DECEMBER 2006 EUROPEAN TAXATION
EUROPEAN UNION
Investment Funds, Tax Planning and State Aid
Prof. Dr Raymond H.C. Luja*
Contents
1. INTRODUCTION
2. INVESTMENT FUND REGIMES
2.1. Introductory remarks
2.2. When do funds qualify as undertakings?
2.3. If funds received aid, how much did they
receive?
3. LIABILITY OF TAX ADVISERS
4. FISCAL AUTONOMY REVISITED
5. CONCLUSIONS
1. INTRODUCTION
The number of State aid decisions and judgments that
are of relevance to taxation is steadily increasing. With
this in mind, the author, in 2., reviews a recently
released decision of the Commission that potentially
affects specialized investment fund regimes in the
European Union. In 3., the author considers a judg-
ment of the European Court of Justice (ECJ) that indi-
cates a more vulnerable position for tax advisers with
regard to their clients when they become involved in
tax planning if State aid could be at issue. Then, in 4.,
the author revisits the issue of regional tax autonomy
by examining the ECJ’s recent decision regarding Por-
tugal and the Azores. Some concluding remarks follow
in 5.
2. INVESTMENT FUND REGIMES
2.1. Introductory remarks
In 2003, the Commission started a State aid investiga-
tion into an Italian regime for specialized investment
vehicles. According to the subsequent decision,1
investment vehicles in Italy are not subject to income
tax, but, rather, to a 12.5% substitute tax on operating
revenue. This income is not subject to tax on distribu-
tion. With regard to specialized investment vehicles
that invest two thirds of the value of their assets in
small and medium-sized enterprises, the substitute tax
is reduced to 5%.2 In an appeal lodged against the deci-
sion to the effect that the 5% reduced rate was prohib-
ited State aid, the Italian government stated that:
in the Italian legislation (which transposes the directives
on regulation of financial markets), unit trusts and open-
ended investment companies are classified merely as
independent funds divided into units. They do not there-
fore constitute undertakings within the meaning of
Community law. The Commission took note of that situ-
ation, but observed that “in certain cases” such invest-
ment instruments constitute undertakings; however, the
Commission did not specify in what cases and under
what conditions open-ended investment companies and
funds acquire that status ... .3
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565
This case addresses a very basic question, i.e. under
what circumstances do investment funds qualify as an
undertaking by carrying out economic activities? The
relevance of this question is easily explained. In order
for the State aid prohibition in Art. 87(1) of the EC
Treaty to have effect, aid (including tax benefits) must
be granted selectively. Limiting tax benefits to certain
undertakings could give rise to such selectivity.
2.2. When do funds qualify as undertakings?
VAT jurisprudence gives some indication of whether or
not funds carry on economic activities. Specifically, in
the BBL case, the ECJ argued that:
it is settled case-law that the mere acquisition and hold-
ing of shares in a company is not to be regarded as an
economic activity ... . The mere acquisition of financial
holdings in other undertakings does not amount to the
exploitation of property for the purpose of obtaining
income therefrom on a continuing basis because any
dividend yielded by that holding is merely the result of
ownership of the property and is not the product of any
economic activity ... . Likewise, the simple acquisition
and the mere sale of other negotiable securities cannot
amount to exploitation of an asset for the purpose of
obtaining income on a continuing basis, the only con-
sideration for those transactions consisting of a possible
profit on the sale of those securities ... . As a rule, such
transactions cannot, by themselves, constitute economic
activities within the meaning of the Sixth Directive.
However, ... transactions affecting securities may come
within the scope of VAT. [ ... The] transactions carried
out by SICAVs consist in the collective investment in
transferable securities of capital raised from the public.
With the capital provided by subscribers when they pur-
chase shares, SICAVs assemble and manage, on behalf
of the subscribers and for a fee, portfolios consisting of
transferable securities. Such an activity, which goes
beyond the compass of the simple acquisition and the
mere sale of securities and which aims to produce
income on a continuing basis, constitutes an economic
activity within the meaning of Article 4(2) of the Sixth
Directive.4 (Emphasis added)
© Raymond H.C. Luja 2006.
