Introduction to EU State Aid Law:Favouring certain undertakings and goods(selectivity)Łukasz Stępkowski, Chair of Int’l and European Law, University of Wrocław

Favouring certain undertakings and goods• Save as otherwise provided in the Treaties, any aid granted by a Member State

or through State resources in any form whatsoever which distorts or threatens to distort 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 internal market

• One of the cumulative requirements for a State aid measure

• Commonly addressed as „selectivity”

• Perhaps the most difficult to analyze (K. Bacon, EU Law of State Aid, Oxford 2013, p. 70, ab initio 2.114)

• Tied to the concept of an undertaking and the concept of goods under EU law, which are autonomous concepts of European Union law

Measures that are general in their scope• Measures that are truly general, e.g. refer to an inderterminate number of

addressees, do not favour certain undertakings or the production of certain goods

• Hence, such truly general measures do not fall within EU law on State aid, notwithstanding the fact that they may remain in breach of some other EU and/or national rules (C. Quigley, EC Law and policy, Oxford 2009, p. 43).

• For a given measure to qualify as State aid measure, it must be possible to identify a distinguishable group of undertakings or goods that benefit from it

• If that is not the case, a finding that there may be State aid being granted is precluded

The notion of „goods”• Goods : products which can be valued in money and which are capable, as such,

of forming the subject of commercial transactions

• (ex Judgment of the Court of 10 December 1968, case 7-68 Commission of the European Communities v Italian Republic, ECLI:EU:C:1968:51, supra P. 429 in the Eur-Lex version).

• See also judgment of the Court of 21 October 1999, case C-97/98 Peter Jägerskiöld v Torolf Gustafsson, ECLI:EU:C:1999:515, para. 33, wherein the Court added that “a product” in the meaning described above need not necessarily equate “anything” which can be valued in money and which is capable, as such, of forming the subject of commercial transactions, as e.g. services and intellectual property rights do not constitute „products”.

The notion of an undertaking• There is a single notion of an undertaking through the breadth of EU competition

law, of which State aid law is part

• Attempts to distinguish a separate definition of it under EU law on State aid are wrong

• The General Court has dismissed an express plea to distinguish between State aid law proper and competition law at large, which has been confirmed by the Court of Justice See joined cases T-443/08 and T-455/08 Freistaat Sachsen and Land Sachsen-Anhalt et al., cf. para. 117 : (“the concepts of ‘undertaking’ and ‘economic activity’ are identical in all branches of competition law, be it the provisions addressed to undertakings or the provisions addressed to the Member States, since all those provisions contribute to the attainment of a single objective, namely the objective referred to in [Article 3(1)(b) TFEU] of establishing a system ensuring that competition in the internal market is not distorted”; confirmed by the CJ, Case C-288/11 P Mitteldeutsche Flughafen AG et al., para. 50).

The notion of an undertaking - continued• The concept of “undertaking” covers any entity engaged in an economic activity,

regardless of its legal status and the way in which it is financed

• Any activity consisting in offering goods or services on a given market is an economic activity

• Usually, the economic activity that is the defining characteristic of an undertaking is carried on directly on the market

• (ex judgment of the Court of 11 July 2006, C-205/03 P Federación Española de Empresas de Tecnología Sanitaria (FENIN) v Commission of the European Communities, ECLI:EU:C:2006:453, para. 25; Case C-222/04 Ministero dell'Economia e delle Finanze v Cassa di Risparmio di Firenze SpA, paras 107, 108 and 109)

• A functional approach : what constitutes “an undertaking” is not dependent on national law concerning companies and partnerships or national provisions on commercial activities (business/commercial law), but is – in a true State aid law fashion – defined as to its effect

Undertakings and secondary law of the Union• Secondary law uses either the term „undertaking” or the term of an „enterprise”

• They are substantially the same and even appear interchangeably in a given legal act of the Union (e.g. Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty [the General Block Exemption Regulation II/GBER II]

• COMMISSION RECOMMENDATION of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, ex Article 1 thereunder:„An enterprise is considered to be any entity engaged in an economic activity, irrespective of its legal form. This includes, in particular, self-employed persons and family businesses engaged in craft or other activities, and partnerships or associations regularly engaged in an economic activity”.• Copy-pasted into Article 1 of the Annex I to the GBER II

• The notion of a SME [a micro-, small and a medium enterprise]ex Article 2 GBER II :

• 1. The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.

