ECJ confirms Commission's action against selective tax advantages as state aid, but the path remains rocky

On November 08, 2022, the Court of Justice of the European Union (ECJ) set aside the judgment of the General Court of the European Union (EGC) of September 24, 2019 regarding the Luxemburg tax decision in favour of Fiat Chrysler Finance Europe (in short: FFT)/Commission (Joined Cases T-755/15 and T-759/15; on appeal C-885/19 P and C-898/19 P) and annulled the previous decision of the Commission of October 21, 2015 on State aid granted by Luxembourg to FFT. While generally confirming the Commission's line of action, the ECJ based its decision on the fact that the Commission's assessment of the reference system and whether a selective advantage was granted to FFT had been carried out incorrectly.

The ruling continues the series of judicial review of the Commission's recent practice of considering tax advantages as aid. On this matter see

• (German) Luxembourg Court upholds Commission's line on targeting selective tax benefits as aid, September 24, 2019,
• (German) Combating tax evasion by looking at the Apple Ireland case, July 15, 2020,
• (German) Legal but unfair? The road to greater tax justice via state aid law remains rocky, May 17, 2021,

The background to the current appeal decision of the ECJ is the adaption of a tax ruling by Luxembourg tax authorities in favuor of FFT. The European Commission determined in its decision of October 21, 2015 that the tax ruling constituted state aid incompatible with the internal market within the meaning of Article 107 TFEU and in violation of the implementation prohibition under Article 108 (3) TFEU. In its judgment of September 24, 2019, the EGC confirmed the Commission decision. However, FFT now successfully sought the annulment of this judgment and the annulment of the Commission decision.

In its decision, the ECJ once again emphasized that a national measure constitutes State aid under four conditions: First, the measure must originate from a State or use State resources. Second, the measure must be found to affect trade between Member States. Third, the beneficiary must obtain a selective advantage through the measure, and fourth, it must distort or threaten to distort competition.

For the third condition relating to selective advantage, it is the Commission's task to first determine the relevant reference system. Given the fiscal autonomy of the Member States, this is to be understood as the tax regulations under national law. The Commission must then show that the measure in question derogates from the reference system by distinguishing between economic operators who are in a comparable factual and legal situation with regard to the objective pursued by the reference system. It must also show that this distinction cannot be justified by the nature or general scheme of the reference system.

Advocate General Pikamäe found that the Commission decision and the judgment of the EGC were lawful, but the ECJ did not agree with this view. It ruled that the Commission had erred in its examination by applying an incorrect arm's length principle outside the concretely applicable Luxembourg tax law.

On the one hand, the ECJ confirms the Commission's approach against selective tax advantages as State aid; on the other hand, the ruling shows that the ECJ examines the reasoning of the European Commission as well as of the EGC with meticulous care. The determination of a tax advantage as State aid may have become more difficult in cases comparable to the Fiat case, but it cannot be ruled out.

Prof. Dr Rainer Bierwagen

Dr Dietmar O. Reich