C-400/97

* Original language: Italian. Article 6 of the Agreement further provides 1 — Boletín Oficial del Estado (BOE) of 28 May 1981. that the Spanish State maintains exclusive 2 — BOE of 27 December 1990. competence for the management, inspec- I - 1074

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tion, review and collection of all taxes particularly of exemptions, reductions or where the taxable person is a natural deductions from taxes in respect of the person or a body, with or without legal formation of new undertakings, invest- personality, not resident in Spain for the ments in fixed assets, investments in purposes of State tax laws. Finally, Arti- research and development, investments to cle 7(1) provides that personal income tax boost exports, depreciation of new assets, can be characterised as an 'agreed' tax, capitalisation of small undertakings, and subject to the Autonomous Community staff recruitment and training. The same system and payable to the Diputación Foral advantages applied to taxable persons which has competence ratione territoriae liable for personal income tax who carry where the taxable person is ordinarily out business or occupational activities and resident in the Basque Country. Article 18 whose net income is determined according of the Agreement lays down the criteria for to the direct assessment system. the application of corporation tax.

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3 — Commission Decision of 10 May 1993 concerning a scheme of tax concessions for investment in the Basque Country 4 — Article 1(1) of Decision 93/337. (OJ 1993 L 134, p. 25). 5 — BOE of 31 December 1994.

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The main proceedings and the question legal persons resident in the State itself or in referred for a preliminary ruling another Member State of the European Community?'

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the impugned provincial laws might have. with Article 52 of the Treaty had been This provision, which applies with retro- eliminated with the adoption of the afore- active effect, could remedy any unfavour- mentioned measure, the national court still able situation which might arise owing to considered it necessary for the Court to the application of the tax system of the give a ruling on this matter. As regards the Historic Territories of the Basque Country. division of jurisdiction (and responsibil- The same parties add that the Commission, ities) under the Treaty, this decision lies in in its letter of February 1995, recognised principle with the national court. Due to its that the adoption of the provision in direct knowledge of the relevant facts and question dispelled any doubts as to the elements of law, it is in the best position to compatibility of the provincial laws with evaluate the relevance of the questions of the relevant provisions of Community law, Community law raised in the case. 7The and emphasise the fact that all the parties solution reached by the national court in to the three main proceedings informed the this respect can be questioned by the Court Tribunal Superior de Justicia that they did only if it is obvious that the interpretation not think a decision was necessary on the or the assessment of the validity of a validity of the contested laws, since any provision of Community law has no con- incompatibility with Article 52 of the nection with the purpose or the subject- Treaty was eliminated by the additional matter of the case. provision.

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grounds of incompatibility have already 13. In addition, the observations submitted been eliminated with the adoption of the by the parties in writing and at the hearing abovementioned additional provision. That do not clearly indicate the temporal scope being so, I consider that it is not for the of the measure adopted by the Kingdom of Court to get involved in the dispute in the Spain in order to eliminate the incompat- main proceedings, making assessments ibility of the local legislation with the which should be made either by the provisions of the Treaty, or the effectiveness national court, which could raise a lack of of that measure in actually putting an end sufficient legal interest to bring proceedings to the inequality of treatment allegedly with respect to provisions which are no caused by that legislation. On this point, longer in force, or by the parties to the we have grounds for doubting that a main proceedings. In fact, it should be compensatory measure such as that laid noted that the central Administration — down in the eighth additional provision is which had expressed, before the national actually equivalent to the non-application court, a positive opinion that the illegality of the provincial laws, since it involves an of the contested laws with regard to activity which requires time and extra costs Community law had been overcome — on the part of undertakings. did not, however, withdraw from the proceedings, which shows that the dispute before the national court is still of interest despite the legislative amendments which have been made.

