Commission Decision
of 28 October 2009
on the tax amortisation of financial goodwill for foreign shareholding acquisitions C 45/07 (ex NN 51/07, ex CP 9/07) implemented by Spain
(notified under document C(2009) 8107)
(Only the Spanish text is authentic)
(Text with EEA relevance)
(2011/5/EC)
THE COMMISSION OF THE EUROPEAN COMMUNITIES,
Having regard to the Treaty establishing the European Community, and in particular the first subparagraph of Article 88(2) thereof,
Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,
Whereas:
By letters dated 15 January 2007 (D/50164) and 26 March 2007 (D-51351), the Commission asked the Spanish authorities to provide information in order to assess the scope and the effects of Article 12(5) TRLIS as regards its possible classification as State aid and its compatibility with the common market.
By letters dated 16 February 2007 (A/31454) and 4 June 2007 (A/34596), the Spanish authorities replied to these questions.
By fax dated 28 August 2007, the Commission received a complaint by a private operator alleging that the scheme set up by Article 12(5) TRLIS constituted State aid and was incompatible with the common market. The complainant asked for his identity not to be divulged.
By letter dated 5 December 2007, the Commission received comments from Spain on the initiating Decision.
Between 18 January and 16 June 2008, the Commission received comments on the initiating Decision from 32 interested parties. The interested parties that did not ask to remain anonymous are listed in the Annex to this Decision.
By letters dated 9 April 2008 (D/51431), 15 May 2008 (D/51925), 22 May 2008 (D/52035) and 27 March 2009 (D/51271), the Commission forwarded the above comments to the Spanish authorities, in order to give them the opportunity to react. By letters dated 30 June 2008 (A/12911) and 22 April 2009 (A/9531), the Spanish authorities gave their reactions to the interested parties’ comments.
On 18 February 2008, 12 May and 8 June 2009, technical meetings took place between the Spanish authorities and Commission representatives to clarify, inter alia, certain aspects of the application of the scheme in question and the interpretation of the Spanish legislation relevant to the case.
On 7 April 2008, a meeting was held between representatives of the Commission and Banco de Santander SA; on 16 April 2008 a meeting took place between Commission representatives and the law firm J & A Garrigues SL representing several interested parties; on 2 July 2008 a meeting took place between Commission representatives and Altadis SA; on 12 February 2009, a meeting took place between Commission representatives and Telefónica SA.
On 14 July 2008, the Spanish authorities submitted further information regarding the measure at issue, in particular data extracted from 2006 tax returns, which provided a general overview of the taxpayers benefiting from the measure at issue.
By e-mail dated 16 June 2009, the Spanish authorities provided additional elements arguing that Spanish companies still faced a number of obstacles to cross-border mergers in the Community.
The measure in question involves tax amortisation of the financial goodwill resulting from the acquisition of a significant shareholding in a foreign target company.
The measure is governed by Article 12(5) TRLIS. In particular, Article 2(5) of Act 24/2001 of 27 December 2001 amended the Spanish Corporate Tax Act No 43/1995 of 27 December 1995, by introducing Article 12(5). Royal Legislative Decree No 4/2004 of 5 March 2004 consolidated the amendments made until then to the Spanish Corporate Tax Act in a recast version.
Article 12(5) TRLIS, which is part of Article 12 ‘Value adjustments: loss of value of assets’, entered into force on 1 January 2002. It essentially provides that a company which is taxable in Spain may deduct from its taxable income the financial goodwill deriving from the acquisition of a shareholding of at least 5 % of a foreign company, in equal yearly instalments, for up to 20 years following the acquisition.
Under Spanish tax policy principles, with the exception of the measure in question, goodwill can only be amortised following a business combination that arises either as a result of acquisition or contribution of the assets held by independent companies or following a merger or de-merger operation.
‘Financial goodwill’, as used in the Spanish tax system, is the goodwill that would have been booked if the shareholding company and the target company had merged. The concept of financial goodwill under Article 12(5) TRLIS therefore introduces into the field of share acquisitions a notion that is usually used in transfer of assets or business combination transactions. According to Article 12(5) TRLIS, the financial goodwill is determined by deducting the market value of the tangible and intangible assets of the acquired company from the acquisition price paid for the shareholding.
- (a)the direct or indirect holding in the foreign company must be at least 5 % and must be held for an uninterrupted period of at least 1 year9;
- (b)the foreign company must be liable for a similar tax to that applicable in Spain. This condition is presumed to be met if the country of residence of the target company has signed a tax convention with Spain to avoid international double taxation and prevent tax evasion10;
- (c)
the revenue of the foreign company must mainly derive from business activities carried out abroad. This condition is met when at least 85 % of the income of the target company:
- (i)is not included in the taxable base under Spanish international tax transparency rules and is taxed as benefits received in Spain11. Income is specifically considered to meet these requirements when it derives from the following activities:
wholesale trade, when the goods are made available to the purchasers in the country or territory of residence of the target company or in any country or territory other than Spain,
services provided to clients that do not have their tax domicile in Spain,
financial services provided to clients that do not have their tax domicile in Spain,
insurance services relating to risks not located in Spain;
- (ii)is dividend income, provided that the conditions on the nature of the income from the shareholding provided for Article 21(1)(a) and the level of direct and indirect shareholding of the Spanish company are met (Article 21(1)(c)(2) TRLIS)12.