* Professor of Comparative Tax Law, Maastricht University and tax
consultant at Loyens & Loeff N.V., Amsterdam. The views expressed in this
article are those of the author and do not necessarily represent those of
Loyens & Loeff N.V. The author can be contacted at
Raymond.Luja@belastr.unimaas.nl.
1. European Commission Decision, 6 September 2005, Official Journal
(EC), L 268/1, 27 September 2006, Para. 20.
2. This description has been simplified for clarity and limited to the
issues that are of direct relevance to this article. For a more detailed descrip-
tion of the Italian system, see note 1.
3. Court of First Instance (CFI), Action brought on 16 November 2005,
Case T-424/05, Italian Republic v. Commission, Official Journal (EC), C
22/23, 28 January 2006.
4. ECJ, 21 October 2004, Case C-8/03, Banque Bruxelles Lambert SA
(BBL) v. Belgian State ECR [2004] I-10157, Paras. 38-43 (references omit-
ted).
566 EUROPEAN TAXATION
The ECJ’s considerations in the EDM case are also rel-
evant in this respect in relation to funds providing
loans, i.e.:
interest received by a holding company in consideration
of loans granted to companies in which it has share-
holdings cannot be excluded from the scope of VAT,
since that interest does not arise from the simple owner-
ship of the asset, but is the consideration for making
capital available for the benefit of a third party ... . As
regards the question whether, in such a situation, a hold-
ing company supplies that service in the capacity of a
taxable person, the Court has held ... that a person car-
rying out transactions which constitute the direct, con-
tinuous, and necessary extension of the person’s taxable
activity, such as the receipt by a managing agent of
interest resulting from the placements of monies
received from clients in the course of managing those
clients’ properties, acts in that capacity. That is with
stronger reason the case when the transactions con-
cerned are carried out with a business or commercial
purpose characterised by, in particular, the wish to max-
imise returns from capital invested. It is clear that an
undertaking acts thus if it uses funds forming part of its
assets to supply services constituting an economic activ-
ity within the meaning of the Sixth Directive, such as
the granting of interest-bearing loans by a holding com-
pany to companies in which it has shareholdings,
whether those loans are granted as economic support to
those companies or as placements of treasury surpluses
or for other reasons. Interest paid to an undertaking in
consideration of bank deposits or placements in secur-
ities such as Treasury notes or certificates of deposit
likewise cannot be excluded from the scope of VAT,
since the interest paid does not arise from the simple
ownership of the asset but constitutes the consideration
for making capital available for the benefit of a third
party ... .5 (Emphasis added)
The decision involving Italy, taken in September 2005,
was only published recently. The Commission’s posi-
tion was and still appears to be that investment vehicles
are to be considered undertakings only in a minority of
cases. In this regard, the author quotes from the Com-
mission’s reasoning, i.e.:
The Commission considers that specialised investment
vehicles perform an economic activity and constitute
undertakings within the meaning of Article 87(1). This
is confirmed by the case law of the Court in the VAT
field. In particular, the Court recently held that transac-
tions carried out by SICAVs and consisting in the col-
lective investment in transferable securities constitute
an economic activity carried out by taxable persons
within the meaning of Article 4(2) of the Sixth VAT Dir-
ective. According to the case law, it is evident from the
preamble to the First Directive that VAT harmonisation
aims to eliminate factors which may distort conditions
of competition and therefore to secure neutrality in
competition. Given that the state aid rules and the VAT
harmonisation directives share the same purpose, the
Commission considers it appropriate to refer to the
[VAT] case law ... , which confirms that the investment
vehicles in question, whether or not they have corporate
form, perform an economic activity and therefore con-
stitute undertakings within the meaning of Article
87(1).6 (Emphasis added)
The Commission also argues that:
in some cases, investment vehicles are undertakings
within the meaning of Article 87 of the Treaty and may
accordingly benefit from the tax reduction ... . In partic-
ular, it considers that, even if specialised investment
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DECEMBER 2006
vehicles do not benefit directly from the tax reduction
granted to their investors, they nonetheless receive an
indirect economic benefit in so far as the tax reduction
on investments in specialised vehicles prompts investors
to buy shares in such vehicles, thereby providing addi-
tional liquidity and extra income in terms of entry and
management fees. [In] some cases where a state meas-
ure provides for the creation of a fund or other invest-
ment vehicle it is necessary to consider whether the fund
or vehicle can be considered to be an enterprise benefit-
ing from state aid. [ ... In] some cases such investment
vehicles take corporate form and may therefore benefit
individually from advantages although taxation of them
is separate from taxation of the assets they manage.
