sales International (ASI) and Apple Operations Europe (AOE).

125

See Apple, Commission Decision (EU) 2017/1283 of 30 August 2016 on State aid SA.38373 (2014/C) (ex 2014/NN) (ex 2014/CP, implemented by Ireland to Apple); Starbucks, Commission Decision (EU) 2017/502 of 21 October 2015 on State aid SA.38374 (2014/C ex 2014/NN) implemented by the Netherlands to Starbucks; Amazon, Commission Decision (EU) 2018/859 of 4 October 2017 on State aid SA.38944 (2014/C) implemented by Luxembourg to Amazon (notified under document C(2017) 6740); Fiat, Commission Decision (EU) 2016/2326 of 21 October 2015 on State aid SA.38375 (2014/C ex 2014/NN) which Luxembourg granted to Fiat.

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These companies operated in Ireland through a permanent establishment and the income generated was, in particular, made up of profits from sales of Apple products purchased in Europe. Almost all of Apple’s profits booked in Ireland were then transferred to the headquarters of these subsidiaries, which were identified as fictitious offices, not resident for tax purposes in any country and without employees or offices of their own. These headquarters could best be described as ‘stateless’ for tax residency purposes and, thus, not subject to tax. The part of the profits taxed in Ireland—according to the approved rulings—used the technique of the transactional net margin method; thus a very small part of the profits was taxed compared to the overall profit. Under the general rules, the two undertakings should have been subject to a 12.5% corporate tax. Under the agreements entered into with the Tax Authorities, the two undertakings paid tax on European profits in Ireland at an actual rate of between 1% and 0.005%. The investigation by the European Commission led to the decision126 which found that the two rulings constituted prohibited aid and ordered Ireland to recover unpaid taxes from Apple. The conditions granted by Ireland were not in line with normal trading conditions between independent undertakings and resulted, on the one hand, in income being allocated to the two Irish undertakings without any factual or economic justification and, on the other hand, constituted a selective advantage in relation to other undertakings subject to the same national tax rules. This conferred a selective advantage in respect of Apple contrary to the ‘arm’s length’ principle. The Apple Group and Ireland itself, appealed the Commission’s decision before the General Court of the European Union; the EU General Court delivered its recent judgment of 15 July 2020127 in which it annulled the European Commission’s decision. That judgment confirmed that the Commission was entitled to analyse rulings in the light of the State aid rules and accepted that the Commission’s legal and logical procedure was correct. However, the Court found that the selectivity of the advantage was not adequately established. The General Court, in fact, annulled the Commission’s decision on the basis that it had failed to demonstrate in a legally adequate and sufficient manner the methodological errors in the contested tax ruling which led to a reduction in Apple’s profits in Ireland.

126 See Commission Decision (EU) 2017/1283 of 30 August 2016 on State aid SA.38373 (2014/C) (ex 2014/NN) (ex 2014/CP) implemented by Ireland to Apple (notified under document C (2017) 5605). 127 Judgment of the General Court or 15 July 2020, T-778/16 and T-892/16, Ireland v European Commission.

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3.7.3.2

157

The Amazon Case

The Amazon case concerns a tax ruling executed with the Luxembourg State Tax Administration in 2003 and renewed on the same terms in 2011. The Amazon group transferred a large part of its profits from an undertaking subject to taxation in Luxembourg to another undertaking belonging to the same group which, however, as a transparent undertaking, was not subject to taxation in Luxembourg. The latter undertaking had no offices, no employees and no business activities as its purpose was only to hold the rights to exploit the intellectual property. In this way, an intense commercial activity was established between the two undertakings, by virtue of which the resident undertaking transferred considerable royalties to the transparent undertaking, considerably reducing its income liable to tax. A significant amount of profit shifting was achieved through the royalty payment transaction. The ruling executed with the Luxembourg Tax Authorities approved the instrumental use of the transactional net margin method, through which the functions performed by the undertaking subject to taxation were valued at a lower rate than those performed by the second undertaking to which, therefore, most of the profits produced were allocated. The European Commission classified the tax ruling by which the State of Luxembourg approved the transfer pricing method between the two undertakings of the Amazon group as prohibited State aid.128 According to the European Commission, in fact, the Luxembourg Tax Authorities did not take effective account of the functions actually performed by the various companies belonging to the same group and approved an inappropriate method of determining transfer prices. In the light of the functional analysis carried out by the Commission, it emerged that it was in fact the undertaking which paid the substantial royalties that held the intangible assets for tax purposes and carried out all the functions necessary for their development, protection, maintenance, copyright and exploitation. On the basis of this decision, the State of Luxembourg had to recover the taxes actually owed by the Amazon Group in accordance with transfer pricing methods under the OECD Guidelines pursuant to Article 16 of Regulation (EU) 2015/1589, plus interest. Recently the General Court of the EU129 overturned the European Commission Decision of 2017 in which the Commission ordered the recovery of the incompatible and unlawful aid supposedly granted to Amazon by Luxembourg. The Court did

128

See Commission Decision (EU) 2018/859 of 4 October 2017 on State aid SA.38944 (2014/C) implemented by Luxembourg to Amazon (notified under document C (2017) 6740). 129 See Judgment of the General Court or 12 May 2021, T-816/17, Luxembourg v Commission and T318/18, Amazon EU Sàrl and Amazon.com, Inc v Commission.

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establish that “none of the findings set out by the Commission in the contested decision are sufficient to demonstrate the existence of an advantage for the purposes of Article 107 TFEU”. According to the Court therefore no selective advantage in favour of a Luxembourg subsidiary of the Amazon group can be identified and hence the tax rulings granted by Luxembourg to Amazon where not incompatible with the internal market. The decision on Amazon case is similar to the decision of Apple case.

3.7.3.3

The Starbucks Case

The Starbucks case began with a request for information, which then resulted in a formal investigation by the European Commission against the Netherlands regarding a tax ruling on transfer pricing. The ruling, agreed between the national Tax Authorities and Starbucks Manufacturing (an undertaking of the Starbucks group), had the effect, according to the Commission’s findings from its reconstruction of transactions, of artificially reducing the taxes to be paid by the undertaking. In particular, the ruling established transfer pricing criteria for the acquisition by Starbucks Manufacturing of coffee beans from companies of the Starbucks group, based in Switzerland. Starbucks Manufacturing was also transferring considerable royalties to an undertaking in the United Kingdom which was part of the same group in exchange for the concession of the use of know-how related to coffee roasting. According to the tax legislation in force, the latter undertaking was not required to pay income tax in either the United Kingdom or the Netherlands. Under those arrangements, the tax liability in respect of the wealth produced was avoided altogether. Overall, the Commission demonstrated that Starbucks Manufacturing had improperly transferred a large part of its taxable profits through very high royalties and had further reduced its tax base by purchasing coffee beans from the Swiss undertaking at a very high price. The determination of transfer prices under the ruling had therefore altered the tax base in respect of the taxes paid by Starbucks Manufacturing, which were lower than those actually due. In its Decision,130 the European Commission found that the ruling constituted State aid, noting that the remunerations paid between the companies were not justified as they did not realistically reflect market value.

130

See Commission Decision (EU) 2017/502 of 21 October 2015 on State aid SA.38374 (2014/C ex 2014/NN) implemented by the Netherlands to Starbucks (notified under document C(2015) 7143), OJEU L 83, 29.03.2017.

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According to the Commission, tax rulings may not use transfer pricing methodologies which are economically unjustifiable and whose purpose is to transfer profits unduly, thereby reducing the tax liability of a particular undertaking. It was established that the ruling in question approved methods that were not in line with the realities of the market, thus resulting in unfair competition. The European Commission’s Decision was annulled by the General Court of the European Union following an appeal brought by Starbucks and the Netherlands.131 The General Court held in fact that the Commission had not succeeded in demonstrating the economic advantage obtained by Starbucks through the application of the above-mentioned tax ruling, thus taking the opposite view to the Commission with regard to the same ruling.

3.7.3.4

The Fiat Case

The European Commission found in a Decision132 that through a 2012 tax ruling granted by the Luxembourg State in favour of Fiat Finance and Trade, the undertaking had been granted prohibited fiscal aid. Specifically, the Decision found that the tax ruling in question had conferred a selective advantage on Fiat Finance and Trade by way of an undue reduction in the tax liability of at least €20–30 million, by approving a calculation method for the allocation of profits to Fiat Finance and Trade within Fiat Group which was artificial and extremely complex and therefore not appropriate for the determination of taxable profits reflecting market conditions. Indeed, the European Commission, in its investigation launched in 2014, pointed out that, first, as a result of a series of economically unjustifiable assumptions and downward adjustments, the capital estimated for the purposes of the tax ruling was considerably lower than the undertaking’s actual capital. Moreover, the estimated remuneration applied to an already much reduced capital for tax purposes was also well below market rates. The analysis carried out by the Commission showed that, if market rate estimates for capital and remuneration consistent with market conditions had been applied to Fiat Finance and Trade, the taxable profits declared in Luxembourg would have been 20 times higher. In that Decision, the Commission ordered the Grand Duchy of Luxembourg to recover the aid granted to the undertaking concerned inasmuch as it was incompatible.

131

Judgment of the General Court of 24 September 2019, T-760/15 and T-636/16, Kingdom of the Netherlands v Commission. 132 See Commission Decision (EU) 2016/2326 of 21 October 2016 on State aid SA.38375 (2014/C ex 2014/NN) which Luxembourg granted to Fiat.

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That Decision, which was challenged by Fiat Finance and Trade and by the Luxembourg authorities themselves, was upheld by the General Court.133 The General Court held that the EU Commission was right to find that the method of calculating taxable profits using the transactional net margin method was not in accordance with the arm’s length principle and, in general, that the choices made had led to a reduction in the taxable base of Fiat Finance and Trade in Luxembourg compared with companies whose profits were determined on the basis of market conditions. The General Court also found that the Commission did not err in finding that the advantage conferred on the undertaking was selective and threatened to distort competition by affecting trade within the Union.

3.7.4

The Principles Laid Down by the European Commission in Respect of Tax Rulings

The challenges to and reviews of the tax rulings were motivated by the guidance laid down by the European Commission in its 1998 Communication134 and the Vestager doctrine. The importance of the issue of tax rulings worldwide and the impact of the Apple, Starbucks, Fiat and Amazon judgments on the European State aid framework led the European Commission in 2016 to return to it in the Communication on the notion of State aid where it laid down some general guidelines.135 In this Communication the Commission established general principles that are intended to shape future national tax policies. Tax rulings must respect the whole framework on State aid and apply the State’s tax rules according to objective criteria and in compliance with the principle of transparency. In that regard, States are advised to draw up general administrative acts containing the conditions applied to rulings in international matters, in order to provide certainty and predictability regarding their contents. In said Communication, the European Commission, established the existence of the principle of free competition—the arm’s length principle—which derives directly from Article 107(1) TFEU and which constitutes a fundamental principle for the assessment of State aid.

133

Judgment of the General Court, T-759/15 (Joined Cases T-755/15, T-759/15), Fiat Chrysler Finance Europe v European Commission. 134 Commission notice on the application of the State aid rules to measures relating to direct business taxation (98/C 384/03), para. 22. 135 See Commission Notice on the notion of State Aid as referred to in Article 107 of the Treaty on the Functioning of the European Union (2016/C 262/01) of 19 July 2016, para. 5.4.4.1, titled ‘Tax rulings and settlements’.

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The arm’s length principle prohibits unjustified unequal treatment in the taxation of undertakings which are in a comparable factual or legal situation. On the basis of that principle, a tax ruling cannot confer a selective advantage on the taxpayer; such a situation arises when the taxpayer is granted a reduction of its tax liability compared to other undertakings in that State which are in a comparable de facto or de jure situation. So far as concerns intra-group transfer pricing transactions, it should be noted that a reduction in the taxable base that results from a transfer pricing valuation method may constitute State aid if it sets a price lower than that applied in conditions of free competition between independent undertakings. Transfer prices should be determined in accordance with market conditions and on the basis of the arm’s length principle, according to which the pricing method chosen must be one which leads to a result which departs only slightly from a reliable approximation of a market-based outcome. This approach ensures that the undertaking’s profit is determined and taxed in accordance with ordinary market conditions. When determining transfer prices in accordance with the above principle, the European Commission has implemented the indications provided by the OECD guidelines, thus establishing that those guidelines contain internationally shared principles.136 If the agreement complies with these principles, it should not constitute prohibited state aid. However, it bears repeating that the choice of criteria should be made with a view to achieving a market-based outcome. In general, as with all the other cases of unfair tax competition, the principle of non-discrimination in taxation when laying down the conditions for taxation has been established.

3.7.5

The Position of European Jurisprudence

The position adopted in European jurisprudence on rulings assumes a certain level of significance in view of the importance of the issue, the impact on the world economy and the fact that until now the power to review rulings in the light of State aid rules had always been claimed by the Commission but never confirmed by other European bodies. In this regard, the first significant element worthy of note is the confirmation by the European courts of the Commission’s power to review national rulings in light of the prohibition of State aid under Article 107 TFEU, thus accepting the approach of the Vestager doctrine.

136 OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 published on 10 July 2017.

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This is of great historical importance as it confirms that rulings fall within the sphere of control of the European Commission and within the scope of the State aid framework. This conclusion will inevitably lead to greater transparency and legal propriety in the use of these instruments, precisely because they are subject to review by European bodies. However, as analysed above, this acknowledgement was followed in some instances by the annulment of the Commission’s decision on the ground that the legal reconstruction had not been adequately demonstrated.137 Indeed, the European Courts have held that the Commission must prove: • • • •

the inadequacy of the tax assessment criteria used; the reduction of the tax liability; the alternative method that should have been chosen; evidence that the choice of the latter method would have resulted in a higher level of taxation equal to that applied to private undertakings on the market.

The courts thus require further evidence to support the Commission’s findings, adopting an extremely strict formal legal approach in line with the traditional notion of State aid. That approach is in contrast with that of the European Commission, which has adopted a more substantive approach to the issue and has not carried out sophisticated calculations to demonstrate how the use of a different criterion would have led to a different result. What is called for are very complex and technically difficult tests, which are nevertheless necessary for the proper handling of the case. In fact, the taxpayer could be called upon to pay substantial unpaid taxes and such a decision would have inevitable geopolitical repercussions on international relations.138 A rigorous approach to evidence is therefore necessary even in cases where the tax saving is immediately obvious. On those issues, therefore, it will be necessary to strike a balance between showing the existence of all the requirements of the prohibited aid and the need to ensure justice in individual cases.

3.7.6

Reflections on the Application of the State Aid Framework to Tax Rulings

The issue of the application of State aid framework to tax rulings raises some important questions to which it is not clear whether there will be adequate answers. 137 138

See Pepe (2021), p. 329. See Pepe (2021), p. 329.

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From a structural point of view, the need to assess tax rulings has led to obvious changes in the typical scheme for classifying State aid. These changes are in addition to those to which had been applied to the framework on State aid in order to cover tax competition, which had led to the assimilation of certain aspects of the principle of non-discrimination. In that regard, there are further changes with respect to advantage and selectivity. The requirements at hand are the same in the cases analysed inasmuch as the advantage provided by the ruling is selective in itself since the ruling is addressed to only one taxpayer. The fact that the tax treatment is different from the general one and is more favourable makes it simultaneously advantageous and selective. This element, highlighted by the legal literature as inimical to the correct assessment of State aid,139 seems none the less to have been accepted by the courts which, on this aspect, have aligned themselves with the position previously taken on individual aid. In contrast, the literature had pointed out that the assessment of selectivity should stand alone and should be based on a comparison with companies belonging to a group. In other words, the comparison had to be made with companies having the same characteristics within a multinational group. The criticism which, instead, emerges from the courts is with regard to establishing advantage. Such evidence, as laid down in the case law, takes on an extremely technical and complex aspect. The general benchmark for assessment must be the arm’s length principle, which reflects the general value of non-discrimination between economic operators that are in the same de facto and de jure situation. This principle also governs the choice of transfer pricing valuation criterion, which must be the one that ensures that it is the market value of the transaction which is applied.140 There has been further criticism of the principle in question in the legal literature to the effect that it has not been codified at European level.141 The principle of free competition (the arm’s length principle) has been implemented by the OECD Conventions in the context of double taxation, where it serves as a general measure for the assessment of certain conduct; in particular, as regards the regulation of transfer pricing, it is the arm’s length principle which is generally applied in order to determine the relevant prices. The aforementioned principle—which is central to the international framework and is binding on undertakings operating on a global scale—suffers from a structural vagueness in its contents as a result of the stratification of the soft rules elaborated

139

See Nicolaides (2006), p. 422; Jaeger (2016), p. 51. See Petruzzi (2016), Chap. 3. 141 See Orlandi (2018a, 2018b, 2018c), passim. 140

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over the last twenty years and merged in various OECD documents, most recently in the BEPS Project.142 The principle of free competition (the arm’s length principle) in fact consists of a multiplicity of rules and criteria for estimating prices which are in constant evolution and however that are applied alternatively. The undisputed value of this principle in the international context, where it has been the subject of significant interpretation, may be contrasted with a different level of importance attributed to it in European law. In the European context, it has been used in only a few judgments,143 and has thus not shown any sign of following a legal regulatory course or being applied in interpretation such as to make it a general principle of the Union. The arm’s length principle was first linked to the State aid framework by an explicit reference in a 2014 Commission Communication;144 the principle was then expressly formalised in legislation to combat unfair competition in 2016.145 It follows that the European Commission, in the context of decisions relating to tax rulings, uses, as a general rule, a principle that is new to the European tradition and which, as noted, has a broad reach characterised by elements of uncertainty.146 Another aspect is thus the content itself of this principle, which differs according to the international and European contexts. It should also be noted that the definition of this principle has not always coincided with the definition given to the same principle at international level. The arm’s length principle in the international sphere expresses the need for a correct distribution of taxable income between States, whilst in the European sphere the principle in question is expressed by the prohibition on allowing different tax treatments and enshrines the value of non-discrimination. It is therefore worth examining the experience of applying this principle in order to understand its contents more accurately. It is thus unavoidable for there to be a need for rigorous proof of advantage that must be in place for the assessment of a ruling as State aid. This evidence must be mostly of an economic nature to effectively demonstrate the amount of tax due. This is a complex but fundamental step for a consistent application of the framework which respects the balances of the States beyond the Member States. The general impression is that we are going through a phase of adapting the State aid framework to new situations.

142

OECD, Action Plan on Base Erosion and Profit Shifting, Paris, 2013. Judgment of the Court of 22 June 2006, C-182/03 and C-217/03, Kingdom of Belgium v European Commission. 144 See Draft Commission notice of the notion on State aid pursuant to Article 7, 2014. 145 See Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market. 146 See Kyriziasis (2016), p. 430. 143

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This adaptation will require gradual progress as a result of the Commission’s future work and European case law. I believe, however, that the framework on State aid is in no way capable of doing justice in the cases analysed above, which are characterised by a combination of unfair competition attributable to the State and very aggressive planning on the part of multinational companies. The State aid framework may be useful for the review of rulings involving domestic undertakings or undertakings operating in another State; however, the same framework is neither conclusive nor effective where multinational undertakings are concerned. Aggressive tax planning has in fact led to the flow of taxable amounts towards any State that has granted advantageous tax conditions to multinational taxpayers. Classification of the measure as State aid allows for a recalculation of the taxes that would have been due under normal conditions and for their recovery by the State where the activity was allocated. Therefore, the State that has already approved a ruling which constituted unfair tax competition would acquire significant taxes related to activities that had been allocated to its territory for business strategic reasons. While such a solution may be helpful in ensuring non-discrimination in taxation, it does not in any way contribute to the fair distribution of taxable income worldwide. This fundamental problem is, in my view, the real issue that prevents a final decision being reached, even though it is obvious that such rulings are seriously detrimental to competition and the market.

3.8

Concluding Remarks

The impact of the prohibition of State aid under Article 107 TFEU on tax matters is undeniable and significant. Over the years, there has been a steady expansion of the scope of the prohibition and of the types of tax situations that could be reviewed. Evidence of this importance is provided by the numerous findings of European bodies and the focus of the European Commission and the specialist legal literature on fiscal aid. The State Aid framework has affected the domestic tax system by introducing a general prohibition on tax measures in support of undertakings which amount to selectivity in a European context. In this way, competition within the national territory was also safeguarded in relation to tax measures enshrining national values. State aid is a balancing act between European competition principles and national competition principles where the balance between them must be ensured in all differentiated tax systems.

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These principles operate in substantive law and in all procedural instruments, which requires a general uniformity of treatment between undertakings within the State. The fight against tax competition has called on the State aid framework to be able to control selective treatment between residents and non-residents. When applied in this way, the aforementioned framework has undergone some changes from its original structure and has moved towards the general principle of non-discrimination in taxation. This latter activity is of central importance in European and global balances, the function of which is to challenge unfair tax competition in a period in which systemic regulatory choices are being evaluated, with a view to the structural regulation of some aspects of direct taxation. In the course of such evaluation, the aid framework has been adapted with some difficulty to specific cases, showing—in any event—strength and determination in combating the various phenomena. The state of integration achieved through the prohibition of State aid in tax matters is an issue still at the heart of the debate in the legal literature. In fact, it should be noted that this framework goes beyond the express conferment of competences by the Treaty and that European law has encroached on areas, such as that of direct taxation, reserved to the Member States. The considerations made on State aid in Chap. 1, highlighted how the State aid framework has taken on increasing importance in respect of its structural characteristics and the values at stake. Integration with the values of the social market economy has thus resulted in an arrangement which is more consistent with the objectives of each individual State. State aid is a competence of the European Union, so anything that is understood to fall within the scope of this field is bound to be drawn into the European sphere. In the current historical moment of economic recession, governance of the multinationals and health emergency, the problem of the alleged threats to sovereignty has been rescaled because the framework in question has provided protection for the States and has created a sense of European belonging, laying down a common line of action in respect of market phenomena that each State (on its own) cannot manage.

Bibliography Adonnino, P. (2004). Considerazioni in tema di ruling internazionale. Riv. dir. trib. Bacon, K. (2017). European union law of state aid. Oxford University Press. Barnard, C., & Peers, S. (Eds.). (2017). European Union law. Oxford University Press. Bartosch, A. (2009). On being selective in selectivity. In European State aid law quarterly. Lexxion. Basilavecchia, M. (2009). L’evoluzione della politica fiscale dell’Unione europea. Riv. dir. trib.

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Biondi, A. (2018). Per una teoria della gravità selettiva: evoluzioni della giurisprudenza della Corte Europea di Giustizia in materia di aiuti di Stato. In VV.AA. (Eds.), Liber amicorum Antonio Tizzano. Giappichelli. Bizioli, G. L. (2008). Il processo di integrazione dei principi tributari nel rapporto fra ordinamento costituzionale, comunitario e diritto internazionale. Cedam. Boccaccio, M. (2016a). Alcune riflessioni sulle recenti decisioni della Commissione in materia di ruling fiscali. Public Finance Research Papers, No 28, in https://www.dsge.uniroma1.it/sites/ default/files/pubblicazioni/economia/pfrp28.pdf Boccaccio, M. (2016b). La disciplina degli aiuti fiscali tra la funzione di controllo e quella di armonizzazione impropria: il ruolo della selettività. E-Public Finance Research Papers, 20, in www.digef.uniroma1.it/pubblicazioni Boria, P. (2004). L’antisovrano. Potere tributario e sovranità nell’ordinamento comunitario. Giappichelli. Boria, P. (2014). European tax law. Giuffrè. Boria, P. (2017). Diritto tributario europeo. Giuffrè. Boria, P. (2018). La concorrenza fiscale tra Stati: verso un nuovo ordine della fiscalità internazionale. In VV.AA. & P. Boria (Eds.), La concorrenza fiscale tra Stati. Cedam. Bousin, J., & Piernas, J. (2005). Developments in the notion of selectivity. In European State aid law quarterly. Lexxion. Brittan, L. (1992). European competition policy. Keeping the playing-field level. Brassey’s, Potomac Books Inc. Buccico, C. (2009). La selettività materiale e il federalismo fiscale. In M. Ingrosso & G. Tesauro (Eds.), Agevolazioni fiscali e aiuti di Stato. Jovene. Carinci, A. (2006). Autonomia impositiva degli enti sub statali e divieto di aiuti di Stato. Rass. trib. Carinci, A. (2010). L’imposta sugli scali della Regione Sardegna: ulteriori indicazioni della Corte di Giustizia sui limiti comunitari dell’autonomia tributaria regionale. Rass. trib. Carpentieri, L. (2018). La crisi del binomio diritto-territorio e la tassazione delle imprese multinazionali. Riv. dir. trib. Ceriani, V. (2009). Competitività dei sistemi fiscali. In Enc. Giur. Treccani, Roma, XXI, ad vocem. Chesaites, N. (2017). Tax incentives as state aid. In V. Tomljenovic, N. Bodiroga Vukobrat, V. Butorac Malnar, & I. Kunda (Eds.), EU competition and State aid rules. Public and private enforcement. Springer. Conte, D. (2016). Imposizione fiscale e nuovi accordi preventivi per le imprese con attività internazionale. Riv. dir. trib. Coppola, P. (2016). Il fisco come leva ed acceleratore delle politiche di sviluppo. Cedam. Da Cruz Vilaça, L. (2009). Material and geographic selectivity in State aid—Recent developments. In European State aid law quarterly. Lexxion. De Pietro, C. (Ed.). (2019). New perspectives on fiscal State aid. Wolters Kluwer. Del Federico, L. (2004). La Corte di Giustizia chiamata a pronunciarsi sulle agevolazioni per i redditi delle fondazioni bancarie: le problematiche comunitarie, processuali e sostanziali. Riv. dir. trib. Di Pietro, A. (2013). Introduzione. In A. Di Pietro & T. Tassani (Eds.), I principi europei del diritto tributario. Cedam. Fantozzi, A. (2003). The applicability of State aid rules to tax competition measures: A process of ‘de facto’ harmonisation in the tax field? In VV.AA. & W. Schön (Eds.), Tax competition in Europe. IBDF. Fantozzi, A. (2008). I rapporti tra ordinamento comunitario e autonomia finanziaria degli Enti territoriali. Dir. prat. trib. internaz. Federico, R. (2018). Sentenza “A – brauerei” C-374/17 o sulla sordità selettiva della Corte di Giustizia. In Studi tributari europei (Vol. 8, II). Felice, F. (2008). L’economia sociale di mercato. Rubbettino. Ficari, V. (2007). Aiuti fiscali regionali, selettività ed insularità: dalle Azzorre agli enti territoriali italiani. Dir. prat. trib. int.