- (i)
- (a)Article 11(4) of the TRLIS13 (Article 11 is entitled ‘Value adjustments: amortisation’ and is contained in Chapter IV of the TRLIS, which defines the tax base) provides for a minimum of 20 years’ amortisation of the goodwill deriving from an acquisition under the following conditions: (i) the goodwill results from an acquisition for value; (ii) the seller is unrelated to the acquiring company. The amendments made to this provision subsequent to the initiating Decision and brought in by Act No 16/2007 of 4 July 2007, also clarified that if condition (ii) was not met, the price paid used for calculating the goodwill will be the price paid for the share acquired by a related company to the unrelated seller and also required that (iii) a similar amount has been allocated to an indivisible reserve.
- (b)Article 12(3) TRLIS, which is contained in Chapter IV TRLIS, permits partial deduction for depreciation of domestic and foreign shareholdings, which are not listed on a secondary market, up to the difference between the theoretical accounting value at the beginning and the end of the tax year. The measure at issue can be applied in conjunction with this Article of the TRLIS14.
- (c)
Article 89(3) TRLIS (Article 89 is entitled ‘Holdings in the capital of the transferring entity and the acquiring entity’), is contained in Chapter VII, Section VIII on the ‘Special system for mergers, divisions, transfers of assets and exchanges’. Article 89(3) TRLIS provides for the amortisation of goodwill arising from business restructuring. Under this provision, the following conditions must be fulfilled in order to apply Article 11(4) TRLIS to the goodwill arising from a business combination: (i) a shareholding of at least 5 % in the target company before the business combination; (ii) it must be proven that the goodwill has been taxed and charged to the seller (iii) the seller is not linked to the purchaser. If condition (iii) is not met, the amount deducted must correspond to an irreversible depreciation of the intangible assets.
- (d)
Article 21 TRLIS, entitled ‘Exemption to avoid international double taxation on dividends and income from foreign sources arising from the transfer of securities representing the equity of entities not resident in Spain’, is contained in Chapter IV TRLIS. Article 21 lays down the conditions under which dividends and incomes from a foreign company are tax exempt when received by a company which is tax domiciled in Spain.
- (e)
Article 22 TRLIS, entitled ‘Exemption of certain income obtained abroad via a permanent establishment’, is contained in Chapter IV TRLIS. Article 22 TRLIS lays down the conditions under which income generated abroad by a permanent establishment not situated in Spain is tax exempt.
- (a)
Transfer of assets shall mean an operation whereby a company transfers, without being dissolved, all or one or more branches of its activity to another company.
- (b)
Business combination shall mean an operation whereby one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company or to a company that they form in exchange for the issue to their shareholders of securities representing the capital of that other company.
- (c)
Share acquisition shall mean an operation whereby one company acquires a shareholding in the capital of another company without obtaining a majority or the control of the voting rights of the target company.
- (d)
Target company shall mean a company not resident in Spain, whose income fulfils the conditions described under recital 21(c) and in which a shareholding is acquired by a company resident in Spain.
- (e)
Intra-Community acquisitions shall mean shareholding acquisitions, which meet all the relevant conditions of Article 12(5) TRLIS, in a target company which is formed in accordance with the law of a Member State and has its registered office, central administration or principal place of business within the Community.
- (f)
Extra-Community acquisitions shall mean shareholding acquisitions, which meet all the relevant conditions of Article 12(5) TRLIS, in a target company which has not been formed in accordance with the law of a Member State or does not have its registered office, central administration or principal place of business within the Community.
In the initiating Decision, the Commission opened the formal investigation procedure laid down in Article 88(2) of the Treaty in respect of the measure in question because it appeared to fulfil all the conditions for being considered State aid under Article 87(1) of the Treaty. The Commission also had doubts as to whether the measure at issue could be considered compatible with the common market, as none of the exceptions provided for in Article 87(2) and (3) seemed applicable.
In particular, the Commission considered that the measure in question departed from the ordinary scope of the Spanish corporate tax system, which is the tax system of reference. The Commission also held that the tax amortisation of the financial goodwill resulting from the acquisition of a 5 % shareholding in a foreign target company seemed to constitute an exceptional incentive.
In this context, the Commission also considered that the selective advantage did not appear to be justified by the inherent nature of the tax system. In particular, it considered that the differentiation created by the measure at issue, which departed from the general rules of the Spanish accounting and tax systems could not be justified by reasons linked to technicalities of the tax system. Indeed, goodwill can only be deducted in the case of a business combination or transfer of assets, except under the provisions of the measure at issue. The Commission also considered that it was disproportionate for the measure in question to claim to attain the neutrality objectives pursued by the Spanish system because it is limited solely to the acquisition of significant shareholdings in foreign companies.
In addition, the Commission considered that the measure at issue implied the use of State resources as it involved foregoing tax revenue by the Spanish Treasury. Finally, the measure could distort competition in the European business acquisition market by providing a selective economic advantage to Spanish companies engaged in the acquisition of a significant shareholding in foreign companies. Nor did the Commission find any grounds for considering the measure compatible with the common market.
The Commission therefore concluded that the measure in question could constitute incompatible State aid. This being the case, recovery should take place according to Article 14 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty. The Commission accordingly invited the Spanish authorities and interested parties to submit their observations as to the possible presence of legitimate expectations or any other general principle of Community law which would permit the Commission to exceptionally waive recovery pursuant to the second sentence of Article 14(1) of the above Council Regulation.
