State aid control has undoubtedly been a focus for Competition Commissioner Vestager over the past five years. The number of dedicated staff increased significantly under Vestager and the State aid expenditure per Member State in 2017 rose to €116.2 billion, representing an increase of €9.6 billion compared to the previous year (see here).

Commissioner Vestager has advocated for more effective State aid enforcement. A new Code for Best Practices provided guidance to all parties involved in order to increase effectiveness, transparency and predictability. Also, a new Recovery Notice was adopted. The notice builds on the experience the European Commission (EC) has acquired with recovery proceedings over the last decade and provides more detail on certain aspects of the recovery procedure, with specific details for recovery of aid granted through tax measures. The EC has already started a “fitness check” of the current rules to gather information for future reform. A list of all State aid-related consultations can be found here.

State aid and taxation

Vestager’s main innovation in State aid was, of course, to attack tax rulings granted by several Member States to multinationals. Over the past five years, the EC has ordered Luxembourg to recover over €430 million in allegedly illegal aid granted through tax rulings to Fiat, Amazon, and Engie. Similarly, it has ordered Ireland to recover €14 billion from Apple, the Netherlands to recover €26 million from Starbucks, and Belgium to recover over €1 billion from the beneficiaries of the Excess Profit “tax scheme”. In addition, the UK CFC regime was deemed to partially constitute illegal State aid, resulting in a recovery order for a currently unknown amount (see our Insights).

The EC’s powers are not unlimited and not all investigations have led to the finding of illegal aid. The investigation of a Luxembourg tax ruling resulting in double non-taxation of McDonald’s European profits based on the Luxembourg–US tax treaty led to a no aid decision. Investigations into Ikea, Nike and Huhtamäki are ongoing.

Appeals of EC decisions in the field of taxation

Both the Member States granting and the beneficiaries receiving allegedly illegal aid have the option to appeal EC decisions to the General Court (GC). This is the case for all of the EC State aid and taxation decisions to date. Most of the appeals are currently pending before the GC, with the judgments in the Fiat and Starbucks cases expected next week on 24 September 2019.

In February of this year, the EC’s decision concerning the Belgian Excess Profit “tax scheme” was annulled by the GC. The GC found that the EC was wrong when it defined the Belgian excess profit ruling system as an ‘aid scheme’. Commissioner Vestager took the judgment as a partial win because the GC found that the EC did not exceed its powers by examining Belgium’s tax system. The GC did not rule on whether the Belgian excess profit rulings could constitute individual aid measures. The EC has appealed the judgment to the Court of Justice of the EU. In addition, to hedge its bets, the EC has this week opened a formal individual State aid investigation into each of the 39 multinationals that obtained an excess profit ruling.

Also this week, the EC has been facing Apple during hearings before the GC. Apple claims that the contested recovery decision is not a proper application of EU State aid law, but an attempt to harmonise diverging national tax regimes.

Taxation and the political agenda

Direct taxation falls within the competence of the Member States, with EU legislation in this field requiring unanimous consent. It is no surprise, then, that Commissioner Vestager has been criticised for putting her political agenda ahead of the rule of law by using State aid laws as a tool to restrict the ability of Member States to use taxation as a policy tool. Vestager acknowledged that: “We are doing this because people are angry about tax avoidance.” Indeed, the State aid rules are, at least for now, the most immediate tool available for the EC in its attempts to remedy disparities in Member States’ tax systems.

Impact of the EC’s decisions so far

Although all of the EC’s recent State aid and taxation decisions are pending before the EU Courts and their outcome is uncertain, the impact of Vestager’s policy in practice is real. For example, many Member States - including Belgium and Luxembourg - have amended their tax legislation or ruling practices following the decisions. With the adoption of a Directive providing for the automatic exchange of cross-border tax rulings, the Anti-Tax Avoidance Directives (ATAD) and the Directive on the mandatory disclosure of potentially aggressive tax planning arrangements (DAC6), the battle against (perceived) aggressive tax planning has been given another boost. The information exchanged via these channels might also lead to further State aid investigations.

Rethinking the State aid rules – the VDL Commission

With Vestager’s nomination for a second term as Competition Commissioner, we can expect some consistency in DG Comp’s State aid policy, with “fair taxation” remaining high on the agenda.

We can also expect some reform, particularly as regards alignment with the political goals of the new EC. Commission President-elect von der Leyen (VDL) has indicated that these priorities include the “green deal” (decarbonisation of the European economy by 2050) and industrial policy.

The competition vs. industrial policy debate is raging, and the question arises whether a more flexible application of State aid rules could be one way to reach industrial policy objectives and level the playing field with non-EU countries (see our Insights). The EC has already relaxed the rules for Important Projects of Common European Interest, in relation to which Member States can pool their resources to support a project of common European interest in all sectors and can grant support to cover up to 100% of the funding gap. The EC recently approved an alliance among France, Germany, Italy and the UK to finance €1.75 billion worth of research into micro-electronics.