Then, concerning the alleged incomplete- are resident there for tax purposes or whose ness of the three references for a prelimin- volume of transactions in that Autonomous ary ruling, which do not state with the Community during the preceding tax year necessary precision that a number of fiscal exceeds 25% of their total volume of systems co-exist in the various areas of transactions, and which does not include Spanish territory, but lead us to believe that among those to which those measures there is only one general system with apply other natural or legal persons resi- exceptions in particular areas, suffice it to dent in another Member State of the say that the order sets out, albeit succinctly, European Community. the scheme applicable to taxable persons in the Historic Territories, its application ratione personae, and the disparity of treatment between the natural and legal persons subject to the scheme in question and those subject to the common legisla- tion. The presence of a number of fiscal systems raises a substantive problem which In fact, the Economic Agreement (Article 6 will be dealt with in the appropriate place, of Law No 12/1981, as amended by Law that is in the context of assessing the No 27/1990) provides that natural and measures in question in the light of the legal persons who are not resident in the Community law on State aid. territory of the Spanish State are subject to the fiscal legislation of the State. They are therefore excluded from the advantages provided by the fiscal legislation of the Basque Country.

20. That being so, it is useful to recall that 18. On this point, it is useful to note that, freedom of establishment, which Article 52 in the accounts of a company, there is a of the Treaty confers on nationals of a considerable difference between exemption Member State and which gives them the upstream, such as that guaranteed by the right to take up activities as self-employed local legislation, and refund a posteriori, persons and pursue them on the same which is introduced by the corrective conditions as those laid down by the law measure adopted by the Spanish Govern- of the Member State of establishment for ment. The mechanism of 'solve et repete'' its own nationals, comprises, pursuant to does not eliminate the discriminatory situa- Article 58 of the EC Treaty (now, after tion faced by foreign companies. Time and amendment, Article 48 EC), the right for staff must in any event be used to track the companies or firms formed in accordance administrative files required to obtain the with the law of a Member State and having refund, resulting in additional costs for the their registered office, central administra- company. I therefore consider that the tion or principal place of business within eighth additional provision to Law the Community, to carry on business in the No 42/1994 was not able completely to Member State concerned through a branch eliminate the inequality of treatment, or agency. 9 caused by the provincial laws, between companies whose residence for tax pur- poses is in the Basque Country and foreign companies.

21. This principle is also applied, according to the settled case-law of the Court, in cases where national tax legislation grants con- cessions only to companies whose regis- tered office is in that State. While it is true that, in the absence of harmonisation measures, the regulation of direct taxation falls in principle within the competence of the Member States, they must exercise their powers consistently with Community 23. However, the Basque Authorities main- law. 1 1Discriminatory tax treatment which tain that the measures adopted were justi- obstructs or limits the exercise of the right fied by the need to guarantee the cohesion of establishment therefore falls within the of the national tax system. In their opinion, scope of Article 52 of the Treaty. 12 the discrimination between taxable persons is based on the fact that the criteria for applicability reflect the internal distribu- tion of powers between the tax authorities of the Basque Country and those of the State. To support this view, the Juntas 22. The Court has emphasised on a number Forales cite the judgment in the Bachmann of occasions that freedom of establishment case, 14 in which the Court used the concept is one of the fundamental principles of the of the 'cohesion of the tax system' for the Community and that the provisions which first time in evaluating the tax legislation guarantee it give those to whom it applies and its effects with regard to persons absolute rights which can be limited only if established in other Member States. The there are interests which are considered to concept of 'fiscal cohesion', understood as be pre-eminent for reasons of public policy, an overriding reason in the public interest capable of limiting the fundamental eco- nomic freedoms guaranteed by the Treaty, 10 — Case 270/83 Commission v France [1986] ECR 273, was then clarified and circumscribed in paragraph 18. 11 — Case C-246/89 Commission v United Kingdom [19911 ECR I-4585; Case C-279/93 Schumacker [1995] ECR I-225; Case C-107/94 Asscher [1996] ECR I-3089; Case 13 —Case C-288/89 Gouda [1991] ECR I-4007; and Case C-250/95 Futura Participations and Singer [1997] ECR I-2471; Case C-264/96 ICI [1998] ECR I-4695. C-484/93 Svensson and Gustavsson [1995J ECR I-3955. 14 — Case C-204/90 Bachmann [1992] ECR I-249, paragraph 12 — Case C-330/91 Commerzbank [1993] ECR I-4017.