In short, the Spanish authorities consider that Article 12(5) TRLIS constitutes a general measure and not an exception to the Spanish tax system since this provision allows the amortisation of an intangible asset, which applies to any taxpayer who acquires a significant shareholding in a foreign company. In the light of Commission practice and the relevant case-law, the Spanish authorities conclude that the contested measures cannot be considered State aid within the meaning of Article 87 of the Treaty. In addition, the Spanish authorities consider that a different conclusion would be contrary to the principle of legal certainty. The Spanish authorities also contest the competence of the Commission to challenge this general measure as they consider that the Commission cannot use State aid rules as the basis for harmonising tax issues.
In general, 30 interested third parties (hereinafter the 30 interested parties) support the views of the Spanish authorities, whereas another two third parties (hereinafter the two parties) consider that Article 12(5) TRLIS constitutes an unlawful State aid measure incompatible with the common market. Hence the arguments of the 30 interested parties will be presented together with the position of the Spanish authorities, while the arguments of the two parties will be described separately.
As an opening comment, the Spanish authorities stress that direct taxation falls within the competence of the Member States. Therefore, the Commission’s action in this field should comply with the subsidiarity principle in Article 5 of the Treaty. Moreover, the Spanish authorities recall that Articles 3 and 58(1)(a) of the Treaty allow Member States to establish different tax systems according to the location of the investment or the tax residence of the taxpayer, without this being considered a restriction on the free movement of capital.
The 30 interested parties also maintain that a negative Commission decision would breach the principle of national fiscal autonomy laid down in the Treaty, as well as Article 56 of the Treaty, which prohibits restrictions on the free movement of capital.
The Spanish authorities and the 30 interested parties consider that the measure at issue does not to constitute State aid within the meaning of Article 87(1) of the Treaty since: (i) it does not confer an economic advantage; (ii) it does not favour certain undertakings; and (iii) it does not distort or threaten to distort competition between Member States. In line with the logic of the Spanish tax system, they maintain that the measure at issue should be considered a general measure that applies indiscriminately to any type of company and activity.
Contrary to the Commission’s position as expressed in the initiating Decision, the Spanish authorities maintain that Article 12(5) TRLIS does not constitute an exception to the Spanish corporate tax system since: (i) the Spanish accounting system is not an appropriate point of reference to substantiate the existence of an exception to the tax system; and (ii) even if it were, the characterisation of financial goodwill as a depreciable asset over time has historically been a general feature of the Spanish accounting and corporate tax systems.
Firstly, because of the lack of harmonisation of accounting rules, the accounting result cannot serve as a reference point for establishing the exceptional nature of the measure at issue. Indeed, in Spain, the tax base is calculated on the basis of the accounting result, adjusted according to tax rules. Therefore, in the case at hand, accounting considerations cannot, in Spain’s view, serve as a reference point for a tax measure.
Thirdly, the Spanish authorities point out that the measure at issue does not constitute a true economic advantage since, in the case of sale of the acquired shareholding, the amount deducted is recovered by taxation of the capital gain, thus placing the taxpayer in the same situation as if Article 12(5) TRLIS had not been applied.
The Spanish authorities point out that the Commission also incorrectly refers to Article 12(3) TRLIS to establish an alleged advantage under Article 12(5) TRLIS: Article 12(3) applies to situations of depreciation in case of an objective loss recorded by the target company, whereas Article 12(5) TRLIS complements this provision and reflects the loss of value attributable to depreciation of the financial goodwill.
Finally, the 30 interested parties also consider that if the measure at issue constituted an advantage, the ultimate beneficiaries would be the target company’s shareholders since they would receive the price paid by the acquiring company benefitting from the measure at issue.
Secondly, according to the Spanish authorities and the 30 interested parties, in its initiating Decision the Commission mixed up the concept of selectivity and the objective conditions of the measure at issue which refer only to certain transactions (i.e. shareholding in a foreign target company). Indeed, the Commission alleges that Article 12(5) TRLIS is selective since the same treatment is not granted to comparable investments in Spanish companies. However, the Commission fails to recognise that the selectivity criterion is not determined by the fact that the beneficiary of the measure at issue is a group of companies or a multinational company that has a share in a target company. The fact that a measure benefits only companies that comply with the objective criterion laid down in the measure at issue does not in itself make it selective. The selectivity criterion implies that subjective restrictions should be imposed on the beneficiary of the measure at issue. The selectivity criterion created for this procedure is inconsistent with previous Commission practice and too vague and broad. Taking this concept further would lead to the erroneous conclusion that most tax deductible expenses fall within the scope of Article 87(1) of the Treaty.
To conclude, the contested measure is designed to remove the tax barriers that the Spanish tax system generates in investment decisions by penalising share acquisitions in foreign companies as opposed to acquisitions in domestic companies. The measure at issue guarantees the same tax treatment for both types of acquisition (direct acquisitions of assets and indirect acquisitions by purchasing shareholdings): goodwill arising from both of them (direct goodwill and financial goodwill) can thus be identified in order to promote the integration of the different markets, until factual and legal barriers to cross-border business combinations have been removed. The Spanish authorities thus ensure that taxpayers can opt to invest at local or cross-border level without being affected by these barriers. Article 12(5) TRLIS basically restores fair conditions of competition by eliminating the adverse impacts of the barriers.
The Spanish authorities state that the Commission has not established to the requisite legal standard that Article 12(5) TRLIS restricts competition, as (i) the alleged ‘market for the acquisition of shares in companies’ does not constitute a relevant market for the purposes of competition law; and (ii) even if this were the case, the amortisation of financial goodwill does not per se affect the competitive position of Spanish undertakings.