[The Commission] further points out that other invest-
ment vehicles without legal personality are managed by
undertakings which compete with other operators man-
aging savings and that those undertakings may accord-
ingly benefit from advantages.7 (Emphasis added)
The Commission then concludes that:
The Commission accordingly considers that a tax
advantage provided to investors investing in specialised
investment vehicles favours the vehicles themselves as
undertakings when they have corporate form or the
undertakings managing such vehicles when they have
contractual form. In particular, the increased demand for
shares of specialised investment vehicles leads to an
increase in the management and entry fees charged by
the vehicles or by the undertakings managing them.8
(Emphasis added)
This decision confirms the view that investment funds
themselves are a potential recipient of aid and may
well be within the scope of the State aid prohibition. In
other words, if an investment fund carries out eco-
nomic activities as provided for in Art. 4(1) and (2) of
the Sixth VAT Directive, taking into account the judg-
ments in the BBL and EDM cases, these funds may
face a State aid procedure if the funds (or their
investors) are subject to a favourable special tax
regime. It is irrelevant whether or not certain activities
are subsequently exempt from VAT in accordance with
the Sixth VAT Directive, as the exemption is of no rel-
evance for State aid purposes.9
With the criteria now used by the Commission, it is
hard to determine situations in which a fund would not
be a beneficiary of a special fund tax regime albeit
indirectly, once the presence of an economic activity is
established. This is despite the Commission’s position
that, in general:
an investment fund or an investment vehicle is an inter-
mediary vehicle for the transfer of aid to investors
and/or enterprises in which investment is made, rather
than being a beneficiary of aid itself.10
5. ECJ, 29 April 2004, Case C-77/01, Empresa de Desenvolvimento
Mineiro SGPS SA (EDM) v. Fazenda Pública ECR [2004] I-4295, Paras.
65-69 (references omitted). See also R.A. Wolf, “EDM: New Guidance
from Luxembourg”, 15 International VAT Monitor 4 (2004), pp. 251-255.
6. European Commission Decision, 6 September 2005, Official Journal
(EC), L 268/1, 27 September 2006, Para. 38 (footnotes omitted).
7. Id., Paras. 36-37 (footnotes omitted).
8. Id., Para. 39.
9. Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmo-
nization of the laws of the Member States relating to turnover taxes, Art.
13(B)(d)(1) and (6).
10. Most recently reflected in the Community Guidelines on State aid to
promote risk capital investments in Small and Medium-Sized Enterprises,
Official Journal (EC), C 194/2, 18 August 2006, p. 10.
DECEMBER 2006 EUROPEAN TAXATION
The Commission does, however, comment that:
fiscal measures or other measures involving direct trans-
fers in favour of an investment vehicle or an existing
fund with numerous and diverse investors with the char-
acter of an independent enterprise may constitute aid
unless the investment is made on terms which would be
acceptable to a normal economic operator in a market
economy [i.e. without the special tax provisions at hand]
and therefore provide no advantage to the beneficiary.11
(Emphasis added)
If the Commission’s considerations in the Italian case
are examined in more detail, the general position that
the fund itself is not normally a beneficiary appears to
have become the exception to the rule, especially with
regard to (open-ended) investment funds that invest
money from a large number of investors. The excep-
tion may, therefore, still be those funds that effectively
receive their means from one particular investor for a
given set of investments that merely provide capital or
credits on its behalf based on a preconditioned invest-
ment structure. In these cases, it may be doubted
whether or not there is substantial economic activity if
a legally separate entity is established merely for the
purpose of transferring money for its principal without
any further involvement.12
2.3. If funds received aid, how much did they
receive?