• 2. Within the SME category, a small enterprise is defined as an enterprise which employs fewer than 50 persons and whose annual turnover and/or annual balance sheet total does not exceed EUR 10 million.

• 3. Within the SME category, a microenterprise is defined as an enterprise which employs fewer than 10 persons and whose annual turnover and/or annual balance sheet total does not exceed EUR 2 million.

Examples of possible undertakings• a natural person (viz. a sole trader / sole proprietorship)

• Esp. a member of a profession (ex judgment of the Court of 18 June 1998, case C-35/96 Commission of the European Communities v Italian Republic, ECLI:EU:C:1998:303, para. 38, para. 7 of the summary (customs agent)).

• a partnership• a „civil partnership” trading as a business entity concluded by way of a contract yet not having separate

legal capacity under national law

• a company (that is, a body corporate)• societas europaea (a SE)

• an european economic interest grouping (an EEIG)

• an association• A registered association

• a foundation

• a pension fund (ex judgment of the Court of 12 September 2000, joined cases C-180/98 to C-184/98 Pavel Pavlov and Others v Stichting Pensioenfonds Medische Specialisten, ECLI:EU:C:2000:428, para. 116 and operative part, in addition to para. 77 (medical specialists as undertakings))

• public law entities engaging in economic activities• Universities

• Public authorities (ex judgment of the Court of 23 April 1991, case C-41/90 Klaus Höfner and Fritz Elser v Macrotron GmbH, ECLI:EU:C:1991:161, para. 23 (public employment agency engaged in the business of employment procurement)

Undertakings and national law• National law may not modify the understanding of the concept of an undertaking

• If a provision of national law required a particular legal form or a frequent conduct of business for a body to be deemed an undertaking, it would be irrelevant for the purposes of Article 107(1) TFEU and EU State aid law in general

• This is notwithstanding the fact that it is principally national law that sets up different instances of undertakings

• Specifically, it is irrelevant whether an entity has a legal personality if it trades

• This leads to a specific take on the concept of a corporate veil (which may be disregarded under EU State aid law)

Groups of entities as a single undertaking• The practical effect of the construction of the notion of an undertaking is the possibility of considering groups of entities (e.g.

companies) as a single undertaking

• There may be the case of an operator in direct contact with the market and, indirectly, of another entity controlling that operator as part of an economic unit which they together form

• While the mere fact of holding shares, even controlling shareholdings, is insufficient to characterise as economic an activity of the entity holding those shares, when it gives rise only to the exercise of the rights attached to the status of shareholder or member, as well as, if appropriate, the receipt of dividends, which are merely the fruits of the ownership of an asset, an entity which, owning controlling shareholdings in a company, actually exercises that control by involving itself directly or indirectly in the management thereof must be regarded as taking part in the economic activity carried on by the controlled undertaking (ex Case C-222/04 Ministero dell'Economia e delle Finanze v Cassa di Risparmio di Firenze SpA, pp. 110-111)

• Even a very large amount of entities may form a single undertaking

• The Dutch petrol stations case, which incorporated over 600 petrol stations and an oil company (ex judgment of the Court of 13 June 2002, case C-382/99 Kingdom of the Netherlands v Commission of the European Communities, ECLI:EU:C:2002:363 , para. 38)

• Rights and duties vested in the Commission (e.g. merger control) do not free, by itself, from considering groupings of undertakings under State aid rules.

• Any possible split of an economic entity into two or more legally distinct entities under national law has no bearing on the concept of an undertaking Judgment of the Court of First Instance of 31 January 2001, case T-156/98 RJB Mining plc v Commission of the European Communities, ECLI:EU:T:2001:29, para. 114 (concentrations and State aid).

• According to the Court therein at para. 114, the simple separation of an undertaking into two different entities, the first of which pursues directly the former economic activity and the second of which controls the first, being fully involved in its management, would be sufficient to deprive the EU rules relating to State aid of their practical effect. Therefore, the underlying rationale for such disregard of separate legal personalities of economic operators is the principle of effectiveness of European Union law.