First, the Commission qualified the measure at issue as an anti-competitive advantage on the grounds that Article 12(5) allows Spanish taxpayers to obtain a premium for the acquisition of significant shareholdings in a target company. However, the Commission did not carry out any benchmarking study on the economic circumstances of Spanish and international companies.
Second, since the measure at issue is open to any Spanish company with no restrictions, it cannot distort competition. Indeed, any company in the same situation as a beneficiary of the measure at issue can benefit from the measure, thus reducing its tax burden, which would cancel any competitive advantage that might derive from it. In addition, a lower rate of taxation in a Member State that can increase the competitive edge of local companies should not come under State aid rules as long as it is of a general nature.
The Commission’s allegations are not only far removed from reality but also out of touch with the investment situation of Spanish companies. The measure at issue neither distorts competition nor adversely affects intra-Community trading conditions to an extent contrary to the common interest.
In a non-harmonised market, as a result of competition between tax systems, identical operations have a different fiscal impact depending on where traders are resident. This situation distorts competition even if the national measures at stake are general measures. In other words, this distortion is not the result of State aid but of a lack of harmonisation. If the Commission’s reasoning were followed through, it would have to open formal investigations into hundreds of national measures, which would create a situation of legal uncertainty that is highly detrimental to foreign investment.
Even if the Commission considers that Article 12(5) TRLIS constitutes State aid within the meaning of Article 87(1) of the Treaty, this provision is compatible with Article 87(3) of the Treaty since it contributes to the Community interest of promoting the integration of international companies.
Therefore, for the Spanish authorities, Article 12(5) TRLIS is compatible with the common market since, in the absence of European tax harmonisation, it achieves the objective of breaking down barriers to cross-border investment in a proportionate manner. The measure at issue is effectively aimed at removing the adverse impact of barriers to cross-border business combinations and aligning the tax treatment of cross-border and local business combinations in order to ensure that the decisions taken as regards such operations are based not on fiscal considerations but exclusively on economic considerations.
Finally, and in the event that the Commission declares that Article 12(5) TRLIS constitutes State aid incompatible with the common market, the Commission must acknowledge the existence of certain circumstances that justify the non-recovery of the alleged State aid received pursuant to Article 12(5) TRLIS. The beneficiaries should have the right to complete the exceptional amortisation of the financial goodwill corresponding to acquisitions made before the date of publication of the final decision.
According to the two parties, Article 12(5) TRLIS constitutes State aid. They maintain that there are no legitimate expectations in the case at hand and therefore call on the Commission to order recovery of any unlawful aid granted.
According to the two parties, Article 12(5) TRLIS is exceptional in nature because the Spanish tax system, with the exception of this provision, does not allow any amortisation of financial goodwill but only a deduction in the case of an impairment test. Until the introduction of Article 12(5) TRLIS the Spanish corporate tax legislation did not allow the amortisation of shareholdings regardless of whether or not there had actually been an impairment. They stress that Article 12(5) TRLIS is probably unique in the European context as no other Member State has a similar system for cross-border transactions not involving the acquisition of controlling shares.
Under the Spanish tax system, goodwill can be amortised only if there is a business combination — the sole exception is the measure at issue, which allows amortisation in an exceptional case: if a minority shareholding is acquired in a target company. This diverges from the general tax system since amortisation is possible not only without there being a business combination but also in cases where the purchaser does not even acquire control of the foreign target company. Article 12(5) TRLIS thus confers a benefit on certain Spanish companies vis-à-vis (a) other Spanish companies that operate only at national level; and (b) other Community operators that compete internationally with the Spanish beneficiaries of the measure at issue.
From an economic point of view, the Spanish authorities are not only providing an interest-free loan that will be drawn over a period of 20 years (interest-free tax deferral), but also effectively leaving the repayment date of the interest-free loan to the discretion of the borrower — if indeed the loan is repaid. If the investor does not transfer the significant shareholding, the effect is the same as cancellation of the debt by the Spanish authorities. In this case, the measure turns into a permanent tax exemption.
One of the two parties estimates that, as a result of the measure at issue, Spanish acquirers, for instance in the banking sector, are able to pay some 7 % more than they would otherwise be able to. However, it also recognises that as the offer price is a combination of various additional elements, the measure at issue is not the only factor, although probably one of the most decisive factors behind the aggressiveness of Spanish bidders benefiting from the measure at issue. This party considers also that the measure provides a definite advantage to Spanish bidders in international auctions.
Furthermore, only enterprises of a certain size and financial strength with multinational operations can benefit from Article 12(5) TRLIS. Although the company’s balance sheet discloses the book values of assets, it is unlikely that it also reflects the tacit market values of assets. Therefore, in practice, only operators with a controlling interest in target companies have sufficient access to a company’s records to ascertain the tacit market value of the company’s assets. Consequently, the 5 % threshold favours companies that perform multinational operations.
Moreover, only a Spanish operator with existing business in Spain has a Spanish tax base and can benefit from the depreciation. Therefore, only companies resident in Spain with a significant Spanish tax base can in practice benefit from it, since the potential benefit is linked to the size of the Spanish operation rather than of the acquisition. Although Article 12(5) TRLIS is drafted to apply to all operators established in Spain, in practice only a limited and identifiable number of companies with a Spanish tax base, which make foreign acquisitions in the relevant tax year and have a sizeable tax base against which to offset the financial goodwill deduction, can benefit from the application of the measure on an annual basis. As a result, the measure at issue in fact gives a different tax treatment even to Spanish operators in the same position of making acquisitions abroad.