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Ficari, V. (2008). Agevolazioni fiscali alle fondazioni (ex) bancarie ed aiuti di Stato: mala tempora currunt. Dir. prat. trib., II. Fontana, C. (2012). Aiuti di Stato di natura fiscale. Cedam. Forte, F., Felice, F., & Forte, C. (2012). L’economia sociale di mercato e i suoi nemici. Rubbettino. Fransoni, G. (2006). Gli aiuti di Stato fra autonomia locale e capacità contributiva. Riv. dir. trib. Fransoni, G. (2007). Profili fiscali della disciplina comunitaria degli aiuti di Stato. Pacini. Gaffuri, G. (2004). Il ruling internazionale. Rass. trib., 488. Gallo, F. (1999). Sviluppo, occupazione e competitività. Rass. trib. Gallo, F. (2004). Fondazioni e fisco. Rass. trib. Giangrande, G. (2018). Tax rulings in the field of State aid: Italian procedures and perspectives. Riv. dir. trib. int., 2. Gonzales Pineiro, R. (2010). Aiuti di Stato, “selettività regionale” e politiche fiscali agevolative delle Regioni. Riv. dir. trib. Grandinetti, M. (2017). Gli accordi preventivi per le imprese con attività internazionale. Rass. trib., III. Jaeger, T. (2016). Tax incentives under State aid law: A competition law perspective. In State aid law and business taxation. Springer. Jansen, S. (Ed.). (2010). Fiscal sovereignty of the Member States in an internal market. Past and future. Wolters Kluwer. Keen, M. J. (1999). Aspects of harmful tax competition. In M. Bordignon & D. Da Empoli (Eds.), Concorrenza fiscale in un’economia internazionale integrata. Franco Angeli. Kyriziasis, D. A. (2016). From soft law to soft law through hard law: The commission’s approach to the State aid assessment of tax rulings. EstAL, 3, 430. La Scala, A. E. (2005). I principi fondamentali in materia tributaria in seno alla costituzione dell’Unione europea. Giuffrè. La Scala, E. A. (2014). Aiuti di stato (dir. trib.). Enc. del diritto on line Treccani. Laroma Jezzi, P., & Russo, P. (2002). Il revirement della Cassazione sul regime fiscale delle fondazioni bancarie: spunti per una riflessione a tutto campo. Rass. trib., 1031. Lefevre, S. (2012). The requirement of selectivity in the recent case-law of the Court of Justice. In European State law quarterly. Lexxion. Lindsay Poulsen, W. (2008). Regional autonomy, geographical. Selectivity and fiscal aid: Between the rock and a hard place. European Competition Law Review, 43. Marino, G. (2018). Note brevi sull’evoluzione del divieto di aiuti di Stato e sostenibilità dei sistemi fiscali. Riv. dir. trib. Melis, G. (voce) (2007). Coordinamento fiscale nell’Unione europea. In Enc. dir., Annali I. Giuffrè, Milan, ad vocem. Miceli, R. (2006). Società miste e diritto tributario: le questioni aperte. Rass. trib. Miceli, R. (2014). Federalismo fiscale e principi europei. Spazi di autonomia, livelli di responsabilità e modelli di federalismo. Giuffrè. Monsenego, J. (2018). Selectivity in State aid law and the methods for the allocation of the corporate tax base. Wolters Kluwer. Monti, M. (1999). How State aid affects tax competition. EC Tax Review, 4, 209. Nicolaides, P. (2006). State aid law and tax rulings. European State Aid Law Quarterly, 15(3), 416– 427. Orlandi, M. (2017). Quando l’accettazione di un concordato comportante una transazione fiscale può costituire un aiuto di stato: l’applicazione del criterio del creditore privato. Riv. dir. trib., IV. Orlandi, M. (2018a). Interpelli (tax ruling), accordi preventivi sui prezzi di trasferimento, principio di libera concorrenza e aiuti di Stato: la nuova frontiera della disciplina della concorrenza. In P. Boria (Ed.), La concorrenza fiscale tra Stati. Cedam. Orlandi, M. (2018b). La Scuola elementare Montessori e Pietro Ferracci, contro i privilegi delle associazioni religiose. Il diritto dell’Unione europea, 771. Orlandi, M. (2018c). Le discriminazioni fiscali e gli aiuti di Stato nel diritto dell’Unione europea. Aracne editrice.

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Pepe, F. (2008). Fiscalità cooperativa ed “aiuti di Stato”: questioni metodologiche e problemi reali. Rass. trib. Pepe, F. (2009). La fiscalità delle cooperative. Riparto dei carichi pubblici e scopo mutualistico. Giuffrè. Pepe, F. (2017). Sulla tenuta giuridica e sulla praticabilità geopolitica della ‘dottrina Vestager’ in materia di tax rulings e aiuti di Stato alle imprese multinazionali. Riv. trim. dir. trib., 3. Pepe, F. (2018). Concorrenza fiscale dannosa e tax rulings: l’uso strategico dell’arm’s length principle nella disciplina europea sugli aiuti di Stato e l’imprevista egemonia della Commissione europea nell’area della fiscalità internazionale. In Federalismi.it, n. 5. Pepe, F. (2019). Tax rulings e aiuti di Stato: la potenzialità egemonica dell’arm’s length principle e i suoi riflessi giuridici e geopolitici. In P. Boria (Ed.), La concorrenza fiscale tra Stati. Cedam. Pepe, F. (2020). Dal diritto tributario alla diplomazia fiscale. Cedam. Pepe, F. (2021). ‘How to dismantle an atomic bomb’: osservazioni sul caso Apple e sulla prima giurisprudenza europea sui rulings fiscali. Riv. trim. dir. trib., 329. Perrone, A. (2019a). L’equa tassazione delle multinazionali in Europa: imposizione sul digitale o regole comuni per determinare gli imponibili? Riv. trib. dir., 1. Perrone, A. (2019b). Tax competition e giustizia sociale nell’Unione europea. Cedam. Petruzzi, R. (2016). Transfer pricing aspects of intra-group financing. Wolters Kluwer. Pistolesi, F. (2007). Gli interpelli tributari. Giuffrè. Quattrocchi, A. (2008). Le norme in materia di “aiuti” di Stato in ambito comunitario e il regime tributario delle società cooperative. Dir. prat. trib., 1111. Quattrocchi, A. (2020). Gli aiuti di Stato nel diritto tributario. Cedam. Saint Amans, P., & Russo, R. (2016). The BEPS package: Promise kept. Bulletin for International Taxation, 4. Schön, W. (2000). Tax competition in Europe – The legal perspective. EC Tax Review. Schön, W. (2016). Tax legislation and the notion of fiscal aid: A review of 5 years of European Jurisprudence. In State aid law and business taxation. Springer. Somma, A. (2009). L’economia sociale di mercato. Il fascino della terza via: torna di moda un passato mai passato. Biblioteca delle libertà. Surrey, S., & McDaniel, P. R. (1985). Tax expenditures. Harvard University Press. Traversa, E. (2010). L’autonomie fiscale des Régions et des collectivités locales des Etats membres face au droit communautaire. Analyse et réflexion à la lumière des expériences belge et italienne. Larcier. Traversa, E., & Flamini, A. (2015). The impact of BEPS on the fight against harmful tax practices: Risks and opportunities for the EU. British Tax Review, 3, 396–407. Trivellin, M. (2018). Studies on international tax dispute resolution tools with special regard to transfer pricing. Giappichelli. VV.AA. (edited by Ingrosso M. & Tesauro G.). (2009). Agevolazioni fiscali e aiuti di Stato. Jovene. VV.AA. (edited by Nemo P. & Petitot J.). (2006). Storia del liberismo in Europa. Rubbettino. Wattel, P. J. (2016). Comparing criteria: State aid, free movement, harmful tax competition and market distorting disparities. In State aid law and business taxation. Springer.

Chapter 4

The Positive Integration of the State Aid Framework into Taxation Matters. Permitted Aid

Contents 4.1 Permitted Aid Under the State Aid Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.1 The General Principles. Integration and Positive Harmonisation . . . . . . . . . . . . . . . . 4.2 Aid Permitted on an Individual Basis. De jure Aid and Aid Granted on a Discretionary Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Aid Permitted on a General Basis. The Legal Framework. Council Regulations . . . . . . . 4.3.1 Commission Regulations (Cont’d). The Compatibility Criteria . . . . . . . . . . . . . . . . . 4.3.2 The Categories of Permitted Aid and the Areas Concerned . . . . . . . . . . . . . . . . . . . . . 4.4 The Function of Permitted Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 The Relationship Between Fiscal Federalism and Permitted Aid. The Role of Territorial Entities in European Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Permitted Fiscal State Aid. Tax Law as a Vehicle for Development Policies at European Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.1 Implementation of Permitted Fiscal Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 The Italian Experience. The Promotional Function of Tax Law . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.1 Environmental Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.2 Aid for Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.3 The Development of Degraded and Deprived Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.4 Aid for Innovation. The Industry 4.0 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.5 Tax Relief Schemes in Favour of Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 Aid Allowed in Times of Economic and Social Emergency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7.1 The Measures Adopted in the Italian State in the Covid 19 Emergency . . . . . . . . 4.8 The Implementation of Permitted Aid by the State and Territorial Entities. Consequences and Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

172 174 176 178 181 183 186 188 190 191 192 193 196 197 199 201 204 205 206 208 209

Abstract The framework for permitted aid confirms the principle that the State may intervene in the economy in order to promote economic and social values. Over time, the regulatory and implementation activity in relation to admitted aid came to constitute an autonomous part of the field which has now become very important. The framework governing permitted aid lays down guidelines for States and Territorial Entities on selective advantage schemes relating to economic activities.

© Springer International Publishing Switzerland and G.Giappichelli Editore 2022 R. Miceli, The Role of State Aid in the European Fiscal Integration, https://doi.org/10.1007/978-3-030-88735-3_4

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In this manner, this has led to a form of harmonisation of national regulations towards European economic and social growth. Taxation matters are at the forefront of this development. Tax concessions are one of the preferred means of granting permitted aid. In times of economic and social emergency, the importance of permitted aid is confirmed. The function of taxation in the Member States is gradually changing and it is becoming an instrument for promoting social values.

4.1

Permitted Aid Under the State Aid Framework

Regulatory output in respect of permitted aid marks an important chapter in the history of State aid, achieving a gradual opening up of the subject to social values and initiating a policy of regulatory evolution based on the social market economy. The European Union, as analysed in Chap. 1, was born of a liberal economic philosophy that was adopted at the time of its constitution.1 The founders of the European Union included among their number a minority socialist element whose reference point is the philosophy of the social market economy.2 The history of the European legal order has gone through various stages in which the liberal and socialist spirits have confronted each other. The framework on permitted State aid marks an important meeting point for those two approaches. According to the principles of liberal economics, the State should not intervene in the market. According to the principles of the social market economy, the State must intervene as a regulator to correct deficits in social values and ensure their promotion. The framework on State aid—in its original wording—is the product of liberal theories, since the principle on which the rules are based is that of prohibition, that is to say a principle which prohibits State intervention in the economy.3 For their part, the framework governing permitted aid provides for the intervention of the State in the economy as a regulator of social policies within determined economic areas and constitutes, in the setting of the general framework (in the sense in mind in the original Community project), an exception to the general principle.

1

See Barber (1988), passim; Denis (1990), Vol. 1 (from Plato to Ricardo). The social market economy had among its main exponents: Eucken W., Muller-Armack A., Erhard L., Ropke W.; Miksch L., Bohm F., GroBmann-Doert H. See Felice (2008), p. 11; Forte et al. (2012), passim; Nemo and Petitot (2006), passim. 3 The principles of economic liberalism are those expressed in the classical economy school of thought whose main exponents have been Smith A., Ricardo D. and Malthus T.R.. See Barber (1988), passim; Denis (1990), Vol. 1 (from Plato to Ricardo). 2

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In this sense, the framework for permitted aid is an expression of the values of the social market economy. The relationship between prohibited and permitted aid has changed throughout the history of the European Union, having come a long way from the initial approach. During the first period of European activity, liberal principles were dominant, and the prohibition of State aid took a central role in regulatory output and its implementation. As the European project evolved, Community competences increased and problems linked to an essentially liberal approach began to emerge, interest in social principles grew to the point of the codification of the social market economy in Article 3(3) of the TEU (Treaty of Lisbon) which established that ‘the Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment’. The State aid framework has highlighted these changes since, as explained above, this is an area with a significant social component.4 In the wake of this, the regime governing permitted aid has grown considerably since the 1990s, establishing the principle that State intervention in the economy is admitted in order to promote social values. The State aid framework has thus been characterised by significant regulatory and interpretative activity concerning exceptions to the prohibition, on the basis of the provisions of Articles 107, 108 and 109 TFEU. The regulatory and interpretative activity in question has been carried out by the Council and the European Commission through the production of Communications, Guidelines, Regulations and Decisions. Over time, the general principles that have emerged from this work have become very important to the point of defining an autonomous segment of the field, namely that of permitted aid. The legal framework for permitted aid has thus changed the structure of the State aid framework, creating one in which the liberal and socialist components are in balance. Indeed, within this field in its current State the aspect of prohibited aid and that of permitted aid are each equivalent and of equal importance within the Community project. The approach that for years was based on the existence of a prohibition of State aid in the European context has thus been finally superseded. The subject of permitted aid cannot be considered a derogation (contained in the framework governing State aid) in view of the extent of the situations it covers and the level of importance it achieved within the general State aid framework.

4

See Tosato (2014), p. 2509; Tosato (2011), p. 3.

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Prohibited aid and permitted aid thus constitutes two (equivalent) parts of the same framework, which today generally refers to the selective schemes put in place by States and aimed at the market.5

4.1.1

The General Principles. Integration and Positive Harmonisation

The field of permitted aid has its own characteristics. The concept justifies the introduction of aid that would in theory be prohibited or which presents all the features set out in Article 107(1) TFEU. However, such aid concerns matters covered by the Treaty and by the regulatory and interpretative acts of the European institutions, whose purpose is understood to be useful to the proper functioning and growth of the market. The values underlying such aid are in fact considered to be particularly worthy. Indeed, in a first phase of European policy, those values were such as to enable derogation from the prohibition on State aid within the terms and in the manner laid down by European legislation and then, in a second phase, the establishment of the separate field of permitted aid. Permitted aid thus constitutes at present regimes which confer advantages, embodying an important European interest, which take precedence over the general principles of competition and the market. The introduction of permitted aid into the European regulatory framework was the result of a general assessment based on two paradigms: the principle of compensatory justification and the principle of transparency.6 The principle of compensatory justification assesses the aid from the Community point of view rather than from the national or beneficiary undertaking’s point of view. In particular, in line with that principle, it is necessary to compare the introduction of the aid in relation to the advantages that the European Union obtains in respect of the attainment of its objectives with the disadvantages that it entails in terms of market distortion. That comparison acknowledges that the achievement of important Community objectives justifies and offsets the distortion of competition and of the market. In other words, it is a question of balancing the positive and negative effects associated with the introduction of the aid. The principle of compensatory justification is therefore the balancing instrument for assessing whether or not aid is permissible, both in cases of discretionary aid subject to authorisation and in cases of aid permitted under legislative acts of the Community institutions. 5 6

See Miceli (2015), p. 31. See Evans (1997), p. 107.

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The balancing which takes place on the basis of the principle of compensatory justification allows the State aid framework to take on important values of the utmost importance. The main values to be protected may include, for example: • the protection of economically disadvantaged areas or areas affected by natural disasters; • the putting right of serious disturbances in the State’s economy; • the promotion of culture and heritage. Interpretation and implementation have subsequently brought in several other important values, including: • support for small and medium-sized enterprises or start-ups with the aim of market innovation; • technological innovation; • the environment; • health. Under the compensatory justification principle, not only must the aid be compatible with the objectives laid down in the Treaty, but it must also satisfy two other conditions: the aid must be necessary to achieve European objectives and the aid must be proportionate. The aid must also comply with the principle of transparency, i.e. the various elements of the aid must be clear and verifiable. It is thus a question of assessing the aid in order to check for: consistency, form, and reasons for compatibility. The implementation of permitted aid may take place through three different procedures which comply with the general rules of the Treaty and other sources of law. They are: • de jure aid which is subject to authorisation; • discretionary aid which is subject to authorisation; • permitted aid which does not require authorisation. The first type of aid is that contained in Article 107(2) TFEU. The second category is that contained in Article 107(3) TFEU. The third category is the one that will be dealt with most at length in this chapter. Albeit with varying degrees of intensity, the three categories identified above perform a function of positive integration of European principles into national legal systems. Through de jure aid and aid allowed on a discretionary basis, what is authorised is an individual aid which entails a positive integration of European values in relation to an individual legal entity within a specific legal system. Integration is at its maximum level where aid is allowed without prior authorisation.

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In that case, general acts are approved providing for the advantageous provisions allowed at European level which are intended to promote the achievement of market objectives through the promotion of social values. Those regulations then become the point of reference for State benefit policies as they are the forms of aid endorsed at European level. This then constitutes a maximum level of integration of European values, achieving a form of harmonisation. In other words, those States which implement those measures will do so in compliance with the limits and methods established by European regulations; the effect of this framework will be a substantial harmonisation of the national advantageous provisions aimed at economic activities. In this way, a regime has been developed that seeks to achieve the same effects as European regulatory harmonisation, with the difference that, in this case, the introduction of national regulatory frameworks is not mandatory (as in, for example, the fiscal harmonization under Article 113 TFEU) but leaves the choice on it, instead, to the individual Member States.

4.2

Aid Permitted on an Individual Basis. De jure Aid and Aid Granted on a Discretionary Basis

Aid may be permitted on an individual or on a general basis. Discretionarily admitted aid and de jure admitted aid are regulated under Article 107(2) and (3) TFEU. This is aid which the European Commission authorises individually and which forms part of the general policy of positive integration of legal systems. Both categories of aid will be authorised following the usual notification procedure for aid by the Member State; authorisation is granted individually in respect of each request for aid authorisation. In particular, Article 107(2) provides for aid which is compatible de jure with the market. The European Commission is required to authorise the aid if it meets the objective criteria laid down in the Treaty; in fact, the European Commission has no discretionary powers in relation to such aid. In response to the request for authorisation, the European Commission will in fact have to verify whether such aid is granted for the purposes identified in Article 107 (2) and whether it is linked to the objectives to be achieved. The aid includes: • aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; • aid to make good the damage caused by natural disasters or other occurrences;

4.2 Aid Permitted on an Individual Basis. De jure Aid and Aid Granted on. . .

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• aid granted to certain areas of Germany to compensate for the economic disadvantages caused by the division of Germany. The cases identified by the aforementioned legislation are exhaustive and the common feature that characterises them is that they are linked to specific social situations that require ad hoc intervention. Compensatory measures, aimed at supporting economic activities or operators, are also allowed under this type of aid. In particular, Article 107(2)(b) TFEU, which allows interventions in serious and exceptional situations, is widely used. This is the provision also currently used for some interventions relating to the COVID-19 health emergency. Article 107(3), for its part, lists the aid which may discretionally be considered compatible with the market. The Commission may therefore decide to allow or disallow such measures at its discretion. The aid in question is exhaustively identified and corresponds to general values and specific aims of the European legal order. The aid measures which are allowed on a discretionary basis under Article 107 (3) TFEU are: (a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349 TFEU, in view of their structural, economic and social situation; (b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State; (c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest; (d) aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Union to an extent that is contrary to the common interest; (e) such other categories of aid as may be specified by decision of the Council on a proposal from the Commission. This list is of particular relevance to the general State aid framework. Article 107(3) is the legal basis for the European Commission’s authorisation of aid by individual decision. Furthermore, this Article also constituted the legal basis for the construction of the framework on aid which is allowed first by way of interpretation and then by way of legislation. It was precisely in the light of the provisions of Article 107(3) that the categories of regional aid, sectoral aid, horizontal aid and de minimis aid were defined, which now constitute the fundamental species of the genus of permitted aid.

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The European Commission grants individual authorisations following an assessment of the aid based on the principle of compensatory justification and the principle of transparency, which are applied on a case-by-case basis. The Commission carries out complex economic and social assessments within the European context. A large part of these assessments, relating to the various economic sectors, have been set out by the Commission itself in numerous guidance documents (Communications), the purpose of which is to make it possible to ascertain the Commission’s position on the various matters and to provide predictability as regards the approval of the aid. In particular, the European Commission balances the objectives of free competition with those of Community solidarity and assesses the proportionality, necessity and transparency of the aid. In order to be authorised, the aid must fall within the areas indicated in Article 107 (3), be consistent with the objectives of the European Treaties and contribute in some way to achieving them and respect the principle of proportionality and the principle of necessity.

4.3

Aid Permitted on a General Basis. The Legal Framework. Council Regulations

Approved aid (without prior notification) is an important area of regulation developed over time by the European institutions. After an initial period in which permitted aid was dealt with within the framework of soft law acts (Communications and Guidelines)—and thus always required an authorisation procedure before the European Commission before being introduced in the Member States—there subsequently came an important change. The Council and the European Commission worked intensively and successfully on legislation, resulting in a structured arrangement for permitted aid. This established certain categories of aid that do not require to undergo an authorisation procedure or to be the subject of prior notification to the European Commission. Such aid has been classified as permitted and may be introduced freely by the Member State. This legislative activity achieved an important arrangement in the field, which is now structured and transparent.7 The legislative activity in question was carried out on the basis of the State aid provisions of the TFEU. In particular, Article 108(4) TFEU provides that ‘the Commission may adopt regulations relating to the categories of State aid that the Council has, pursuant to 7

See Orlandi (2018), p. 19; Orlandi (2006), p. 1668.

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Article 109, determined may be exempted from the procedure provided for by paragraph 3 of this Article’. For its part, Article 109 TFEU reads as follows: ‘The Council, on a proposal from the Commission and after consulting the European Parliament, may make any appropriate regulations for the application of Articles 107 and 108 and may in particular determine the conditions in which Article 108(3) shall apply and the categories of aid exempted from this procedure’. All the provisions contained in the aforementioned Articles have been the legal basis for the construction of the permitted aid framework. In particular, the Council has enacted two important successive regulations, laying down the conditions under which the Commission may exercise its power to determine whether prior authorisation is required for certain categories of aid (block exemptions).8 In other words, the Council, within the framework of the aforementioned regulations, considered it necessary to empower the European Commission to identify permitted aid on the basis of the provisions of the Treaty, recognising the Commission’s proven experience in this area. That power was justified in the interest of the proper functioning of the internal market and the strict and effective application of the State aid framework. For those categories of aid, therefore, the assessment in pursuance of the principles of compensatory justification and transparency is carried out beforehand within the framework of the regulations, which lay down the conditions and limits that make the measure compatible with the market. The Regulation currently in force (Council Regulation (EU) 2015/1588) is the second Council Regulation.9 Permitted aid is aid that is exempt from the obligation of prior notification, despite fulfilling the criteria of Article 107(1) TFEU. Such aid must belong to the categories as specified in the Council Regulations and subsequently taken up in Commission Regulations. The Council authorises the Commission to issue specific block exemption regulations, which—in accordance with the principle of transparency—specifies10 for each individual aid measure: • the purpose of the aid • categories of beneficiaries

8

These are Council Regulation (EU) 2015/1588 of 13 July 2015 and Council Regulation (EC) 994/ 98 of 7 May 1998. Previously, under Regulation 994/98, the European Commission issued Commission Regulation (EC) 800/2008 of 6 August 2008 (known as the General block exemption Regulation) in which it declared certain categories of aid compatible with the common market. 9 That Regulation was amended in some respects by Council Regulation (EU) 2018/1911 of 26 November 2018 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid. 10 See Article 1(2) of Council Regulation (EU) 2015/1588 of 13 July 2015.