subsequent judgments, including Svensson Basque Authorities would like, the alloca- and Gustavsson, 1 5Asseber 16and Futura tion of competence for tax matters within a Participations and Singer. 17 Member State, but the particular link between two operations — one debit, the other credit — within the same fiscal system. In this case, within the Spanish tax system, there is no taxation which may be regarded as directly linked to the deductions provided for by the legislation 24. Leaving aside any assessment of the of the Basque Territories for companies possibility of relying on that exception with which have their residence there for tax regard to clearly discriminatory mea- purposes. sures, 18 I do not consider that in this case there is any question of safeguarding the cohesion of the Spanish tax system. It is clear from the cases cited above that the application of that 'overriding reason in the public interest', in order to justify national measures restricting freedom of establish- ment and freedom to provide services, requires the presence of a direct link between taxation and deduction within the same tax system. In particular, off- setting must take place between the sums received by the State following taxation and those returned to the taxpayer in the form of deduction. 19 25. I therefore consider that the conditions imposed by the Basque legislation for entitlement to fiscal advantages constitute a discriminatory measure for the purposes of Article 52 of the Treaty, and I therefore The 'cohesion of the tax system' to which propose that the Court respond to the first- the Court refers does not concern, as the part of the question from the Tribunal Superior del Pais Vasco that Article 52 of the Treaty precludes legislation on urgent 15 — Case C-484/93, cited in note 13, paragraphs 16 to 18. measures to aid investment which may 16 — Case C-107/94, cited in note 11, paragraphs 56 to 60. benefit taxable persons who pay tax exclu- 17 — Case C-250/95, cited in note 11. sively to the tax authorities of the Historic 18 — Sec my Opinion delivered on 10 June 1999 in Case C-55/98 Vestergaard, point 27 et seq. Basque Territories or are resident there for 19 — In Bachmanm, the loss of tax revenue due to the deduction tax purposes or whose volume of transac- of contributions to life insurance was offset by the tax applied on pensions, income and capital payable by the tions in that Autonomous Community insurers. In the Svensson case the Court also stated that the existence of such a link was not sufficient: it should be a during the preceding tax year exceeds direct link between the two operations involved. In that 25% of their total volume of transactions, case, concerning a system of housing benefit in the form of an interest rate subsidy on loans from credit institutions and which does not include among those to established on the national territory, the Court decided (paragraph 18 of the p i d g m e n t ) that 'in this case there was which those measures apply other natural no direct link between the grant of the interest rate subsidy or legal persons resident in another Mem- to borrowers on the one band, and its financing by means of the profit tax on financial establishments, on the other.' ber State of the European Community.

27. On this point, it should be stated first that the assessment which the national court makes, possibly with the assistance of the Court of Justice, with respect to the 28. That being so, we should now decide characterisation of a national measure as whether, in concrete terms, the measures State aid for the purposes of Article 92 of adopted by the Basque Authorities fall the Treaty is important, since any positive within the concept of aid referred to in assessment would allow the aid measures to Article 92(1). The analysis must focus on be regarded as illegal by definition if they three factors in particular: whether the had not been notified to the Commission in accordance with Article 93(3) of the EC Treaty (now Article 88(3) EC). In the 20 — See, in particular, Case C-39/94 SFEI [1996] ECR I-3547, procedural context of the dispute before paragraph 39, in which the Court stated that '[t]he involvement of national courts is the result of the direct the national court, the provincial laws are effect which the prohibition on implementation of planned aid laid down in the last sentence of Article 93(3) has been the subject of an action for annulment held to have.' The Court then added that 'the immediate brought by the central Government on the applicability of the prohibition on implementation referred to in that article extends to all aid which has been ground that they allow favourable fiscal implemented without being notified'. treatment to companies established in the 21 — Case C-39/94 cited above, paragraph 39. See the recent Opinion of Advocate General Ruiz-Jarabo Colomer in Historic Basque Territories. In this context, Case C-295/97 Piaggio [1999] ECR I-3735, paragraphs 24-27. the national court is required to assess 22 — As stated by the Court on many occasions (Case 78/76 whether, in this case, the conditions neces- Steinike and Weinlig [1977] ECR 595, paragraph 14; Case sary for a national measure to be charac- C-189/91 Kirsammer-Hack [1993] ECR I-6185, paragraph 14; SFEI, cited above, paragraph 49), 'a national court terised as 'aid' for the purposes of Arti- may have cause to interpret the concept of aid ... in order to determine whether a State measure introduced without cle 92 are met. In view of the settled case- observance of the preliminary examination procedure provided for in Article 93(3) ought to have been subject law of the Court concerning the powers of to that procedure'.