The two parties consider that they have not been able to identify any objective or horizontal criterion or condition that justifies the measure at issue. On the contrary, they are of the view that the basic intention of the measure is to give a benefit to certain Spanish operators. In addition, if the measure at issue is inherent to the Spanish tax system, foreign shareholdings acquired prior to that date should also qualify for the measure, which is not the case since the tax relief is granted only for shareholdings acquired after 1 January 2002.
The measure at issue is clearly discriminatory as it gives Spanish operators a clear fiscal and monetary benefit that foreign operators are not able to enjoy. In a situation of an auction or other competitive procedure for the acquisition of a company, such an advantage makes a significant difference.
Takeover bids usually presuppose the payment of a premium over the share price of the target company that would almost always result in financial goodwill. On several occasions, the financial press has reported on large acquisitions by Spanish companies and the respective tax benefits accruing from the Spanish tax rules on the amortisation of financial goodwill. For one of those acquisitions by an investment bank, the tax benefit resulting from Article 12(5) TRLIS was estimated to be EUR 1,7 billion, or 6,5 % of the offer price. Another report indicated that the Spanish acquirer had been able to bid about 15 % more than non-Spanish competitors.
The measure at issue is of benefit to undertakings that meet certain requirements and enables them to reduce their tax base and thereby the amount of tax that would normally be due in a given year if this provision did not exist. It therefore provides the beneficiary with a financial advantage, the cost of which is directly borne by the budget of the Member State concerned.
The Spanish authorities point out that the vast majority of third parties’ comments support their point of view. Only two parties consider that the measure at issue constitutes State aid, whereas all the others conclude that Article 12(5) TRLIS does not constitute State aid within the meaning of Article 87(1) of the Treaty. Otherwise, fewer economic operators would have submitted comments. In addition, the wide range of activities and size of the interested third parties demonstrates the general nature of the measure at issue.
Regarding the alleged distorting features of the measure at issue, the Spanish authorities point out that any tax relief that reduces the operating costs of a company increases the competitive edge of the beneficiary. However, this statement is irrelevant since the measure at issue is a general measure. The different tax rates applied across the Member States, which impact on the competitiveness of their resident companies, do not fall under State aid rules. In addition, the measure at issue has not been shown to affect trade between Member States. Moreover, the consequence of amortising financial goodwill is not necessarily to increase the price offered by a competitor.
As regards the compatibility of the contested measure with the common market, the Spanish authorities consider Article 12(5) TRLIS to be appropriate and proportionate to address a market failure by establishing a neutral tax system for domestic and cross-border operations that fosters the development of pan- European companies.
In order to ascertain whether a measure constitutes aid, the Commission must assess whether the measure at issue fulfils the conditions of Article 87(1) of the Treaty. This provision states that: ‘save as otherwise provided in this Treaty, any aid granted by 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 common market’. In the light of this provision, the Commission will assess below whether the measure at issue constitutes State aid.
To be considered State aid, a measure must be specific or selective in the sense that it favours only certain undertakings or the production of certain goods.
As explained in more detail in the following section, the Commission considers that the measure at issue is selective in that it only favours certain groups of undertakings that carry out certain investments abroad and that this specific character is not justified by the nature of the scheme, regardless of whether the reference system is defined as the rules on the tax treatment of financial goodwill under the Spanish tax system (see recitals 92 to 114) or as the tax treatment of goodwill deriving from an economic interest taken in a company resident in a country other than Spain (see recitals 115 to 119). The Commission considers that the measure at issue should be assessed in the light of the general provisions of the corporate tax system as applicable to situations in which the emergence of goodwill leads to a fiscal benefit (see recitals 35 to 55), essentially because the Commission considers that the situations in which financial goodwill can be amortised do not cover the whole category of taxpayers placed in a similar factual and legal situation.
Moreover, even if an alternative reference system inspired by the one suggested by the Spanish authorities were chosen (see recitals 56 to 58), the Commission concludes that the measure at issue would still constitute a State aid measure essentially due to the different factual and legal conditions required for the different scenarios to benefit from the provisions on the goodwill that arises from an economic interest acquired in a company resident in a country other than Spain.
In the light of the above, the Commission considers that there is no reason to depart from the reference system in the initiating Decision: the appropriate reference framework for the assessment of the measure at issue is constituted by the general Spanish corporate tax system, and more precisely, by the rules on the tax treatment of financial goodwill contained in this tax system.
That being said, because of the fiscal nature of the measure at issue, the existence of an exception must be assessed in comparison to the reference tax system, and not merely on an accounting basis. In this context, the Commission notes that the Spanish tax system has never permitted the amortisation of financial goodwill, except under Article 12(5) TRLIS. In particular, no such amortisation is possible for domestic transactions. This is demonstrated by the following factors:
Under Article 12(5) TRLIS, part of the financial goodwill deriving from the acquisition of shareholdings in foreign companies can be deducted from the tax base by way of derogation from the reference system. Therefore, by reducing the tax burden of the beneficiary, Article 12(5) TRLIS provides them with an economic advantage. It takes the form of a reduction in the tax to which the companies concerned would otherwise be liable. This reduction is proportionate to the difference between the acquisition price paid and the market value of the underlying booked assets of the shareholdings purchased.
The precise amount of the advantage with respect to the acquisition price paid corresponds to the net discounted value of the tax burden reduction provided by the amortisation that is deductible throughout the amortisation period following the acquisition. It is therefore contingent on the company tax rate in the corresponding years and the discount interest rate applicable.