The good news with regard to the decision regarding
Italy is that the Commission affirms that the proper
benchmark for the Italian regime for specialized
investment vehicles is the “normal” substitute tax
regime for investment vehicles and not the general cor-
porate income tax to which other legal entities are nor-
mally subject. Although this finding was widely
assumed, there have not been that many instances in
which the Commission has explicitly confirmed this
point of view. In the Commission’s opinion, the tax
advantage (the aid) is conferred on “special investment
vehicles and their management companies, to the detri-
ment of the other undertakings offering alternative
forms of investments.”13 In order to recover this aid, it
would, therefore, suffice to consider the difference
between the 5% and the 12.5% substitute tax.14
From the author’s perspective, the Commission
appears to affirm that it is possible to maintain a “nor-
mal” tax regime for investment vehicles and their
investors.15 The Member States that decide to intro-
duce more than one investment fund regime that offer
different tax incentives or another means of taxation to
particular types of investment funds may, however, be
at risk of violating the State aid prohibition if the Com-
mission is not properly consulted in advance.16 For the
record, it is not the author’s opinion that introducing
more than one regime results in selectivity per se, but,
rather, that many specialized regimes may result in
such selectivity, as they target particular investors or
investments.17 It should, therefore, be noted that it is
possible that tax benefits may have to be returned over
a ten-year period, including interest, depending on the
circumstance of the case in question.18
At the same time, the financial risk of the recovery of
prohibited tax benefits has been substantially reduced
now that the Commission has decided to compare the
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567
particular regime for the specialized investment vehi-
cle with the normal regime for investment vehicles.
This is instead of using the normal (corporate) income
tax regime for comparison and recovery purposes.
Such a development is somewhat remarkable. In par-
ticular, Art. 87(1) of the EC Treaty states that:
Save as otherwise provided in this Treaty, any aid
granted by a Member State or through State resources in
any form whatsoever which distorts or threatens to dis-
tort competition by favouring certain undertakings or
the production of certain goods shall, in so far as it
affects trade between Member States, be incompatible
with the common market. (Emphasis added)
If investment funds are considered to be in a particular
branch of economic activity, it might be wondered
whether or not the Commission’s point of view is evi-
dent. Most if not all Member States have some kind of
special tax regime for investment funds. Yet taxing a
particular group of undertakings in a different and
favourable manner would normally fall within the
scope of State aid supervision, unless the special
regime is justified by the nature or general scheme of
the tax system, i.e. if the difference in treatment is jus-
tified by reasons relating to the logic of that system.19
In the case involving Italy, the Commission did not
give any indication whatsoever as to on what grounds
it considered the normal substitute tax to be the proper
benchmark.20 The Commission did not say why the
general substitute tax itself was outside the scope of
11. Id.
12. The ECJ may shed some light on the position of closed-ended funds in
ECJ, Pending Case C-363/05, J.P. Morgan Fleming Claverhouse Invest-
ment Trust plc, The Association of Investment Trust Companies v. Commis-
sioners of HM Revenue and Customs, Official Journal (EC), C 330/7, 24
December 2005.
13. European Commission Decision, 6 September 2005, Official Journal
(EC), L 268/1, 27 September 2006, Paras. 40-41.
14. Id., Para. 60. According to the Commission, the investment vehicles
may claim from their investors an amount corresponding to the substitute
tax recovered if national law so allows.
15. It is assumed that the Italian 12.5% regime does not result in further
selectivity itself, i.e. a restriction of the potential investors, the (types of)
companies to be invested in or the persons allowed to establish such funds,
to an extent that is not objectively necessary.
16. The Member States may notify details of fund regimes that they con-
sider not to contain State aid for reasons of legal certainty in order to be sure
of the Commission’s position prior to implementing such regime. See Com-
mission Regulation (EC) 794/2004 of 21 April 2004, Official Journal (EC),
L 140/1, 30 April 2004, Annex I.
