State constitute unlawful state aid?
Adv LLM thesis
submitted by
Jose María Vargas-Machuca Reyes
in fulfilment of the requirements of the
'Advanced Master of Laws in International Tax Law'
degree at the University of Amsterdam
supervised by
Prof. dr Stef van Weeghel
co-supervised by
PERSONAL STATEMENT
Regarding the Adv LLM Thesis submitted to satisfy the requirements of the 'Advanced Master of Laws in International Tax Law' degree:
1. I hereby certify (a) that this is an original work that has been entirely prepared and written by myself without any assistance, (b) that this thesis does not contain any materials from other sources unless these sources have been clearly identified in footnotes, and (c) that all quotations and paraphrases have been properly marked as such while full attribution has been made to the authors thereof. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree. I also accept that in case of such a violation professional organizations in my home country and in countries where I may work as a tax professional, are informed of this violation.
2. I hereby authorize the University of Amsterdam and IBFD to place my thesis, of which I retain the copyright, in its library or other repository for the use of visitors to and/or staff of said library or other repository. Access shall include, but not be limited to, the hard copy of the thesis and its digital format. 3. In articles that I may publish on the basis of my Adv LLM Thesis, I will include the following statement in a footnote to the article’s title or to the author’s name:
“This article is based on the Adv LLM thesis the author submitted in fulfilment of the requirements of the 'Advanced Master of Laws in International Tax Law' degree at the University of Amsterdam.”
4. I hereby certify that any material in this thesis which has been accepted for a degree or diploma by any other university or institution is identified in the text. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree.
signature:
name: Jose María Vargas-Machuca Reyes
Table of Contents
List of Abbreviations ... v
Executive Summary ... vi
Main Findings ... vii
1.
Introduction ... 1
1.1. BEPS and the state aid crusade ... 1
1.2. Bilateral tax treaties and the PPT under the scope of state aid ... 2
1.3. The Principal Purpose ... 3
1.4. Fiscal state aid ... 4
2.
Aid scheme or individual measure ... 4
3.
State aid assessment ... 6
4.
De iure selectivity in the non-application of the PPT ... 6
4.1. The three steps approach ... 6
4.2. First step: the identification of the reference framework ... 6
4.2.1. The relevance of the identification of the reverence framework and the difficulties in determining it……….6
4.2.2. The scope of the reference framework ... 7
5.
The second step: the discrimination analysis ... 10
5.1. The identification of the tertium comparationis ... 10
5.1.2. The tertium comparationis, in the light of which object? ... 11
5.1.3. Tax abusers vis a vis non-abuser in the light of the anti-abuse objective. ... 12
5.1.4. Tax abusers vis a vis abuser in the light of the anti-abuse objective ... 13
5.2. Derogation from the reference framework giving rise to discrimination ... 13
5.2.1. The administrative discretion in the PPT application ... 13
5.2.2. Interim conclusion ... 14
5.3. The normal application of the PPT should be established by the Member State ... 14
5.3.1. Interim conclusions ... 15
6.
Focusing on discrimination: the new Commission approach ... 16
6.1.1. Cross-border tax abusers vs domestic tax abusers in the light of the anti-abuse objective ………16
6.1.2. The anti-abuse objective is maybe instrumental to the primary objective of the corporate tax system……….17
6.1.3. Interim conclusions ... 19
6.1.4. Cross-border situation vis a vis domestic situation ... 19
6.1.5. Interim conclusions ... 20
6.2. Finding the “normal” application of the PPT. ... 21
6.2.1. Non-biding materials as part of the reference framework ... 21
7.
De facto discrimination ... 24
7.1. The Gibraltar III case ... 24
8.
Step 3: Justifications ... 26
10.
Bibliography ... 28
10.1.Books…….………..28
10.2.Articles and legislation ... 28
List of Abbreviations
AG Advocate General
Art., Arts Article, Articles
ATAD Anti Tax Avoidance Directive BEPS Base Erosion and Profit Shifting CJEU Court of Justice of the European Union
EU European Union
GAAR General anti-avoidance rule
MLI Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting
OECD Organisation for Economic Co-operation and Development
PPT Principal Purpose Test
Executive Summary
The thesis aims to predict if a failure to apply the Principal Purpose Test (hereafter, PPT) can constitute unlawful state aid within the meaning of art 107 TFEU. It is design to foreseen future European Commission actions in a hypothetic state aid investigation. Hence, apart from stating the author's opinion, it studies multiple scenarios under which a failure to apply the PPT, which deny treaty benefits in case of abuse, may entail the grant of an advantage to certain undertakings within the meaning of 107 TFEU.
Given that the first four conditions (an advantage conferred by State resources that distort the competition) for a measure to being state aid in case of the non-application of the PPT are rather straightforward the thesis is focused on analyzing the selectivity element following the three-step approach formulated in the Paint Graphos case. The past decade the Commission started a crusade against tax rulings granted to multinational enterprises with a new approach in the selectivity assessment which shift the focus to a discrimination test with several repercussions in its power of scrutiny. Tax treaties and the PPT are not out of the scope of this new approach in state aid investigations.
The structure draws a distinction between the classic derogation test approach and the new discrimination approach. For the former, to find a selective treatment a formal derogation from the reference framework which states the correct interpretation of the PPT is required. Contrary, the latter could conduct to a selective treatment if an intrinsic anti-abuse principle to the reference framework is not honoured placing in a better situation cross-border enterprise that enjoys tax treaty benefits. Besides, de facto selectivity is also taken into account where a Member State operates a general softly interpretation of the PPT. A strong focus is also posed in the comparability analysis trying to find, in five different scenarios, which undertakings are in a similar and factual situation with the conclusion that not every comparison is valid.
There are different tracks in which a failure to apply the PPT might be selective in the eyes of the Commission. The PPT recurses a case-by-case interpretation of the relevant facts and circumstances. Bearing in mind that direct taxation, therefore, tax treaties and anti-abuse rules (aside from the ATAD) are competence of Member State only intentional and clear-cut deviations from the PPT operation should constitute state aid within the meaning of 107 TFEU.
Main Findings
For a measure to be classified as fiscal state aid according to art. 107 TFEU, it must involve an intervention by a Member States that distorts the competition granting a selective advantage. The selectivity criterion is the cornerstone in tax cases and implies that the non-application of the PPT favours certain undertakings over others that are in a similar factual and legal situation.