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• the limits and conditions for the grant of aid • further conditions for compatibility, where necessary. The matters identified by the aforementioned Council Regulation (EU Regulation No 1588/2015)—and already provided for in the European Commission’s regulations—are those that are now exempt from prior authorisation. Specifically, it is horizontal aid in favour of: • • • • • • • • • • • • •

•

small and medium-sized enterprises; research, development and innovation; environmental protection; employment and training; culture and heritage conservation; making good the damage caused by natural disasters; making good the damage caused by certain adverse weather conditions in fisheries; forestry; promotion of food sector products not listed in Annex I of the TFEU; conservation of marine and freshwater biological resources; sports; residents of remote regions, for transport, when this aid has a social character and is granted without discrimination related to the identity of the carrier; basic broadband infrastructure, small individual infrastructure measures covering next-generation access networks, broadband-related civil engineering works and passive broadband infrastructure, in areas where there is either no such infrastructure or where no such infrastructure is likely to be developed in the near future; infrastructure in support of the objectives listed in points in support of the objectives listed in precedent points and in support of other objectives of common interest.

Aid that complies with the map approved by the Commission for each Member State for the grant of regional aid is also allowed.11 From the analysis of the acceptable cases it is therefore clear that the aid allowed is a broader category than that set out in Article 107(3) TFEU. However, Article 107(3)(e) for its part provided for the possibility of establishing new categories of aid as may be specified by decision of the Council on a proposal from the Commission. The Commission started from the categories provided for in Article 107(3) TFEU but over time and according to market needs has extended the list of permitted aid. The Council ratified the Commission’s choice by transposing it into the 2015 Regulation.

11

See Article 1 of Council Regulation (EU) 2015/1588 of 13 July 2015.

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4.3.1

181

Commission Regulations (Cont’d). The Compatibility Criteria

By implementing the regulatory framework set forth in Articles 107, 108 and 109 TFEU and on the basis of the endorsement received from the Council (as examined in the previous section), the European Commission has issued numerous regulations over time that have established what type of aid is allowed. Those regulations have been referred to as ‘block exemption regulations’. Through those regulations, the European Commission has identified species of permitted aid or advantageous measures that are exempt from the prior notification and authorisation procedure. Block exemption regulations define the conditions and limits under which aid is exempted and does not therefore have to be subject to a prior notification procedure. The Commission’s legislative activity has been intense and has been in step with the historical course of development of State aid. The first important step was taken following Council Regulation 994/98 of 7 May 1998. At that stage, the field of State aid embarked on positive integration which established the function of the area of permitted aid as being that of safeguarding social interests in the market. Following this regulation, the European Commission issued several specific regulations aimed at exempting certain categories of aid.12 The first general block exemption regulation was then issued in 2008 by the European Commission.13 The General Block Exemption Regulation marked an important historical step. The European legal system acknowledged the existence of numerous derogations and felt the need to take an important step towards the systematic regulation of these cases through a system of uniform codification. By this means, two important objectives were achieved. The first objective was to identify general principles, common to all cases of permitted State aid, which would justify, first, derogations from the prohibition on State aid and, secondly, the existence of an autonomous regulatory framework. The second objective was to reorganise under a single regulation all the types of aid allowed, making it easier to understand and find European sources. Both objectives have contributed to the achievement of a general transparency of the European State aid framework.

12

The legislation in mind is that on exemptions for regional aid, namely: Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Articles 87 and 88 of the Treaty to national regional investment aid and Commission Regulation (EC) No 70/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises; Commission Regulation (EC) No 364/2004 of 25 February 2004 amending Regulation (EC) No 70/2001 as regards the extension of its scope to include aid for research and development. 13 See Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the internal market in application of Articles 87 and 88 of the Treaty.

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The General Block Exemption Regulation therefore constitutes a general legal text with an exhaustive list of the various types of aid allowed, consistent with a general approach of the Commission. Only de minimis aid, which is based on different principles and has a different status in the system, is not covered by the rules. In line with this approach, the European Commission issued a subsequent block exemption regulation in 2014, which is the one currently in force.14 This regulation was then confirmed in every respect by the 2015 Council Regulation, which essentially ratified all the provisions.15 Contrary to what happened previously, in fact, in this case the Council adopted the Regulation after the Commission’s own Regulation, thus ratifying the content of what had already been laid down. Generally speaking, this legislative framework translates the principle of compensatory justification and the principle of transparency into stable and predefined criteria, as applied over time in the various interpretations of the European Commission. In other words, it sets out the requirements that permitted aid must meet in order to comply with the general principles that have governed the authorisation of State aid subject to prior notification. The overall structure of the field of permitted aid makes a distinction between two things: general principles and specific principles for the different categories of aid. In the first instance, any aid granted must not exceed the maximum amount laid down in the Regulation. In the second, the aid must be transparent and must have an incentive effect. The principle of transparency requires that the nature and scope of the aid in relation to Community trade and competition should be clear and verifiable on the basis of all the elements necessary including for the purpose of making the comparison required by the compensatory justification principle. Technically, transparent aid is aid for which it is possible to identify the GGE (Gross Grant Equivalent), a (mathematical) formula which makes it possible to assess the intensity of the aid. This value indicates the nominal benefit expressed as a percentage of the value of the investment. It should be noted that, where tax relief or benefits are concerned, there is a need to set a ceiling. The incentive effect requires that the aid must be aimed at growth and a positive development of economic activity. Two conditions appear to be necessary with regard to tax concessions:

14

See Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty. 15 See Council Regulation (EU) 2015/1588 of 13 July 2015 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid (codification).

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• the favourable regime must be usable by any entity on the basis of objective criteria; • where the measure is linked to a project or an investment, it must be adopted before the start of the project or investment. There are also specific principles and rules for the different types of aid allowed. To that end, under the latest General Block Exemption Regulation, specific provisions concern: • • • • • • • • • • • • • •

regional aid aid to SMEs; aid for research and development and innovation; training aid; aid for disadvantaged workers and workers with disabilities; aid for environmental protection; aid to make good the damage caused by certain natural disasters; social aid for residents in remote regions; aid for broadband infrastructures; aid for heritage conservation; aid for sport and multifunctional recreational infrastructures; aid for local infrastructure; aid to regional airports; aid to ports.

It should be noted that the general regulations already expressly refer to the granting of aid through taxation. In fact, the European Union is aware of the centrality that taxation has assumed in the process of implementing the policy of positive integration through the regulation of permitted aid.

4.3.2

The Categories of Permitted Aid and the Areas Concerned

The way in which the European Commission has interpreted the legislation has gradually established—on the basis of the wording of Article 107(3) TFEU—a number of categories of aid sharing common characteristics and the need for a specific framework. Subsequent regulatory work, implemented by way of Council and European Commission regulations, used the same categories to define the species of permitted aid. Today, these categories are also used officially in legislation. They are:

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• regional aid; • sectoral aid; • horizontal aid. In addition to these three, de minimis aid constitutes an autonomous category. As regards regional aid, the European Commission in the historical phase prior to the adoption of the block exemption regulation produced a significant number of atypical acts and guidelines which attests to the fundamental view that aid for limited territorial areas (within individual Member States) was of decisive importance for the achievement of Community objectives. From the outset of the implementation of the State aid framework, it was acknowledged that there were many economic and social problems within the States, which varied according to the territories, and which prevented the Member States from entering the single market on an equal footing. The European Union had in fact to deal with territories with very low levels of development, and the gap has gradually widened with the growth of the process of economic integration and the liberalisation of the market. In that regard, it became clear that there was a need to ensure that States and Regions had the instruments to activate social policies aimed at the economic recovery of areas that were not able to deal with the market. To that end, the European Commission periodically draws up (in cooperation with the Member States) Regional Maps which identify the areas that may be in need of aid and the types of aid that are permissible. Regional aid—if it is to be consistent with the Community framework—must show an assessment of national problems in a European context; in this sense, it must form part of a national policy that is compatible with Community development objectives. Regional aid is identified either on the basis of Article 107(3)(a) or (c) TFEU, depending on whether the geographical area concerned qualifies as disadvantaged in relation to the Community or to the national average. In either case, the aid must be aimed at promoting the development and economic recovery of Regions that are disadvantaged at European level, in accordance with shared rules and in compliance with thresholds relating to value and subject matter laid down by EU legislation. The aim of regional aid is in fact to achieve positive integration by restoring the Region’s economic balance and promoting social cohesion within the Community (rather than the national) context. For this reason, aid is regulated by the European Union and is not the responsibility of individual Member States. To that end, the European Commission has provided constant guidance and regulations over time. In particular, the regulations establish the maximum aid intensity through the calculation of a ‘permissible regional ceiling’, which takes into account various factors such as: the competition situation in the place concerned, the impact of the aid on the economic area, and the capital:labour ratio.

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As regards taxation, regional aid was granted in the form of investment aid and operating aid. Investment aid is aid granted for an investment in tangible and intangible assets relating to the setting-up of an establishment, the extension of an existing establishment, diversification of the output of an establishment into new products or a fundamental change in the overall production process of an existing establishment. This is referred to as an ‘initial investment project’. Operating aid is aid intended to reduce a firm’s current expenditure, for example in the form of tax exemptions or reductions in social security contributions which are not linked to eligible investment costs. The tendency is to allow mainly investment aid and to limit operating aid. The basic idea is that the aid should not be used for the survival of the undertaking but for its improvement and growth in order to bring it back into line with European economic levels. Sectoral aid is defined as measures aimed at certain sectors of economic activity on the basis of the provisions of Article 107(3)(c) TFEU, in so far as it allows aid to facilitate the development of certain economic activities where such aid does not adversely affect trading conditions to an extent contrary to the common interest. Sectoral aid is motivated by the need to promote certain sectors of particular strategic importance to the Union. The aid in question must facilitate the development of certain economic activities with the general limitation that it must not affect trade between Member States to an extent greater than the common interest. In order to be allowed, therefore, such aid must aim, through targeted and proportionate interventions, at resolving structural problems, thereby effectively improving the long-term economic viability of the sectors concerned. Normally, such aid is used to enable certain sectors of the economy to adapt to the international market, protecting workers’ employment and neutralising market distortions. In such cases, the European Commission adopts a unified approach for the sector concerned, assessing the problem as a whole in accordance with European principles. The aid allowed will thus be tailored to the economic sector which respects the common European interest in the harmonious development of the various economic sectors. The main sectoral aid schemes concern audiovisual productions, broadcasting, coal, electricity, postal services, shipbuilding and steel. One particular scheme is the ‘multisectoral’ framework on aid for large projects. Sectoral aid also includes certain specific frameworks derived directly from the Treaty for particular sectors, such as agriculture, forestry, fisheries and aquaculture, and transport. Horizontal aid is designed to support horizontal objectives which cut across all economic sectors and geographic areas.

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This is aid identified on the basis of Article 107(3)(e) TFEU which contains a general rule that the Council and the European Commission may establish certain categories of permitted aid. Thus, unlike the sectoral and regional aid categories—provided for on the basis of Article 107(3)(c)—such aid does not have the effect of adversely affecting trading conditions to an extent contrary to the common interest. Horizontal aid is: aid to small and medium-sized enterprises, aid for research and development, aid for environmental protection and aid for employment and training. Finally, there has been the development of de minimis aid, which is also excluded from the scope of prohibited State aid and is qualified as permitted aid. This is aid involving modest amounts (hence the term de minimis) intended for small and medium-sized enterprises and usually managed at territorial level. The condition for allowing such aid is that it does not exceed a certain amount, which is set as a maximum limit. If that limit is exceeded, indeed, the aid is no longer automatically permitted. The reason for the exclusion of such aid from the prohibition of State aid is that the amount of its value is essentially small and therefore is not such as to affect the market significantly, thereby distorting competition. At the same time, the rationale for de minimis aid is the need to allow the Member State to intervene rapidly and at a limited scale in economic sectors in difficulty, thereby simplifying procedures and reducing the time taken to grant the aid. There have been several successive Regulations on de minimis aid.16 Currently, the regulation in force is Regulation No 1407/2013, which sets the maximum applicable amount at €200,000 over 3 financial years. That amount constitutes the maximum amount of permitted aid that a single undertaking can obtain under the de minimis rule for the period concerned. The legislation requires the principle of transparency with regard to de minimis aid. The Member States are required to ensure that the procedures for establishing and granting aid are transparent.

4.4

The Function of Permitted Aid

In the field of State aid, the establishment of permitted aid has created a new autonomous regime which reflects an autonomous theory. In this sense—after having taken note of the general values underlying the question of permitted aid and the way in which this subject has gradually taken 16

In particular, General Regulations such as Council Regulation (EC) No 994/98 of 7 May 1998 and Council Regulation (EU) No 2015/1588 of 13 July 2015 set out the legal basis. The specific framework was laid down by the Commission in: Commission Regulation (EC) No 1998/2006 of 15 December 2006; Communication from the Commission to the Council of 26 November 2008, COM(2008) 800 final; Commission Regulation (EU) No 1407/2013 of 18 December 2013.

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shape—it is necessary to understand how today it constitutes a linchpin for European development policy. With the State aid framework, the European Union now sets out the terms and conditions under which the State can intervene in specific sectors of the national economy. The State aid framework, from this first perspective, sets the guidelines of European economic policy as it defines the limits, the subjects and the modalities for intervention by the selective promotional regimes addressed to economic activities within the Member States. The States would thus be able to take part in the European project in accordance with the directives laid down by the Commission and the Council. This also applies to Territorial Entities, but with the provisos set out in the section that follows. A new structure has been laid down for both States and their Territorial Entities which not only regulates aid permitted by the European Union but also classifies measures which the European Union promotes in order to improve the economic and social situation in Europe. State aid thus becomes a useful tool for growth, removing the social and economic obstacles which prevent States or Territorial Entities from participating in the common market. When the foregoing position became established and that change took place, State aid (as a whole) then pursued two different functions that were designed to contribute to establishing the single market but through provisions which appear contrary to one another: on the one hand, a prohibition of the introduction of State aid and, on the other, a general framework for permitted aid. With permitted aid, the European Union established a legal framework (for State aid) that differed from the initial approach of the founding Treaties. This is a regulatory framework which, together with the other instruments defined by the Treaty, provides direction for development for the States and Regions in order to ensure the economic and social growth of their territories and make them fit for the single market. The development of this regulatory arrangement now means that permitted aid is considered of the essence, playing a key role within general European cohesion policy and European regional policy. These are, in fact, two political plans aimed at overcoming social and economic hardship in European areas in order to achieve cohesion with the more developed areas.17 At present, cohesion policy in particular calls for the need to support the process of:

17

See Piattoni and Polverari (2016), passim; Simonato (2017), p. 8.

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• internationalisation of markets; • specialisation of undertakings in technological and innovative goods and services; • growth in size; • pursuing sustainable development; • increasing employment levels; • environmental growth. In those terms, it is clear how much importance the European Union attaches to the subject of permitted aid and how it seeks to see more and more use of this aid by the Member States. In view of the interests underlying the permitted aid framework, measures of a fiscal nature have been of particular importance. As part of the process of implementing the framework on permitted aid, the European Union institutions have dedicated important Communications to fiscal aid. Likewise, even during the regulatory phase, the conditions for any aid to be allowed where it was granted through tax instruments were specifically provided for. In general, therefore, the European Union has always considered the possibility of implementing the aid in question through tax instruments. That probably arose not least from an awareness that the States tend to make more recurrent use of instruments of a fiscal nature than of other legal tools for the reasons that will be analysed in the sections which follow.

4.4.1

The Relationship Between Fiscal Federalism and Permitted Aid. The Role of Territorial Entities in European Policy

The importance of achieving European objectives (competition and the single market) is linked to the need for the various territorial State and regional Entities to be able to participate actively in the European project such as to take part in the single market. This assessment has two important implications. The first is that it is necessary to define, on the basis of the framework on permitted aid, territorial policies suited to the economic and social growth of the various geographical areas. From the outset, the framework for permitted aid paid particular attention to specific geographical areas, considering it necessary to differentiate territorial policies in all cases where these territories presented features of economic asymmetries or social deficits in order to achieve healthy competition in the European Union. Permitted aid thus became an instrument that could be used by States and Regions to encourage the process of economic growth in the most disadvantaged areas. It should be noted, in fact, that the framework on permitted aid can also be used by Territorial Entities with fiscal autonomy.

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The second important consideration is that Territorial Entities will be able to introduce permitted aid provided they have adequate powers under domestic law. Whether Territorial Entities can introduce permitted aid will depend on the national rules on fiscal federalism. In relation to this second aspect—as analysed in Chap. 3—the extension of the principles of State aid to the territorial Entities of the Member States occurred as a result of a number of landmark judgments of the Court of Justice that overturned previous interpretations and defined the issue in the terms in which it is considered now. These were decisive rulings in the historical process of understanding the European limits to the financial autonomy of national territorial Entities, which made clear that the prohibition of State aid applies also to territorial Autonomous Entities.18 The judgments of the Court of Justice on territorial autonomy set out general principles relating directly to the identification of the geographical area of reference for assessing the selectivity of a measure for the purposes of applying the prohibition on State aid. Thus, in the context of negative integration, European limits are relevant to the taxation powers of territorial Entities vested with government powers. Those same principles, in a clear shift of interpretation, highlight the fact that all autonomous territorial Entities can introduce State aid in general and, thus, permitted State aid also.19 This conclusion is supported by the framework for permitted aid, which provide for different measures for Regions or limited geographical areas. In this way, each national territorial Entity can participate directly in supporting European values, provided that it is endowed with powers of government, as defined in the context of the European Union. The internal organisation of each State and the choices made regarding the devolution of powers take on importance in the Community sphere and actually determine the spaces and ways in which each territorial Entity can effectively take part in the European project. The role of smaller territorial Entities in European growth through the introduction of permitted aid could be very important provided that they are given sufficient scope for legislative autonomy at national level to enable them to participate effectively in Community legal integration. Therefore this explains why the single market gradually became a project that could be jointly pursued by the European Union, the Member States and the Regions.

18

See Judgment of the Court of Justice (Grand Chamber) of 6 September 2006, C-88/03, Portuguese Republic v Commission of the European Communities; Judgment of the Court of Justice (Third Chamber) of 11 September 2008, C-428/06 and C-434/06, Unión General de Trabajadores de La Rioja (UGT-Rioja) and Others v Juntas Generales del Territorio Histórico de Vizcaya and Others; Judgment of the Court of First Instance (Third Chamber, extended composition) of 18 December 2008, Government of Gibraltar (T-211/04) and United Kingdom of Great Britain and Northern Ireland (T-215/04) v Commission of the European Communities. 19 See Basilavecchia (2009), p. 983.

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Furthermore, it should be pointed out that the European Union has always favoured the devolution of powers to territorial Authorities and the implementation of European regulatory acts at territorial level in accordance with the general principle of subsidiarity.20 In the Italian legal system, territorial Entities are vested with powers of government, but these powers are limited in scope and characterised by a strong role for the State, which in any case lays down the parameters for the most important areas of government.21 Thus, the possibility of participating in European growth policy through the introduction of permitted State aid is deemed to be limited.22

4.5

Permitted Fiscal State Aid. Tax Law as a Vehicle for Development Policies at European Level

An observation of trends in the field of State aid paints a general picture in which taxation is at the forefront. Whether in the area of prohibited aid or in that of permitted aid, the involvement of taxation has been very frequent and greater than in other fields. As regards, specifically, the field of permitted aid, there are many technical and ideological reasons for resorting to taxation. On the basis of such considerations and in implementing the framework on admitted aid, a new promotional function of European taxation has developed in recent years. That function has always been restricted (at the national level) to limited aspects of taxation, aimed mainly—within each State—at contributing to public expenditure according to wealth indexes in order to provide for the costs of the State (as a community) and the State (as an organisation) and to fulfil social growth programmes. The promotional function within States in tax matters is in fact linked to the use of tax advantages and the support and defence of social values. With the advent of the regime governing permitted aids, taxation has taken on the function of a vehicle for the promotion of social values in the market. In that regard, it is worth noting the positive integration function that taxation is intended to fulfil on the basis of European regulations, the aim of which is to achieve economic harmonisation and social cohesion. In accordance with this approach, including at national level, there have been important studies which have demonstrated the promotional function of taxation on

20

See Ippolito (2007), passim; D’Atena (2005), p. 59. See, with regard to the current national rules in the field of fiscal federalism, Giovannini (2012), p. 1305; Gallo (2005), p. 1033; Perrone (2004), p. 113. 22 See Miceli (2014), passim. 21

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the impulse of the European system and of the general framework on permitted aid.23 Taxation has become an important part of this process, especially because of the content that has always characterised it. The economic interests underlying taxation—i.e. the need to identify sources of wealth as the basis for taxation and to acquire revenue for public expenditure—make it easier than other fields in which to make regulations to promote economic objectives. There is also a greater chance that taxpayers will be aware of and observe such regulations because of the obligation to pay taxes at regular intervals and the immediate advantages that may be enjoyed. In other words, taxpayers are periodically called upon to contribute to public expenditures; consequently, in fulfilling a social duty, they will be more inclined to adhere to economic growth programmes that provide them with a form of immediate savings. The same taxpayer will thus have an incentive to carry out the active conduct envisaged by the framework, since it will be translated at the same time into an action aimed at the development of the business and at a saving of the taxes due. This thus fleshes out a significant function in terms of the promotion that taxation is called upon to enable in accordance with the objectives of economic growth and social development. In the Italian experience, the regulatory technique used for the implementation of the promotional function is that of the provision of tax concessions or schemes offering tax concessions, that is, regulations which have the effect, when applied, of offering a significant reduction of the tax burden.

4.5.1

Implementation of Permitted Fiscal Aid

The framework on permitted aid was implemented by means of tax benefits (or tax advantages) or regulatory frameworks with the purpose of providing aid. The most widely used instrument was the tax credit. Traditionally—in the context of national taxation—benefits are a familiar mechanism that alleviate the tax burden in order to protect certain legal values of a constitutional nature. Tax advantages are instruments of tax policy, the result of a constant balancing act between the fiscal interest and other general values which, on the basis of national interests considered to be priorities, become embodied in schemes that substantially derogate from general tax regulations. Tax advantages have been justified in various ways by the legal literature as a derogation or a special tax, in the common basic belief that the provision providing for the concession was justified by the need to mitigate the tax burden in the face of

23

See VV. AA. (2015), passim; Coppola (2012), p. 71.

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legal values of constitutional importance requiring to be safeguarded for the sake of the principle of solidarity, which is the basis of our legal system.24 Tax benefits have taken different forms over time and have been implemented in various ways, always within the context of the framework of the various taxes. At present, tax advantages for economic activities are deemed to be governed by the rules on State aid and, in particular, on permitted aid. Any advantageous rules introduced in the Member States must comply with the general framework on permitted aid and naturally conform to categories of permitted aid.25 In that regard, tax advantages for businesses must be ascribable to a category of permitted aid, as it is only in this case that they may be exempt from the procedure of prior notification to the European Commission in order to obtain authorisation and will be fully shared within the European system. Therefore, the field of tax concessions is now regulated by European regulations and is essentially outwith the scope of national competences. In this sense, only the social values of the market as selected and regulated by European law are protected. It should be noted that the protection afforded by the European Union is not aimed at the mere protection of the social value, except in the case of concessions granted under Article 107(2) TFEU. In most cases concessions are aimed at the growth and development of social values to encourage evolution in the market. Supporting aid and operating aid is indeed very limited. The regulations in question, in fact, do not limit themselves to protecting a legal good; rather they seek to promote the growth and evolution of the market. They thus constitute a legal project which is different from the traditional national tax concessions. It changes the basis and the meaning of protection. At the base of it is the need for the single market and the protection of the social value in order to bring that project to fruition. Protection is therefore instrumental to the market and proportionate to its development.

4.6

The Italian Experience. The Promotional Function of Tax Law

Within the Italian State, as well, there began an important cultural evolution aimed at recognising that taxation has a promotional function for the pursuit of European goals.

24 See, among many others, Moschetti (1987), p. 84; Basilavecchia (2002), p. 435; Fichera (1992), passim. 25 See Basilavecchia (2002), p. 433.

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Said evolution covered different subjects and legal frameworks, such as: environment, culture, economic growth, and industrial development. In the current historical phase, due to the health emergency, there have been multiple interventions in order to contain the negative economic effects resulting from the Covid-19 epidemic. Beyond the health emergency, the promotional function of taxation has grown until it has reached its maximum extent latterly with the introduction of schemes aimed at technological innovation and the diffusion of industrial research, which have taken on particular importance in the legal landscape. The general impression is that an important course of action has been set in motion, but has not—to date—reached an acceptable level of coherence and consistency. In that regard, in fact, there are many opportunities for growth at the European level, but at national level these opportunities have been used in a fragmented way. The hope, therefore, is for more structured policies aimed at economic growth that take full advantage of European opportunities. Such policies should be put in motion at both the State and regional level. An examination of individual development policies—implemented through taxation—will show how some European opportunities have been seized in Italy, but further efforts should be made. An exception to this is the Industria 4.0 plan (Industry 4.0 Plan), which has instead set out a structured framework for taxation in order to stimulate industrial research and technological development. This was the first comprehensive and systematic legislative activity in the field of taxation within European law.

4.6.1

Environmental Aid

The environment is one of the social values protected under the State aid framework and environmental aid has been classified as permitted aid and is now the subject of a self-standing policy. In this way, the regulation of selective environmental measures which was gradually introduced has developed a number of models which are now the guidelines to be followed when establishing environmental incentives within the Member States. In this area too, therefore, the Union would like to see the introduction of environmental aid in order to encourage the promotion and protection of the territory.