• Secondary law sets procedures and thresholds for considering whether a group of undertakings is a single undertaking (viz. GBER II and the De minimis regulation (no. 1407/2013)

• Such secondary law rules may not deprive State aid law of its effectiveness and are joined with the need to interpret them effectively

• Enterprises which do not formally have one or other of the relationships described under secondary law can still be considered a single undertaking (ex Judgment of the Court of 27 February 2014., case C-110/13 HaTeFo GmbH v Finanzamt Haldensleben, EU:C:2014:114, para. 36)

Approach to selectivity• A measure is obviously selective if there is only a single undertaking that

benefits from it (K. Bacon, op. cit., p. 70, infra 2.113)

• Otherwise, the question of selectivity has to be analysed

• As a first step, a measure may be prima facie selective, i.e. its selectivity is apparent at a first glance

• If a measure is not prima facie selective a relevant reference framework (the “normal” conditions under which undertakings operate or goods are produced) has to be established

• Then, one needs to ascertain whether those that receive an advantage from a measure are sufficiently distinct from the framework

• Additionally, there exists a special regime of assessment for measures that are introduced by way of taxation, as, in that field, the existence of either material selectivity or territorial (geographical) selectivity should be demonstrated

Approach to selectivity - quantity of undertakings• the fact that the number of undertakings able to claim entitlement under a

measure is very large, or that they belong to a single, yet entire sector or different sectors of economic activity, is not sufficient to call into question the selective nature of that measure and, therefore, to rule out its classification as State aid.

• where the measure in question is governed by objective criteria of horizontal application, that fact too does not call into question its selective character, since it can serve only to show that the aid at issue falls within an aid scheme and is not individual aid

• See e.g. judgment of the Court of 7 June 1988, case 57/86 Hellenic Republic v Commission of the European Communities, ECLI:EU:C:1988:284, para. 8 (all Greek export undertakings, “in so far as they benefit from an economic advantage which reduces the expenses incurred in respect of their sales on the markets of other Member States”), case C-295/97 Piaggio above, para. 37 (large industrial undertakings in difficulties which owe particularly large debts to certain, mainly public, classes of creditors), case C-156/98 Federal Republic of Germany v Commission above, para. 23 (undertakings situated in the “new” Länder or West Berlin)

• See e.g.case C-66/02 Italian Republic v Commission, para. 96 (banking sector).

• Judgment of the Court of 17 June 1999, case C-75/97 Kingdom of Belgium v Commission of the European Communities, ECLI:EU:C:1999:311, para. 29 (sectors of processing industry).

• case C-279/08 P European Commission v Kingdom of the Netherlands, para. 50.

Establishing the general framework of a measure• in order to assess potential selectivity, one has to search for entities or goods in

a comparable legal and factual situation (ex Case C-279/08 P European Commission v Kingdom of the Netherlands, para. 52, judgment of the Court of 8 November 2001, case C-143/99 Adria-Wien Pipeline GmbH and Wietersdorfer & Peggauer Zementwerke GmbH v Finanzlandesdirektion für Kärnten, ECLI:EU:C:2001:598, para. 41)

• should there be a situation in which an undertaking (or a relevant production of goods) may not be readily ascertained (i.e. there is more than one, or even an easily identifiable group), the Court requires a three-part test to be conducted, especially in cases concerning taxation.

• See judgment of the Court of 13 February 2003, case C-409/00 Kingdom of Spain v Commission of the European Communities, ECLI:EU:C:2003:92, para. 49 (natural persons and SMEs carrying on transport operations on their own account or for another, or a target of a measure which is “selective by nature”, according to the Court; see also K. Bacon, op. cit., p. 71. On tax measures, T.M. Rusche et al.,Faull & Nikpay, EU Competition Law, Oxford 2014, p. 1948, ab initio 17.109, although not limited to them, as e.g. in case C-279/08 Commission v Netherlands).