To perform the selectivity examination, it is first necessary to establish the reference framework under which the comparability analysis is carried on. Interpreting the German Sanieroung clause cases the proper reference framework in the non-application of the PPT would be the tax treaty in which it is embodied. Since the effect of the non-application of the PPT is that tax treaty benefits are granted, the tax treaty should be the appropriate reference framework. The PPT has not sufficient entity to form a coherent set of rules by itself. Besides, an insolation of the PPT would mean that is artificially extracted from a broader frame that aims to protect and which operation requires an analysis of other tax treaty provisions.
Once the reference framework is established, the next step is the comparability analysis. Only undertakings under the scope of the tax treaty are comparable. The correct comparison is between tax abusers, being the selective treatment not to apply the PPT to a category of them. The result is a misapplication of the law which is the reverse mirror of a correct application. In the actual stage of the EU integration to define what the correct interpretation of the PPT is a competence of Member States. Therefore, a misapplication can only arise in case of an intentional and adverted deviation from the previous interpretation of the PPT.
Resulting from the selection of a broader reference framework (the corporate income tax system) new comparisons are possible in the light of the discrimination test approach. The correct comparison is between tax treaty beneficiaries vis a vis domestic undertakings in the scope of the anti-abuse objective inherent to the corporate income tax. It could be argued that they are not comparable or that it would be difficult to prove that a domestic GAAR is applied tougher than the PPT. On the other hand, this approach opens the possibility for the Commission to establish its own correct interpretation of the PPT, including the use of the OECD Commentaries, to honor the anti-abuse objective of the tax system. Finally, the facto selectivity could arise in the case that a generally soft application of the PPT places cross-border undertakings in a better position than purely domestic companies. Nevertheless, de facto selectivity should be interpreted strictly to solve a situation where it can be probed a nonrandom plan by using the legislative technique, to favor cross-border undertakings.
It is necessary to make a plea for a firmer interpretation of the European Commission scrutiny power. The rationale of state aid is not to fight tax abuse, however, we may face a near future where state aid is a tool to ensure the implementation of BEPS measures.
1. Introduction
1.1. BEPS and the state aid crusade
When State Aid rules were first introducing in 1958, most likely no one could foresee the impact that it would have on the tax policy of the EU Member States and its international tax practice.1 Seven years
ago, the Commission created a dedicated task force to investigate tax rulings creating a large list of cases against alleged favored treatment to multinationals. In the light of BEPS discussions, EU jurisdictions that promote tax competition has attracted the attention of the Commission.2 Member States
like Netherlands, Belgium, Ireland, or Luxembourg have been put under the microscope.3 While this
investigation has several repercussions for the Member States, the United States qualifies it as an “unforeseeable departure from the status quo”,4 given that they mainly involve US headquarter
companies, EU external relations are also affected.
The issue is not only about the scope of the new voracity of the Commission inquiries, but also about a revolutionary approach unfolded from the World Duty Free5 and Gibraltar6 case which has its pinnacle
in the Fiat7 and Starbuck8 cases. A shift from state aid classic reference framework-derogation test
towards a discrimination test that includes subjective elements in the state aid analysis. In the mentioned Transfer Pricing cases the Commission has achieved its goal, a comparison between multinational and standalone companies in the light of an inherent principle of the tax system. This revolutionary approach opens the possibility of dig deeper into the tax policy choices of Member States, as the objective of the tax system and the comparability analysis requires value judgments. Yet, the scrutiny of advance pricing agreements is just a stop along the journey. Meanwhile, in the EU anti-abuse doctrine, the Danish cases have recently probed its relevance. The French Supreme Court,9 and the Spanish Central Tax
Tribunal,10 have applied the beneficial owner condition to deny the parent-subsidiary benefits while such
requirement is not embodied in the wording of the Directive.11 Coming back to the state aid field, in 2015
EC Commissioner Margrethe Vestager declared “The purpose of Double Taxation treaties between countries is to avoid double taxation – not to justify double non-taxation”.12 Might it be tax avoidance
through tax treaties in the climate of BEPS the new Commission’s target?
1 Raymond H. C. Luja, Will the EU’s state aid regime survive BEPS?, BRITISH TAX REVIEW 379–390 (2015). 2 ‘To conclude that is sufficient to just have to take a look at the Comission website Tax Planning Practices -
European Commission’, https://ec.europa.eu/competition/state_aid/tax_rulings/index_en.html
3 J Schaffner & S Balliet, BEPS, EU State Aid Investigations and LuxLeaks: And What about Luxembourg?, 23
INTERNATIONAL TRANSFER PRICING JOURNAL (2018).
4 USD
EPARMENT OF TRESUARY, The European Commission’s Recent State Aid Investigations of Transfer Pricing
Rulings, WHITEPAPER 26 (2016).
5 Cases C-20/15 P AND C-21/15 P, World Duty Free, (2016).
6 Cases C-106/09 P AND C-107/09 P, Gibraltar 2011, (2011).
7 Cases T-755/15 AND T-759/15 Luxembourg and Fiat Chrysler v Commission, (2019).
8 Cases T-760/15 Netherlands v Commission and T-636/16 Starbucks and Starbucks Manufacturing Emea v
Commission, (2019).
9 Le Conseil d’État, Base de jurisprudence Ariane Web: Conseil d’État 423809, lecture du 5 juin 2020,
ECLI:FR:CECHR:2020:423809.20200605 Decision n° 423809, https://www.conseil-etat.fr/fr/arianeweb/CE/decision/2020-06-05/423809.
10 Barba de Alba A, Spanish Tax Authorities Rejoice over the Danish Cases, KLUWER INTERNATIONAL TAX BLOG
(2020), http://kluwertaxblog.com/2020/07/09/spanish-tax-authorities-rejoice-over-the-danish-cases/.
11 COUNCIL DIRECTIVE 2011/96/EU OF 30NOVEMBER 2011 ON THE COMMON SYSTEM OF TAXATION APPLICABLE IN THE CASE
OF PARENT COMPANIES AND SUBSIDIARIES OF DIFFERENT MEMBER STATES, .
12 European Commission, Commission opens in-depth State aid probe into Luxembourg’s taxation of McDonald’s,
EUROPEAN COMMISSION—EUROPEAN COMMISSION ,
1.2. Bilateral tax treaties and the PPT under the scope of state aid
It appears that at first, that international juridical double taxation (and double non-taxation) are completely outside of the scope of state aid scrutiny. The Kerchhaert Morres case,13 and the Gilly case
confirmed that Member States are competent to determine the criteria for taxation on income with a view to eliminating double taxation by the way of tax treaties.14 In the doctrine, it is discussed if tax treaties
can confer a selective treatment.15 In the author’s opinion, unlawful State aid cannot be derived directly
from tax treaty rules. First, they are well established internationally accepted rules that can be considered a general system.16 Second, as tax treaty benefits are the consequence of the internal logic
of the tax system (the allocation of taxing rights to avoid double taxation) they may also not constitute state aid at the level of the justification.