If the acquired shareholdings are resold, part of this advantage would be recouped via capital gains tax. In effect, by allowing the amortisation of financial goodwill, if the foreign shareholding in question is resold, the amount deducted would lead to an increase in the capital gains charged at the time of sale. However, in the event of these uncertain circumstances, the advantage would not disappear completely since taxation at a later stage does not take the liquidity cost into account. As rightly pointed out by the two parties, from an economic point of view, the amount of the advantage is at least similar to that of an interest-free credit line that allows up to twenty annual withdrawals of a 20th of the financial goodwill for as long as the shareholdings are held on the taxpayer’s books.
Lastly, the Commission cannot accept the views of the Spanish authorities and the 30 interested parties that the final beneficiary of the measure at issue would be the seller of the foreign shareholding since it would receive a higher price. First, there is no mechanism guaranteeing that the advantage is passed on in full to the seller. Second, the acquisition price results from a series of different elements, not just from the measure at issue. Third, in the hypothetical situation that an economic advantage were transferred to the seller, as a result of the measure at issue the acquirer would increase its acquisition price, which is of the upmost importance in the case of a competitive acquisition transaction.
Therefore, the Commission must conclude that, in any event, the measure at issue provides an advantage at the moment of the acquisition of foreign shareholdings.
Secondly, the contested measure does not constitute a mechanism to avoid double taxation of future dividends that would be taxed upon realisation of future profits and should not be taxed twice when distributed to the company that holds a significant shareholding for whose acquisition financial goodwill was paid. In fact, the contested measure creates no relation between the dividends received and the deduction enjoyed as a result of the measure. On the contrary, the dividends received from a significant shareholding already benefit from both the exemption provided for by Article 21 TRLIS and the direct tax neutrality provided for by Article 32 TRLIS to avoid international double taxation. In this connection, the amortisation of financial goodwill results in an additional advantage in respect of the acquisition of significant shareholdings in foreign companies.
Fourthly, the Commission notes that the financial goodwill deriving from the acquisition of Spanish shareholdings cannot be amortised whereas the financial goodwill of foreign companies can be amortised under certain conditions. Different tax treatment of the financial goodwill of foreign as opposed to domestic companies is a differentiation introduced by the measure at issue which is neither necessary nor proportionate in terms of the logic of the tax system. In fact, the Commission considers that it is disproportionate for the scheme at hand to impose substantially different nominal and effective taxation on companies in comparable situations just because some of them are involved in investment opportunities abroad.
In the light of the above, the Commission considers that the neutrality principle cannot justify the measure at issue. Indeed, as also highlighted by the two parties, the fact that the acquisition of a 5 % minority shareholding benefits from the measure at issue demonstrates that the measure would include certain situations that bear no real similarity. In this way it could be said that, under the reference system, situations which are both factually and legally different are treated in an identical manner. The Commission therefore considers that the neutrality principle cannot be invoked to justify the measure at issue.
According to the Spanish authorities, providing a specific fiscal treatment for cross-border shareholding acquisitions would be necessary to ensure the neutrality of the Spanish tax system and to avoid Spanish shareholding acquisitions being treated more favourably. Therefore, the Spanish authorities and the 30 interested parties consider that the correct reference framework for the assessment of the measure at issue would be the tax treatment of the goodwill for foreign acquisitions.
Although the Commission considers that under the present procedure the Spanish authorities and the 30 interested parties have provided insufficient evidence to justify different tax treatment of Spanish shareholding transactions and transactions between companies established in the Community (as described in recitals 92 to 96), the Commission cannot a priori completely exclude this differentiation as regards transactions concerning third countries. Indeed, outside the Community, legal barriers to cross-border business combinations may persist, which would place cross-border transactions in a different legal and factual situation from intra-Community transactions. As a result, extra-Community acquisitions that could have led to the tax amortisation of goodwill — as in the case of a majority shareholding — may be excluded from this tax advantage because it is impossible to perform business combinations. Amortisation of financial goodwill for these transactions, which fall outside the Community factual and legal framework, may be necessary to ensure tax neutrality.
As the measure at issue now stands, it allows the tax amortisation of financial goodwill to arise separately, including in cases where the beneficiary acquires a 5 % shareholding, and therefore the measure at issue could constitute a derogation from the reference system, even if this were defined as in recital 117.
In this context, the Commission maintains the procedure, as initiated by the initiating Decision of 10 October 2007, open for extra-Community acquisitions in the light of new elements which the Spanish authorities have undertaken to provide as regards the obstacles to extra-Community cross-border mergers. The procedure as opened on 10 October 2007 is therefore still ongoing for extra-Community acquisitions.
The measure involves the use of State resources as it implies foregoing tax revenue for the amount corresponding to the reduced tax liability of the companies taxable in Spain that acquire a significant shareholding in foreign companies, for a period of minimum 20 years following the acquisition.
For these reasons, the Commission considers that the measure at issue involves State resources being used.
Second, the measure at issue is liable to distort competition, most clearly among European competitors, by providing a tax reduction to Spanish companies that acquire a significant shareholding in target companies. This analysis is confirmed by the fact that several companies complained or intervened after the initiating Decision to state that the measure at issue provided a significant advantage fuelling the merger appetite of Spanish companies, in particular in the context of auctions. These interventions confirm at least that a series of non-Spanish companies consider that their position on the market is affected by the measure at issue, irrespective of the correctness of their detailed submissions as regards the existence of aid.