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More specifically, the European Commission has established types of environmental aid that are compatible with the Community market and are therefore allowed.26 Such aid includes environmental aid granted in the context of taxation.27 The specific framework represents a reiteration of the Commission’s longstanding view that environmental aid is to be granted for the following purposes:28 • to incentivise undertakings to invest in sustainable development; • to promote actions for energy saving; • in favour of renewable energy sources. To that end, environmentally friendly aid is deemed to be one of the measures widely promoted by the European Union that should be used mainly at territorial level.29 Over the years, a large number of aid measures have been introduced at national level, varying both in terms of the type of instrument used to implement the tax advantage, the categories of recipients and the specific aims from time to time pursued. An important example was the now-repealed ‘Tremonti ambiente’30 which instituted a system of corporate income tax relief in favour of small and medium-sized enterprises, excluding the portion of income destined to environmental investments from being deemed taxable income that had the effect of preventing, reducing and repairing damage caused to the environment. The tax instrument most commonly used to implement relief is tax credit, which is more readily available to undertakings. In that connection, it should be recalled that temporary aid was introduced for undertakings which had signed programme agreements designed to promote making safe, rehabilitating or enabling the industrial conversion of polluted sites of national

26

See Communication from the Commission of 3 February 2001, Community guidelines on State aid for environmental protection (2001/C 37/03); Notices from European Union Institutions and bodies Commission community guidelines on State aid for environmental protection of 1 April 2008; Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation). The latter regulation substantially implemented the aforementioned 2008 Communication. 27 See Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty. 28 See Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty (Articles 36–49); Council Regulation (EU) 2015/1588 of 13 July 2015 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid (codification) (Article 1). 29 See Picciaredda and Selicato (1996), passim; Amatucci (2005), p. 85; Selicato (2005), p. 257; Pepe (2012), p. 281. 30 Article 6, paragraph 13 to 19.2301, of Law No 388 of 23 December 2000.

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interest.31 The measure was introduced in order to encourage the re-use of such sites under conditions of health and environmental safety. In the field of environmental tax concessions, it is worth noting how recently the instrument of tax deduction has been widely implemented. In particular, the ‘Relaunch Decree’ (‘decreto Rilancio’)32 provided for the ‘superbonus’, which strengthened the support measures already in force (‘ecobonus’, ‘sismabonus’, ‘photovoltaic solar panels’ and ‘recharging posts for electric vehicles’), envisaging a deduction of 110% of the expenses incurred in insulating external walls, replacing old heating, hot water and air conditioning systems in common areas, replacing old heating, hot water and air conditioning systems in one-family buildings or in the units of detached multi-family buildings, and putting in place earthquake-proofing measures. For the sake of completeness, it should also be pointed out that, instead of the direct use of the relief, it is possible to opt for an advance contribution in the form of a discount from the suppliers of the goods or services (‘discount on the invoice’) or, alternatively, for the assignment of the receivable corresponding to the expected relief. The environment is one of the main areas in respect of which there is heightened awareness. Both at European and national level, over the last few years, ambitious projects have been planned which will also find tax concessions to be a means to implement the policies laid down in those projects. The highest expression of this approach is that of the ‘Piano Nazionale Integrato per l’Energia e il Clima’ (National Integrated Plan for Energy and Climate)33 which aims to change energy and environmental policies, thus initiating a virtuous process

31 See Article 4, paragraph 2–10 and 14, of Decree-Law No 145 of 23.12.2013 (converted, with amendments, into Law No 9 of 21 February 2014), implemented by Ministerial Order of 7 August 2014 and Departmental Decree of 18 May 2015. 32 See Articles 119 and 121 of Decree-Law No 34 of 19 May 2020 (converted, with amendments, into Law No 77 of 17 July 2020). 33 Ultimately sent to the European Commission in January 2020. The Plan contains the new elements introduced by the Decree-Law on Climate (Decree-Law No 111 of 14 October 2019, converted with amendments into Law No 141 of 12 December 2019) and those dedicated to investments for the Green New Deal provided for in the 2020 Budget Law (Law No 160 of 27 December 2019), implementing Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action, amending Regulations (EC) No 663/2009 and (EC) No 715/2009 of the European Parliament and of the Council, Directives 94/22/EC, 98/70/EC, 2009/31/EC, 2009/73/EC, 2010/31/EU, 2012/27/EU and 2013/30/EU of the European Parliament and of the Council, Council Directives 2009/119/EC and (EU) 2015/652 and repealing Regulation (EU) No 525/2013 of the European Parliament and of the Council.

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of de-carbonisation and use of renewable sources in the implementation of European objectives.34

4.6.2

Aid for Culture

Culture and heritage conservation are also among the values that can justify the granting of aid without prior authorisation.35 At present, what is seen at national level is a highly fragmented approach to legislative activity, characterised not least by a series of disparate interventions without a common framework. They include the tax credit for cultural and creative undertakings,36 on the one hand, and the incentive scheme known as ‘brain gain’, on the other. In particular, with regard to the first measure, a tax credit is granted37 for the years from 2018 to 2020, for 30% of the costs incurred for the development, production and promotion of cultural and creative products and services.38 The ‘brain gain’ scheme, however, is available to returning workers39 as well as for teachers and researchers40 resident abroad who decide to move their residence to Italy. These are favourable measures aimed at attracting highly qualified people with a high degree of specialisation in order to stimulate the technological, scientific and cultural development of the Country. The benefit—which was the subject of recent legislative interventions41—takes the form of exemptions, with effect from the 2020 tax period for a duration of 5 years. In particular, so far as returning workers are concerned, income from employment and the like, as well as income produced in Italy from self-employment, is included in the total income up to 30% of its amount, provided that certain conditions are met.

As stated in the final text of the Energy and Climate Plan, ‘for some time Italy has been resorting in so far as possible to instruments that together improve energy security, environmental protection and accessibility of energy costs, contributing to European energy and environmental objectives’. 35 The conditions are laid down in the General Block Exemption Regulation No 651/2014. 36 Introduced by Article 1, paragraphs 57 and following of the 2018 Budget Law (Law No 205 of 27 December 2017). 37 May be used only by way of compensation. 38 Within a spending limit of €500,000 for 2018 and €1 million for each of the years 2019 and 2020, until the available resources are exhausted. 39 Article 16 of Legislative Decree No 147 14 September 2015. 40 Article 44 of Decree-Law No 78 of 31 May 2010 (amended and converted into Law No 122 of 30 July 2010). 41 By Decree-Law No 34 of 30 April 2019, referred to as the ‘Decreto Crescita’ (Growth Decree) (converted, with amendments, into Law No 58 of 28 June 2019). 34

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The advantage is also extended to business income produced by returnees who start a business activity in Italy starting from the 2020 tax period. The benefit reflects the rationale that informed its introduction by being greater where the move is to one of the regions of Southern Italy;42 in such cases, in fact, the taxable base is limited to 10% of the value of the income generated in Italy. So far as teachers and researchers are concerned, for their part, their taxable income is made up for 10% of the value of their emoluments if those taxpayers have carried out documented research or teaching activities abroad at public or private research centres or universities for at least 2 continuous years and come back to carry out their activities in Italy, thereby acquiring tax residence in the territory of the State.43 The importance of the sector, especially within the Italian State, calls for a review of legislation that will lead to an increase in reliefs for the relaunch and enhancement of an area that is intrinsically linked to the essence and identity of the country.44

4.6.3

The Development of Degraded and Deprived Areas

The introduction of tax measures aimed at the economic development of the territory is one of the most important principles of the permitted aid scheme, in relation to which the different categories of regional aid have been provided for. As has already been stated, regional aid constitutes aid that is admitted in accordance with the regulations of the Council and European Commission without prior notification. Alongside regional aid is the approval of ‘free zones’ which the various Member States, including Italy, have set up within European guidelines. The so-called ‘Urban Free Zones’ are areas of the national territory that face particular difficulties and are disadvantaged socially and economically and for which there are ad hoc programmes that provide for the granting of benefits in favour of local undertakings in the form of tax and contribution exemptions.45 Free zones therefore concern taxation since they mainly concern tax concessions compatible with the European market. Free zones are created by the Member State and are subject to the prior authorisation of the European Commission, which determines whether the conditions for establishing the free zones are compatible with the principles of State aid.

42

Abruzzo, Molise, Campania, Apulia, Basilicata, Calabria, Sardinia and Sicily. See Article 44(1) of Decree-Law No 78 of 31 May 2010. 44 See Del Federico (2019), p. 2. 45 See Buccico (2018), p. 108; Barabino (2020), p. 111; Cedro (2015), passim. 43

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In Italy, free zones were established by the 2007 Budget Law46 and were authorised by the European Commission in 2009.47 Free zones are thus beneficiaries of admitted aid. As stated by the European Commission, free zones are in fact eligible under Article 107(3)(c) TFEU, as they form part of territorial development plans. It is a matter of pursuing the development of degraded areas through measures that respect the principles of proportionality and necessity. In the Italian State, therefore, the territorial tax relief measures were granted within the Free Zones framework.48 So far as the provisions governing the Free Zones are concerned, those introduced under the 2020 Budget Law are of particular interest49 inasmuch as they concerned Special Economic Zones (Zone Economiche Speciali—ZES), amending and extending the relevant concession regime. These are geographically delimited areas, generally located in the South of Italy where there is a port area that benefits from tax concessions and administrative simplifications in order to attract investments and improve the overall economy of the area. For undertakings located in those Zones, in fact, a tax credit for the purchase of new assets intended to improve the production structures located there is accorded. The tax credit rules for ZES, in particular, allow anyone with business income to use the tax credit for specific investments in machinery, plant and equipment, the amount of which varies according to the size of the applicant and its location. Moreover, in order to be eligible for the benefit in question and in accordance with the rationale for the relief, applicants are required to keep the productive activity in the ZES area for at least 7 years after the completion of the investment; otherwise, the benefit is revoked. The same thinking lay behind the implementation of tax concessions for areas affected by earthquake disasters. Indeed, areas have been marked out as part of the so-called ‘Sisma Centro Italia’ (Central Italy Earthquake Zone) where aid has been granted to undertakings of any size and to those in receipt of self-employment income who, due to the seismic events that had been taking place since 24 August 2016, have suffered a reduction in turnover.50

46

See, Article 1(340) of Law No 296 of 27 December 2006. See Commission Decision of 28 October 2009—State Aid No 346/2009 Italy-Urban free zones. 48 See Coppola (2009), p. 573. 49 See Article 1(316) of Law No 160 of 27 December 2019. 50 The Central Italy Earthquake Zone was established by Article 46, Decree-Law No 50 of 24 April 2017 (converted, with amendments, into Law No 96 of 21 June 2017). 47

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Aid for Innovation. The Industry 4.0 Plan

A very significant development programme of recent years in Italy is the Industry 4.0 Plan for industrial research and technological innovation. Specific regulation has been enacted in this field within the framework of permitted aid. In that respect, a Communication of the European Commission in 201451 in which—in line with international studies—the important role of technological innovation in the European project was established, is particularly important. Three areas of research to be developed are defined in that document: • fundamental research; • industrial research; • experimental development. Such cases could usefully be the subject of favourable measures for undertakings under national legislations. That Communication thus launched a policy of incentives in favour of technological innovation in compliance with the rules on State aid. In that regard, the eighth recital of Regulation (EU) 2015/1588 of 13 July 2015 established that innovation has become a Union policy priority and that many aid measures for innovation are relatively small and create no significant distortions of competition. Article 1 of that Regulation identifies, among the categories of aid which may be declared compatible with the market and not subject to the notification obligation, aid in favour of research, development and innovation. This provision thus legitimises those of the earlier Commission Regulation52 which already classified innovation aid as permitted aid under certain conditions laid down in that Regulation. More specifically, according to Article 2(80) of Commission Regulation (EU) No 651/2014 of 17 June 2014, the aid must be aimed at ‘innovative enterprises’, i.e. undertakings which in the foreseeable future will develop new or significantly improved products, services or processes compared to the state of the art in the sector concerned or which carry a risk of technological or industrial failure and which incur research and development costs of at least 10% of their operating costs in at least one of the 3 financial years preceding the granting of the aid. The two above-mentioned regulations have thus made it possible to introduce favourable rules for undertakings within the Member States, thus highlighting how innovation constitutes, within the prescribed limits, a value to be promoted through incentivising and support regulations. 51

See Communication from the Commission Framework for State aid for research and development and innovation (2014/C 198/01). 52 See Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty.

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Business innovation is considered a fundamental factor to start a transformation of economic relations that sits comfortably with the new dimension of the global market: on the one hand, the offer of products and services matches emerging needs in the new socio-economic context, giving rise to the ability to provide customised and made-to-measure products on a large scale; on the other hand, it supports the tendency of consumers to search for goods through the internet and digitalised channels with a significant reduction in efforts and costs. Under European guidance, the idea has spread in the various States of drawing up legislation aimed at favouring the development of undertakings, guiding them towards the use of research and technological innovation as a tool to increase the competitiveness of the production system in comparison with other international economic operators. In particular, the plan, enshrined in legislation, in favour of innovation and research—referred to, as stated above, as the ‘Industry 4.0’ project—was initially developed in Germany in 2011 and was subsequently exported to several other EU Member States. Italy has also dedicated a significant part of the legislation in the 2016 and 2017 Stability Law to this project. Pursuant to the national Industry 4.0 plan,53 a number of statutory rules were introduced, mainly concerning taxation.54 In fact, under that scheme there has been significant legislative activity which has given priority to the introduction of numerous provisions on the subject of small and medium-sized enterprises (‘SMEs’) and innovative start-ups55 and of some statutory arrangements in relation to the determination of business income. Worth noting with regard to the latter are: • the research tax credit regulations (the ‘research and development bonus’);56 • the Patent Box Regime;57 • the rules governing the purchase of capital goods.58 Although a common thread runs through them, the above-mentioned cases describe an autonomous regulatory framework, characterised by their own principles and specific regulations as shall be briefly described below.

See Piano nazionale industria 4.0, in www.mise.gov.it, documenti, politiche – tendenze – risultato azioni. 54 See Miceli (2020), p. 40. 55 See Decree-Law No 179 of 18 October 2012, also known as the ‘Decreto Crescita 2.0’ (2.0 Growth Decree); Decree-Law No 76 of 28 June 2013, the ‘Decreto Lavoro’ (the Job Decree), converted into Law No 99 of 9 August 2013; Decree-Law No 3 of 24 January 2015, known as ‘the Investment Compact’, converted into Law No 33 of 24 March 2015; Decree-Law No 34 of 30 April 2019; Decree-Law No 34 of 19 May 2020 (the ‘Decreto Rilancio’ (Relaunch Decree)). 56 Established by Law No 190 of 22 December 2014 and supplemented by Law No 232 of 11 December 2016. 57 Established by Law No 190 of 22 December 2014. 58 Established by Law No 232 of 11 December 2016. 53

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201

Tax Relief Schemes in Favour of Innovation

The implementation of the National Plan for Industry 4.0 is linked to important tax incentives for determining business income which—as pointed out above—are: the research and development bonus; Patent Box; and incentives for the purchase of capital goods. From 2016, the tax credit scheme for research and development activities (the so-called research and development bonus) took on the structure of an advantage aimed at supporting innovation and research compatible with the permitted aid framework.59 The legislation provides for tax credit to be used for the payment of direct taxes by any undertaking that invests in research and development activities. The amount of the credit depends on the costs incurred. The logic behind the scheme is in fact the attribution of an economic advantage to any business aimed at increasing its know-how and introducing innovative goods or services on the market which are planned to be of long duration. By way of example, research and development activities must demonstrate that they are in pursuit of innovative and original results in industrial processes (procedures for the definition of products) and relate to products (namely, final results of industrial processes). The types of expenditure allowed by those rules are enshrined in law and comply with European level requirements regarding the concepts of fundamental research, industrial research, and experimental development.60 The Bonus provides for several types of eligible expenses, such as those relating to highly qualified personnel, depreciation of expenses for the acquisition or use of laboratory instruments and equipment, expenditure relating to research contracts entered into with universities, research bodies and similar bodies and with other undertakings, technical expertise and industrial patents. Following the amendments introduced by the 2020 Budget Law, the legislator, while leaving the requirements for application and the incremental nature of the benefit unchanged, adjusted the regulatory framework by expanding the range of costs eligible for subsidies and adapting the intensity of the benefit. In the latest version, the tax credit is in fact granted for investments not only in research and development, but also in ecological transition, technological innovation 4.0 and other innovative activities. The framework at hand represents a significant tax benefit that does not alter the legal structure of the existing institutions but rather fits in with it by implementing a significant relief which is applied when tax is paid, at which point the credit can be used by way of compensation. 59

The scheme was introduced by Law 296 of 27 December 2006. It was subsequently supplemented by Decree-Law No 145 of 23 December 2013 and by Law No 232 of 11 December 2016. It was last amended by Law No 160 of 27 December 2019. 60 See Boria (2017a), p. 1869.

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The final result is an important tax saving, linked to the implementation of industrial research activities and to expenditure incurred to that end. In any event, it is a relief characterised by the fact that the beneficiary is able to benefit from it quickly; the Bonus is in fact granted automatically. Within the context of the Industry 4.0 Plan, the Patent Box regime has taken on particular importance.61 The purpose of the scheme is to promote the development of national intangible assets. Since the middle of the last century, intangible assets have been the object of numerous production and trade activities and represent an important core of wealth in the international economy. With the development of technology, information technology and advertising, some essential features of the world economy have changed, shifting part of the productive resources from the creation of tangible assets to the preparation of intangible assets. Intangible assets are characterised by their volatility and by their nature as being difficult to localise. In this general context, the introduction of the Patent Box regime in the Italian State essentially responds to the need to encourage the development of national intangible assets, rooting them in the territory and stimulating the carrying out of constant research and development activities in relation to them.62 Intangible assets are in fact subsidised in proportion to the study and research activities carried out by the resident company, contributing to the development of those assets. The Patent Box is a statutory regime for the granting of tax relief which is included in the ordinary rules for determining business income in direct taxes without, however, modifying the existing general framework. The rules themselves consist of two favourable regimes: the treatment of income for the purposes of direct taxes and the substantial exclusion from taxation of any capital gains from the sale of the intangible property. Under the regulatory framework, the scheme is optional or subject to the choice of the taxpayer as to whether or not to make use of it.63 The legislation introducing it is undoubtedly in the nature of a fiscal advantage as it provides for a reduction of the taxable base or a removal of tax from the sale price of the intangible asset consistent with and proportional to the research and development activity carried out on the intangible asset by the resident company.

61

The scheme was established by Law No 190 of 23 December 2014 (2015 Stability Law), amended by Decree-Law No 3 of 24 January 2015 (converted, with amendments, into Law No 33 of 24 March 2015) and by Decree-Law No 50 of 24 April 2017 (converted, with amendments, into Law No 96 of 21 June 2017), amended by Decree-Law No 34 of 30 April 2019 (converted, with amendments, into Law No 58 of 28 June 2019). 62 See Miceli (2017), p. 79; Arginelli and Pedaccini (2014), p. 60. 63 See Peddis (2017), p. 233.

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Finally, the national framework has provided for subsidies for the purchase of capital goods with high technological value.64 As to the objectives of the Industry 4.0 Plan, the measures concerned relate to the promotion of technology and the digitalisation of production processes. The purpose of such schemes is to encourage the purchase of machinery and instruments that are particularly advanced for the modernisation of domestic undertakings through tax benefits that obviously translate into a reduction in the tax burden for the undertaking. In that regard, since 2016, a new regime was introduced to replace the previous scheme; this regime was intended for all new capital goods with high technological content appropriate for the technological and digital transformation of their production processes. The assets to which this scheme applies have been specifically indicated in the legislation. Since 2020, that scheme was itself replaced by a new regulatory arrangement whereby the purchase of capital goods was also regulated within the general framework of the tax credit for investments in research and development, ecological transition, technological innovation 4.0 and other innovative activities. The purchase of capital goods of proven technological value makes it possible to benefit from a tax credit to a level which varies according to the type of goods invested in. It is worth noting that the schemes in question have been of fundamental importance in the process of national industrial development and have confirmed the central position played by taxation as a legislative instrument for the promotion of certain values. In this process, taxation is also intended to regulate cases that are new to the legal landscape. In that regard, at national level, tax law has also become a reference point for other legal fields, establishing, for the first time, concepts intended to have a general role in the legal system. These include the concept of innovative research, which is the logical and legal basis for eligibility for the research and development bonus, developed in the field of taxation and applied generally.65

64

See Law No 232 of 11 December 2016; the scheme was amended by Article 1(184) to (197), Law No 160 of 27 December 2019. 65 See Boria (2017a), p. 1869.

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4.7

4 The Positive Integration of the State Aid Framework into Taxation Matters. . . .

Aid Allowed in Times of Economic and Social Emergency

The guidelines of selective advantage policies aimed at economic activities take on particular relevance during emergency phases. As noted in Chap. 2, the State aid framework has also gradually taken on the function of defining national policy guidelines in times of crisis, providing for the interventions allowed by the European system in the most difficult moments of history. That function was first expressed during the economic crisis of 2008. The same function was confirmed recently when the European Union found itself on the front line in coping with the Covid-19 health emergency. Gradually, in the current historical phase, the European Union has drawn up general measures to affect budgets, public accounts and the provision of finance and liquidity. This was a policy aimed at strengthening existing mechanisms and introducing some new instruments.66 A decisive role has been played in general by the State Aid framework where specific guidelines have been approved. The European Commission made its position known on the issue of State aid in the Covid-19 emergency with several successive communications in March and April 2020 which provided for what was referred to as the ‘temporary framework’.67 In the first instance, the emergency led to the introduction of certain measures which are temporarily outwith the scope of the State aid framework. The Member States can therefore grant them freely without requiring the involvement of the European Commission in any way. Such measures involve the suspension of payment of corporation taxes and VAT. Essentially, this is a deferral of the tax obligations. Secondly, it is envisaged that there could be aid which must be notified to the European Commission to which the latter will respond very quickly following an accelerated procedure. The aid is authorised under Article 107(2)(b) and (3)(b) TFEU. The European Commission requires the aid to be shown to be necessary, appropriate and proportionate, according to the indications provided. The aid includes the use of tax advantages in the field of health or in general for aid to undertakings.

66

See Pepe (2020), p. 2. See Communication from the Commission of 13 March 2020, C-2020/91 ‘Temporary framework for State aid measures to support the economy in the current COVID-19 outbreak’; Comm. 19.3.2020, C-2020/1863; Information from European Union Institutions, Bodies, Offices and Agencies European Commission Communication from the Commission amendment to the temporary framework for State aid measures to support the economy in the current COVID-19 outbreak (2020/C 112 I/01). 67

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More specifically, the temporary framework provides that Member States may grant selective tax relief within certain limits to undertakings operating in the primary agricultural sector, to undertakings operating in the fishery and aquaculture sector and to undertakings operating in any other sector facing urgent liquidity needs. With that last clarification, the guideline provides for a measure that is essentially wide-ranging, as it can be addressed to any economic sector experiencing problems or difficulties. Of great importance are the fiscal measures aimed at protecting health within the market. In that regard, the aid serves to restore healthy market conditions through targeted protection of the social value that caused the crisis. Recovery is achieved by promoting research to eradicate the virus and by implementing the production of the means to cure people. The European Commission thus supports fiscal aid (but not exclusively fiscal aid): • to support research and development activities related to the coronavirus in order to address the current health crisis; • to support the construction and modernisation of testing facilities to develop and test products (including vaccines, mechanical ventilators, and protective clothing and equipment) useful in tackling the coronavirus pandemic up to the first industrial deployment; • to support the manufacture of products to deal with the coronavirus pandemic. In addition to the specific provisions, it generally confirms that aid allowed by the European block exemption Regulations and de minimis may also be activated. This does not affect the possibility of activating individual or general aid measures to be submitted for authorisation by the European Commission on the basis of the specific needs of each individual Member State. The temporary framework offers the States a wide range of possibilities and confirms the European approach of safeguarding social values in order to restore the market and insofar as it serves that objective.

4.7.1

The Measures Adopted in the Italian State in the Covid 19 Emergency

Faced with the health emergency caused by Covid-19 and the consequent economic crisis, the Italian legislator introduced a series of fiscal aid measures to support certain categories of taxpayers. The first step was to defer tax obligations and deadlines in compliance with European directives.

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Tax credits have also been provided for rent of property other than for residential use. This measure was introduced to allow persons carrying on a business, art or profession to limit the effects of reduced revenues or fees arising from the measures to contain the epidemic and, at the same time, to reduce the fixed costs that such persons have to face. That advantage was granted indiscriminately to anyone with income from business and self-employment, provided that certain income requirements were met. Specifically, the tax credit for rent of property other than for residential use is available only to subjects that recorded revenue or fees not exceeding €5 million in the tax period prior to the current one and that could demonstrate a drop in turnover of at least 50% compared to the previous year. The benefit consists of a tax credit of 60% of the monthly rent paid by the taxpayer for renting, leasing or letting real estate for the purpose of production activities, or of 30% for business rental contracts or service contracts with complex services. At the same time, aid in the form of direct subsidies, repayable advances or tax concessions granted by the Regions, Autonomous Provinces and other territorial Entities was also set up. These constitute a range of instruments aimed at supporting Italian undertakings at a time of serious economic difficulty.