However, with the “although direct taxation is a matter for the Member States, they must nevertheless exercise their taxation powers consistently with Community law“17 mantra it may be almost nothing
sacrosanct in the hands of the CJEU.18 Indeed, in the Saint-Gobain case, EU Freedoms was extended
to tax treaties regardless it is concluded between Member States or between a Member State and a third state. In case of conflict between international law and the EU Treaties, the latter prevails by action of a contrario sensu interpretation of 351 TFEU. On the word of Pistone, EU law is gradually depriving Member States “of a consistent legal framework that reflects their international tax policies, but this interpretation activity is in fact simply removing the measures that Member States are not allowed to have because they are in conflict with the rules and principles of the internal market”.19 In the field of
State aid law, AG Kokott, in the Congrecación de Escuelas Pías case,20 affirms that “In terms of EU law,
it [tax treaties] is thus to be treated in the same way as national law”.21
The logical consequence of these statements is that if the PPT test is not applied in conformity with EU law, because of a conflict with art. 107 TFEU, the Commissions has the prerogatives to open a state aid investigation. The McDonald case a demonstration of that entitlement.22 Payani asserted, “the fact that
they are long-established legal instruments is not an ECJ-proof defence”.23
In this regard, it is important to note that State Aid is not defined by reference to their causes or aims but defines them in relation to their effects.24 That assertion makes it possible for the Commission not
to attack directly the compatibility of a tax treaty article with State Aid, but rather, the outcome of its misapplication. It is settled case-law that “the exercise of reserved powers cannot permit the unilateral adoption of measures prohibited by the Treaty”.25 Therefore, if as avowed by the Commission in its
Notice on State aid, a tax ruling establishes how a tax treaty provision is going to be applied departing
13 Case C-513/04, Kerckhaert Morres, 10, 22 (2006). 14 Case C-336/96, Gilly, 24, 30 (1998).
15 Luc De Broe, Can Tax Treaties Confer State Aid?, 26 ECT
AX REVIEW (2017).
16 Raymond H. C. Luja, Tax treaties and state aid: some thoughts, 44 E
UROPEAN TAXATION 234–238, 2 (2004).
17 Case C-307/97,Saint-Gobain v Finanzamt Aachen-Innenstadt, 58 (1999),
http://curia.europa.eu/juris/showPdf.jsf?docid=44717&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&p art=1&cid=7028478 (last visited Jun 27, 2020).
18 Christiana Panayi, Limitation on Benefits and State Aid, European Taxation, 2004 (Volume 44), No 2, 91 (2004). 19 MICHAEL LANG, HORIZONTAL TAX COORDINATION P. Pistone, Chapter 16: Steering the Development of Direct Taxes
towards a Fair Mix of Positive and Negative Integration in Horizontal Tax Coordination (2012).
20 Case C-74/16, Congregación de Escuelas Pías Provincia Betania v Ayuntamiento de Getafe, (2017).
21 Opinion of Advocate General Kokott on Case C‑74/16 Congregación de Escuelas Pías Provincia Betania v
Ayuntamiento de Getafe, 61 (2017).
22 Commission Decision SA.38945 (2015/C) (ex 2015/NN) (ex 2014/CP) granted by Luxembourg in favour of
McDonald’s Europe, (2018).
23 Panayi, supra note 18 at 91. 24 Case C-417/10 3M italy, 20 (2012).
from the normal application of the treaty it may constitute State aid.26 On a conceptual level, the referred
McDonalds case is not about a tax treaty mechanism (permanent establishment mismatch) which by itself creates a selective advantage to McDonalds. What created the advantage was the tax ruling issued by the Luxembourg tax administration that in the eyes of the Commission did not reflect the correct interpretation of the tax treaty.27 Nonetheless, may the Principal Purpose Test (hereafter, PPT), which
is design as a general anti-abuse rule, result in the grant of an unlawful State aid? Similar reasoning can be maintained about the PPT, if the Commission detects that is non-application departs from normal operation of the tax system it may constitute state aid.
We may face two situations. In the first one, the incorrect non-application of the PPT is just a consequence of the inaction of the tax administration. In the second one, the tax administration issues a tax ruling confirming the grant of tax treaty benefits to a structure that does not comply with the PPT. In this latter case, a State aid investigation is more likely to occur since the Commission may probe readily an intentional deviation from the normal application of the tax system. In the former, conceptually, nothing precludes the Commission to open an investigation because of a simple negative act. As confirmed by a constant CJEU jurisprudence formalism should be rejected as “All that matters in that regard is the fact that the measure, irrespective of its form or the legislative means used, should have the effect of placing the recipient undertakings in a position that is more favourable than that of other undertakings”28. However, it would mean that the Commission has the prerogatives to investigate every
arrangement that benefits from the non-application of the PPT even if the Member State was not aware, for example, of the artificiality of the arrangement.
Before embarking into the State aid assessment, a brief description of fiscal state aid and the PPT elements are highlight above.
1.3. The Principal Purpose
Action 6 of the MLI introduces the PPT as one of the Minimum Standards with the aim to protect tax treaties against its improper use. Its wording embodied in art. 29(9) of the OECD MC, it states follows: “Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention”.29
The application of the PPT results in the denial of tax treaty benefits in case of tax treaty abuse. Three main elements need to be present for its application:
• A tax treaty benefit.
• Subjective element: it is reasonable to conclude, having regard all relevant facts and circumstances, that the principal purpose or one of the principal purposes of the taxpayer was to obtain treaty benefits.
• Objective element: to grant the benefits in those circumstances would not be in accordance with the object and purpose of the tax treaty.
26 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/C262/01), 169–170.
27 European Commission Decision SA. 38945 (2015/C) (ex 2015/NN) – Luxembourg Alleged aid to McDonald’s, 63
(2016).