Therefore the Commission concludes that the measure at issue is liable to affect trade between Member States and distort competition, chiefly in the internal market, by potentially improving the operating conditions of the beneficiaries that are directly engaged in economic activities liable to tax in Spain.
Before concluding on the classification of the measure, the Commission considers it appropriate to analyse in more detail certain arguments raised by the Spanish authorities and by third parties which have not yet been explicitly or implicitly addressed in the sections concerning the assessment of the scheme (recitals 83 et seq).
Moreover, Article 58 of the Treaty, as invoked by the Spanish authorities, must be read together with Article 56 of the EC Treaty, which prohibits restrictions on the movement of capital between Member States. In fact, Article 58(1) of the Treaty provides that ‘the provisions of Article 56 shall be without prejudice to the right of Member States: (a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested’.
In the light of the above, the Commission considers that, in the present case, domestic share acquisitions and share acquisitions of companies established in another Member State are, for the reasons highlighted above, in an objectively comparable situation and that there are no overriding reasons of general interest which could justify a different treatment of taxpayers with regard to the place where their capital is invested.
In view of all the above considerations, the Commission considers that the measure at issue, to the extent that it applies to intra-Community acquisitions, fulfils all the conditions laid down in Article 87(1) of the Treaty and should thus be regarded as State aid.
As stated in the initiating Decision, the Commission considers that the aid scheme in question does not qualify for any of the exemptions laid down in Article 87(2) and (3) of the Treaty.
The exemptions in Article 87(2) of the Treaty, concerning aid of a social character granted to individual consumers, aid to make good the damage caused by natural disasters or exceptional occurrences and aid granted to certain areas of the Federal Republic of Germany, do not apply in this case.
In the same way, the contested measure adopted in 2001 cannot be regarded as promoting the execution of a project of common European interest or remedying a serious disturbance in the economy of Spain, as provided for in Article 87(3)(b). Nor is its purpose to promote culture and heritage conservation as provided for in Article 87(3)(d).
Finally, the measure at issue must be examined in the light of Article 87(3)(c), which provides for the authorisation of 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 that is contrary to the common interest. In this respect, it should first be noted that the measure at issue does not fall under any of the frameworks or guidelines that define the conditions to consider certain types of aid compatible with the common market.
The fact that a specific company may not be capable of undertaking a certain project or transaction without aid does not necessarily mean that there is a market failure. Only where market forces would not in themselves be able to reach an efficient outcome — i.e. where not all potential gains from the transaction are realised — can a market failure be considered to exist.
The Commission does not dispute that the costs involved in some transactions may well be higher than those in other transactions. However, since these costs are real costs that accurately reflect the nature of the projects being considered — i.e. costs relating to their different geographic location or the different legal environment in which they are to take place — it is efficient for the companies to take these costs fully into account when making their decisions. On the contrary, inefficient outcomes would arise if these real costs were ignored or, indeed, compensated by State aid. The same type of real cost differences also arise when comparing different transactions within the same country as well as when comparing cross-border transactions, and the existence of these differences does not mean that inefficient market outcomes would arise.
The examples provided by the Spanish authorities of alleged increased costs for conducting international transactions compared to national transactions are all related to real costs of conducting transactions, which should be fully taken into account by market participants in order to achieve efficient outcomes.
For a market failure to be present, essentially there would have to be externalities (positive spillovers) generated by the transactions or significant incomplete or asymmetric information leading to otherwise efficient transactions not being carried out. While these may be, theoretically, present in certain transactions, both international and national (e.g. in the context of joint R & D programmes), they cannot be considered inherently present in all international transactions, let alone in transactions of the type in question. In this respect, the Commission considers that the claim relating to market failures cannot be accepted.
- (a)
assessing whether the aid is aimed at a specific objective of common interest (e.g. growth, employment, cohesion, environment or energy security);
- (b)
assessing whether the aid is well-designed to deliver the objective of common interest, i.e. whether the proposed aid addresses the market failure or other objective. For assessing this, it must be checked whether:
- (i)
State aid is an appropriate policy instrument;
- (ii)
there is an incentive effect, namely if the aid changes the behaviour of undertakings;
- (iii)
the measure is proportional, i.e. if the same change in behaviour could be obtained with less aid;
- (i)
- (c)
assessing if the distortions of competition and effect on trade are limited, so that the overall balance is positive.
It is first necessary to assess whether the objective pursued by the aid can indeed be regarded as being in the common interest. Despite the alleged aim of fostering single market integration, in the present case the objective pursued by the aid is not clearly defined as it goes beyond market integration, by promoting the expansion of Spanish companies in the European market in particular.
The second step requires assessing whether the aid is properly designed to reach the specific objective of common interest. More precisely, State aid must change the behaviour of a beneficiary undertaking in such a way that it engages in activities that contribute to achieving the objective of common interest, which it would not carry out without the aid or would carry out in a limited or different way. The Spanish authorities and the 30 interested parties did not present any specific arguments demonstrating the likelihood that this incentive effect would be produced.
The third question addresses the negative effects of State aid. Even if it is well-designed to address an objective of common interest, aid granted to a particular undertaking or economic sector may lead to serious distortions of competition and trade between Member States. In this respect, the 30 interested parties consider that the aid scheme does not have an impact on the competitive situation of companies liable to corporate tax in Spain, since the financial effect of Article 12(5) would be negligible. However, as already indicated above in recitals 101 et seq., there are serious indications that the effect of Article 12(5) is far from negligible. Moreover, since the aid scheme is applicable only to foreign transactions, it clearly has the effect of focusing the distortions of competition on foreign markets.