4.8

The Implementation of Permitted Aid by the State and Territorial Entities. Consequences and Liability

The aim of the European system is to achieve, through the regulation of State aid and, in particular, of aid allowed without prior notification, ever greater positive integration of national systems which, as suggested earlier, amounts to substantial fiscal harmonisation. As has been pointed out on several occasions, in fact, States and territorial Entities can introduce permitted aid and thereby facilitate the achievement of Community objectives, thus implementing a policy of European growth. All the provisions on permitted aid together constitute, in fact, the context within which States and territorial Entities can plan aid that is in line with the prohibitions imposed by competition policy and with the objectives of social growth. The implementation by the State and the Territorial Entities of permitted aid thus establishes a policy of territorial and national development compatible with the European system, which is now the expression of the concept of social market economy. The implementation, failure to implement or erroneous implementation of the European guidelines on permitted aid each brings with it certain consequences and liabilities for the State and the territorial Entity. That now calls for a number of considerations.

4.8 The Implementation of Permitted Aid by the State and Territorial Entities.. . .

207

The subjective legal position of the State and the territorial Entity within the context of the regulatory provision of permitted aid is one of bodies which have been empowered.68 Most provisions of European law provide for duties in respect of conduct, which are expressed as actual prohibitions (such as the prohibition of State aid under Article 107(1) TFEU), or, more generally, in implementation obligations of certain frameworks. Those provisions, by generating duties as to conduct, require States or territorial Entities to follow what they establish unconditionally. Therefore, in the event that any requirements contained in the provisions is infringed, the State will be liable to the European Union and to individuals. The evolution of European law has also developed provisions conferring powers on the State and for territorial Entities. The power conferred arises from an assessment of the possibility of a legal effect (or for no need for a legal effect to be implemented).69 In some situations, in fact, the need to favour a gradual and harmonious integration between Community Countries has led to provisions which confer on the State and on the smaller territorial Entities the power to introduce certain rules within their own territory which are considered a priori compatible with the European legal system, as an expression of an adequate weighting of important shared values. This category includes the various types of State aid that are permitted without prior notification. The implementation of these frameworks is not compulsory, but is an expression of a power granted to the State or to the territorial Entity; for this reason it is considered to be a power of the State or the Entity itself to decide whether or not to introduce them. Therefore, failure to implement these disciplines does not engage the liability of States or smaller territorial Entities since it is within the powers granted to them by the European legal system whether they introduce them or not. The European Union hopes for a spontaneous alignment of the States to the aforementioned disciplines but does not provide for any form of enforcement in relation to conduct (of the States themselves) that does not positively achieve such objectives. The non-implementation of these regimes is, therefore, without consequences for States or smaller territorial Entities. The view is completely different where the territorial Entity or the State itself decides to implement the aforementioned frameworks in its own legal system, exercising the relevant powers to introduce them.

68

A distinction is traditionally made between rules that contain powers and rules that contain duties. Assessments as to necessity or possibility in relation to the realisation of Community values fall into one of those categories (powers and duties). See Falzea (1999), p. 479. 69 See Romano (1953), p. 171; Romano (1937), p. 139.

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Where that is the case, the State or territorial Entity must comply with all European provisions, which become binding and obligatory regarding their content. The consequence of infringing the provisions is that it engages the liability of States and territorial Entities. In other words, if the State or the territorial Entity decides to introduce an admitted aid, it must be fully compliant with all the European framework that have provided for it because otherwise (that is to say if it infringes certain provisions of the law) the aid will be considered incompatible with the Community rules and will no longer be admitted. Therefore, even in the event that there are Community provisions which provide for the possibility of introducing a certain type of aid, that possibility must be employed in a way that is compatible with the legislation, since otherwise it could give rise to liabilities towards the Union and towards individuals in the same way as where prohibited aid is introduced.

4.9

Concluding Remarks

This analysis highlights the existence of a European legal framework for permissible aid which is now a fundamental part of the State aid framework and is bound to have a very significant impact on the field of taxation. An assessment of this aspect confirms the new role that State aid now plays, that is to say, that of providing general guidance for selective advantageous schemes aimed at economic activities within the Member States. With specific reference to the framework on permitted aid which does not require prior authorisation, the European Union contributes to the establishment of actual regulatory frameworks which reflect general values of the social market economy. Such a framework is, in fact, currently the expression of a general policy of support and development, in accordance with European principles, addressed to Member States and territorial Entities. Permitted concessions are regulated and categorised, and the criteria determining their compatibility with Community rules are made explicit and transparent. Within the framework of permitted aid, taxation has assumed a very important role since the preferred framework for the granting of aid is through tax advantages. Several features of the field of taxation have made this possible. A form of legal integration has therefore been implemented in a very important area of direct taxation, that of granting concessions for economic activities. The subject of permitted aid has also meant an important change in the tax function. In many Countries, including Italy, taxation has expanded its promotional function, becoming the most fertile field for the implementation of growth and development policies in a European sense.

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Bibliography Alfano, R. (2011). Agevolazioni fiscali in materia ambientale e vincoli dell’Unione europea. Rass. trib. Amatucci, F. (2005). Agevolazioni fiscali ambientali, aiuti di stato e incompatibilità comunitaria. Riv. dir. trib. int. Amatucci, F. (2008a). I principi e le competenze degli enti locali in materia tributaria. In F. Amatucci et al. (Eds.), Il nuovo sistema fiscale degli Enti locali. Giappichelli. Amatucci, F. (2008b). L’impatto dei principi comunitari sulla nuova fiscalità locale. In F. Amatucci & G. C. San Luca (Eds.), I principi costituzionali e comunitari del federalismo fiscale. Giappichelli. Arginelli, P., & Pedaccini, F. (2014). Prime Riflessioni sul regime italiano di ‘patent box’ in chiave comparata ed alla luce dei lavori dell’OCSE in materia di contrasto alle pratiche dannose. Riv. dir. trib. Barabino, P. (2020). Le zone franche nel diritto tributario. Giappichelli. Barber, W. (1988). Storia del pensiero economico. Feltrinelli. Basilavecchia, M. (2002). Agevolazioni, esenzioni ed esclusioni. Rass. trib. Basilavecchia, M. (2009). La fiscalità di vantaggio e la prospettiva federalista. Corr. trib. Biondi, A., Eeckhout, P., & Flynn, J. (2005). The law of State aid in the European Union. Oxford University Press. Bizioli, G. L. (2009). Profili ricostruttivi dell’autonomia tributaria delle Regioni e degli Enti locali derivante dalla legge delega in materia di ‘federalismo fiscale’. La Finanza locale, 9. Bizioli, G. L. (2012). L’autonomia tributaria e finanziaria regionale. Giappichelli. Boria, P. (2017a). La ricerca e l’innovazione industriale come fattori di una fiscalità agevolata. Dir. prat. trib. Boria, P. (2017b). Taxation in European Union (2nd ed.). Springer. Boria P. (2020a). La fiscalità stabilita dal progetto industria 4.0 come strumento giuridico per lo sviluppo economico in Ricerca e sviluppo quali fattori di crescita e di promozione per le imprese. In P. Boria & B. Quattrociocchi (Eds.), Ricerca e sviluppo quali fattori di crescita e di promozione per le imprese. Jovene. Boria, P. (2020b). La Ricerca e l’innovazione industriale come fattori di una fiscalità di promozione in Ricerca e sviluppo qualifattori di crescita e di promozione per le imprese. In P. Boria & B. Quattrociocchi (Eds.), Ricerca e sviluppo quali fattori dicrescita e di promozione per le imprese. Jovene. Buccico, C. (2018). Il fondamento giuridico delle zone franche urbane e l’equivoco con le zone franche doganali. Dir. prat. trib. Cedro, M. (2015). La fiscalità di vantaggio nella prospettiva del diritto dell’Unione Europea. Cedam. Coppola, P. (2009). Nuove forme agevolative: la sperimentazione italiana delle Zone franche urbane. In M. Ingrosso & G. Tesauro (Eds.), Agevolazioni fiscali e aiuti di Stato. Naples. Coppola, P. (2012). Il fisco come leva ed acceleratore delle politiche di sviluppo. Cedam. Cordeiro Guerra, R., Pace, A., Verrigni, C., & Viotto, A. (2019). Finanza pubblica e misure tributarie. Prime riflessioni. Giappichelli. D’Atena, A. (2005). Modelli federali e sussidiarietà nel riparto delle competenze normative tra l’Unione europea e gli Stati membri. Il dir. del U.E., I. Del Federico, L. (2006). Agevolazioni fiscali nazionali ed aiuti di stato, tra principi costituzionali ed ordinamento comunitario. Riv. dir. trib. int. Del Federico, L. (2011). La fiscalità di vantaggio degli Enti territoriali fra decisioni politiche e limiti comunitari. Tributi locali e regionali. Del Federico, L. (2019). Finanza pubblica e misure tributarie per il patrimonio culturale italiano. Introduzione alla ricerca. In R. Cordeiro Guerra, A. Pace, C. Verrigni, & A. Viotto (Eds.), Finanza pubblica e misure tributarie. Prime riflessioni. Giappichelli.

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Denis, H. (1990). Storia del pensiero economico (Vol. 1: From Plato to Ricardo). Milan: Mondadori. Evans, A. (1997). EC Law in State aid. Oxford University Press. Falzea, A. (1999). Efficacia giuridica. Giuffrè. Felice, F. (2008). L’economia sociale di mercato. Rubbettino. Ficari, V. (2007). Aiuti fiscali regionali, selettività ed insularità: dalle Azzorre agli enti territoriali italiani. Dir. prat. trib. int. Ficari, V. (2008). Sviluppo del turismo, ambiente e tassazione locale. Rass. trib. Ficari, V. (2009). L’autonomia tributaria delle Regioni e degli Enti locali tra Corte Costituzionale (sentenza n. 102/2008 e ordinanza n. 103/2008) e disegno di legge delega. Quaderni di Rivista di diritto tributario, 3 (Milan). Fichera, F. (1992). Le agevolazioni fiscali. Einaudi Editore. Fontana, C. (2012). Aiuti di Stato di natura fiscale. Cedam. Forte, F., Felice, F., & Forte, C. (2012). L’economia sociale di mercato e i suoi nemici. Rubbettino. Gallo, F. (2005). Ancora in tema di autonomia tributaria delle Regioni e degli Enti locali nel nuovo Titolo V della Costituzione. Rass. trib. Gallo, F. (2013). Politiche europee, finanza e fiscalità per le aree danneggiate. Rass. trib. Giovannini, A. (2012). Sul federalismo che non c’è. Dir. prat. trib., I. Gonzales Pineiro, R. (2010b). Aiuti di Stato, ‘selettività regionale’ e politiche fiscali agevolative delle Regioni. Riv. dir. trib. Iagher, T. (2016). Tax incentives under State aid law: a competition law perspectives. In I. Richelle, W. Schön, & E. Traversa (Eds.), State aid law and business taxation. Springer. Ingrosso, M., Tesauro, G., et al. (2009). Agevolazioni fiscali e aiuti di Stato. Jovene. Ippolito, F. (2007). Fondamento, attuazione e controllo del principio di sussidiarietà nel diritto della Comunità e dell’Unione europea. Giuffrè. La Rosa, S. (1989). Esenzioni ed agevolazioni tributarie. Enc. giur., XIII (Rome). La Scale, E. A. (2005). Il divieto di aiuti di Stato e le misure di fiscalità di vantaggio nel quadro della politica regionale dell’Unione europea e degli Stati membri. Dir. prat. trib. int. Melis, G. (2009). La delega sul federalismo fiscale e la cosiddetta ‘fiscalità di vantaggio’: profili comunitari. Rass. trib. Miceli, R. (2014). Federalismo fiscali e principi europei. Autonomia, responsabilità e modelli di federalismo. Giuffrè. Miceli, R. (2015). La metamorfosi degli aiuti di stato nella materia tributaria. Riv. Dir. trib. Miceli, R. (2017). Patent box: ratio legis, disciplina, possibili profili abusivi. Riv. dir. trib. Miceli, R. (2020). Il piano Industria 4.0 e la materia tributaria. Principi generali e discipline specifiche. In P. Boria & B. Quattrociocchi (Eds.), Ricerca e sviluppo quali fattori di crescita e di promozione per le imprese. Jovene. Moschetti, F. (1987). Agevolazioni fiscali. II) Problemi di legittimità costituzionale e principi interpretativi. Dig. disc. priv., sez. comm., I (Turin). Nemo, P., & Petitot, J. (2006). Storia del liberismo in Europa. Rubbettino. Onida, V. (1991). Il ruolo delle Regioni nel sistema comunitario. Le Regioni. Orlandi, M. (2006). La disciplina degli aiuti di Stato, in Diritto privato dell’Unione Europea. In A. Tizzano (Ed.). Giappichelli. Orlandi, M. (2018). Le discriminazioni fiscali e gli aiuti di Stato nel diritto dell’Unione europea. Aracne. Peddis, F. (2017). Patent box: profili procedimentali e problematiche applicative. Riv. dir. int. trib. Pepe, F. (2012). Le agevolazioni fiscali ‘regionali’ in materia ambientale. Riv. dir. trib. Pepe, F. (2020). L’emergenza Covid-19 nell’Unione europea: verso una solidarietà tributaria ‘strategica’? Riv. tel. dir. trib. Perrone, L. (2004). La sovranità impositiva tra autonomia e federalismo. Riv. dir. trib., I. Piattoni, S., & Polverari, L. (2016). Handbook on cohesion policy in the EU. Edward Publishing. Picciaredda, F., & Selicato, P. (1996). I tributi e l’ambiente. Profili ricostruttivi. Giuffrè. Romano, S. (1937). Corso di diritto amministrativo (3rd ed.). Cedam.

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Romano, S. (1953). Frammenti di un dizionario giuridico. Quodlibet. Ronchetti, F. A. (2016). Regole europee ed incentivi fiscali allo sviluppo dei brevetti: prime considerazioni sulla ‘patent box’. Rass. trib. Russo, P. (2003). Disciplina comunitaria degli aiuti di Stato. Rass. trib., 1bis, p. 330. Selicato, P. (2005). Profili teorici e lineamenti evolutivi degli strumenti agevolativi a carattere fiscale e non fiscale per la promozione dello sviluppo sostenibile. Riv. dir. trib. int. Simonato, A. (2017). Integrazione europea e autonomia regionale: profili giuridici della governance multilivello e politiche di coesione. Federalismi. Stammati, S. (2011). Il principio di sussidiarietà tra passato e presente. Dir. e società. Tosato, G. L. (2011). L’evoluzione della disciplina degli aiuti di stato. In C. Schepisi (Ed.), La modernizzazione della disciplina degli aiuti di stato. Giappichelli. Tosato, G. L. (2014). Appunti in tema di economia sociale di mercato. In Scritti in onore di Giuseppe Tesauro (Vol. III). Jovene. Traversa, E. (2010). L’autonomie fiscale des Régions et des collectivités locales face au droit communautaire. Larcier. Uricchio, A. F. (2017). La ricerca e l’innovazione industriale come fattori di una fiscalità agevolata. Rass. trib. VV. AA. (2007a). In F. Amatucci & G. C. San Luca (Eds.), I principi costituzionali e comunitari del federalismo fiscale. Turin: Giappichelli. VV. AA. (2007b). In L. Salvini (Ed.), Aiuti di stato in materia fiscale. Padua: Cedam. VV. AA. (2010). In F. Amatucci (Ed.), Il nuovo sistema fiscale degli Enti locali. Turin: Giappichelli. VV. AA. (2011). In C. Schepisi (Ed.), La ‘modernizzazione’ della disciplina degli aiuti di Stato. Turin: Giappichelli. VV. AA. (2015). In A. Uricchio, M. Aulenta, & P. Selicato (Eds.), La dimensione promozionale del fisco. Bari: Cacucci Editore. VV. AA. (2016a). In I. Richelle, W. Schön, & E. Traversa (Eds.), State aid law and business taxation. Springer. VV. AA. (2016b). In M. Basilavecchia, L. del Federico, A. Pace, & Verrigni C. (Eds.), Interventi finanziari e tributari per le aree colpite da calamità, tra norme interne e principi Europei. Turin: Giappichelli. VV. AA. (2020). In P. Boria & B. Quattrociocchi (Eds.), Ricerca e sviluppo quali fattori di crescita e di promozione per le imprese. Jovene. Weber, A. (1993). Federalismo e regionalismo nell’Unione europea. Riv. it. di dir pubbl. com.

Chapter 5

The Implementation of the State Aid Framework and the Protection of Rights in Tax Matters. The Italian Experience

Contents 5.1 The Implementation of the European State Aid Framework. General Principles and the Special Nature of Fiscal Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 The European Principle of Effectiveness as a General Principle of Legal Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2 The Principle of Procedural Autonomy (Cont’d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.3 The Development of the Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 State Aid Control and the Role of the European Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 The Control of Compatibility by the European Commission . . . . . . . . . . . . . . . . . . . . 5.2.2 Review of Legality by the Courts. Cooperation Between the Courts and the European Bodies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 National Obligations Prior to Notification of the Aid. The Italian Experience . . 5.2.4 Monitoring Fiscal Aid. Problematic Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Recovery of State Aid. General Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 The European Commission Recovery Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 Recovery Decisions in the Field of Taxation. Problematic Issues . . . . . . . . . . . . . . . 5.3.3 Exceptions to the Recovery Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.4 National Procedures for the Recovery of State Aid. General Background . . . . . . 5.3.5 National Procedures for the Recovery of Fiscal Aid. The Italian Experience . . . 5.3.6 The National Procedure for Recovery of Incompatible aid (Cont’d). The Specific Nature of Tax Matter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.7 The Exclusive Jurisdiction of the Administrative Court (Cont’d). Problems in Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 The Protection of Third Parties. The Principle of Compensation for Damage . . . . . . . . . . 5.4.1 State Liability for Breach of Community Obligations in the State Aid Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 State Liability in Fiscal Aid. Problematic Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.3 Non-contractual Liability Within the Aid Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

214 217 219 222 224 226 228 230 231 232 233 235 236 239 240 242 244 246 247 251 252 254 255

Abstract The principles governing the implementation of administrative and judicial procedures of State aid matters are analysed. There are three stages in this area in which European and national competences come together in different ways: the monitoring of aid, the recovery of aid and the protection of the affected rights. © Springer International Publishing Switzerland and G.Giappichelli Editore 2022 R. Miceli, The Role of State Aid in the European Fiscal Integration, https://doi.org/10.1007/978-3-030-88735-3_5

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There has been an important historical and legal evolution of such implementation leading to the establishment of the principles of public and private enforcement. Within this general framework, which is consistent with the State aid framework, there is the matter of the special nature of fiscal aid, which raises difficult matters in relation to the various stages of the implementation procedure. With regard to this aid, the choices made at European and national level are clearly problematic and require interpretation and frequent adjustments. The evolution of Italian legislation is an example of such considerations. This confirms the conceptual autonomy of fiscal State aid and the need for autonomous regulation.

5.1

The Implementation of the European State Aid Framework. General Principles and the Special Nature of Fiscal Aid

Implementation is an essential part of the State aid framework matters. It is in that phase, indeed, that the entire administrative and judicial procedures are carried out in order that the legislative provision applies, enforcing the general values of the framework being discussed here. As has been said at several points, these are values which are fundamental to the European project and their implementation cannot be affected. The application of State aid has therefore always been the subject of important considerations by the European Union, in view of the fact that only a very effective implementation of the framework would make the system under consideration very effective. In this respect, the application of the framework on State aid is part of the broader issue of the implementation of European law and the recognition of subjective legal rights arising under the European legal system.1 As has been pointed out elsewhere, this is an extremely important issue governed by the principle of effectiveness.2 The first element to be taken into account is therefore the need for any implementation of aid to be consistently informed by the requirements of effectiveness because only in this way can aid be considered truly in line with European principles. In that respect, the EU fiscal State aid framework relies on the various aspects of the principle of effectiveness, so that its scope of application fully embodies the

1 2

See De Pietro (2019), Chapter 1. See Miceli (2009b), passim.

5.1 The Implementation of the European State Aid Framework. General Principles . . .

215

aforementioned value covering both the static and dynamic aspects of legal integration in European as well as in national procedures.3 Another important element in the implementation of State aid is the mixing of European and national competences. In the context of State aid it is, in fact, possible to combine the competences of the State with those of the Union, defining a multilevel procedure with variable geometries. This interweaving between the levels is fundamental to maintaining a balance and provides several ways of offering protection in national and European fora and at different stages of the implementation process. In that context, the acknowledgement of an exclusive European competence (namely, the power to authorise compatible aid) is the fixed point that has provided it with its great strength so that, as a result, it has been fully and widely applied. This aspect of the field of taxation was a further element in favour of the establishment of the framework at hand. In fact, none of the European rules on taxation, other than in respect of customs duties, provides for the direct involvement of the European institutions in the implementation phase. The application of the State aid principles to the field of taxation has thus made it possible to apply to it a legislative framework in which Europe—through the European Commission—has played a direct role. Integration in the field of taxation has thus been very effective and the results have been pointed out in Chap. 2. The aid implementation framework has followed the course of European history and the evolution of the substantive aid rules themselves. Pursuant to that, the integration of European and national competences has been brought about in different ways, with different structures at different stages in its history. It is necessary to refer to those historical stages in this introduction in order to understand the current rules better. As noted at the start, the historical-legislative evolution of the framework at hand has essentially led to the identification of three important structures in its implementation as a result of the interpretation and implementation of the provisions set down in the Treaty. This called for the obligation of prior authorisation of new State aid by the European Commission and in some cases by the Council, establishing a stage at which there is a necessary intervention at European level which cannot be sidestepped. The prior control stage, regulated under the Treaty, is therefore the most important stage characterising the structure of the framework. The European Institutions play an important role in this stage, and this role is essential.

3

See Miceli (2009a), p. 1621.

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On the other hand, the recovery of aid and judicial protection of rights are areas in which the role of the Member States, which must operate according to the principles of procedural autonomy, is recognised as being of fundamental importance. In those stages, the role of the European legal system is the same as in other harmonised legal areas, although the importance of State aid has led to greater attention being paid to the implementation of the provisions. The analysis of the topic of the implementation of State aid is therefore divided into the following stages: • control of the aid; • recovery of aid; • protection of (infringed) rights. Those stages will be analysed independently, involving different reflections. First and foremost, there follows a definition of the principle of effectiveness as a general value governing the implementation of European law, and the historical development of the framework governing the implementation of State aid will be highlighted. It should be noted that in relation to the implementing framework, fiscal aid faces specific problems which reflect its special nature with respect to the general concept of State aid. As has been pointed out on several occasions, fiscal aid is characterised by the following elements: • the field on which they act, tax law, which structurally uses selective schemes to pursue economic and social objectives and at the same time regulates the contribution to public expenditure at national level; • the particular way in which the aid is granted; • the different functions it performs which also involve interests of international importance (the fight against harmful tax competition); • the technical complexity of identifying the aid and, in particular, the difficulty of ascertaining the selectivity requirement. The abovementioned elements have a major impact on the regulation of implementation and protection and is thus a specific field in which independent reflection is necessary. Such reflections will be carried out in the various parts analysed.

5.1 The Implementation of the European State Aid Framework. General Principles . . .

5.1.1

217

The European Principle of Effectiveness as a General Principle of Legal Integration

Effectiveness runs through European law and is a general principle of prime value. The principle of effectiveness has an undisputed historical value and an important recognition in international law4 and in domestic law.5 In accordance with this tradition, the Community system has incorporated this principle and made it the basis of its own legal system.6 The content of this principle may be seen in the way in which there is a complete match between legislative provisions and social reality and is expressed in the need for every legal system to be able, at all levels, to pursue the objectives for which it was created. Effectiveness in fact requires there to be an overlap between fact and law and means excluding the possibility that rules of procedure and processes can prevent the application of a legislative provision. As a general rule, all forms of law, and therefore also the domestic laws of the Member States, aspire to a strong link between reality and regulation (between fact and law). However, full effectiveness cannot be achieved within each State, as different interests and values have to be regulated, including those arising from the system of administrative and procedural justice.7 The complexity of State governments and the wide range of matters to be regulated naturally lead to a compromise in terms of effectiveness, which can thus never be fulfilled. For that reason, the field in which the value of effectiveness has been most fully realised is that of international and European law, which are sectoral and pursue specific objectives. In European legislation, the principle of effectiveness has been aimed above all at the legal integration of the Member States, where it has been interpreted in both its static and dynamic aspects.8 This was a necessary step because the European Community—in its initial configuration—did not have administrative and judicial structures for the general implementation of European law. Implementation was intended to be carried out within the Member States, using existing administrative and procedural structures. In fact, as is well known, the European Community was created in a general way for the production of law, the application of which was delegated to the Member States.