28 CASES C-20/15PANDC-21/15P,WORLD DUTY FREE, supra note 5 at 79.
29 OECD Income and Capital Model Convention and Commentary (Condensed Version) (2017) - Tax Research
1.4. Fiscal state aid
Article 107 (1) TFEU declares incompatible with the internal market any aid granted by a Member State or through State resources which distorts the distort competition between Member States by favouring certain undertakings or the production of certain goods shall. According to settled case-law, the classification of a national measure as ‘State aid’, within the meaning of Article 107(1) TFEU, requires all the following conditions to be fulfilled:
• There is an intervention by a Member State or through its resources, • the measure must be liable to distort the competition between states, • It confers an advantage,
• this advantage is a result of a selective treatment.30
A failure in the application of the PPT easily meets the first three criteria. Starting from the advantage, to determine its existence a question must be formulated in the abstract.31 Is the position of the taxpayer
more favorable than other taxpayers because of the non-application of the PPT?32 To conclude in
affirmative, a comparison should be made between the situation before and after the application of the PPT.33 The advantage would result in the mitigation of the tax assessment, thanks to the benefits under
the relevant tax treaty, where, if a normal application of the tax system is done, the PPT would have operated denying the benefits of the tax treaty. As the Member State forgives revenues it would have received with the normal application of the PPT this measure mitigate the tax resources of the State hence, the first condition is met, as State aid does not require the positive transfer of state resources.34
The non-application of the PPT also strengthening the position of the taxpayer compared with other companies engaged in the European Union trade, therefore it would distort the competition.35
Thus, the cornerstone in the application of the PPT, and most tax related cases is to establishes if there is a selective treatment. As Lang notes, “if selectivity applies, there is favoring in any case”.36 In the
words of the Court, selectivity is the “constituent factor in the concept of State aid”37. Given that the four
conditions are cumulative, the absence of a selective treatment means that there is no state aid within the meaning of art 107 TFEU.38 The Commission efforts, like this thesis, would be placed in
demonstrating the selective (non) application of the PPT.
2. Aid scheme or individual measure
The distinction of a measure between aid scheme and individual scheme is established by the Regulation 2015/1589. According to it, an aid scheme is a measure that “without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and any act based on which aid which is not linked to a specific project may be awarded to one or several undertakings for an indefinite period of time and/or for an indefinite
30 CASES C-20/15PANDC-21/15P,WORLD DUTY FREE, supra note 5 at 53.
31 CARLA DE PIETRO, NEW PERSPECTIVES ON FISCAL STATE AID: LEGITIMACY AND EFFECTIVENESS OF FISCAL STATE AID
CONTROL Paul-John Loewenthal, Fiscal Selectivity: A Notion in Need of Clarity, 34 (2019).
32 CASE C-417/103M ITALY, supra note 24 at 38. 33 C
ASES T-755/15ANDT-759/15LUXEMBOURG AND FIAT CHRYSLER V COMMISSION, supra note 7 at 139.
34 CASES C-106/09PANDC-107/09P,GIBRALTAR 2011, supra note 6 at 72. 35 Case C-128/16 P, Commission v Lico Leasing SA and others, 84 (2018). 36 6 I
SABELLE RICHELLE, STATE AID LAW AND BUSINESS TAXATION Lang, Michael, State Aid and Taxation: Selectivity and Comparability Analysis, 29 (2016).
37 CASES C-106/09PANDC-107/09P,GIBRALTAR 2011, supra note 6 at 74. 38 CASES C-20/15PANDC-21/15P,WORLD DUTY FREE, supra note 5 at 53.
amount”.39 On the other hand, an individual scheme is defined negatively, a measure that is not an aid
scheme would be an individual scheme.40
This distinction is not merely formal. According to the Court case law in the MOL case, the selectivity criterion is laxer when the measure is classified as an individual scheme, in such a case, the identification of an advantage leads to a presumption of selectivity.41On the other hand, if an aid scheme
is found, the Commission does not need to carry out an independent analysis of individual cases that involve the non-application of the PPT.42
Recently, the case law has probed the relevance of that classification in the Belgium Excess Profit Rulings Decision case where the General Court rejected the Commission assessment of the measure as an aid scheme.43 Following its analysis, it appears that the non-application of the PPT does not
implicate an aid scheme, rather an individual aid under which the selectivity presumption would operate. The application of the PPT could barely be made without further implementing measures being adopted because its essential elements emerge from the provisions identified as the basis for the scheme.44 It can barely be constrained to a merely “technical application of the provisions”45. To the contrary, the
(non-) application of the PPT requires a case by case analysis in its subjective part “if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes”.46 To reach the existence of the tax avoidance motive as one of the principals,
the tax administration and the judiciary need to give a reasoned opinion after considering all facts and circumstances of each individual case. Even on very similar facts, tax administrations may decide to deny treaty benefits or not to apply the PPT, so it is clearly not restricted to a technical application.47 We may accept that the non-application of the PPT can not constitute an aid scheme within the meaning of Article 1(d) of Regulation 2015/1589. However, it is settled case-law that in the field of State Aid, effects have a prevalence over the form.48 A constant application of the PPT could lead to a de facto aid
scheme, which is different from the de facto selectivity. The Commission would need to demonstrate the existence of a systematic approach that can be inferred from the fact that the tax administration always follows a lenient interpretation. In such a case, even though the PPT as a tool requires the use of interpretation on a case by case analysis if the interpretation leads to automatic non-application, it creates a situation where, the facto, there is no margin of discretion.49
In conclusion, the (non) application may be also classified as both,50 and aid scheme and as individual
aid. In the former, the selectivity presumption does not operate and is for the Commission to establish that measure, although it confers an advantage of general application, favors exclusively certain
39 COUNCIL REGULATION (EU)2015/1589 OF 13JULY 2015 LAYING DOWN DETAILED RULES FOR THE APPLICATION OF ARTICLE
108 OF THE TREATY ON THE FUNCTIONING OF THE EUROPEAN UNION, art 1(d) (2015).
40 Id. at art 1 (e).
41 Case C-15/14 P - Commission v MOL, 60 (2015); CASES T-755/15ANDT-759/15LUXEMBOURG AND FIAT CHRYSLER
V COMMISSION, supra note 7 at 333.
42 Cases T-131/16 y T-263/16, Belgium, 78 (2019). 43 CASES T-131/16 Y T-263/16,BELGIUM, supra note 42. 44 Id. at 98–98.
45 Id. at 99.
46 OECD Income and Capital Model Convention and Commentary (Condensed Version) (2017) - Tax Research
Platform - IBFD, supra note 29 at art29 (9).
47 CASES T-131/16 Y T-263/16,BELGIUM, supra note 42 at 107. 48 Case C-487/06 P, Brithis Aggregates, 89 (2008).
49 CASES T-131/16 Y T-263/16,BELGIUM, supra note 42 at 128.
undertakings or certain sectors of activity.51
3. State aid assessment
As stated above, the first three conditions (advantage conferred by State resources that distort the competition) for a measure to being State aid in case of the non-application of the PPT are rather straightforward. Hence, the thesis would focus on the selectivity element.
4. De iure selectivity in the non-application of the PPT
4.1. The three steps approach
To establish a de iure selectivity of a measure the CJEU follows a three steps analysis. According to it, it is first necessary to identify a reference framework or normal tax regime. Second to analyze whether the measure derogates from that reference framework insomuch it differentiates between economic undertakings who are in a comparable factual and legal situation in the light of the objective of the tax system. Thirdly, a prima facie selective treatment can, however, be justified if that derogation results directly from the basic or guiding principles of the tax system.52 Contrariwise, if the advantage results
from a general measure that applies without distinction to all taxpayers it does not constitute State Aid.53
4.2. First step: the identification of the reference framework
4.2.1. The relevance of the identification of the reverence framework and the difficulties in determining it
The first step in order to determine the selectivity of a measure is to identify the reference framework. It can be defined as the benchmark against which the selectivity of a measure is assessed.54 The
selectivity character of the measure is given where it favors certain undertakings in comparison with others that are in similar situations. The reference framework is the yardstick under which the comparison is made.55 The Commission proposes the following definition in the Commission Notice on
State Aid:
“The reference system is composed of a consistent set of rules that generally apply — on the basis of objective criteria — to all undertakings falling within its scope as defined by its objective. Typically, those rules define not only the scope of the system, but also the conditions under which the system applies, the rights and obligations of undertakings subject to it and the technicalities of the functioning of the system”.56
51 C
ASES C-20/15PANDC-21/15P,WORLD DUTY FREE, supra note 5 at para. 55.
52 Cases C-78/08 to C-80/08, Paint Graphos and others,para. 49 (2011).
53 CASES C-106/09PANDC-107/09P,GIBRALTAR 2011, supra note 6 at para. 73. 54 C
OMMISSION 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/C262/01), supra note 26 at para. 132.
55 Opinion of Advocate General Wahl on Case C-203/16 P Dirk Andres, 93–94 (2017).
56 COMMISSION NOTICE ON THE NOTION OF STATE AID AS REFERRED TO IN ARTICLE 107(1) OF THE TREATY ON THE
How to establish the “set of rules that generally apply”? The reference framework is a concept that leads to great uncertainty given the complexity of the tax system. Still, that difficulty must not lead to a carte blanche for an arbitrary selection of the reference frame to reach a selectivity conclusion easier. An incorrect selection of the reference framework vitiates the whole selectivity analysis.57
4.2.2. The scope of the reference framework
4.2.2.1. The purpose of the measure as a starting point to establish the reference framework
Although there is no clear guidance on how to establish the reference framework, an overall examination leads us to think that the reference framework should take in mind the purpose or the effects of the measure that is being assessed under state aid.58 This idea can be an explication of why the CJEU
seems to adopt a broad definition of the reference system.59
For example, in Paint Graphos, the purpose of the measure was to exempt corporative societies from corporate income tax, so the Italian corporate income tax was chosen as a reference framework.60 In
World Duty Free the purpose of the measure was to establish a deduction in the corporate income tax base in form of an amortization of the goodwill resulting from the acquisition of foreign undertakings, so, the proper reference framework was the Spanish corporate income tax.61 Only in cases where a system
from a coherent set of rules with its own entity, we should take into consideration a narrower reference system. This example can be found in the Braurei case where the reference system was not the tax system as a whole, but the rules governing the real property transfer tax.62
The question in the PPT application would be, then, to evaluate the object and effects of PPT and if it can form a “set of rules” in its own merit,63 so as to be a separate reference framework.
4.2.2.2. The CJEU brings some light in the reference framework of anti-abuse rules: the German Sanieroung clause
In the recent German Sanieroung clause cases the facts were the following:
Any company subject to corporate income tax in Germany could carry forward losses to later tax years (the carry forward rule). An exception from this carry forward rule is introduced to counteract the abusive acquisition of dead companies with the purpose of using its losses (the loss forfeiture rule). In addition, the loss forfeiture rule has also an exception, it will not apply if the acquirer of the dead company for the purposes of restructuring and continues its economic activities (the restructuring or Sanierungs clause). According to the General Court reasoning, the reference framework was the loss forfeiture rule from
57 J
ÉRÔME MONSENEGO, SELECTIVITY IN STATE AID LAW AND THE METHODS FOR THE ALLOCATION OF THE CORPORATE TAX BASE 24 (2018).
58 DE PIETRO, supra note 31 at 45; Opinion Advocate General Saugmandsgaard on Case C-374/17, Finanzamt B
v. A-Brauerei,para. 130 (2018).
59 OPINION OF AGWAHL ON CASE C-203/16PDIRK ANDRES, supra note 55 at para.106. 60 C
ASES C-78/08 TO C-80/08,PAINT GRAPHOS AND OTHERS, supra note 52 at paras 51–52.
61 CASES C-20/15PANDC-21/15P,WORLD DUTY FREE, supra note 5 at para. 62. 62 Case C-374/17 A-Braurei, para. 37 (2018).
63 Commission Decision, SA.44896 implemented by the United Kingdom concerning CFC Group Financing
which the Sanierungs clause forms an exception, and therefore, a derogation from the reference system that constitutes state aid.64
The CJEU, following the AG Wagel opinion, asserted that the Commission erred in law by selecting a reference framework too narrow by compounding it only by rule governing the forfeiture of losses. Certainly, as the Sanierungs clause was introduced to define a situation where the general rule should apply (carry forward rule) it would be more appropriate to include the general rule inside the reference framework.65
It also confirmed that the regulatory technique cannot be decisive for the determination of the reference framework.66 The expansion of the reference framework to “the entire body of rules that influence the
tax burden” ensures that it “includes all relevant provisions, and not against provisions that have been carved out artificially from a broader legislative framework”.67 Finally, it eliminates the possibility that a
too narrow approach would conclude that the derogation itself is the reference framework. For example, if in the Paint Graphos we take as a reference framework only the rules concerning the taxation of cooperatives there is no derogation.68 After the judgment, the Commission changed its assessment of
the measure and concluded that there is no State aid within the meaning of 107 TFEU. They read the judgment in a way that requires the reference system to be the German corporate tax system which includes the general loss carry-forward rule, from which the Sanierungs clause is not a derogation.69
Now we are going to extrapolate this reasoning to our case. The PPT represents a derogation from tax treaty benefits. The primary object of tax treaties is to promote economic exchange between the Contracting States by eliminating double taxation, being an auxiliary object not to create opportunities for tax abuse and evasion. On the other hand, the PPT has as an object to deny those treaty benefits in case of abuse. As the non-application of the PPT would be the result that no abuse is found (i.e. it is in accordance with the Convention or the subjective test is not passed), tax treaty benefits would come again into play. Therefore, since the non-application of the PPT has as effect or purpose the conferral of tax treaty benefits, is the tax treaty what should constitute the reference framework and not the PPT by itself. Besides, the principal purpose test has as a rationale to serve to the ancillary object of the tax treaty, to prevent tax treaty abuse. The PPT is just a manifest of part of the object of the tax treaties which is clearer since the new preamble introduced by the MLI (“without creating opportunities for non-taxation or reduced non-taxation through tax evasion or avoidance”).70
The Commission in the UK CFC case establishes that the CFC rules form a “specific set of rules”71, with
its own objective which leads to the conclusion that it has sufficient entity to form a reference system in its own right. That should be also the case with tax treaties. Following the Commission definition in the State Aid notice, tax treaties are applicable only to taxpayers that fall within its scope, they contain the conditions under which they apply (i.e. art 4 OECD MC requires taxpayers to be residents), and rights and obligations different from domestic tax law rules.72 It is also confirmed that the ratio personae of the
64 Case T-287/11, Heitkamp Bauholding v Commission, para. 22 (2016).
65 Case C-203/16 P Dirk Andres, para. 102 (2018). 66 Id. at 104.
67 O
PINION OF AGWAHL ON CASE C-203/16PDIRK ANDRES, supra note 55 at para. 109.
68 MONSENEGO, supra note 57 at 47–48.
69 Commission Decision SA.29150—2010/C (ex 2010/NN), Sanierungsklausel, 49–63 (2020).
70 OECD Income and Capital Model Convention and Commentary (Condensed Version) (2017) - Tax Research
Platform - IBFD, supra note 29 at Preamble.
71 C
OMMISSION DECISION, SA.44896 IMPLEMENTED BY THE UNITED KINGDOM CONCERNING CFC GROUP FINANCING EXEMPTION, supra note 63 at para. 106.
72 C
OMMISSION 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/C262/01), supra note 26 at 133.
measure is relevant for the purposes of establishing the reference framework,73 being the PPT
applicable to undertakings under the scope of the tax treaty.
4.2.2.3. The object of PPT and the need for a purposive interpretation
To select the tax treaty as reference framework is also vital to understand the operation of the PPT. The PPT alone cannot be selected as a reference framework as it would be artificially extracted from a broader frame which is, at least, the tax treaty at stake. A purposive interpretation is necessary when performing the norm test of the PPT.74 Every provision of the tax treaty necessitates an analysis, of the
object and purpose of the tax treaty or the relevant norm as mandated by the Vienna Convention.75 The
necessity of taking into account the object and purpose of the tax treaty is more perceptible in the application of the PPT. Lang appoints that, where the principal purpose of the taxpayer for entering into the arrangement, the PPT mission is to remind tax administrations and courts the need of paying particular attention to the object and purpose of the tax treaty.76 Hence, the PPT requires the study of
the context of the tax treaty to decide whether granting or not the benefits are in accordance with its object and purpose. Concisely, selecting the relevant tax treaty instead of the PPT as reference framework would favor a deeper understanding of the broader system that it aims to protect.77
The result of this classification would be that if the non-application of the PPT is due to no abuse is present, it won’t constitute a derogation, rather, that non-application would be part of the reference framework.78 However, the thesis presupposes a failure to apply the PPT, a case where abuse is present
and it is not applied, consequently, the selectivity analysis will continue.
4.2.2.4. Interim conclusions
In conclusion, the PPT has not the sufficient entity to form a “set of rules”,79 different from the tax treaty.
An isolation of the PPT from tax treaties would be artificial, given that its operation inextricably linked to other tax treaty provisions. It is stated in the Commentaries that the PPT “must be read in the context of paragraphs 1 to 7 and of the rest of the Convention, including its preamble”.80 Thus, the appropriate
reference framework is the tax treaty. Once the reference framework is established, the next step is to perform the comparability analysis.
73 Case C‑6/12. P Oy, 20 (2013) at para. 20.
74 Michael Lang, The Signalling Function of Article 29(9) of the OECD Model – The “Principal Purpose Test”, 74
BULLETIN FOR INTERNATIONAL TAXATION, Chapter 2: Object and purpose (2020).
75 UN Vienna Convention on the Law of Treaties (1969), art. 31. 76” in Lang, supra note 74 at Chapter 2: object and purpose. 77 6 R
ICHELLE, supra note 36 at Traversa, Edoardo, Anti-avoidance Measures and State Aid in a Post-BEPS Context: An Attempt at Reconciliation, 107.
78 Andreas Pederwitz & Ruxandra Vlasceanu, Incorrect System of Reference: ECJ Overrules Commission Decision
on German Restructuring Clause Authors: Andreas Perdelwitz and Ruxandra Vlasceanu, White Papers Collection,
10.
79 C
OMMISSION 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/C262/01), supra note 26.
80 OECD Income and Capital Model Convention and Commentary (Condensed Version) (2017) - Tax Research
5. The second step: the discrimination analysis
The previous chapter concluded in the first step with the identification of the relevant tax treaty as the ordinary or normal tax system that constitutes the reference framework. The second step in the selectivity analysis is to assert whether the non-application of the PPT derogates from the reference framework as it discriminates between undertakings that are in the light of the objective pursued by the reference system in a comparable legal and factual situation. If such discrimination exists, the non-application of the PPT would constitute a prima facie selective measure, that may be nevertheless be justified by the nature or the logic of the reference framework.81
5.1. The identification of the tertium comparationis
It stems from World Duty Free that the selectivity criterion in State Aid Law has converted into a non discrimination analysis very similar to the EU freedoms field. An equality examination searching for different treatment of undertakings in a similar situation. However, it should not be an arbitrary exercise, the comparison needs to be made about the “essential joint features and differences” in the specific light of the respective context.82 Therefore, only truly comparable situations must be taken into account,
exercise to which the next section is dedicated.
5.1.1.1. The reference framework stricto sensu
It is crucial to note that the reference framework, in this case, tax treaties, is instrumental to the discrimination or comparability analysis and that they are two separate steps that must not be merged. The identification of the reference framework (first step) precedes the comparability analysis (second step) by setting up a benchmark under which the comparison must be made.83 That assertion has two
consequences.
First undertakings that can be compared must be under the scope of the reference framework, therefore, only taxpayers that are under the scope of the tax treaty can be compared. Undertakings which are not involved in cross-border situations could not form part of the comparability analysis.
Second, it also means that not all the taxpayers under the scope of the reference framework should be compared, a presumption that all undertakings that are under the scope of the reference framework are in a similar situation would lead the comparability analysis to be meaningless. Consequently, only undertakings that are in similar factual and legal circumstances in the object of the reference system may be compared, those who are not are rejected from this second step. Buendía refers to this situation as “system of reference stricto sensu”.84 An example of this reasoning can be found again in the World
Duty Free case where the reference framework was established in the Spanish corporate income tax but not all companies were compared. The comparison was made solely between Spanish undertakings that acquire shareholdings in companies’ resident in Spain vis a vis Spanish undertaking that makes acquisitions of shareholdings in non-resident companies.85
81 C
ASE C-374/17A-BRAUREI, supra note 62 at paras 35,36.
82 6 RICHELLE, supra note 36 at Lang, Michael, State Aid and Taxation: Selectivity and Comparability Analysis, 35. 83 O
PINION OF AGWAHL ON CASE C-203/16PDIRK ANDRES, supra note 55 at para.109.
84 Jose Luis Buendia Sierra, Finding Selectivity or the Art of Comparison Case Law Annotations, 2018 EUR.ST.AID
L.Q. 85–92, 88 (2018).
5.1.2. The tertium comparationis, in the light of which object?
It is in the light of the reference framework, the tax treaty, and its objectives where the comparability analysis must be carried on and not in the light and objective of the measure, the PPT, itself.86What
follows from the literal wording of the CJEU judgments, again, in World Duty Free the comparability analysis is carried out “in the light of the objective pursued by the tax system concerned.”87 This
conclusion also follows by the fact that taking into account only the objective of the measure that is assessed in barely any case a discrimination can be found as the measure may have as an object to produce a different treatment.
As every system, tax treaties may be driven by several objectives, subsequently, it is necessary to determine under which objective the comparability analysis is going to be executed, by weighed them in a case by case analysis.88 Stemming from MLI, the object of tax treaties is the elimination of double
taxation without creating opportunities for non-taxation or reduced taxation through tax avoidance.89
Hence, there is a principal purpose, i.e. the elimination of double taxation and two ancillary purposes, de prevention of tax avoidance and tax evasion.90 The comparison can be made under the light of the
principal objective or its secondary objects.
Given that it is in the specific light of the second objective where the PPT tallies, the comparison should be under that specific objective. Similarly, in the Fiat and Starbucks cases, the General Court refers to the Forum 187 case which establishes that the objective of the ordinary tax system is the netting taxation (“difference between profits and outgoings of an undertaking carrying on its activities in conditions of free competition”)91 but is not directly in the light of that objective where the comparability analysis is
carried on. It is performed in the light of the equal principle that is inherent to the tax system which is “is to tax integrated and stand-alone undertakings in Luxembourg in the same way with regard to corporate income tax”.92 In the same vein, in the non-application of the PPT the comparison should be made under
the specific objective of the reference framework: the fight of tax treaty abuse, being the PPT one of the manifest of that objective.
5.1.2.1. The comparison under the elimination of double taxation objective: to treat different different situations
Nevertheless, if the comparison is made in the light of the first objective (the elimination of the double taxation) virtually every undertaking which enjoys treaty benefits, had been them being involved in abusive situations, or not, are comparable. If tax abusers and non-abusers are compared it seems that the first condition for a measure to be state aid is not fulfilled, the four conditions being cumulative. There is not an advantage as both categories enjoy treaty benefits because the consequence of the non-application of the PPT (leaving aside other anti-abuse rules) is that tax abusers would enjoy treaty benefits as non-abusers do.
Could the advantage be given by the fact that two different situations are treated in the same way? It is true that in the EU Freedoms field discrimination can arise only through the application of different rules
86 Buendia Sierra, supra note 84 at 89; DE PIETRO, supra note 31 at 46–47. 87 C
ASES C-20/15PANDC-21/15P,WORLD DUTY FREE, supra note 5 at para. 79.
88 RICHELLE, supra note 36 at Traversa, Edoardo, Anti-avoidance Measures and State Aid in a Post-BEPS Context:
An Attempt at Reconciliation, 105.
89 OECD, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS art. 6. 90 Stef van Weeghel, A Deconstruction of the Principal Purposes Test, 11 W
ORLD TAX JOURNAL 3–45, chapter 4 (2019).
91 C
ASES T-755/15ANDT-759/15LUXEMBOURG AND FIAT CHRYSLER V COMMISSION, supra note 7 at para. 142.
to comparable situations or the application of the same rule to different situations.93 However, this
scenario results in a negative discrimination for the non-abuser, and the application of art. 107 TFEU always requires a positive discrimination that is not present.94
State Aid does not address every discrimination, its logic starts from the fact that there is a benefit or favour which creates an advantage as the basis for art. 107 TFEU and art. 108 TFEU.95 Its rationale is
not to treat worst certain undertakings in order to reach equality, its rationale is based in not to treat
better certain undertakings. Besides, if we visualize a scenario where a Member State has not sign the
MLI, how would the advantage for tax abusers (because they are treated in the same way while in a different situation) be solved?
Since the comparison between tax abusers and non-abusers in the light of the elimination of double taxation does not lead to the existence of an advantage, the comparison in the scope of the anti-abuse objective of tax treaties may be the correct one.
5.1.3. Tax abusers vis a vis non-abuser in the light of the anti-abuse objective.
On the other hand, if the discrimination test is made under the anti-abuse objective of tax treaties abusers and non-abusers are not in a comparable situation.
According to the EU anti-abuse doctrine, the objective of anti-abuse measures, and hence, the PPT, should be limited to the counteracting of arrangements that do not show any valid commercial reason. The anti-abuse objective is inevitably limited to conducts involving the creation of wholly artificial arrangements that do not reflect economic reality.96
In consequence, if the comparison is made in the
light of that objective (to counteract non-genuine arrangements) it implies that undertakings who show valid economic reasons (and therefore, are out of the scope of that objective) cannot be compared with undertakings that entered into artificial arrangements for purely tax motives. As they are not in the same situation (not under the scope of the objective), they are not comparable. Hence, the non-application of the PPT to the formers cannot arise a selective advantage as there is no discrimination between them due to a lack of comparability.97 The above reasoning can be also replicated here, the state aid rationale,
contrary to EU Freedoms case law, is not to treat dissimilar different situations.