Establishing the general framework of a measure• To begin with, a reference system, as mentioned above, should be established, to see whether there

are any undertakings or goods in comparable situations. Such a system would serve as a benchmark for a measure deemed to be aid. According to the Court, it is for the Commission to prove that a measure creates differences between undertakings which, with regard to the objective of the measure in question, are in a comparable factual and legal situation. Despite the above, it is not necessary to prove that undertakings are subject to the same kind of obligations for them to be in comparable situations (ex case C-279/08 P Commission v Netherlands above, para. 66)

• While a measure may be prima facie selective, this may be checked by comparing the group suspected of being beneficiaries and the benchmark. This would be the case if a measure in question identifies its beneficiaries by itself. However, measures may also be deemed selective if they purport to be general, but in actual fact are found to be selective . The burden of proof for the this step also rests with the Commission (See joined cases C-106/09 P and C-107/09 P Commission and Spain v Gibraltar and UK,, para. 101. See also judgment of the Court of First Instance (of 6 March 2002, joined cases T-127/99, T-129/99 and T-148/99 Territorio Histórico de Álava - Diputación Foral de Álava (T-127/99), Comunidad Autónoma del País Vasco and Gasteizko Industria Lurra, SA (T-129/99) and Daewoo Electronics Manufacturing España, SA (T-148/99) v Commission of the European Communities, ECLI:EU:T:2002:59, para. 149

• Thirdly, a prima facie selective measure may be justified by nature and general scheme of the system. This excludes classification as a selective measure (and, therefore, as an aid measure), but the burden of proof for demonstrating such a feature of a measure in question rests with a party wishing to establish such a fact (which, usually, would be a Member State desiring to exonerate itself and prove that a measure does not fall within the criteria of Article 107(1) TFEU, ex judgment of the Court of 22 December 2008, case C-487/06 P British Aggregates Association v Commission of the European Communities and United Kingdom, ECLI:EU:C:2008:757, para. 83, C-143/99 Adria-Wien Pipeline GmbH, para. 42, C-279/08 P Commission v Netherlands above, para. 77).

Justification by the system• If the measure in question differs from the general framework, it still may be

„saved” by the justification as to the nature and scheme of the system

• the general proviso that State aid measures are assessed as to their effect still holds – it is the nature and scheme of the system as to their effects (and not the justification or external objectives) that may exonerate a measure from being found selective

• a measure which creates an exception to the application of the general tax system may be justified if it results directly from the basic or guiding principles of that tax system ( ex case C-75/97 Kingdom of Belgium v Commission of the European Communities, para. 25 (social character), case C-279/08 P European Commission v Kingdom of the Netherlands above, para. 75, case C-487/06 P British Aggregates, para. 92 (environmental protection), K. Bacon, op. cit., p. 80, ab initio 2.136).

• judgment of the Court of 8 September 2011, joined cases C-78/08 to C-80/08 Ministero dell’Economia e delle Finanze and Agenzia delle Entrate v Paint Graphos Soc. coop. arl (C-78/08), Adige Carni Soc. coop. arl, in liquidation v Agenzia delle Entrate and Ministero dell’Economia e delle Finanze (C-79/08) and Ministero delle Finanze v Michele Franchetto (C-80/08), ECLI:EU:C:2011:550, para. 69.

• a rather desperate way of trying to avoid selectivity

Tax measures and selectivity• tax measures are especially liable to merit extensive analysis and greater

attention of the Commission and the European Union Courts, and are most likely to feature the full application of the test outlined above

• it is especially important in those tax cases, both for the Commission as to the burden of proof and for the Courts as to subsequent judicial review, to establish a reference framework, or “a normal system of taxation”, from which a measure is purported to derogate. It is impossible without such finding to assess whether an advantage is granted (ex e.g. judgment of the General Court of 5 February 2015, case T-500/12 Ryanair Ltd v European Commission, ECLI:EU:T:2015:73, para. 131 (excise duty or air travel tax, Commission decision annulled in part), judgment of the General Court of 5 February 2015, case T-473/12 Aer Lingus Ltd v European Commission, ECLI:EU:T:2015:78, para. 123, case C-522/13 Ministerio de Defensa and Navantia SA above, para. 35, judgment of the General Court of 7 March 2012, case T-210/02 RENV British Aggregates Association v European Commission, ECLI:EU:T:2012:110, para. 49 (“(…) the very existence of an advantage may be established only when compared with ‘normal’ taxation”)).

Tax measures and selectivity• the situation of territorial selectivity, found in C-88/03 Portuguese Republic v Commission of

the European Communities above, has been further elaborated on by the Court, in the field of taxation. The notion that 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 purposes of Article 107(1) TFEU, has been further confirmed. The third situation (i.e. a sufficiently autonomous entity), described by the Court in case C-88/03, has been described as the criteria of “institutional, procedural, and economic and financial autonomy”.