4

See Kelsen (1967), p. 48; Sperduti (1950), p. 6. See Piovani (1953), p. 12; Gavazzi (1988), p. 420; Catania (2005), p. 249. 6 See Quadri (1965), p. 51. 7 See Ferrajoli (2005), p. 129. 8 See Miceli (2009a), p. 1621. 5

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In that sense, the principle of effectiveness has managed to be applied by becoming the official instrument of European legal integration within the Member States. The legal provision of reference has been Article 4 TEU9 which provides for the principle of sincere cooperation between the States and the European Union within which the principle of effectiveness is contained. According to that Article, the Union and the Member States are, in full mutual respect, to assist each other in carrying out tasks which flow from the Treaties. Member States are to take all appropriate measures, whether general or particular, to ensure fulfilment of the obligations arising out of the Treaties or resulting from acts of the Institutions of the Union. Member States are to facilitate the achievement of the Union’s tasks and refrain from any measure which could jeopardise the attainment of the Union’s objectives.10 Article 4 TEU is deemed to be a general obligation on Member States to apply the rules of European law and to provide effective protection for the subjective legal situations arising from those provisions. Legal literature and European case law on that Article has led to the definition of the principle of effectiveness, which serves as a general paradigm both of the application of European provisions in national legal systems and of the protection of rights within those systems. As regards the first aspect—the application of European provisions in national legal systems—the principle of effectiveness entails both the obligation to apply Community rules that have direct effect or are directly applicable and to give them precedence over national rules that are incompatible or in conflict with them.11 As regards the second aspect—the protection of rights within national systems— the general principles that should guide the recognition of European rights within the Member States have been established. To that end, the general principle of procedural autonomy has been generated, which is analysed at length in the following section and is widely applied in the field of State aid. The Community legal system has in any case set up its own administrative and judicial bodies (the European Commission, the General Court, the Court of Justice), reserving to the latter only specific functions and competences (rather than generalised competence on the implementation of European law). In regulating European procedures and processes aimed at implementing specific functions and competences, the Union itself has relied on the value of effectiveness. In view of the importance of the issues involved, the risk could not be taken of those matters being frustrated by ineffective governance.

9

Now Article 4(3) TEU (formerly Article 5, EEC Treaty, and Article 10, Maastricht Treaty). Cfr. Nizzo (1997), p. 381. 10 For a general overview of this principle, Von Bogdandy (2011), p. 99; Bilancia and Pizzetti (2004), p. 91; Miceli (2009a), p. 1621. 11 See Orlandi (2012), p. 5.

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In that regard, European procedures and processes were the first to be regulated according to the canons of effectiveness, thus defining important general paradigms that were eventually to be followed in the Member States. As will be seen further below, the principle of ‘good administration’ has been implemented in relation to administrative procedures, while judicial procedures have adopted the general rules of ‘due process’.12 In that regard, effectiveness has led to general principles that must regulate procedures and processes (at national and European level), having as its aim the application of European rules and which is encapsulated in the expression to ‘do everything possible’ to implement European law.

5.1.2

The Principle of Procedural Autonomy (Cont’d)

The principle of effectiveness has been widely applied with regard to the protection of European rights in the Member States. As mentioned above, the European legal system generally has no defined specific procedure or procedural framework for the protection of legal rights of European origin within the Member States and has not established specific administrative and judicial bodies. The implementation of European law and the recognition of subjective legal rights has generally been left to the procedural autonomy of the Member States; on the basis of this principle, the latter enjoy a certain autonomy in establishing the ways and means of protecting European rights in domestic contexts. This autonomy is, however, conditional, since the States must respect two European values, equivalence and effectiveness stricto sensu, as the articulation of the principle of effectiveness.13 These two values ensure a standard of effectiveness for national procedures, ensuring alignment with European principles. In other words, these values ensure that application of EU law rights are not put off for an indefinite period and that, in any event, the most effective possible protection of Community legal rights is achieved, guaranteeing a minimum standard of uniform protection within the Member States. The Community ‘claim’ that the implementation of European law should take place in the Member State through the use of procedures and processes suitable to

12

See Nehl (1999), p. 34. See Judgment of the Court of Justice (Fifth Chamber) of 10 July 1997, C-261/95, Palmisani v INPS; Judgment of the Court of justice of 1 December 1998, C-326/96, Levez v T. H. Jennings (Harlow Pools) Ltd; Judgment of the Court of Justice of 14 December 1995, C-430/93 and C-431/ 93, Van Schijndel v Stichting Pensioenfonds voor Fysiotherapeuten.

13

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guarantee the effective application of European law derives from the principle of procedural autonomy.14 The principle of equivalence, as a general rule, requires that, when protecting rights of Community origin, the same procedural rules be used, and similar provisions applied as those provided for in the Member State for the protection of the same rights deriving from domestic law. Equivalence therefore constitutes both the criterion for identifying the procedure which may be used and the parameter for assessing whether any provision governing those procedural rules does not discriminate against the protection of a Community right as compared with domestic law. It is, therefore, a principle that operates exclusively by means of a ‘comparison’ with national rights and procedures and is aimed at implementing non-discrimination (in protection) between Community-derived legal rights and those based on domestic provisions.15 The principle of effectiveness stricto sensu, on the other hand, precludes the application of any national provision which prevents or makes it too difficult or onerous for the holder of the right to have legal rights of Community origin recognised.16 On this last point, no provision relating to procedure or process can limit the possibility of relying on European law, unless the limitation is justified by a general principle of good administration or due process, since the latter principles are in fact the expression of shared values enshrined at European level. The general principles of good administration and due process thus become the parameters for assessing the justification of any national provisions aimed at protecting legal rights of European origin. It follows that any national rule which is not so justified, and which restricts in practice the possibility of relying on the right must be disapplied. Regarded more broadly, it follows from the above that any (administrative or judicial) procedure aimed at the recognition of a right of European origin must be

14

This claim, as shall be seen below, thus makes it possible to bring an action for damages in all cases in which damage to a person has resulted from the non-application or incorrect application of such European procedures or procedural principles. 15 See Judgment of the Court of Justice of 16 May 2000, C-78/98, Preston v Wolverhampton Healthcare NHS Trust and Others; Judgment of the Court of 19 June 2003, C-34/02, Pasquini v INPS; Judgment of the Court of Justice of 13 July 2006, C-295/04, Manfredi v Lloyd Adriatico Assicurazioni SpA and Others; Judgment of the Court of Justice of 11 September 2014, C-112/13; Judgment of the Court of Justice (Third Chamber) of 27 June 2013, C-93/12, ET Agrokonsulting04-Velko Stoyanov v Izpalnitelen direktor na Darzhaven fond ‘Zemedelie’. 16 See Judgment of the Court of Justice of 9 November 1983, C-199/82, State Finance Administration v San Giorgio; Judgment of the Court of Justice (Grand Chamber) of 13 March 2007, C-432/ 05, Justitiekanslern v Unibet (International) Ltd; Judgment of the Court of Justice of 30 September 2003, C-224/01, Köbler v Republik Österreich; Judgment of the Court of Justice of 13 June 2006, C-173/03, Traghetti del Mediterraneo v Italian Republic; Judgment of the Court of Justice of 20 September 2018, C-448/17, EOS KSI Slovensko s. r. o. v Ján Danko v Margita Danková.

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aligned with the general principles of good administration and due process, as recognised at European level. There is thus an obligation on the Member States to use procedures which are in line with the abovementioned general principles, as recognised at Community level; this approach would have the consequence that any national procedure which is not in line with those principles could potentially incur a Member State in liability under Community law where the failure to comply with the Community principle has resulted in loss or damage to a citizen. The term good administration includes the principle of due process. Good administration is not a unitary principle but an expression which is intended to encompass all the general principles of administrative activity, which constitute, according to the Community legal system, the European standards of an administration that is transparent in its methods of action and functional as to its results. Generally speaking, within the principles of good administration, a distinction is made between principles relating to the relationship between the administration and the citizen and those more specifically relating to administrative decision-making. The first group includes the principles of legal certainty, good faith, impartiality, effectiveness, efficiency and appropriateness of the activity, administrative responsibility and transparency. On the other hand, the principles which apply to administrative decisions are those of: the right to be heard, the duty to provide reasons, and proportionality. The principles of due process are instead those regulated by Article 6 of the European Convention for the Protection of Human Rights (hereinafter ECHR),17 which have been transposed into Article 6 of the TEU, according to which, the fundamental rights guaranteed by the European Convention for the Protection of Human Rights constitute general principles of the Community’s law.18 Article 6 of the ECHR protects the right to a fair trial (Article 6), where the expression ‘fair trial’ refers to structural principles of fairness and functional principles of efficiency.19 The structural principles of equity aim to ensure a fair outcome in light of the facts of a case; these principles tend, therefore, to ensure a decision which is as close as possible to the truth. This genus includes: the existence of an independent and impartial judge, equality between the parties, and a full and effective right to be heard. The functional principles of efficiency are, on the other hand, instrumental to the administration of speedy, full and timely justice. These include the need for a reasonable length of trial, the need for general precautionary protection and the inclusion of the principles of the right to be

17 On that point, see Maresca (2003), p. 223 and following; Malherbe (2000), p. 249; Picozza (2000), p. 1061. Del Federico (2010), passim. 18 Cfr. Bifulco et al. (2001), passim; Del Federico (2010), passim. 19 See Cecchetti (2001), p. 595; Del Federico (2005), p. 154.

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heard, immediacy, publicity, the need for expert defence and legal aid for those unable to meet the costs of the proceedings. The procedural protection of a Community-derived legal right requires the presence of this bundle of principles, which have now become the yardstick of or benchmark for the effectiveness of any national process. In conclusion, it must be emphasised that European law must be ensured by means of instruments in line with these principles, which guarantee effective protection in accordance with European principles. Those points are highly relevant with regard to State aid, as will be seen in the discussion which follows.

5.1.3

The Development of the Framework

The procedural framework for State aid has changed over time according to the importance gradually assumed by the substantive rules in the European and national contexts and developments in European procedure and process. The procedural framework has in fact supported the substantive rules, on the basis of the logical and legal view that, in the European system, procedure serves substantive requirements. In the first phase of application of the State aid rules (after the establishment of the European Community), the framework focused on the implementation of the principle of prior control of State aid under what has become known as the unilateral model. The Treaty required Member States to submit new aid and existing aid for review by the European Commission by means of the notification obligation. Control by the European Commission was at the heart of the aid framework; the first phase of European Union history therefore focused on the need to consolidate in the Member States the obligation of prior authorisation.20 At that time, only the European Commission (and sometimes the Council) was in charge of carrying out such control, which fell therefore under the exclusive competence of the European Union. During the 1980s and the 1990s, important interpretations of the Court of Justice changed this approach, making room for the bilateral model of monitoring on the compatibility of State aid. That marked the move from the unilateral model to the bilateral model. Applying this model has led to a role for national courts at the State aid compatibility monitoring phase. This was an important step toward raising awareness among States and undertakings of the national application of the State aid framework.

20

See Simonsson (2006), p. 233.

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Any undertaking was recognised with the power to have recourse to national courts in the event of unlawful or misused aid having been granted, accepting the jurisdiction of those national courts to find aid unlawful (inasmuch as it was adopted without complying with the prior notification obligation) or misused (inasmuch as it was in breach of the European Commission’s decision). National courts have also been given the power to order repayment of the prohibited aid and to rule on compensation for damage caused to third parties where the appropriate conditions are met. This was done in pursuit of the direct effect of the provision containing the obligation of prior notification of State aid (now Article 108(3) TFEU). It thus also became possible to review the lawfulness of the aid at national level by the fact that individual economic operators were able to bring actions before the courts. In this second phase, the rules on the recovery of State aid also developed considerably; those rules were elaborated by the European Commission and subsequently enshrined in a regulation of the Council.21 The obligation to recover prohibited aid primarily involves the Member States which, by virtue of the principle of procedural autonomy, are required to fulfil their European obligations. At the end of the 1990s, there was a further evolution of the bilateral model, which then went on to become a cooperative model. A complementary model of protection was thus created in which European bodies and national bodies cooperated in the application of the State aid framework within the limits of their powers and responsibilities. In this context, the European Commission continued to have substantial power to determine the legal system governing State aid and to maintain exclusive competence for the assessment of permitted aid. This power is exercised with the assistance of the Council. The national courts pursue those objectives in cooperation with the European Commission. In contrast, national administrative and judicial procedures are exclusively designated to ensure the recovery of incompatible aid and to protect the legal status of the parties concerned. National administrative and judicial bodies have a major role to play as regards the latter two objectives which they must fulfil in accordance with the principle of effectiveness. The process was completed by the modernisation policy, which led to a simplification and rationalisation of procedures and a strengthening of shared control. Thus began the strengthening of public and private enforcement.

21

See Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty.

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This phase focused mainly on the prior control of all aid, according to two important objectives: the strengthening of monitoring and the reinforcement of devolved control by national courts. The model currently in force for the implementation of the State aid framework, which is the result of that development over time, therefore provides for shared control whether it be ex ante or ex post. Prior control has been strengthened, involving public administrations and other national bodies in this procedure. The latter are required to know the State aid framework and to carry out preliminary assessments of the aid measures adopted in the Member States, ensuring prior notification of all aid. The monitoring can be carried out at European or national level; this monitoring can be carried out both by public bodies (European Commission, public administrations or national jurisdictions) and by private entities (national undertakings). The principle of public and private enforcement, which is typical of the competition sector and embodies horizontal and vertical subsidiarity, is thus rendered effective. The individual stages involved in the implementation of the framework will now be analysed in the light of these assessments.

5.2

State Aid Control and the Role of the European Commission

Article 108 TFEU is the starting point for the entire procedural administrative and judicial systems of State aid. In particular, that Article establishes the competence of the European Commission to authorise new aid and to verify whether existing aid complies with the Treaty. As regards new aid, in particular, Article 108(3) sets out that any plans to grant or alter aid must be communicated to the Commission in sufficient time. Furthermore, the Member State concerned must not put the proposed measures into effect until this procedure has resulted in a final decision. The following fundamental principles are derived from that Article: • the obligation of the Member State to notify the aid and not to put it into effect until it has been authorised by the European Commission; • the exclusive competence of the European Commission to authorise aid in advance. The first principle has direct effect and forms the basis for the control of aid by national courts (as shall be shown in the next section). Control plays a very important role in the overall set-up of the framework and is at the heart of it.

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The basic idea is in fact that any aid that has the characteristics set out in Article 107 TFEU must be notified in advance to the Commission and authorised by the latter. Although this framework has evolved over time to become a widespread and multilevel control, the control of compatibility of the aid—in order to allow it in the European territory—is an exclusive competence of the Commission.22 The compatibility check must take place at European level since it involves the fundamental interests of the European project (competition and the market). Control must then be carried out by the Commission, the executive body responsible for safeguarding the Treaty. The Commission is called upon to make a discretionary assessment in the light of the principles of competition and the values of the social market economy in order to achieve European objectives. This is a power that cannot be delegated to any other body.23 Review by the (European and national) courts is, in fact, exclusively a review of legality aimed at contributing to the application of the State aid framework and never at cooperating in the assessment of the compatibility of aid with the European system. It is thus clear that control of compatibility is a prerogative of the Commission, whereas the control of legality is widespread and multi-level. The control on the compatibility of the aid with the Treaty system originated as a prior control—that is to say it is to be carried out before the measure is introduced. Certain administrative bodies now intervene in the phase preceding the notification of the planned aid in order to check whether the notification is regular and the rules complete. The system has thus ensured greater transparency and cooperation.24 The exceptions to the principle of prior control concern cases of aid granted without prior authorisation which are regulated in general acts. In such cases, the compatibility of the aid was checked on the basis of a general hypothetical case (rather than a concrete case), thus defining the content and limits of the permitted aid, which were then transposed into a general regulation. These acts express the choices made upstream by the European Commission and legitimised by the Council in relation to certain categories of aid. If aid is introduced without prior authorisation or in a form other than that authorised, this constitutes unlawful aid or misused aid. Such aid will be subject to subsequent checks and a possible recovery order, which may also be issued by national courts.

22

See Nicolaides (2002), p. 240. See Quattrocchi (2020), p. 305. 24 See Verouden (2015), p. 459. 23

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The Control of Compatibility by the European Commission

The quintessential control procedure is that for new aid or aid newly introduced to the market. In such cases, the planned aid that the State intends to introduce is submitted to the European Commission. Article 108 TFEU regulates the control procedure of new State aid, the implementing rules of which are now laid down in Council Regulation (EU) 2015/ 1589 of 13 July 2015.25 It is worth pointing out the well-known established principles that newly created aid must be notified to the European Commission and cannot be implemented before the Commission has formally authorised it (‘the standstill clause’). Once the internal procedures in each State have been completed, the new aid is notified to the European Commission, which will carry out a preliminary examination, to be completed within 2 months. Preliminary examination is a summary stage that concludes with a decision based on the information provided by the State. This phase is not transparent and the participation of third parties is only optional. The aim is to resolve all the simpler issues and refer more complex ones to a more structured procedure. It thus allows, in accordance with the principle of effectiveness, certain clearly compatible cases to be applied immediately in the Member State without a complex and detailed verification procedure and without additional burdens on the State. At the end of the preliminary examination, the Commission may decide that: • the measure thus does not constitute aid; • the measure constitutes aid compatible with the market, specifying what derogation under Article 107(2) and (3) TFEU has been applied; • it is necessary to initiate a formal investigation procedure. The formal investigation procedure is the phase in which the nature and structure of the aid is analysed in detail and the implications for the market and competition are carefully assessed. At that stage, the Member State and all concerned parties (undertakings and associations of undertakings) are invited to submit observations within a prescribed time limit, and the Commission may, if it considers it necessary, request additional information from the State. This is a stage in which the rights of the defence are protected, and which is conducted in a transparent and proportionate manner.

25

Formerly, Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty.

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At the end of the formal investigation the Commission may take either a positive, a negative or a conditional decision.26 The positive decision declares the aid compatible with the internal market and specifies which derogation was applied. A negative decision finds the aid not compatible with the market and does not authorise its being put into effect. The conditional decision makes a positive decision attaching conditions subject to which aid may be considered compatible. The other control procedures are very close to the latter, which act as a general framework for the Commission’s control system. Unlawful aid is aid put into effect without prior notification to or approval by the European Commission. The control of such aid is carried out either on the initiative of the Commission (which constantly acquires information and monitors the application of the State aid framework) or following a complaint from a concerned party. Also at this stage, a preliminary verification is carried out after which the formal investigation procedure may be initiated. At that stage, the Commission may request information from the Member State concerned, other Member States, undertakings or associations of undertakings. In the course of this procedure, the Commission may issue an injunction to the Member State aimed at obtaining information, suspending the aid, or provisionally recovering the aid. The latter occurs in specific cases.27 The formal investigation procedure concludes with a negative, positive or conditional decision. The negative decision is to be accompanied by a recovery decision requiring the Member State concerned to take all necessary measures to recover the aid from the beneficiary. Recovery will then be carried out within the Member State, as will be analysed below. The control of misuse of aid (i.e. aid put into effect in a manner other than that authorised by the European Commission) follows essentially the same procedure as for unlawful aid. After a preliminary examination, the European Commission may open the formal investigation, which must conclude with a positive, negative or conditional decision. In this case too, the incompatible aid may be ordered to be recovered. The control of existing aid concerns aid that does not technically qualify as new aid because it is already applied on the market.

26

Article 9, Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (codification). 27 See Article 13, Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (codification).

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However, existing aid may become new aid when it takes on specific innovative features. If the Commission considers that the existing aid in question is no longer compatible with the internal market, it will inform the Member State and allow it time to submit its observations. If the Commission considers that the aid is not compatible with the market, it will issue a recommendation proposing to amend the scheme or abolish the aid. If the Member State does not comply with those measures, the European Commission will initiate a formal investigation procedure which may result in a positive, negative or conditional decision. Again, the negative decision and the recovery obligation must be enforced by and in the Member States.

5.2.2

Review of Legality by the Courts. Cooperation Between the Courts and the European Bodies

The evolution of the State aid framework has resulted in the so-called diffuse and multilevel control which can also be carried out by the courts. This concerns a review of legality aimed at verifying compliance with the rules, during which aid may be classified as unlawful or misused (but never permitted). Appeals against decisions of the European Commission can be brought before the General Court and the Court of Justice. On this occasion, the European Courts carry out a review of the legality of the Commission’s decision, checking the formal legal correctness of the classification of the State aid and the adequacy of the evidence. In such cases, the examination by the General Court and the Court of Justice is part of a European procedure which follows the Commission’s decision. This control is now also entrusted to the national courts, whose powers have been more clearly specified in Communications from the European Commission in the context of the general powers to protect rights.28 The Commission has supported and encouraged control by national courts as an extremely important instrument in the European project.29 In fact, it has been pointed out that proceedings before national courts make it possible to resolve and deal with many problems relating to the application of State aid at State level. National courts can, in fact, offer very effective tools for the implementation of the aid framework and contribute significantly to its effectiveness.

28

See Commission notice on the enforcement of State aid law by national courts (2009/C 85/01); formerly, Notice on cooperation between national courts and the Commission in the State aid field (95/C 312/07) of 23 November 1995. 29 See Heimler (2018), p. 75.

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The national court is called upon to assess the unlawfulness of State aid at the request of a competitor or a third party in the context of its general competence to protect European rights.30 In that regard, recourse may be had to the national courts in order to claim that a State aid has been introduced without complying with the obligation of prior notification to, and authorisation by, the Commission. In such cases, the national court is called upon to review the legality of the aid in relation to compliance with Article 108(3) TFEU. As has been pointed out at several junctures, this Article has direct effect and can be the basis for claims by individuals in the Member State. On the basis of that provision, the national court may: • suspend the unlawful aid; • recover the unlawful aid together with interest; • take interim measures to preserve the rights of individuals. In such actions, national courts may ask the European institutions for assistance. To that end, it is always possible to make a reference for a preliminary ruling to the Court of Justice under Article 267 TFEU in order to obtain a decision interpreting a point of law. Likewise, the courts may ask the European Commission for assistance in this matter pursuant to the principle of effectiveness and the duty of sincere cooperation laid down in Article 4 TEU.31 The national court may request the European Commission for: • information on a specific pending procedure; • the transmission of documents in its possession which are not covered by the obligation of professional secrecy; • an opinion on the application of State aid rules. In particular, the opinion may cover several issues, such as, by way of example: • whether a measure is State aid; • whether a measure may be covered by an Exemption Regulation; • whether a specific requirement can be identified in the present case such as to constitute prohibited aid. The opinion can never concern the compatibility of the aid with the market since this is an exclusive competence of the European Commission which—as stated at several points—cannot be exercised by national courts.

30

Commission notice on the enforcement of State aid law by national courts (2009/C 85/01), Section 2 and ff. 31 See Law No 234 of 24 December 2012 on the participation of Italy in the formation and implementation of European Union policy regulations; Articles 44 et seq. thereof regulate State aid.

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National Obligations Prior to Notification of the Aid. The Italian Experience

The various Member States, implementing the European aid framework, have adopted specific procedures aimed at assisting at the prior control stage.32 A specific Law on the implementation of European regulations and policies was introduced in Italy, which among other things regulates aid matters. This Law draws a distinction between obligations prior to the notification of the aid and obligations after the European Commission’s recovery decision. These obligations concern both the State and Territorial Entities. In particular, it requires that the central or territorial Administrative Entities which intend to put into effect State aid subject to notification must communicate it in advance to the Presidenza del Consiglio dei Ministri—Dipartimento delle politiche europee (the Department for European Policies of the Office of the President of the Council of Ministers). The Department is responsible for checking the completeness of the documentation contained in the notification and for forwarding it to the European Commission.33 In order to contribute to the correct implementation of the State aid framework, ensuring transparency and publicity, the Registro nazionale degli aiuti di Stato (National State Aid Register) has been set up in Italy.34 This is a public document, accessible to all, which contains, for the Italian State, data relating to: • • • •

aid notified pursuant to Article 107 TFEU; aid exempted from the notification requirement; de minimis aid aid which must be recovered.

The purpose of this document is to allow the State authorities and all third parties in general to ascertain the subjects that are the beneficiaries of aid in the Italian State. This action is part of the ‘Common Understanding’ protocol signed on 3 June 2016 between the European Commission and the Italian State in order to facilitate the process of modernisation of aid in the national territory, strengthening the collaboration between the Commission, the Italian State and national Authorities. This protocol established the need to improve the level of national administrative systems responsible for implementing European rules, both by encouraging coordination between Italy and Europe and by guaranteeing the possibility for everyone to carry out checks on the aid granted. 32

See Heimler (2018), p. 75. See DPCM (Decree of the President of the Council of Ministers or Prime Ministerial Decree) of 24 January 2017. 34 See Article 52, of Law No 234 of 24 December 2012; Decreto Ministeriale (Ministerial Decree) No 115 of 31 May 2017. 33

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5.2.4

231

Monitoring Fiscal Aid. Problematic Issues

The principle of prior control is now established in the various Member States and is easy to implement in most legal fields. Where taxation is concerned, the principle in question encounters various problematic aspects that make its implementation complicated. The first reason is the difficulty of identifying fiscal aid which, for various reasons, concerns both models of fiscal aid, that is to say aid in the traditional sense and aid as unfair tax competition. With regard to fiscal aid in the context of the traditional way in which State aid is put into effect, as has been repeatedly stated, that it tends to be in the form of tax concessions, i.e., provisions which remove or alleviate the tax burden in order to achieve certain objectives of an economic, social or constitutional nature. This has been the thinking in the national legal system with reference to tax matters but may be generally applied to the tax systems of any Member State. Tax law makes systematic and generalised use of concessions, which are a typical instrument of tax policy. In that regard, national tax concessions are many and varied. Clearly, prior notification, with its consequent need to for authorisation, is unworkable for all the different types of tax benefits introduced or adjusted in the tax system. The legislator, in fact, constantly defines tax concessions as part of a tax policy that has the characteristics of continuity and must be applied immediately in order to pursue its objectives effectively and immediately. In this context, national Governments are encouraged to notify the concessions that are most likely to conflict with European law, leaving aside all other cases. This choice represents a substantial acceptance of risk for many other cases that will not be subject to notification. It should also be noted that the notification and waiting times of the authorisations entail a postponement of the entry into force of certain rules with a number of repercussions on the annual tax burden of the various taxpayers and on the revenue acquired by the State. It is therefore clear that the system of prior notification works for the financing paid by the State to companies in the various legal fields, but is inadequate for a matter (such as taxation) that uses selectiveness and exemptions as a matter of course.35 This is all the more so for cases that constitute unfair tax competition. As the analysis in the preceding chapters shows, it is difficult to recognise fiscal aid in such situations. If the fiscal aid has a statutory origin (i.e. it is based on legal provisions) it may be extremely difficult to demonstrate selectivity.