17. Notwithstanding the possibility that both the normal and specialized
tax regime may be considered to be selective, as is discussed later.
18. See Council Regulation (EC) 659/1999 of 22 March 1999, Official
Journal (EC), L 83/1, 27 March 1999, in particular, Art. 14 and Art. 15.
19. ECJ, 2 July 1974, Case 173/73, Italian Republic v. Commission of the
European Communities ECR [1974] 709, Para. 15 and ECJ, 22 November
2001, Case C-53/00, Ferring SA v. Agence centrale des organismes de sécu-
rité sociale (ACOSS) ECR [2001] I-9067, Para. 17. Could it, for instance, be
argued that the tax authorities must ensure that investors are not at a disad-
vantage when rerouting their investments through a fund instead of carrying
them out directly; hence the requirement for a (or better: one) special
regime? The peculiar nature of investment funds may justify the introduc-
tion of specific tax rules for the sector in order to adapt to the distinctive fea-
tures of such funds (in line with European Commission Decision, 11
December 2001, Official Journal (EC), L 194/27, 13 July 2002, Para. 32.).
Yet creating “transparency”, which is an argument often used to defend spe-
cial fund regimes, goes, in the author’s opinion, beyond the mere adaptation
of the tax system to the particular features of funds. To be clear, trans-
parency was not at issue in the case involving Italy.
20. The Commission may have assumed that the 12.5% substitute tax
would effectively equal the income tax that it is supposed to replace, but the
author considers this to be rather unlikely.
568 EUROPEAN TAXATION
the prohibition contained in Art. 87(1) of the EC
Treaty, although the author admits that this was not the
object of the Commission’s investigation.21
Accordingly, if governments consider special tax treat-
ment of investment funds to be warranted, they should
agree on a regulatory framework in order to exempt
special regimes from the State aid notification proce-
dure.22
3. LIABILITY OF TAX ADVISERS
Less than a year ago, the ECJ stated that a taxpayer
should take any State aid risks into account as part of
any tax planning. When confronted with the repayment
of tax benefits (a State aid recovery procedure), it can-
not be argued that the actual tax benefit should be
determined by comparing a given situation with alter-
native structures that could have been established with-
out giving rise to the unlawful State aid. Specifically,
the ECJ held that:
The withdrawal of unlawful aid by recovery is the logi-
cal consequence of the finding that it is unlawful. ... By
repaying, the recipient forfeits the advantage which it
had enjoyed over its competitors on the market, and the
situation prior to payment of the aid is restored ... . It
would not be right to determine the amounts to be repaid
in the light of various operations which could have been
implemented by the undertakings if they had not opted
for the type of operation which was coupled with the
aid. That choice was made in the knowledge of the risk
of recovery of aid granted contrary to the procedure laid
down in Article 88(3) EC. Those undertakings could
have avoided that risk by opting immediately for opera-
tions structured in other ways.23
The former finding draws attention to the fact that
there is a particular responsibility for those persons
who advise taxpayers in their course of business. They
should take any State aid risk into account as part of
any tax planning process, but in the end it remains for
the client to decide whether or not to accept the risk.
Based on the classic premise that a diligent business-
man can normally determine whether or not the proper
State aid procedure has been followed, the ECJ has
affirmed that it is for the taxpayer to minimize his risk
of recovery by opting for a safe structure from the out-
set. In doing so, the ECJ has remarkably reduced the
chances in liability suits against the Member State
because of the particular responsibility of the taxpayer
to minimize his risk. Any taxpayer is deemed to be able
to do so, although, in practice, one may disagree
strongly with such a theory.
The ECJ continued by stating that:
re-establishing the status quo ante means returning, as
far as possible, to the situation which would have pre-
vailed if the operations at issue had been carried out
without the tax reduction [i.e. the state aid in this case].