30. Concerning the first of the aforemen- tioned conditions, relating to the classifica- 31. With regard to whether measures tion of the measures adopted under the adopted, as in this case, by regional autho- concept of aid within the meaning of rities are attributable to the State, it is Article 92 of the Treaty, suffice it to note sufficient to recall the judgment of the that, according to the settled case-law of Court in Germany v Commission. 25This the Court, the concept of aid is wider than concerned a system of aid set up by the that of a subsidy because it embraces 'not Land of Nordrhein-Westfalen under a pro- only positive benefits, such as subsidies gramme to improve the regional economic themselves, but also measures which, in structure, in favour of companies estab- various forms, mitigate the charges which lished in certain areas of its territory. The are normally included in the budget of an regional legislation had been adopted on undertaking and which, without therefore the basis of a federal framework law. In being subsidies in the strict meaning of the assessing the legality of the Commission word, are similar in character and have the decision which found the programme of same effect.' 23 Concerning more specifi- regional aid to be incompatible with the cally measures which involve tax conces- common market, the Court stated first that

2 3 — Case 30/59 Steenkolenmujnen v High Authority [1961] ECR 1; more recently Case C-387/92 Banco Exterior de 24 — Case C-387/92, cued above, paragraph 14; Case C-6/97 España | 1 9 9 4 | ECR I-877; Case C-200/97 Ecotrade Italy v Commission [ I 9 9 9 | ECR I-2981, paragraph 16. | 1 9 9 8 | ECR I-7907. 25 — Case 248/84 [1987] ECR 4013.

'the fact that the aid programme was prevent their being attributable to the State adopted by a State in a federation or by a for the purpose of the application of the regional authority, and not by the federal or Community rules on State aid. As a result, central power, does not prevent the appli- the laws at issue in this case fall within the cation of Article 92(1) of the Treaty if the scope of Article 92 of the Treaty. relevant conditions are satisfied.

26 — Emphasis added. nies which are subject to the common 27 — Case C-248/84, paragraph 17. In the following paragraph, system, or a general measure which, as the Court then added that '[a]id programmes may concern such, comes within the political and eco- a whole sector of the economy or may have a regional objective and be intended to encourage undertakings to nomic choices of the State which are not invest in a particular area'. In both cases these are measures which fall within the concept of aid within the subject to review at Community level under meaning of Article 92 of the Treaty. the rules stated in Article 92 et seq. of the 28 — J o i n e d Cases 62/87 and 72/87 [1988] ECR 1573. Treaty, but may be subject to other less 29 — The attribution to the States of aid measures adopted by regional authorities may be inferred from the general rigorous provisions of the Treaty. 30 For this system laid down by the Treaty, under which the sole purpose, we can, as a first approximation, interlocutor of the Commission in the procedure for reviewing aid, as in every subsequent stage of the centralised system of review prescribed in Article 93 of understand as 'general measures' provi- the Treaty, is the State. In this context, see Case 130/83 sions of a legislative and regulatory nature Commission v Italy [1984] ECR 2849.

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butable to the State, which favour certain toric Territories on the basis of the Eco- economic sectors or certain operators as nomic Agreement of 1981, which recog- opposed to others are to be regarded as nises their full autonomy in determining 'aid' within the meaning of Article 92. direct taxation.

