It is reported this week that the European Commission has started investigating Member States offering sweetheart tax deals to companies that would base operations within their territory. In particular, information has been requested from at least three Member States (Ireland, Luxembourg and The Netherlands) in connection with reported tax deals offered to companies such as Apple and Starbucks.
Governments in the countries concerned have either made no comment or indicated that they are not aware of a formal EU investigation having been opened. But, on what legal basis might the Commission investigate any such deals.
One of the fundamental objectives of the EU is to create a single market in which competition is not distorted. The EU state aid regime is designed to achieve this, by eliminating the risk that favourable financial treatment is provided to certain undertakings which, as a result, acquire an unfair advantage over competitors which do not benefit from that same treatment.
State aid is prohibited unless it has been notified to, and pre-approved by the EU Commission. In essence, four conditions are required to give rise to state aid:
(a) support is conferred by a Member State or through state resources;
(b) it confers a selective advantage on an undertaking or the production of certain goods;
(c) it distorts or threatens to distort competition; and
(d) it may have an effect on trade between Member States.
Any form of selective advantage could be unlawful aid: direct transfers of money or other valuable resources at undervalue obviously count; but so too do grants or loans at favourable rates and guarantees on beneficial terms that are not otherwise commercially available. Generally applicable measures, including a generally applicable low rate of business tax, will not be aid (since there is no selective advantage).
The key issue, therefore, will be whether any Member State has 'sweethearted' some companies more than others. If so, then the preferential tax rate is likely to be unlawful aid and anyone in receipt of unlawful aid can be required to pay it back, with interest.
If you would like to discuss this issue, please do not hesitate to contact John Cassels.