That does not imply reconstructing past events differ-
ently on the basis of hypothetical elements such as the
choices, often numerous, which could have been made
by the operators concerned, since the choices actually
made with the aid might prove to be irreversible. Re-
establishing the status quo ante merely enables account
to be taken, at the stage of recovery of the aid by the
national authorities, of tax treatment which may be
more favourable than the ordinary treatment which, in
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DECEMBER 2006
the absence of unlawful aid and in accordance with
domestic rules which are compatible with Community
law, would have been granted on the basis of the opera-
tion actually carried out.24
This basically means two things. First, the eventual tax
position must be determined, based on the structure
chosen, even if the taxpayer would have chosen an
alternative, either domestic or foreign, had the tax-
payer known of the repayment of the State aid in
advance. Second, in doing so, it is possible to take
account of other tax benefits available to the taxpayer
within the normal tax system, based on the structure
chosen and the transactions that took place in as far as
these do not violate State aid provisions themselves.
4. FISCAL AUTONOMY REVISITED
In a previous issue of European Taxation, the author
discussed the issue of regional fiscal autonomy and the
possibility of this giving rise to the application of the
State aid prohibition.25 In its judgment in Portugal v.
Commission, the ECJ recently affirmed that regional
fiscal autonomy does not give rise to selectivity per se,
thereby creating what the author refers to as the “fiscal
autonomy defence”. Specifically, the ECJ held that:
The determination of the reference framework has a par-
ticular importance in the case of tax measures, since the
very existence of an advantage may be established only
when compared with “normal” taxation. The “normal”
tax rate is the rate in force in the geographical area con-
stituting the reference framework. [ ... The] reference
framework need not necessarily be defined within the
limits of the Member State concerned, so that a measure
conferring an advantage in only one part of the national
territory is not selective on that ground alone for the pur-
poses of Article 87(1) EC. ... It is possible that an infra-
State body enjoys a legal and factual status which makes
it sufficiently autonomous in relation to the central gov-
ernment of a Member State, with the result that, by the
measures it adopts, it is that body and not the central
government which plays a fundamental role in the def-
inition of the political and economic environment in
21. Obviously, the issue of the proper benchmark is not addressed in the
Italian appeal against the Commission’s decision (see note 3). Needless to
say, the Commission will probably not comment on this particular issue
either. If this issue remains unaddressed at the CFI and the ECJ, the Com-
mission’s decision might perhaps give rise to legitimate expectations in
future comparable cases and, therefore, reduce the risk of actual State aid
recovery.
22. See Art. 89 of the EC Treaty for the possibility to exempt in conjunc-
tion with Art. 87(3)(e). It follows from the CFI’s judgment in the Deutsche
Bahn case that the State aid provisions do not apply if a tax exemption is
mandatory as a result of other (non-State aid) secondary EU legislation, as
such an exemption could then not be attributed to the state (CFI, 5 April
2006, Case T-351/02, Deutsche Bahn AG v. Commission of the European
Communities, not yet published, Para. 102). The CFI’s position on this
point is still to be affirmed by the ECJ. Although this judgment covered
an indirect tax regulated under Art. 93 of the EC Treaty, basically any clear
and precise obligation to introduce a preferential tax treatment for funds,
such as an exemption, advanced in a regulation under Art. 94 of the EC
Treaty, would lead to a similar outcome and would, therefore, prevent
Art. 87(1) of the EC Treaty from having effect.
23. ECJ, 15 December 2005, Case C-148/04, Unicredito Italiano
SpA v. Agenzia delle Entrate, Ufficio Genova 1 ECR [2005] I-11137,
Paras. 113-116.
24. Id., Paras. 117-119.
25. See Raymond H.C. Luja, “State Aid Reform 2005/09: Regional Fiscal
Autonomy and Effective Recovery”, 45 European Taxation 12 (2005), pp.
566-570 regarding Gibraltar and the United Kingdom.
DECEMBER 2006 EUROPEAN TAXATION
which undertakings operate. In such a case it is the area
in which the infra-State body responsible for the meas-
ure exercises its powers, and not the country as a whole,
that constitutes the relevant context for the assessment
of whether a measure adopted by such a body favours
certain undertakings in comparison with others in a
comparable legal and factual situation, having regard to
the objective pursued by the measure or the legal system
concerned. ... The Commission’s argument that such an
analysis is rendered inadmissible by the wording of the
Treaty and the well-established case-law in that field
cannot be accepted.26
This may be considered to be a breakthrough for those
Member States that have autonomous regions within
their borders.27 The ECJ was not prepared to follow the
Commission’s argument that fiscal autonomy as such
should be disregarded. Some strict conditions must,
however, be fulfilled. With reference to Advocate Gen-
eral Geelhoed’s Opinion, the ECJ provided for the
three conditions that have to be fulfilled. First, the sub-
national authority concerned must have a separate
political and administrative status, i.e. it should be
competent to deal with its own (fiscal) affairs and be
politically and financially held accountable. Second, a
decision with regard to reducing the tax rate for the
region concerned, as in the case in question, must have
been adopted without the central government being
able to directly intervene. Third, the financial conse-
quences of the decision must not be offset by financial
aid from other regions or the central government.28 In
the case in question, with regard to the Azores, the ECJ
concluded that a budgetary transfer system was in
place that required the central government to offset the
tax revenue foregone to a certain extent. Accordingly,
the conditions to regard the autonomous region as the
framework of reference in determining selectivity were
not met.29
The third condition, i.e. the non-offsetting of tax rev-
enue foregone, would make it very difficult, in most
cases, to meet the criteria for regional autonomy. In the
case in question, it was sufficient for the Commission
to point to the existence of a compensatory system of
financial transfers that was inextricably linked to the
Azores tax reduction, which put the burden on Portugal
to provide evidence that the Azores did not receive any
compensatory financing from the central state.30 Even
if there is no direct link between the tax revenue fore-
gone and the budgetary compensation from the central
government, there may still be an indirect consequence
in the long run. This year’s tax cut may result in a gen-
eral, non-specific increase in financial support from the
central government in the next year or the year there-
after. Whether or not such compensation would suffice
to fail the third condition is still to be determined.
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569
5. CONCLUSIONS
State aid still plays its part in tax planning. Taking
account of the Commission’s reasoning in the case
regarding Italy and specialized investment vehicles,
other EU investment fund regimes may be in danger if
they coexist with other fund regimes within a Member
State, provided that they carry out economic activities.
The Commission appeared to be willing to exclude a
Member State’s general fund regime from the State aid
prohibition, although this appears to be at odds with
the verbatim text of Art. 87(1) of the EC Treaty. It
should, however, be remembered that the Commis-
sion’s views in the case involving Italy still have to be
confirmed in future court cases.
The ECJ has also implicitly drawn attention to the par-
ticular responsibility of the tax adviser with regard to
informing his client of State aid risks as part of the tax
planning process. The author has the impression that
registered accountants are also starting to become
involved in potential State aid issues when drawing up
the company’s accounts for publication. For example,
checklists of liabilities may now include questions for
the company’s lawyer and/or tax adviser regarding
potential State aid risks, in particular when State aid
investigations into tax incentives are ongoing. The
author expects that these issues will be addressed more
often in takeover negotiations and due diligence
reports, just to be on the safe side.
Finally, as far as fiscal autonomy is concerned, the ECJ
has ended the Commission’s line of reasoning that
such autonomy is not to be taken into account in deter-
mining the selectivity of a tax regime. This is despite
the fact that the ECJ rightly places stringent conditions
on such autonomy in order to safeguard the effective-
ness of the prohibition regarding State aid.
26. ECJ, 6 September 2006, Case C-88/03, Portuguese Republic v. Com-
mission of the European Communities, not yet published, Paras. 56-59.
27. It should be noted that this case did not consider the autonomy of local
authorities at the same level that are spread over a Member State, which are
entitled to levy their own taxes, such as provinces, municipalities or any
other division in districts of a Member State. Rather, the issue was that of a
particular authority within a certain region, which is not part of this kind of
administrative division, but has more or less a separate status.
28. ECJ, 6 September 2006, Case C-88/03, Portuguese Republic v. Com-
mission of the European Communities, not yet published, Para. 67.
29. Id., Paras. 71-77.
30. Id., Para. 71.