• Furthermore, it has been found a tax measure may be deemed selective if the authorities concerned enjoy discretion as to its grant (ex case C-88/03 Portuguese Republic v Commission, para. 57, judgment of the Court of 11 September 2008, joined cases C-428/06 to C-434/06 Unión General de Trabajadores de La Rioja (UGT-Rioja) and Others v Juntas Generales del Territorio Histórico de Vizcaya and Others, ECLI:EU:C:2008:488, para. 47, joined cases C-428/06 to C-434/06 UGT-Rioja above, para. 51, K. Bacon, op. cit., p. 73, joined cases T-346/99, T-347/99 and T-348/99 Territorio Histórico de Álava - Diputación Foral de Álava, cited above, para. 51, judgment of the Court of First Instance of 23 October 2002, joined cases T-269/99, T-271/99 and T-272/99 Territorio Histórico de Guipúzcoa - Diputación Foral de Guipúzcoa, Territorio Histórico de Álava - Diputación Foral de Álava and Territorio Histórico de Vizcaya - Diputación Foral de Vizcaya v Commission of the European Communities, ECLI:EU:T:2002:258, para. 55).

• Compare judgment of the General Court of 12 November 2013, case T-499/10 MOL Magyar Olaj- és Gázipari Nyrt. v European Commission, ECLI:EU:T:2013:592, paras 72 and 81, wherein the GC found that the Commission had not demonstrated an actual exercise of discretion in order to grant advantages to prove selectivity, despite the fact that the existence of discretion had not been disputed, and accordingly annulled the impugned decision.

Justification by the system – tax measures• advantages resulting from measures applicable without distinction to all economic operators,

namely the requirement to make a profit, which would benefit unprofitable operators, and those resulting from the capping of tax, which would benefit very profitable operators, do not mean that the tax regime under consideration can be regarded as entailing selective effects

• According to the Court, those effects are not such that they favour ‘certain undertakings’ or ‘the production of certain goods’ within the meaning of Article 107(1) TFEU, but are merely the consequence of the random event that the undertaking in question is unprofitable or very profitable during the period of assessment (ex joined cases C-106/09 P and C-107/09 P Commission and Spain v Gibraltar and UK, para. 83).

• On the other hand, a Member State may not prove that a measure is justified by nature of a tax system by pleading, in itself, that it is just an extension of other general tax provisions. The Court has also linked the situation of a prima facie general measure, which is actually selective, as mentioned above, “in particular” with the existence of discretion (ex judgment of the Court of 21 June 2012, case C-452/10 P BNP Paribas and Banca Nazionale del Lavoro SpA (BNL) v European Commission, ECLI:EU:C:2012:366, paras 136-137. See also judgment of the Court of First Instance of 4 September 2009, case T-211/05 Italian Republic v Commission of the European Communities, ECLI:EU:T:2009:304, para. 141, judgment of the Court of First Instance of 6 March 2002, joined cases T-92/00 and T-103/00 Territorio Histórico de Álava - Diputación Foral de Álava (T-92/00), Ramondín, SA and Ramondín Cápsulas, SA (T-103/00) v Commission of the European Communities, ECLI:EU:T:2002:61, para. 31 : “Interventions which, prima facie, apply to undertakings in general may be to a certain extent selective and, accordingly, be regarded as measures designed to favour certain undertakings or the production of certain goods. That is the case, in particular, where the administration called upon to apply a general rule has a discretionary power so far as concerns the application of the measure”.

Proportionality as a supplementing additional layer of the test of selectivity• Lastly, even if the third part of the test has shown that a measure is justified,

Member States would have been still subject to the operation of the principle of proportionality, which, in a sense, serves as a “fourth” layer of the test in question.

• Joined cases C-78/08 to C-80/08 Paint Graphos, cited above, para. 75 : „In any event, in order for tax exemptions such as those at issue in the main proceedings to be justified by the nature or general scheme of the tax system of the Member State concerned, it is also necessary to ensure that those exemptions are consistent with the principle of proportionality and do not go beyond what is necessary, in that the legitimate objective being pursued could not be attained by less far‑reaching measures”

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