The last step in the compatibility analysis is to evaluate whether the positive effects of the aid, if any, outweigh its negative effects. As indicated above, in this case the Spanish authorities and the 30 interested parties did not demonstrate the existence of a specific objective leading to clear positive effects. They consider, in general terms, that Article 12(5) TRLIS fulfils the Community objective of promoting cross-border transactions, without embarking on the evaluation of the potential and actual negative effects of the measure at issue. In any case, even assuming that the positive effect of the measure is to promote cross-border transactions by eliminating barriers in such transactions, the Commission considers that the positive effects of the measure do not outweigh its negative effects, in particular because the measure’s scope is imprecise and indiscriminate.
In the light of the above, it must be concluded that the aid scheme in question, to the extent that it applies to intra-Community acquisitions, is incompatible with the common market.
The measure at issue has been implemented without having been notified in advance to the Commission in accordance with Article 88(3) of the Treaty. Therefore, the measure, to the extent that it applies to intra-Community acquisitions, constitutes unlawful aid.
The Spanish authorities and the 30 interested parties have essentially invoked the existence of legitimate expectations based, firstly, on certain Commission’s replies to written parliamentary questions and, secondly, on the alleged similarity of the aid scheme with earlier measures which have been declared compatible by the Commission. Thirdly, the Spanish authorities and the 30 interested parties consider that the principle of legitimate expectation implies that the Commission can ask for recovery neither of the deductions already realised nor all outstanding deductions, up to the 20-year period established by the TRLIS.
As regards the impact of the Commission’s declarations on legitimate expectations of the beneficiaries, the Commission considers that a distinction should be drawn between two periods: (a) the period starting from the entry into force of the measure on 1 January 2002 until the date of publication of the initiating Decision in the Official Journal on 21 December 2007; and (b) the period following the publication of the initiating Decision in the Official Journal.
Moreover, the Commission considers that a reasonable transition period should be envisaged for companies which had already acquired, in a long-term perspective, rights in foreign companies and which had not held those rights for an uninterrupted period of at least 1 year on the date of the publication of the initiating Decision. The Commission therefore considers that companies who fulfilled all other relevant conditions of Article 12(5) TRLIS (see recital 21) by 21 December 2007, apart from the condition that they hold their shareholdings for an uninterrupted period of at least 1 year, should also benefit from legitimate expectations, if they held those rights for an uninterrupted period of at least 1 year by 21 December 2008.
On the other hand, in cases where the Spanish acquiring company did not hold the rights directly or indirectly until after 21 December 2007, any incompatible aid will be recovered from this beneficiary unless, firstly, before 21 December 2007 an irrevocable obligation was entered into by a Spanish acquiring company to hold such rights; secondly, the contract contained a suspensive condition linked to the fact that the operation at issue is subject to the mandatory approval of a regulatory authority and, thirdly, the operation had been notified before 21 December 2007. In fact, after the publication of the initiating Decision in the Official Journal, it cannot be argued that a prudent trader could not have foreseen the adoption of a Community measure that could affect his interests like the present Decision. In the light of the above, the Commission concludes that the recovery shall take place with respect to all cases not covered by recitals 167 and 169 of this Decision. The Commission also considers that the measure at issue does not constitute aid if, at the time the beneficiaries enjoyed its benefits, all the conditions laid down in legislation adopted pursuant to Article 2 of Regulation (EC) No 994/98 and applicable at the time the tax deduction was enjoyed were met.
In the light of the above considerations, in a given year, for a given beneficiary, the precise amount of the aid corresponds to the net discounted value of the tax burden reduction granted by the amortisation under Article 12(5) TRLIS. It is therefore contingent on the company tax rate in the years concerned and on the discount interest rate applicable.
For a given year and a given beneficiary, the nominal value of the aid corresponds to the tax reduction granted by the application of Article 12(5) TRLIS for rights in foreign companies that do not fulfil the conditions described in recitals 167 and 169.
The discounted value is calculated by applying the interest rate to the nominal value, in accordance with Chapter V of Regulation (EC) No 794/2004, as amended by Regulation (EC) No 271/2008.
The Commission considers that, in the light of the above-mentioned case-law and the specificities of the case, Article 12(5) TRLIS constitutes a State aid scheme within the meaning of Article 87(1) of the Treaty to the extent that it applies to intra-Community acquisitions. The Commission also finds that the measure at issue, having been implemented in breach of Article 88(3) of the Treaty, constitutes an unlawful aid scheme to the extent that it applies to intra-Community acquisitions. However, given the presence of legitimate expectations until the publication date of the initiating Decision, the Commission exceptionally waives recovery for any tax benefits deriving from the application of the aid scheme for aid linked to shareholdings held directly or indirectly by a Spanish acquiring company in a foreign company before the date of publication in the Official Journal of the European Union of the Commission Decision to initiate the formal investigation procedure under Article 88(2), except where, firstly, before 21 December 2007 an irrevocable obligation has been entered into by a Spanish acquiring company to hold such rights; secondly, the contract contained a suspensive condition linked to the fact that the operation at stake is subject to the mandatory approval of a regulatory authority and, thirdly, the operation had been notified before 21 December 2007.
The Commission maintains the procedure initiated on 10 October 2007 open as regards extra-Community operations in view of new elements that the Spanish authorities have undertaken to provide,
HAS ADOPTED THIS DECISION: