Spanish tax lease system on shipyards as a State aid scheme: General Court’s reconsideration of the Spain and Others v. Commission case

On 23rd September the General Court issued a ruling on a case referred back from the European Court of Justice concerning appeals brought by Spain and several Spanish shipyard companies presented against the Commission’s decision on the Spain’s application of a tax lease system (TLS) in respect to maritime shipping companies. This regime has been qualified unlawful as a State aid scheme, being a government’s fund that makes the Spanish ships 30% cheaper in respect to prices applied by other Member States.

Back in 2006, the European Commission received several complaints by shipyard federations regarding the TLS. This scheme, applied since 2002, offered the opportunity for shipping companies to save from 20% to 30% on the purchasing price of ships built by Spanish shipyards, causing losses for competitors from other Member States, thus producing a selective advantage.

The Spanish tax lease regime follows a precise juridical structure. The organization of the fiscal planning system involves a leasing society and an Economic Interest Group (EIG), set up by a banking institution. These intermediaries are interposed between the maritime transport company and the shipyards, through series of finance leasing contracts among the parties. As previously mentioned, the tax lease regime grants a discount on the maritime transportation companies’ purchases, but only if they accept to buy ships indirectly by the EIG, instead of having them built directly by the shipyards.

Indeed, the EIG gets a ship on lease by another leasing society, from the date on which the ship starts to be built. When the works are terminated, the EIG grants the transportation means on lease to the ships company, who starts to engage it. In any case, the EIG undertakes to purchase the vessel at the expiry of the lease agreement and the shipping company does the same at the expiry of the bareboat lease agreement, by means of reciprocal contracts with sale or purchase option clauses. All of this is subordinated to a general contract signed by all the parties to accept the organization and the structure of the tax lease regime. The aim of this system is to give some fiscal advantages to the EIG and the other investors, so that a part of these discounts is automatically transferred to the maritime transportation companies too.

Within the functioning of the Spanish fiscal framework, these advantages are gained through two phases, on the basis of two different series of fiscal rules. In the first one, the EIG receives considerable tax reductions consequently to the application of an early and accelerated depreciation of the leased vessel under the “normal” corporate tax regime. Moreover, under normal circumstances, savings obtained by the early depreciation should be offset by the payment of higher taxes when the ship has been fully depreciated and depreciation costs are no longer deductible or when the ship is sold and a capital gain is derived from the sale. Contrarily, within the Spanish tax lease regime, EIGs do not retain ships after depreciation has been completed, thus they don’t have to pay higher taxes. In the second phase, the tax savings resulting from the transfer of the initial losses to investors are safeguarded following the transfer of the EIG from the income tax regime to the tonnage tax regime and the total exemption of the capital gains from the sale of the ship, immediately after the changeover to the new system, to the shipping company.

According to the information available to the Commission, the combined effect of the tax measures used in the Spanish tax lease scheme has allowed the EIG and its investors to achieve a capital gain of around 30 % of the initial gross price of the vessel. Part of the capital gain, which is around 10%-15%, is retained by the investors, while the rest is transferred to the shipping company (85-90 %), which eventually becomes the owner of the vessel, with a reduction of between 20 % and 30 % of the initial gross price of the vessel.

As result of an accurate analysis of the tax lease system, in its decision the Commission considered it a State aid scheme. Indeed, where aid granted by a Member State strengthens the position of an undertaking compared with other undertakings competing in intra-Community trade, the latter must be regarded as affected by that aid. According to the Commission’s reasoning, “it is sufficient that the recipient of the aid competes with other undertakings in markets open to competition and trade between Member States”. Furthermore, according to the Commission findings, the State aid grant is destined directly to the investors of EIGs, which are active in various sectors of intra-Union trade, such as the markets for bareboat chartering, purchase and sale of deep-sea vessels. The advantages of the Spanish tax lease regime strengthen their position in their respective markets, distorting or threatening to distort competition. As far as shipping companies were concerned, the Commission considered that their economic advantage deriving from the STL resulted from the combination of legal transactions between private entities, thus it was not imputable to the State.

As a consequence, the Commission ordered the national authorities to recover the aid from the investors of the EIGs, which have been the only ones to benefit from a direct flowing of State resources.

In September 2013, Spain, Lico Leasing, SA and Pequeños y Medianos Astilleros Sociedad de Reconversión, SA brought actions for annulment of the Commission’s decision, challenging the alleged violation of State aid clause and claiming the violation of the principle of legitimate expectations. Firstly, in its judgment Spain and Others v Commission of 17th December 2015, the General Court of the European Union stated that the benefit obtained by the investors of the EIGs was not selective and that the statement of reasons relating to the criteria of distortion of competition and effect on trade was inadequate. Consequently, the Commission’s decision was annulled, without being necessary to rule on the other complaints in law and arguments proposed by the applicants.

By way of its judgment of 25 July 2018, the Court of Justice, upholding an appeal brought by the Commission, set aside the judgment of the General Court. The Court of Justice held that the General Court, in its analysis of the selective nature of the tax measures, was wrong in assessing that the Commission’s decision was vitiated by “a lack of sufficient reasoning and […] did not rely on specific circumstances” in stating a distortion of competition. Noting that the General Court did not ruled on all the pleas in law raised before it, the Court of Justice found that the state of the proceedings did not enable it to give final judgment and, accordingly, referred the case back to the General Court.

Firstly, the General Court examined the Commission’s classification of the Spanish tax system as State aid, on the basis of its character of selectivity. As stated by the Commission’s decision, the STL was considered selective as it conferred discretionary powers and as the tax administration would only authorize STL operations to finance sea-going vessels. As in its case-law, the Court observed that the benefit of the tax regime in question was granted by the tax administration under a prior authorisation scheme on the basis of unclear criteria. Therefore, the tax administration could set the starting date of depreciation on the basis of circumstances defined in terms which gave the administration a considerable margin of discretion. According to the Court’s assessment, the existence of these discretionary aspects was such as to favour the beneficiaries over other taxable persons who were in a comparable factual and legal situation.

Furthermore, in order to reject the argument that authorisation had been granted in practice to all the EIGs active in the sector in question, the Court pointed out that, in view of the de jure discretionary nature of the legislation, it made little difference whether or not its application was de facto discretionary. Therefore, the Court stated that the Commission had not erred in considering that the system as a whole was selective, and that the conditions relating to the risk of distortion of competition and the effect on trade between Member States were fulfilled. Consequently, the General Court dismissed the plea in law alleging a misrepresentation of the classification of a measure as State aid.

Lastly, the General Court also rejected the plea alleging infringement of the principles applicable to recovery. The claimants contested the Commission’s decision in so far as it ordered the recovery of all aid from the investors (the members of the EIGs) even though part of the tax benefits had been transferred to the shipping companies. The Commission had decided that the shipping companies were not beneficiaries of the aid and therefore the recovery order was directed solely and entirely to the investors, who were the sole beneficiaries of all the aid on account of the tax transparency of the EIGs. The General Court held that the Commission did not err in ordering recovery of all the aids from the investors, even though the investors transferred part of the benefit to other operators, since the latter were not deemed to be beneficiaries of the aid. Indeed, the investors who actually benefited from the aid at issue, since the applicable legislation did not require them to transfer part of the aid to third parties.

This reversal of the previous judgement represents an indirect victory for the European Commission within the issue of the State aid rules. The General Court’s judgement constitutes a turning point in respect to its previous rulings concerning State aid, especially in the way it has identified of the beneficiaries of the grants. As stated in the cases Autogrill Espana and Banco Santander, the “selectivity must be proved only through the individuation of a category of undertakings which are exclusively favoured by the measure at issue […]”.  Even though this system granted indirect benefits to more agents, which cannot be identified by a specific sector, the Commission acted correctly in finding that two types of operators benefited from a direct selective advantage, namely the EIGs and their investors. Thus, this case deserves special attention, not only for the developments on the links between the separate notions of advantage and selectivity, but also because it demonstrates the complex structure of actors involved when dealing with State aid schemes.