This scope cannot be extended by the Commission either in the derogation test or in the discrimination test, nor by Member State as it would be un breach of the proportionality test mandated by EU Freedoms case law. The lack of comparability results that no selectivity can be found as both categories are not in the same circumstances in the light of the anti-abuse objective pursued by the reference framework.98
In the same vein, the CJEU established in Paint Graphos that cooperatives societies and commercial companies may not be comparable,99 with the result that corporate tax exemption is not even prima face
selectivity.100
Certainly, the dividing line between what constitutes abuse or not (and what is comparable or not) might
93 Case C-279/93, Schumacker, 30 (1995).
94 6 RICHELLE, supra note 36 at 62. 95 W
OLFGANG SCHÖN, Tax Legislation and the Notion of Fiscal Aid – A Review of Five Years of European
Jurisprudence 8 (2015).
96 Case C-196/04, Cadbury Schweppes and Cadbury Schweppes Overseas, 55 (2006).
97 Richelle, State Aid Law and Business Taxation, 6: E. Traversa and P.M. Sabbadini, page 108. 98 CASES C-20/15PANDC-21/15P,WORLD DUTY FREE, supra note 5 at 85.
99 C
ASES C-78/08 TO C-80/08,PAINT GRAPHOS AND OTHERS, supra note 52 at 61.
be blurred. Following the EU Freedoms case law, that situation should be solved with a proportionality analysis of whether the objective difference is such as to justify the incomparability.101 Yet, given that
tax treaties are Member State competence’s it should be expected that the Commission would trigger an investigation only in clear-cut cases.
5.1.4. Tax abusers vis a vis abuser in the light of the anti-abuse objective
Following this process of elimination, the correct comparison would be, then, between undertakings that fall under the scope of the objective of the reference system which is the anti-abuse objective. As stated before, 107 TFEU requires a benefit that favours certain undertakings over others. Certain undertakings would be favoured if the PPT is not applied to them whereas it is applied to other groups of undertakings that are in the same circumstances.
In other words, both categories have entered into an arrangement with the principal purpose or one of the principal purposes of obtaining treaty benefits contrary to the object and purpose of the treaty, yet, treaty benefits are not denied to some of them. The result of that differentiation is the abnormal application of the reference system in favour of certain undertakings or in the words of the Commission a misapplication.
5.2. Derogation from the reference framework giving rise to discrimination
The above line of thoughts is the one used by the Commission in the McDonalds case where finally it “cannot establish that the contested rulings granted a selective advantage to McD Europe by misapplying the Luxembourg – US double taxation treaty”102. A misapplication can only exist by a
reference of a correct application. The next section establishes that is for the Member State to establish what the correct or normal application of the PPT is.
5.2.1. The administrative discretion in the PPT application
Tax authorities need room to maneuver to apply the PPT, a test that requires a high degree of flexibility and a case-by-case analysis. Douma asserts that the abuse of law doctrine requires a complex balancing of conflicting principles; the right to select the most tax-efficient way, the principle of legal certainty or the power to tax, and the Member State in a better position to perform such ponderation than the Commission.103
According to the CJEU in the P Oy case, the exercise of the administrative discretion is not selective by nature if the criteria used by the tax administration are related to the object of the tax system.104 As a
result, the degree of latitude that may enjoy the tax administration toward deciding whether to apply (or not) the PPT may be limited by the object of reference framework, which is to combat the abuse of tax treaties. Even so, it is for the Member State to decide what is the “abuse” threshold in the PPT application, and, therefore to some extent, the object and the comparability. In this regard, if for example,
101 Case C-170/05, Denkavit International, 25 (2006). 102 C
OMMISSION DECISION SA.38945(2015/C)(EX 2015/NN)(EX 2014/CP) GRANTED BY LUXEMBOURG IN FAVOUR OF MCDONALD’S EUROPE, supra note 22 at 124.
103 S. C. W. Douma, Staatssteunpraatjes vullen geen gaatjes!, 2018 NTFR.N
EDERLANDS TIJDSCHRIFT VOOR FISCAAL RECHT (2018).
a Member State decides that the PPT is not applicable given that the taxpayer shows valid economic reasons, selectivity cannot arise as the criteria for not applying the PPT is intrinsic to the reference system.
Traversa and Sabbani question if the existence of valid economic reason is a criterion extrinsic from the reference system,105 such as the maintenance of the employment in the P Oy case.106 I believe that
should not be the case, the existence of valid economic reason is a general criteria inherent to the rationale of the anti-abuse doctrine in the EU and for the PPT application.On the other hand, if the non-application lacks any criteria relating the anti-abuse doctrine of the Member State, because, for example, wants to attract to its jurisdiction a certain group of undertakings (i.e. it wants to appeal the intellectual property industry) that decision would be for a reason that is unrelated the tax system.
As a result, given that the PPT is a flexible test only in cases of manifest error or intentional failure to apply the PPT, a misapplication can arise. That would be the case where the decision of not to apply the PPT is clearly based on a criterion that is unrelated to the anti-abuse objective of the reference framework in benefit of a certain undertaking(s). Nevertheless, a distinction should be made between intentional misapplication and accidental misapplication. In the latter case, it cannot be derived a plan to give a benefit to a certain taxpayer, therefore inadvertent misapplication cannot constitute State aid.107
In addition, as the General Court has stated in the Fiat and Starbuck cases if the Commission checks the application of an undetermined concept (such an arms-length price) it has to acknowledge its flexibility. Indeed, with identical facts, different interpretations of the PPT can arise.108 Thus, it has to
take into account the inherent pliability of the PPT.109
5.2.2. Interim conclusion
If the Commission is in the position of probing clear-cut misapplication of the normal tax system, the selective treatment would be the corollary conclusion, since there is nothing more selective than the non-application of the law. That misapplication would be the reverse mirror of a correct application.
5.3. The normal application of the PPT should be established by the Member State
As we mentioned, in the abuser’s vis a vis tax abusers’ comparison the question would be if there is a misapplication of the PPT. The starting point would be then the reference framework that contains its correct application.
The reference framework should only comprise the interpretation that Member State does of its anti-abuse rules, as direct taxation is a competence of the Member States. Hence, the requirement of derogation needs to have, as a starting point, the normal tax system in the Member State concerned.110
The correct interpretation cannot be derived autonomously from European law (as not harmonized area), not from international BEPS or OECD standards.111
105 RICHELLE, supra note 36 at 107. 106 C
ASE C‑6/12.POY, supra note 73 at para. 27.
107 CONOR QUIGLEY, EUROPEAN STATE AID LAW AND POLICY 10 (2009).
108 Van Weeghel compares the Prévost, X Holding ApS and the Dutch case Hoge Raad, 14 July 2006 in van
Weeghel, supra note 90 at chapter 5.
109 CASES T-755/15ANDT-759/15LUXEMBOURG AND FIAT CHRYSLER V COMMISSION, supra note 7 at para.144. 110 SCHÖN, supra note 95 at 6.