33. From the case-law of the Court it does 35. I consider that the laws adopted by the not seem possible to identify with any Juntas Forales must be characterised as certainty a criterion of a general nature 'aid' within the meaning of Article 92 of which provides a clear demarcation line the Treaty, and not as general measures of between the two concepts. The case-law of economic policy. These measures are selec- the Court has up to now essentially deter- tive in nature, whether one takes into mined the element of specificity of the consideration the recipients of the aid or measure by reference to the beneficiaries of whether one applies the criterion of the the aid: aid intended for specific sectors, •" legislative measure as a derogation from a particular company, 3 2 or even companies the general system. They arc intended situated in a particular region. ·" Another exclusively for companies situated in a criterion, used by Advocate General Dar- particular region of the Member State in mon in his Opinion in Sloman Neptun,™ question and constitute for them an advan- refers to the measure as a derogation from tage which companies intending to carry the scheme of the general system in which it- out similar economic operations in other is set. areas in the same State cannot enjoy.

case there would be an element of selectiv- adopted by regional authorities with exclu- ity with regard to taxable persons, since the sive competence under national law is, as measure is limited in its scope to some of observed by the Commission, merely a the taxable persons who could be addres- matter of form, which is not sufficient to sees, in the second case the element of justify the preferential treatment reserved selectivity is lacking, since the measure is to companies which fall within the scope of addressed to all taxable persons who, under the rules of allocation of competence, are the provincial laws. If this were not the subject to the fiscal legislation of the local case, the State could easily avoid the authorities. application, in part of its own territory, of provisions of Community law on State aid simply by making changes to the internal allocation of competence on certain mat- ters, thus raising the 'general' nature, for that territory, of the measure in question. In addition, this solution would be difficult to justify in view of the case-law of the Court, according to which the words 'in any form whatsoever' in Article 92 mean that it is Those parties add that, from this point of necessary to assess the effects of the aid, view, the rules on the allocation of compe- rather than the nature of the authority tence in tax matters to the authorities of the granting the aid or its powers in the light of Historic Territories are no different from domestic rules. 35 In Exécutif régional wal- the rules governing the allocation of com- lon, 36 for example, the Court interpreted petence between the sovereign tax autho- the concept of State aid in the context of rities of two Member States of the Eur- measures adopted by the Walloon Regional opean Union. The differences between fiscal systems cannot constitute State aid Executive, although in the framework of a for the purposes of Article 92 of the Treaty, State law introducing measures to favour while the only remedy to the distortions economic development. In Germany v caused to the market would be the adop- Commission, cited above, the Court exclu- tion of measures to harmonise national ded the possibility of giving importance to laws. To consider, however, that the alloca- the internal constitutional structure of the tion of competence in tax matters between State in question, emphasising the fact that, the State and the Historic Territories is '[i]n referring to any aid granted by a contrary to the provisions of the Treaty on Member State or through State resources in State aid would be tantamount to issuing a any form whatsoever Article 92(1) is direc- value judgment on the constitutional struc- ted at all aid financed from public ture of the Spanish State. resources. It follows that aid granted by regional and local bodies of the Member

States, whatever their status and descrip- according to the Court, 39 can justify treat- tion,37 must be scrutinised to determine ment different from that under the legisla- whether it complies with Article 92 of the tion of general application, refer not to Treaty.' 38 Finally, in Commission v Italy, elements of form, such as the degree of also cited above, the Court ordered the autonomy of the regional body in question, central government to take the necessary but to the existence of a different substan- steps to eliminate aid measures adopted by tive situation which justifies a deviation a law of the Sicilian Regional Authorities in from the general rules. In this case, it is a sector in which they had exclusive difficult to determine which circumstances, competence. It emerges from this case-law linked to the nature and scheme of the that all the measures which involve a system, can justify the difference of treat- competitive advantage limited to compa- ment which arises from the Basque laws. nies which invest in a particular area of the The fiscal autonomy of the Basque Terri- Member State are attributable to the State tories does not reflect any specificity of the in question and cannot therefore, by defi- territory in question — in terms of eco- nition, in the scheme of the fiscal system of nomic conditions such as level of employ- the State, be understood as measures of a ment, production costs, infrastructures, general nature. labour cost — which would require, indir- ectly, fiscal treatment different from that in force in the rest of the Spanish territory. The scheme which results from the provi- sions in question satisfies only the desire to favour investment in the Historic Terri- tories. The reasons given by the Basque Authorities for the adoption of the mea- sures at issue show that they are short-term measures which aim to improve the com- petitiveness of the companies to which they apply in order to meet the challenges of the market. This clearly shows, once again, the exceptional nature of the measures in 38. As the Commission observed, 'the nat- question which derogate from the general ure and scheme of the system', which, scheme of the tax legislation.

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