35

See Di Pietro (2015), p. 220.

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Both the territorial selectivity test and the material selectivity test (in law and in fact) take on extremely technical features in the field of taxation, calling for legal and economic knowledge. The situation becomes more complicated in the case of tax rulings, where the investigation into the nature of prohibited aid is already extremely complicated for the European Commission itself. In tax matters, the risk of not carrying out prior notification is still very high because of the difficulty of recognising prohibited aid. This is made worse by the European Commission’s approach, which continually broadens the scope of the concept of aid itself. The same difficulties are also encountered where national courts find aid to have been unlawful. Given the complexity of the assessment and the impact that a possible recovery decision would have on the overall tax system, there is a tendency for national courts to request preliminary rulings from the Court of Justice in order to obtain an interpretative decision. This clearly means it all takes longer, leading to legal uncertainty over the application of certain provisions and any appeals before a European court.

5.3

Recovery of State Aid. General Principles

The possibility of following up a negative decision with a recovery order has never been provided for in the successive versions of the European Treaties. However, the Court of Justice has elaborated this obligation since its first judgments on State aid, considering it necessary for the proper rebalancing of the market and competition.36 Indeed, recovery makes it possible to restore the situation of the market prior to the granting of the same aid. In that regard, recovery is not a sanction and is not intended to affect or punish the beneficiary, but is merely the logical consequence of the granting of incompatible aid. This is the rationale underpinning the recovery decision and justifying, as will be seen, substantial inflexibility on the part of the European Commission in its disposition and implementation. The second principle that has been gradually elaborated by way of interpretation establishes that responsibility for carrying out recovery lies with the Member States, in accordance with procedural autonomy.37

36

See Judgment of the Court of Justice of 12 July 2000, C-70/72, European Commission v Federal Republic of Germany. 37 See Commission communication of 24 November1983, C-318, State aids (Articles 92 to 94 of the EEC Treaty), Notice pursuant to the first subparagraph of Article 93 (2) of the EEC Treaty to

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In 1999, those principles were formalised in Regulation No 659/1999 of 22 March 1999. Currently, recovery of State aid is governed by Article 16 of Regulation 2015/1589 of 13 July 2005. According to it: • the aid must always be recovered unless recovery is contrary to a general principle; • the aid is to be recovered including interest; • recovery must be effected in the Member State in accordance with national procedures which must allow the immediate and effective execution of the Commission’s decision. In light of these developments, it is considered that recovery of aid is not a discretionary act for the Commission; the Commission is obliged to require it in all cases where it takes a negative decision in pursuit of protecting competition in the market. Recovery therefore consists of two aspects: • the recovery decision issued by the European Commission; • the obligation of the Member State to enforce the decision, using procedures that ensure effective recovery. Recovery thus consists of a complex procedure characterised by a succession of acts of the European Union and the Member State in accordance with defined competences. The European Commission orders the recovery of the aid and the State has to execute it through national procedures. Recovery therefore becomes a predominantly national matter while only the source of the obligation is European. Recovery is the most complex stage of the State aid framework and has been the subject of several generations of regulation in the Member States. In the Italian State, as shall be seen, there has been significant development in the internal rules on the matter.

5.3.1

The European Commission Recovery Order

The recovery order is issued by the European Commission at the end of the formal investigation procedure in cases where the aid is found to be incompatible. Recovery is an act of due process and does not require to be reasoned.

interested parties, other than the Member States, regarding a proposal by the Kingdom of the Netherlands to assist the cotton, rayon, linen and jute industry, the wool industry, the ribbon, tape, belting and webbing industry, and the ready-made clothing and knitwear industry.

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Recovery may also be ordered provisionally by injunction in the course of proceedings where the following circumstances exist:38 • according to established practice, there are no doubts as to the incompatibility of the aid; • the situation is urgent; • there is a serious risk of irreparable damage to a competitor. The recovery order is contained in a European decision, which is immediately enforceable and binding in its entirety. That decision is supported by a ‘presumption of lawfulness’ in that it remains binding also while proceedings before the Union’s General Court are pending. There were some doubts about the direct effect of the Commission’s decision in national legal systems when the rules were first implemented in view of the fact that the decision in question emanated from the Union’s administrative body. This was also a source of debate in Italy. The Court of Justice has always upheld the direct effect of European Commission decisions in national legal systems. In Italy, the direct effect of the decisions of the Commission was part of the debate aimed at the recognition of the primacy and effectiveness of Community law as part of the path towards European legal integration. In that context, the pooling of sovereignty by the Italian State with the European Union has led to a substantial acceptance of the different sources and the implementation of law originating at Community level.39 The decisions of the European Commission have been recognised as administrative acts with immediate and binding effects in the national legal system in accordance with their recognised function in the European context. Such decisions have a legislative content and require all branches of national (administrative and judicial) bodies to disapply any incompatible national provisions by virtue of the general principles of the primacy of EU law and direct effect. Commission decisions impose an obligation on the Member State concerned to implement their contents and to recover the aid from the beneficiaries; more specifically, all State bodies are required to take the necessary measures to ensure the immediate and effective execution of the Commission’s decisions in accordance with the procedures laid down by the Member State.

38

See Article 13 of Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (codification). 39 See decision of the Corte Costituzionale (Constitutional Court) No 389, 11 July 1989. See Gallo (2003), p. 2282; Cipolla (2015), p. 134.

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Recovery Decisions in the Field of Taxation. Problematic Issues

The decisions of the European Commission, while by their nature having direct effect, are not always directly applicable in the Member States. In other words, in some cases these decisions, while setting out general principles with direct effect, cannot be applied without prior analysis and assessment of the concrete case. This situation occurs frequently in the field of taxation. Because of the complexity of tax cases, national assessments are often necessary in order to: • identify the beneficiaries who have to repay the aid; • determine the amount that is actually to be repaid. These are complex matters which help to draw a further distinction between fiscal and other aid. While recovering aid granted by the State is essentially a simple operation, recovering aid from which the taxpayer has benefited when settling their taxes is a technical and complex operation. In this regard, the European Commission spelled out some general principles in a recent 2019 Communication.40 There is a requirement that the Member State must identify the subjects that have benefited from the incompatible aid and proceed to recover it. The Member State is obliged to re-establish the status quo ante by re-establishing the situation which would have prevailed if the taxes had been paid absent the aid. In such an investigation, it is irrelevant whether the taxpayer has fraudulently benefited from the aid since the State must focus on the timely recovery of the aid.41 Several problems have arisen, including in Italy, regarding that requirement concerning quantification. Determining a level of taxation in the past means reconstructing the tax base in the absence of the prohibited aid, taking into account all the factual or legal situations that would have affected that determination. This entails assessing the possibility of using other tax concessions (which were not used at the time because the aid was used) or of identifying other business choices for the undertaking which were discarded at the time because the aid was benefitted from. The European Commission and the Court of Justice have ruled in this regard that the Member State must recalculate the amount of tax due minus the incompatible aid.

40

See Commission Notice on the recovery of unlawful and incompatible State aid (2019/C 247/01), paras 4.3.3; 4.4.1. 41 See Judgment of the Court of 14 July 2011, C-303/09, Commission v Italian Republic.

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This tax must be based on choices made in the past, to which no changes or modifications are allowed. In other words, hypothetical choices that would have been available if the aid had not been used cannot be taken into account. It is however possible to use concessions that were already available at the time of the initial determination of taxes.42 The transactions in question require specific assessments that prove complex, since they have to reconstruct an economic situation that took place many years earlier and have to derogate from the general national principles on time limits for tax assessment. These difficulties have also occurred in Italy, where a judgment on failure to fulfil obligations by the Court of Justice has reaffirmed the above principles.43 The recent Communication from the European Commission, ignoring the above difficult matters, reiterated the general principles on the subject. It was thus held that domestic tax audits may be allowed to determine the amount of tax due provided that: • they give rise to recovery within the time limit laid down; • they meet the general criteria laid down in the European Commission Decision.

5.3.3

Exceptions to the Recovery Order

On the basis of the current regulatory framework44 and established guidelines of the European Commission45 recovery is not to take place if it is contrary to a general principle of EU law. The decision not to carry out recovery is an exclusively European competence and can be used only in cases where there has been an infringement of general EU principles recognised by the Court of Justice or enshrined in the Treaty, which are of an undisputed fundamental and primary nature in the Union’s legal system. Those principles have recently been set out in a Commission Communication, which reiterates that they should be interpreted restrictively with a view to enabling an effective State aid recovery policy.46

42 See Judgment of the Court of Justice of 15 December 2005, C-184/04, Unicredito italiano spa v Agenzia delle Entrate; Commission Notice on the recovery of unlawful and incompatible State aid (2019/C 247/01), para 4.4.1. 43 See Judgment of the Court of 14 July 2011, C-303/09, European Commission v Italian Republic. 44 See Article 16 of Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (codification). 45 See Commission Notice on the recovery of unlawful and incompatible State aid (2019/C 247/01). 46 See para. 2.4 of Commission Notice on the recovery of unlawful and incompatible State aid (2019/C 247/01).

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The abovementioned Communication analyses the most important principles of the State aid framework which are identified as follows: • • • • •

legal certainty; the protection of legitimate expectations; res judicata; impossibility to recover the aid; limitation period.

However, this is an illustrative and non-exhaustive list of principles; it is therefore considered that all general European principles could be applied under the same conditions. The guidance provided on these principles shows a tendency for the Commission not to uphold such cases. The Communication, in fact, highlights mainly negative cases, that is, cases in which the principles in question cannot be invoked, and never cases in which the same principles may be admitted, leaving them open to interpretation. This is representative of a general approach aimed at an unconditional recovery of the aid. With regard to legal certainty, it was made clear that this cannot refer to the need to defend national rules that conflict with European rules or to support national procedures or provisions which preclude recovery. European law, in fact, always takes precedence over national (substantive and procedural) rules which must not be applied if they are incompatible. Above all, the principle of legal certainty is recognised as being the corollary of the principle of legitimate expectations, which, itself, is a manifestation of legal certainty. In the context of the State aid framework, what matters is the legitimate expectation created by the European (rather than the national) institutions, which occurs where those institutions have given rise to well-founded expectations as to the lawfulness of the aid. Here, too, the Commission specifies the cases in which legitimate expectations cannot be invoked, leaving it to others to argue the opposite may be the case. An important precedent of the Court of Justice allows to make clear that such an argument can be raised in cases where the European Commission revokes a decision authorising aid.47 The European Commission also has the power to revoke its decisions, changing its opinion in relation to previously authorised aid. In such cases, the beneficiary may rely on its legitimate expectations vis-à-vis the European bodies which have given rise to them on the basis that the aid was compatible.

47

See Judgment of the Court of Justice (Second Chamber) of 22 June 2006, C-182/03 and C-217/ 03; European Commission v Kingdom of Belgium.

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On the other hand, it has been made clear (and essentially now accepted at national level) that no legitimate expectation can be entertained by beneficiary undertakings vis-à-vis the national bodies which planned or granted the prohibited aid. In fact, the view that each beneficiary is responsible for verifying the legality of the procedure for setting up and disbursing the aid at national level is confirmed, and no reliance may be placed on incompatible aid or unlawful procedures. Similarly, the principle of res judicata cannot be invoked against a national judgment which infringes the State aid framework. That principle, which has already been referred to in some important interpretative precedents, is also fully confirmed with regard to the field of aid. The European approach recognises the general effectiveness of the principle of res judicata; this effectiveness is absent in cases where the final judgment is in conflict with Community law. In such cases, that judgment is bound to make way in favour of the correct application of European law.48 As regards the limitation period, it should be noted that this precludes recovery only where the aid was awarded 10 years before the first intervention of the European Commission, and in particular the limitation period may be interrupted by any action taken by the Commission or the Member State. The absolute impossibility of recovering the aid is the only ground that may be relied upon by the Member State, which must prove the existence of situations precluding total or partial recovery. Such situations cannot be of a general nature, but must be substantiated. Those grounds cannot rely on political or social unrest which recovery would cause in the State or in the absence of internal rules for the recovery of the aid, since the Member State has a legal obligation to identify and take all measures to implement the Commission’s decision.49 It should also be noted that the above reasons cannot be invoked against beneficiaries that are in precarious economic circumstances; recovery must be implemented including against companies in crisis or in a state of bankruptcy. The Commission will accept such a reason only when recovery is impossible where the beneficiary has already ceased to exist, without any legal and economic successor. 48

See Judgment of the Court of Justice (Grand Chamber) of 18 July 2007, C-119/05, Ministero dell’industria v Lucchini S.P.A.; Judgment of the Court of Justice (Second Chamber) of 3 September 2009, C-2/08, Agenzia delle entrate v Fallimento Olimpic club; Judgment of the Court of Justice (Fourth Chamber) of 22 December 2010, C-507/08, European Commission v Slovak Republic; Judgment of the Court of First Instance of 11 July 2018, T-185/15, Buonotourist v European Commission; Judgment of the Court of Justice (Ninth Chamber) of 4 March 2020, C-586/18, Buonotourist v European Commission. See Fransoni (2015), p. 145. 49 See Judgment of the Court of Justice (Second Chamber) of 20 September 2007, C-177/06, European Commission v Kingdom of Spain. Judgment of the Court of Justice (Second Chamber) of 13 November 2008, C-214/07, Commission v France; Judgment of the Court of Justice of 5 May 2011, C-305/09, Commission v Italy; Judgment of the Court of Justice of 14 July 2011, C-303/09, European Commission v Italian Republic.

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To that end, the principle of economic continuity has been developed, which requires the Member State to recover the aid also from the entities to which the activity has been transferred.50 This obligation ceases only when the activity no longer exists objectively or subjectively.

5.3.4

National Procedures for the Recovery of State Aid. General Background

The recovery of aid is an administrative process delegated to the Member States, to be implemented in accordance with European guidelines. The general principle with which implementation must comply, as noted at several points previously, is that of procedural autonomy, according to which procedures must be in line with the values of equivalence and effectiveness stricto sensu. The principle of equivalence—in its practical application—makes it possible to find the procedure that the Member State deploys for the protection of Europeanderived rights on the basis of the general criterion that the procedure existing in the same Member State for the national legal right must be equivalent to the European one. In view of the fact that there were no national procedures for the recovery of aid in the various Member States, as this was a typical European situation, the principle of equivalence could not be applied as a matter of course. Thus, the Member States in most cases put in place administrative arrangements especially for the recovery of such aid. This thus led to different approaches. Sometimes, general schemes have been put in place for the recovery of all State aid, irrespective of the legal context in which it was paid. In some cases, however, recovery procedures were applied on a case-by-case basis according to the specific circumstances of each case. In yet other cases, procedures for the recovery of State aid have been regulated in a general way with different rules depending on the legal issues involved. Those different options are all possible and compatible with the European system. The European-level condition, as pointed out several times already, is represented by the alignment with the principle of procedural autonomy, which calls for recovery to actually take place in accordance with the relevant Commission decision. The importance of State aid has led Member States to adopt certain options and then to modify them on the basis of actual experience, gradually correcting the inconsistencies and inefficiencies of previous options.

50

See Judgment of the Court of First Instance (Fifth Chamber, Extended Composition) of 29 June 2000, T-234/95, DSG Dradenauer Stahlgesellschaft mbH v Federal Republic of Germany; Commission Notice on the recovery of unlawful and incompatible State aid (2019/C 247/01).

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In that regard, the Italian experience in the field of taxation, which is about to be analysed next, is very much representative of this trend.

5.3.5

National Procedures for the Recovery of Fiscal Aid. The Italian Experience

The general question concerning the procedures to be used for the recovery of State aid in the Italian legal system has gone through various historical stages, which are well defined in the fiscal legal framework, where the subject of aid has been of central importance, in view of the numerous cases that have been recorded in recent years. In general, it could be said that there have been three stages: • the natural provision of ad hoc regulations on the recovery of State aid; • the introduction of a set of rules into the tax proceedings, which suggested that there was an element of ‘stabilisation’ taking place; • the introduction of Law No 234 of 24 December 2012, which has completely reformulated the subject by providing for a general procedure for the recovery of State aid under Chapter VIII. Thus, at one time or another, the various possible general options referred to in the preceding section were put into effect. During the first stage, which lasted until 2006, the experience of aid recovery in the tax system showed that there was uncertainty over the procedures to be used; these uncertainties arose, in particular, over disputes about the nature of the sums to be repaid. The position that had the most support at that time was the one recognising the significance in fiscal terms of the duty to recover the aid and the nature as a tax of the sum to be repaid. That general definition would have ceased to apply if the Member State had established a procedure for repayment through an ad hoc measure attributing responsibility for the recovery to entities other than the administrative and judicial bodies responsible for deciding issues relating to taxation. At the national level, therefore, many and varied types of procedure have been provided for, with the legislator each time adopting the solution that appeared most appropriate according to the type of sums to be recovered. This was also necessary because the existence of the ten-year period within which the European Commission could order the recovery of the unlawful aid had made the national assessment procedures unusable, as the time limits (provided for in the rules governing the individual taxes) had expired. The second stage began in 2006, following the formal recognition of the competence of the Agenzia delle Entrate (the Italian tax authority) to recover State aid, with

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the use of ordinary assessment and collection procedures in the context of certain particular cases of fiscal State aid. This included the recovery of aid granted to former municipal undertakings. This arrangement was confirmed by Law No 101 of 6 June 2008, which introduced special rules for civil and tax court judgments regarding the recovery of State aid, definitively enabling both types of courts to deal with the matter in the ordinary way. It was thus deemed that there had been an undoubted ‘stabilisation’ of the situation from this point on. This arrangement has also been confirmed by the national Constitutional Court. This express regulation on tax jurisdiction has led to the recognition that the Tax Agencies are responsible for the recovery of fiscal aid and, where there is a dispute, that the Tax Commissions have jurisdiction. In general, therefore, the need to recover fiscal aid in accordance with the Community principle of effectiveness had led typically to choosing tax-related procedures and acts and to involving bodies, such as the Tax Authorities and Tax Commissions, which are responsible according to the national legal system for determining tax matters. In any event, under the European framework, national judicial cases could only concern disputes over the formal or substantive aspects of the recovery order of the European Commission. The aforementioned Law (No 101 of 6 June 2008) expressly regulated the procedures for suspending acts aimed at recovering State aid and settling the relevant disputes (Article 47bis, Legislative Decree No 546 of 31 December 1992). The choice was therefore made in favour of having a general framework for the recovery of State aid which differs according to the field within which the aid was granted. Thus, within each individual field, the general procedures would be used with some specific provisions introduced at that stage. The provisions that supported the latter system were repealed by the Law on Italy’s participation in the formation and implementation of European Union policy regulations (Law No 234 of 24 December 2012), whereby, under Chapter VIII, it reformed the national framework on State aid, launching the third stage of this process. The Law noted the importance of the State aid issue and revised the whole question. To that end, it provided for information and cooperation obligations, reformed the recovery procedure and established exclusive jurisdiction in State aid matters.

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5 The Implementation of the State Aid Framework and the Protection of Rights. . .

The National Procedure for Recovery of Incompatible aid (Cont’d). The Specific Nature of Tax Matter

The Law on Italy’s participation in the creation and implementation of European Union policy regulations (Law No 234 of 24 December 2012) devotes an entire chapter to State aid, implementing the objective of introducing a comprehensive framework of rules on the matter at national level. The most important and innovative aspect of that Law, however, is that it laid down a general procedure for the recovery of aid. The principle which governs the entire body of rules is that of the unicity of the concept of State aid, a European principle which is unquestionably inferred from the Treaty, from which also follows the unicity of the procedural rules and provision for exclusive jurisdiction on the matter. The general scheme provides that, following a European Commission recovery decision, the Italian minister responsible for the matter must issue a decree within 2 months51 in which are identified: • • • •

those liable to repay the aid; the amounts due; the methods for repayment; payment deadlines.

In the event that more than one Administrative Entity is involved in the payment of the aid, the President of the Council of Ministers is to appoint an Extraordinary Commissioner by decree within 15 days and is to lay down the detailed rules for the recovery of the aid. The Extraordinary Commissioner must issue a decree containing the foregoing elements within 45 days. The decree of the Minister or the Extraordinary Commissioner is enforceable against the parties concerned. In that context, the Law empowers the Agenzia delle Entrate (the Italian Tax Authority) to make the subsequent recovery of the amounts due. That Authority is thus responsible for concluding the procedure by collecting the relevant amounts from the beneficiaries in a timely manner. If the aid has been granted by a territorial Authority, the Region, Autonomous Province or Local Entity is responsible for issuing the order meeting the above requirements while collection of the amounts due is entrusted to the local authority normally responsible for local collections. The aforementioned Authorities, in agreement with the Presidency of the Council of Ministers (Department for European Policies), are required to respond to requests from the European Commission for information on recovery procedures.

51

See Article 48, 49 and 50 of Law No 234 of 24 December 2012.

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Where tax matters are concerned, recovery decisions are to be implemented by way of a decree of the Ministry of Economy and Finance which is to provide for the manner and timing of repayment. This is certainly a coherent and effective step as it is thus the administrative body most competent on the subject which deals with tax-related matters. These decrees are of particular importance in tax matters. As already noted, in tax matters there are in fact no provisions granting tax concessions, since the latter are relied on by taxpayers individually when settling their taxes. The purpose of these decrees is therefore to determine the actual beneficiaries of the aid and the taxes they are required to repay.52 Experience shows that, in tax matters, the procedure cannot end with the service of a single recovery measure on the basis of the decree of the Ministry of Finance, since a further stage of investigation is necessary in order to ascertain the legal and factual conditions laid down by the Commission decision and by the national decree and to recalculate the taxes actually due.53 At this time, there are two extremely important general interests which must be protected and balanced: on the one hand, the restoration of competition and the market in accordance with European law and, on the other, the contribution to public expenditure in accordance with national constitutional principles. It is therefore not a question of recovering taxes but of recalculating what would have been paid without the aid, using all the substantive and procedural provisions laid down in the domestic system. The latter element also appears to be fundamental to the first, namely the restoration of competition and the market, which can only be effectively done if the taxes recovered are those properly due under the domestic tax system.54 The Authority will therefore have to quantify the amount to be recovered, applying the general parameters which the taxpayer has evaded in using the aid. Whereas in the other areas affected by the payment of incompatible aid there is an actual form of collection of the amounts due, in tax matters there is a stage where the conditions must be ascertained and the taxes determined, which makes the procedure much more complex.55 The Tax Authority is required to restore the European market in the context of contributing to national public expenditure. For those reasons, disputes frequently arise on those issues in which taxpayers challenge the application by the Tax Authorities of the European Commission’s decision.

52

See Di Pietro (2015), p. 225. See Quattrocchi (2020), p. 347, in particular with regard to the recovery of aid to undertakings located in the Abruzzo Region which have been affected by the 2009 earthquake. 54 See Di Pietro (2015), p. 225. 55 See Quattrocchi (2020), p. 348. 53

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5.3.7

5 The Implementation of the State Aid Framework and the Protection of Rights. . .

The Exclusive Jurisdiction of the Administrative Court (Cont’d). Problems in Taxation

Through Law No 234 of 24 December 2012, an important choice has been made regarding the jurisdiction of national disputes concerning State aid. The Regional Administrative Tribunal (Tribunale Amministrativo Regionale— TAR) has jurisdiction to adjudicate on: • acts and measures taken to implement a recovery decision of the European Commission; • disputes concerning acts and measures granting State aid in breach of European rules. As regards the first point, all disputes concerning acts which, in implementation of the Commission’s decision, order the general or individual recovery of State aid are referred to the TAR. The applicant may challenge the formal or substantive lawfulness of the procedure to implement the Commission’s recovery decision. Such disputes are subject to a specific shortened procedure56 which makes the handling of such disputes very fast pursuant to the European principle of effectiveness. As for the second point, the Regional Administrative Tribunal is responsible for disputes regarding aid that was not notified to the European Commission or aid that was applied contrary to the standstill clause; in those cases, the ordinary procedure is applied and the administrative court has jurisdiction to annul the measure, suspend it, order its recovery and determine the level of compensation for damage (where the measure has been challenged by a competitor which has suffered damage). This framework thus designates the administrative court as having jurisdiction in all disputes regarding State aid in the internal legal system both with regard to the beneficiaries (to contest recovery actions) and competitors (to challenge the lawfulness of the application of the measure within the State). In Italy, therefore, the intention was to implement a single State-wide jurisdiction in order to avoid the recovery of State aid being dealt with differently and on different timescales. This step has been much criticised, especially in the field of taxation57 where many problems over interpretation and implementation remain. The Law clarified all doubts by providing that disputes arising out of acts adopted pursuant to recovery decisions now fall within the jurisdiction of the administrative courts. The administrative court hears and determines cases relating to measures in the context of taxation that apply the decision of the European Commission. The administrative court ascertains whether the European decision corresponds 56

See article 119(3) of the Code of Administrative Procedure (Legislative Decree No 104 of 2 July 2010). 57 See Altieri (2013), p. 197.

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subjectively and objectively with the administrative act, as well as whether the amounts to be recovered are lawful and well founded and the calculation of the amount is itself correct. In such cases, the administrative court is undoubtedly the court with jurisdiction ex lege; many doubts arise, however, on the technical competence of this court in respect of tax matters since it will have to evaluate tax assessments measures (which are extremely technical in content) rather than recovery measures of the type applying in other matters. As regards the second category of disputes, the subject appears more complex and, according to some of the legal literature, the civil courts have some jurisdiction, and the tax courts also retain jurisdiction in part.58 The basic problem is that in tax matters it is not common to find that it is a measure which grants a benefit, but that the latter is always provided for by a legal provision and relied on by taxpayers. Any suspicions of incompatibility are therefore likely to arise in the first instance in pending tax disputes. Taxes are in fact paid periodically and disputes before the tax courts arise constantly. It is frequent, therefore, that in the course of such cases the compatibility of a tax advantage with European legislation may be questioned and the tax court required to assess the merits and, where necessary, request European assistance (by way of requesting an opinion of the European Commission or by making a reference for a preliminary ruling to the Court of Justice). In such cases, it is for the tax court to make its assessment and determination and, if necessary, order repayment of the aid. On the other hand, where it is alleged that Article 108(3) TFEU has been infringed by a party other than the taxpayer (for example, a competing undertaking), the courts with jurisdiction are deemed to be the ordinary courts, since there is no act or measure that could justify an action before the administrative courts. In fact, the legislation speaks of ‘acts and measures granting State aid contrary to European rules’; if there is no act or order, the matter cannot be referred to the administrative court. Any other view would run counter to the principles enshrined in the Italian Constitution that govern which courts have jurisdiction in relation to the legal rights affected. Although the legislator has conferred exclusive jurisdiction on the administrative courts, such jurisdiction is deemed not to be fully so because it is always necessary to observe the general criterion of subjective rights under the Italian Constitution. Proof of this may be found in the field of taxation where, as stated, there are still disputes which are heard and settled by other courts.

58 See Di Pietro (2015), p. 225; Fiorentino (2018), p. 278; Quattrocchi (2020), p. 369; Lembo (2019), p. 643.

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5 The Implementation of the State Aid Framework and the Protection of Rights. . .

The Protection of Third Parties. The Principle of Compensation for Damage

The evolution and progressive enlargement of the European State aid framework have been in pursuit of new areas of protection, especially in relation to the position of the various individuals involved in various ways in the legal field of incompatible or unlawful aid. In that context, the need has grown to confer protection on those who have suffered damage in relation to the granting of aid, a need already mentioned in the legal literature since the rules of State aid were first applied.59 This approach has since been endorsed by the European Commission, which has issued two communications expressing support for recognising claims for damages in the context of State aid.60 This debate was part of the general question of the importance of the principle of the compensation for damage under European law and its use in the State aid framework. The principle of the compensation for damage is considered a general European principle as it is common to the traditions of all Member States.61 At EU level, in confirmation of this approach, provision has also been made for actions for liability against the European Institutions for damage caused by unlawful acts or conduct.62 The need to make European law effective has thus provided support for significant interpretation which has followed two lines. The first was the recognition that a specific type of action for liability under European law may be brought against the Member State by persons affected by the failure to apply European law. Following this line has led to the gradual establishment of the principle that courts may adjudicate on infringements of European law by means of an action for liability brought in the Member States in accordance with the principle of procedural autonomy. The second line was the admission of various actions for non-contractual liability provided for in the legal systems of the Member States in cases where conditions arising from European law were met. That constitutes, for its part, a clear application of the principle of procedural autonomy. European protection of rights has thus been enriched by an important element that has made it possible in various ways to compensate for damage caused by non-application or the incorrect application of European law.

59

See Salberini (1969), p. 135; Hancher et al. (1993), passim. Notice on cooperation between national courts and the Commission in the State aid field (95/C 312/07); Commission notice on the enforcement of State aid law by national courts (2009/C 85/01). 61 See Judgment of the Court of Justice of 5 March 1996, C-46/93 and C-48/93, Brasserie du Pêcheur v Federal Republic of Germany. 62 See the second paragraph of Article 340 TFEU. 60

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Both abovementioned lines have been applied in the State aid framework.63 However, the application of the principle in question in the field of State aid brings with it extremely complex issues which will vary according to the two types of actions: actions for breach of Community obligations and actions for non-contractual liability according to national principles. Indeed, it is necessary that the action for damages should not nullify the recovery of the State aid, and thus become in turn a form of aid itself. In that regard, the action must be directed at making good the actual damage suffered by the applicants; such damage cannot be the mere competitive disadvantage suffered by the beneficiary’s competitors, since the recovery of the aid already takes account of that. Awarding damages to competitors when the beneficiary has repaid the aid could in fact create a situation which is itself harmful to competition. Similarly, were the State to award damages to the beneficiary, that could amount to a form of compensation for the aid recovered, which in turn would constitute a new distortion of the market. In the dynamics of State aid, the action aimed at rebalancing competition is the recovery of the aid and its effects can only be seen once it is completed. The need to maintain a competitive balance in the face of the effect of aid recovery lies at the heart of damages actions. Such assessments are linked to those related to the special nature of fiscal aid which does not make it possible to apply automatically the principles governing compensation. Taxation implies particular features that also impact the actions discussed here.

5.4.1

State Liability for Breach of Community Obligations in the State Aid Framework

Entitlement to compensation for any loss or damage suffered as a result of a Member State’s non-application or misapplication of European rules and the corresponding obligation of the Member State to make good the damage caused derives from the direct application of Article 4(3) TEU. That Article, as noted previously, contains the well-known principle of effectiveness (as well as of sincere cooperation), which is the basis of the obligation—on the part of the Member State—to do everything possible to implement European law.64 63

See Orlandi (2018), p. 396; Id. (2000), p. 971. The action in question, in fact, was created by way of interpretation in the context of the case law of the Court of Justice, which has held that the right to compensation for damage caused by a breach of a Community obligation has its source in the obligation of cooperation of the States. That obligation is also broadly understood to include the removal of the unlawful consequences of a breach of Community law. See, to that end, Judgment of the Court of Justice of 4 July 2000, C-424/ 1997, Haim v Kassenzahnärztliche Vereinigung Nordrhein; Judgment of the Court of Justice of

64

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Breach of this obligation, initially caused by the non-application or incorrect application of European rules of law, together with other conditions which will be analysed below, thus gives entitlement to compensation for the damage suffered as a result of such conduct. The conditions for establishing liability a breach of Community law are:65 • • • •

serious and manifest breach of a Community provision intended to confer rights; imputability of the breach to the Member State; determination of damage; existence of a causal link between the damage and the breach.

These conditions are determined at Community level and, where they are established, the injured party is entitled to compensation. The first condition is the non-application or incorrect application of a Community rule, together with the requirement that such a breach be serious and manifest. The serious and manifest breach attributable to the Member State must relate to the non-application or incorrect application of a Community provision intended to confer rights. The latter phrase—as clarified in the context of the case law of the Court of Justice—includes any European provisions that are characterised by having a clear and defined content, even if they are not directly applicable.66 It therefore includes provisions that are directly applicable and those that have direct effect. The non-implementation or incorrect implementation of the European provision must be classified as being serious and manifest. Those requirements are found in the existence of indicative signs, developed by the Court of Justice, which represent confirmation of a certain refusal on the part of national bodies to fulfil their obligations under Community law; moreover, it does not appear necessary (as the Court of Justice has also pointed out) for the Court itself to make a preliminary finding that the conduct of the national institution is contrary to Community law.67 The case law of the European Courts has identified indicative signs as being: the clarity and precision of the rule infringed, the binding nature of the power (which the infringed rule attributed to the national body), the inexcusable nature of the error of 19 November 1991, C-6/90 and C-9/90, Francovich v Italian Republic; Judgment of the Court of Justice of 5 March 1996, C-46/93 and C-48/93, Brasserie du Pêcheur v Federal Republic of Germany; Judgment of the Court of Justice of 26 March 1996, C-392/93, The Queen v British Telecommunications; Judgment of the Court of Justice of 23 May 1996, C-5/94, The Queen v Lomas; Judgment of the Court of Justice of 30 September 2003, C-4/01, Köbler v Republic of Austria; Judgment of the Court of Justice of 13 June 2006, C-173/03, Traghetti del Mediterraneo v Italian Republic; Judgment of the Court of Justice of 24 November 2011, C-379/10, European Commission v Italian Republic. 65 The conditions for an action for State liability arising out of an infringement of an EU law obligation as well as the rules governing such actions have been developed by the relevant case law of the Court of Justice. See the case law cited in the previous footnote. 66 See Tesauro (2012), p. 341. 67 See, in particular, Judgment of the Court of Justice of 5 March 1996, C-43/93 and C-48/93, Brasserie du Pêcheur.

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law, the intentional nature of the infringement or damage, the fact that no conduct on the part of the Community bodies contributed to the Member State’s act or omission.68 The infringement must be attributable to the Member State, as it relates to the Legislator, to the State apparatus (Public Administration or, in tax matters, the Financial Authority) or to the judiciary system. In particular, as may be deduced from the cases before the Court of Justice, the breaches in question can be found, so far as the legislative power is concerned, in the following circumstances: failure to implement a directive, implementation by the Legislator in a way contrary to the Community provisions, retention of legislative measures contrary to Community law, failure to adopt the necessary measures for the correct implementation of European obligations. As regards the judiciary, the infringement must be located in the erroneous application of or the failure to apply the Community law to the case before judges. With regard to the administrative power, on the other hand, the aforementioned infringement must take the form of an incorrect implementation of Community law or a failure to implement it by the State Administrative Authorities. The third prerequisite which must be demonstrated is damage. The only damage that may be compensated is certain and actual damage that the (injured) party proves to be a direct consequence of the Community infringement. According to the settled case law of the Court of Justice, both pecuniary damage and non-pecuniary damage, be it consequential damage or loss of profit, are to be regarded as being grounds for an action for damages.69 Finally, the causal link between the breach and the damage suffered by the injured party must be established. The conditions set out above are sufficient to give the injured party a right to compensation, since they constitute, according to the settled case law of the Court of Justice, the common basis for the rules (on non-contractual liability) of all the Member States. It should therefore be noted that the conditions for establishing liability may be less restrictive, but never more stringent than those. It should also be noted that, for the purposes of attributing liability, it is not necessary to ascertain the subjective element, consisting in the wilful misconduct or negligence of the agent. In the EU system, in fact, the subjective element is not of itself relevant and does not amount to an autonomous constituent element of liability. The subjective element is relevant to the extent that it represents an indicative sign in order to be able to decide whether the breach is serious and manifest. The

68

The indicative signs have been developed by European case law on actions for damages. In particular, Judgment of the Court of Justice of 5 March 1996, C-46/93 and C-48/93, Brasserie du Pêcheur v Federal Republic of Germany. 69 In particular, Judgment of the Court of Justice of 5 March 1996, C-46/93 and C-48/93, Brasserie du Pêcheur v Federal Republic of Germany.

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subjective element may be part of the assessment as to the existence of the non-contractual liability of the State only within those margins.70 Finally, Community law does not generally identify a national procedure for the protection of the right to compensation for breaches of Community law; that procedure is therefore also governed by the well-known principle of procedural autonomy. The European Commission has repeatedly pointed out that liability for damages may also arise in the event that loss or damage is caused by the infringement of the prohibition of State aid; this again is a situation in which the protection afforded by an action for damages is combined with that offered by the direct effect of the provisions in question, which in any case guarantee recovery of the aid and a restoration of the market situation existing before the aid was granted. The right to compensation for damages, including in relation to the infringement of the prohibition of State aid, exists where all the requirements indicated above are met. In the context of that framework, in particular, it has been pointed out that it is not unlawful or incompatible aid alone which may constitute a ground for liability; non-compliance with the standstill clause or failure to implement the recovery decision in good time may also constitute such grounds. The following parties may be entitled to claim compensation for damage or loss: third parties in general, competitors of those that have benefited from the aid (and therefore have sustained damage as a result of their unfavourable treatment), the beneficiary of the aid itself (that has suffered damage linked to the organisation of its activity, which was based on the belief that the aid received was lawful and reliable). Although it is necessary to ascertain all the elements, in particular whether there is a causal link between the breach and the damage, in the field of State aid it is deemed to be particularly straightforward to ascertain whether there has been a serious and manifest breach of a European provision intended to confer rights. In fact, there is a view that the obligation of prior notification and the standstill clause pursuant to Article 108(3) are to be considered extremely clear provisions, the violation of which by the State may be unequivocally deemed a serious breach.71 Although those principles have been clearly stated by the Commission on several occasions, there is no European Court of Justice case law on this point. The only case in which the application of this principle has been confirmed is the well-known Traghetti del Mediterraneo judgment, in which the national court was found to be liable for having ruled without assessing the fact that the same case was the subject of a European procedure before the Commission aimed at establishing whether certain sums paid were in the nature of aid.72

70

See, in those terms, Tesauro (2012), p. 347. Cfr. Orlandi (2018), passim; Grespan and Pelin (2016), p. 1489. 72 See Judgment of the Court of Justice (Grand Chamber) of 13 June 2006, C-173/03, Traghetti del Mediterraneo v Italian Republic. 71

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In that case, State liability (in respect of the judiciary) for breach of Community law was established since damage was caused by the erroneous application of European law by a court. That judgment unarguably confirms the fact that the non-application or misapplication of the State aid framework can incur the liability of the State.

5.4.2

State Liability in Fiscal Aid. Problematic Issues

As mentioned earlier, the obligation of prior notification and the standstill clause pursuant to Article 108(3) are to be considered extremely clear provisions, the violation of which by the State may be unequivocally deemed a serious breach.73 This assessment is evident in most State aid cases because such obligations are extremely well known following their dissemination and establishment in the European context. Fiscal aid, however, is a different matter, both because of its typical characteristics and because of the special features it has taken on in recent times. Fiscal aid, as mentioned previously, does not consist in the allocation of a sum but in not having to pay a contribution in a particular area (tax law) where the determination of taxes is in itself complex and there are structural provisions for alleviating the tax burden. The aid is therefore (in most cases) not ‘visible to the naked eye’. Added to that, the investigation into the nature of aid is in some cases very complex, especially as regards selectivity. As has been seen, many cases of aid have been classified as such after investigations and in-depth inquiries that have lasted for years and have also led to innovations for the Community system. The difficulty of recognising the aid and the technical nature of the investigation into its nature therefore make it extremely difficult to establish the liability of the State with regard to the obligation of prior notification. The latter could only be the case in the context of traditional tax advantages which have been granted without complying with the aid framework; however, this is currently difficult to ascertain in view of the various prior obligations which have been provided for. With regard to tax rulings which constitute a form of unfair tax competition, the problem could be posed in different terms and call for a form of State liability. In such cases, the State is infringing the State aid rules and is clearly fully aware that it is doing so. The fact, moreover, that the European Commission has for several years been monitoring tax rulings (as instruments for the possible payment of prohibited aid) makes the Member State liable for breaching its obligations to provide information

73

Cfr. Grespan and Pelin (2016), p. 1489.

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and prior notification when it enters into tax agreements with multinational companies. It cannot therefore be ruled out that, in the case of tax rulings which constitute prohibited aid, the State may incur liability towards the injured parties for having breached Community law. As shown by the various provisions in that field, even recovery in the context of taxation poses extreme complexity as it does not simply result in a mere restitution of amounts but requires an analytical quantification of the taxes that were not paid at the relevant time. The length of the recovery process is unlikely to constitute a serious and manifest infringement, being fully justified by the technical complexity and objective difficulty of the operation. As regards the possibility that the Tax Authorities or the courts may incur liability in this matter, the same assessments apply. Apart from the technical complexity of these cases, which is also a feature of the administrative implementation or judicial review of the case itself, it is considered absolutely normal for these bodies to adopt an attitude of extreme caution in ascertaining the nature of prohibited aid which may lead, in the event of doubts about compatibility, to request a ruling from the European Court of Justice. Disapplying a favourable tax scheme is in fact a step which entails disruptive and generalised effects; such a step must therefore take place with a certain degree of certainty as to the nature of the prohibited aid. Apart from outstanding cases, such as Traghetti del Mediterraneo (where the Italian court ignored the existence of an ongoing European procedure on the aid in question), holding the State liable for omission or misapplication of the aid framework is deemed to be a truly complicated matter in the field of taxation.

5.4.3

Non-contractual Liability Within the Aid Framework

The Court of Justice74 and the European Commission itself75 have repeatedly stated that the general principle of non-contractual liability applies to State aid, so that claims for damages by parties that have suffered damage as a result of the conduct of the recipient of the aid are admissible. In other words, it has been suggested that the beneficiary of the unlawful aid may be held to incur liability vis-à-vis competitors that have suffered damage as a result of its conduct. 74

See Judgment of the Court of Justice of 11 July 1996, C-39/94, SFEI v La Poste and Others; Judgment of the Court of 5 October 2006, C-368/04, Transalpine Olleitung v Finanzlandesdirektion für Tirol and Others. 75 See Notice on cooperation between national courts and the Commission in the State aid field (95/C 312/07) of 23 November 1995; Commission notice on the enforcement of State aid law by national courts (2009/C 85/01).

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The Court of Justice, in the wake of those statements of principle, considered whether the European rules on State aid imposed specific obligations on the beneficiary as regards the correctness of the procedure for granting the aid or a duty of care in relation to the use of the aid itself. The Court did not consider that there were such specific obligations on the beneficiary of the aid, but nevertheless pointed out that in certain circumstances an economic operator benefiting from unlawful or incompatible State aid could be held liable for the damage caused on the basis of national rules. The principles of compensation for damage caused are thus deemed to apply and that actions can be brought against the beneficiary. However, such actions will be governed exclusively by national law and such claims may therefore be upheld so far as they are proven in accordance with national law. Although the foregoing has substantial support at European institutional level, in this author’s opinion it is not consistent with the framework on State aid. The obligations relating to State aid are addressed to the State rather than to the individual citizen. The framework is intended for the State and it should therefore be liable for the breach if damage has resulted from it. The beneficiary of the aid is required to repay the aid and this, according to the overall aid framework, restores its position in relation to the market and to competition, repairing the previous distortion. The liability of the beneficiary should, in principle, be excluded. It should only arise in specific cases where the beneficiary of the aid has engaged in anti-competitive behaviour by contributing to the payment of the incompatible aid and thereby harming its competitors on the market. In such a case, the beneficiary has committed a tort or delict which has caused loss or damage to third parties. According to the legal literature, this offence is known as a competition offence and consists of conduct contrary to the European principles of competition that has caused damage unfairly. In tax matters, the possibility of finding cases of non-contractual liability runs into the problems indicated above: uncertainty in identifying them and procedural complexity. In general, therefore, the considerations set out above regarding acknowledgement of such liability apply here too. However, in all cases of fiscal aid that is classified as unfair tax competition and aggressive tax planning, where the taxpayers’ conduct has been particularly detrimental to competition and the market, it is deemed that there may be grounds for establishing such liability. As mentioned several times, tax rulings which are classified as State aid represent unquestionable anti-competitive conduct on the part of multinational companies which causes damage to the market and to competitors. It therefore cannot be ruled out that, where the facts of a particular case are assessed, there may be circumstances which give rise to liability under the law of the relevant State for an infringement of competition rules.

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5 The Implementation of the State Aid Framework and the Protection of Rights. . .

Concluding Remarks

The implementation and protection of rights in the field of State aid reflect a very complex historical and legislative path that has led to a significant and important system of justice in which European and national level competences are integrated. This is an ever-growing system designed to provide support in a field that has become extremely important within the European system. Implementation and protection thus define the effectiveness of the aid, i.e. the ability of the aid to be put into practice and to achieve its objectives. This approach confirms the special nature of fiscal aid, resulting in greater complexity of the implementation procedure, which in some cases fails to be effective and timely, defeating the objectives of the general framework.76 Despite constant interpretation by the European Commission and regulation by the Council, difficulties nevertheless remain because they are structural to the tax rules. At the preventive control stage, fiscal aid is difficult to detect because of the structural use of tax evasion mechanisms within the tax system and the technical complexity of identifying prohibited aid. However, the most complex issues arise in relation to the recovery phase. In fact, in the context of recovery, competition is only restored through a (subsequent) settlement of the taxes due by the undertaking in the tax period during which it used the incompatible aid. This means that the State is called upon to carry out complex checks in order to define the correct contribution to public expenditure of each taxpayer. This makes it very different from other fields, where recovery of the aid is effected by simply repaying the amounts received and thus restoring competition. In tax matters, by contrast, the aid forms part of the actual management of the tax relationship with taxpayers, which is of a periodic nature. In this sense, therefore, the recovery will be an ad personam affair, which will involve an ad hoc assessment of the individual tax bases. Difficulties also arise in respect of the protection of third parties. The only cases excluded from this consideration are those which relate to unfair tax competition and which, instead, could amount to liability of the State or of the taxpayer for having acted in a manner contrary to the interests of the market. Given the importance that fiscal aid has at present assumed in European policy, it is necessary to establish autonomous rules, justified by the specific nature of the subject and the significance of the interests involved. It is therefore necessary to recognise the autonomy of fiscal aid and the need to devise a regulatory system that will make the matter effectively viable in the European and national tax systems.

76

See De Pietro (2019), Chapter 11.

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Chapter 6

Final Conclusions

The development of Community policy has placed State aid at the centre of its action, giving it a progressive and decisive importance in the single market project. In fact, this subject has made it possible to lay down important guidelines for national and European economic policy, creating a fundamental synergy between the European Union and the Member States in the verification, selection and implementation of selective favourable schemes aimed at economic and social growth. The State aid framework has thus played a role providing European-level support in times of crisis and social emergency which has proved decisive in the most complex moments in recent times, such as during the economic crisis and the COVID-19 emergency. The importance of the State aid issue is linked to the balance of principles that defines its theoretical framework. The principles of economic liberalism and the principles of the social market economy are in fact destined to be combined according to the dynamic logic dictated by historical imperatives and by the needs of the market and by social emergencies. The governance of the field of fiscal aid by the European Commission (the executive body of the European Union) and the flexibility of the concepts on which the State aid framework is based (competition and market) have contributed to the development of a subject that has no effective limits but, rather, an inexhaustible potential to deal with the problems of the market, the States and the European Union. The importance acquired by State aid takes on particular connotations in the field of tax law, where it has taken on a centrality that was not foreseeable when the Treaty was first drafted. Fiscal legal integration has shown itself to be an important part of the European project and has come up against the limits of the Treaty and the resistance of the States to ceding important parts of their sovereignty. In that context, State aid has been the instrument that has made it possible to overcome regulatory and political constraints by carrying out a de facto harmonisation of fundamental aspects of taxation. © Springer International Publishing Switzerland and G.Giappichelli Editore 2022 R. Miceli, The Role of State Aid in the European Fiscal Integration, https://doi.org/10.1007/978-3-030-88735-3_6

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6 Final Conclusions

State aid has thus taken on general objectives, with the use of a body of rules that has combined European and national competences and has involved thereby bodies and institutions at both levels. In particular, with due reference to the discipline of the allowed State aids, which represent a category in exponential growth within the European project, it is possible to find a sound relation with the tax matter. The definition of such aids and their referability to fiscal themes have slowly given tax the character of an instrument of economic and social growth according to Community standards. Indeed, a modification of the fiscal function, as traditionally conceived within each Member States, has occurred. The fiscal function has acquired a promotional value that supports the principles of the social market economy and aims at overcoming social deficits through the policy of differentiation. This is a crucial step that defines a positive harmonization of favourable tax regimes, according to values shared by European Union and member States and on the basis of a regulatory technique based on natural convergence. In this sense, the policy of allowed fiscal aids becomes—for the reasons set out above—an instrument for strengthening national economies and for a more effective European integration. On the other hand, the path of prohibited fiscal aids has been different. The rules on prohibited aid have shown their own autonomous characteristics and objectives, which are reflected in the definition of aid, in the structure of the area in which they operate, and in the aims they pursue. The notion of prohibited aid is based on the classical theory of tax expenditures and uses selectivity in different meanings, which are always very complex to ascertain. The difficulty in defining it stems from the context in which the aid is placed. Tax law structurally uses selective advantage schemes to implement tax policies and is characterised by a large number of such cases in relation to which it is not easy to identify prohibited aid. Tax law is responsible for contributing to public expenditure in the national sphere, pursuing an aim that is fundamental to the survival of the State. The content of the field of taxation gives rise to numerous problems in the application of the State aid framework, especially at the stage of implementing the framework and recovering the aid. Finally, the function that fiscal aid pursues touches on interests of extreme importance in the European and international context, such as—in particular—the fight against harmful tax competition. By fighting against it, the whole area of aid has become involved in a global problem with national repercussions. Fiscal aid has played a pivotal role that has helped rescue States from a general taxation crisis. Under this framework, the special nature of fiscal aid and the need for autonomous regulation within the European Union are established. The adaptation of the general framework is complex and it does call for regulation of no fixed type.

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The result is a framework in which fiscal aid is designed to achieve major objectives but where the framework is substantially inadequate. In our opinion, in order to ensure the effectiveness of an area that is necessary to the European project and fundamental for global and international fiscal balances, the need to regulate and define fiscal aid is a necessary step that the european bodies must take account of.