Aino Mäkisalo - Master_s Thesis - Direct Corporate Tax Benefits and the Concept of Fiscal State Aid.PDF

Direct Corporate Tax Benefits and the Concept of
Fiscal State Aid in the European Union
The University of Helsinki
The Faculty of Law
Master’s Thesis
Professor Kristiina Äimä
Summer 2010
Aino Mäkisalo

Faculty
The Faculty of Law
Department
Author
Aino Mäkisalo
Title
Direct Corporate Tax Benefits and the Concept of Fiscal State Aid in the European Union
Subject
Financial Law – International Tax Planning (Professor, LL.D, Kristiina Äimä)
Level
Master’s Thesis
Month and year
09/2010
Number of pages
131 + appendices
Abstract
The study focuses on direct corporate taxation within the European Union and tax benefits, which the Member States have granted to
undertakings in one form or another. The main research problem of the thesis is: "What types of direct corporate tax benefits constitute
State aid incompatible with the Common Market in accordance with Article 107(1) of the TFEU?”. The research problem is further
divided into two sub-questions of which the first one addresses the direct corporate tax benefits that have been viewed as selective and
the second question focuses on the types of tax benefits that have been regarded as general measures and thereby have not been
classified as fiscal State aid. The research focuses on examining the relevant decisions made by the Commission of the European Union
and the rulings of the European Courts. Although the research is mostly carried out from the European perspective, some relevant
Finnish case law is also examined.
While direct tax legislation has developed in the EU rapidly over the past few decades, the number of tax-related State aid cases appears
to have grown simultaneously. However, the main reason for this ostensible growth appears to be the Member States’ increased
awareness of the fact that the expression “in any form whatsoever” of Article 107(1) also covers tax benefits. This partly reflects the
political nature of the State aid policy in general. In order to be classified as fiscal State aid, the measure needs to fulfill the four basic
principles of State aid: it must provide an economic advantage to the recipient, it must be financed through State resources, it must
distort or at least threaten to distort intra-EU trade and competition and finally and foremost, it must be selective by nature. Selectivity
is by far the most essential criterion in identifying the types of tax benefits that may be classified as State aid, since most tax benefits
fulfill the three other criteria relatively easily. Therefore this study focuses on examining how the Commission and the Courts have
interpreted the selectivity criterion.
In order to be deemed as selective, the tax measure must be an exception of the Member State’s general tax system and it should not be
justified by its nature or general scheme. The measure should confer an unfair advantage on a limited group of undertakings, industries
or other recipients for example in the form of a tax rate or tax base reduction or a rescheduling or cancellation of tax debt. Since most
fiscal aid measures include some kinds of tax benefits and since defining the reference system against which the tax benefits should be
measured may be subject to various interpretations, the selectivity criterion is the main reason why tax benefits are among the most
challenging measures to be evaluated under the State aid regulation. Furthermore, this study finds that although the Commission has
only limited discretion in the legal State aid procedure, it nevertheless does enjoy discretion in establishing policies and guidelines for
tax benefits that may be viewed as compatible with the Common Market and do not therefore fall under Article 107(1). Secondly, this
study finds that even though State aid assessment should in principle be carried out on a case-by-case basis and should be purely
effects-based, this is always not the case. The Commission has deviated from this principle occasionally by comparing the measures
against the tax treatment of similar elements in other Member States. In such cases the fact that national tax provisions are not
harmonized in the EU may have an impact on the outcome of the assessment. Particularly intragroup cross-border transactions seem to
cause interpretation problems and raise the question of how to identify tax benefits that merely result from the differences in the
Member States’ national tax provisions and measure that are truly selective in the means of Article 107(1).
The Commission has underlined several times that State aid assessment is always effects-based. However, it nevertheless appears to
have an especially critical attitude towards tax benefits whose sole aim is to attract foreign capital into the Member State at the expense
of another Member States as well as all selective tax measures that are purely protectionist by nature. It would appear that the objective
of the tax benefit scheme does at least occasionally have an impact on the outcome of the assessment. The study finds skilled national
legislation highly important due to the challenges in distinguishing between selective and general tax benefits: a skilled legislator is
able to formulate the national tax provisions sufficiently generally for the regime to escape the selectivity assessment but yet deliver the
objective, which mostly tends to be the attracting of new investments into the Member State. Finally the study estimates that the ever-
expanding concept of prohibited fiscal State aid may render the State aid assessment of tax measures even more challenging in the
future.
Keywords
Fiscal State aids, direct corporate tax benefits.
Where deposited
The Library of the University of Helsinki, the Faculty of Law.

I
Contents
Contents .................................................................................................................................... I
References..............................................................................................................................III
Literature ................................................................................................................................................ III
Official Sources.........................................................................................................................................V
Finnish Parliamentary Sources........................................................................................................V
Finnish Case Law...........................................................................................................................VI
The European Commission and the Courts of the European Union...............................................VI
Publications, Letters, Press releases and Guidelines by the European Union............................. XIII
Other Publications, Electronic Sources, Websites and Databases....................................................XVI
Interviews..............................................................................................................................................XIX
Abbreviations........................................................................................................................................XIX
1 Introduction ....................................................................................................................1
1.1 Background.....................................................................................................................................1
1.2 Research Problem, Objectives and Scope of the Study...............................................................2
1.3 Methodology ...................................................................................................................................3
2 The Concept of Fiscal State Aid in the European Union ............................................4
2.1 Evolvement of the State Aid Policies.............................................................................................4
2.2 Legal and Illegal State Aid –Notification Procedure ...................................................................7
2.3 Recovery Procedure.......................................................................................................................9
2.4 De Minimis Rule, Block Exemptions & Actual Beneficiary .....................................................12
3 Harmful Tax Competition............................................................................................14
3.1 Development of Direct Taxation Policies....................................................................................14
3.2 Description of Harmful Tax Competition ..................................................................................17
3.3 State Aid Regulation to tackle Harmful Tax Competition ........................................................19
4 Concept of State Aid in light of Direct Corporate Taxation .....................................22
4.1 Beyond the Traditional Concept of Fiscal State Aid..................................................................22
4.2 Advantage .....................................................................................................................................23
4.3 State Resources.............................................................................................................................26
4.4 Effect on Competition & Trade between Member States .........................................................28
4.5 Introduction to Tax Benefits........................................................................................................30
4.5.1 Tax Base and Tax Rate Reductions ...............................................................................30
4.5.2 Measures related to Tax Collection ...............................................................................31
4.6 State Aid Compatible with the Common Market......................................................................32
4.6.1 Regional Aid..................................................................................................................32
4.6.2 Rescuing & Restructuring Aid for Firms in Difficulty..................................................33
4.6.3 R&D&I Aid, Aid for Small & Medium-Sized Enterprises & Risk Capital...................36
4.6.4 The Balancing Test........................................................................................................37
5 The Selectivity Criterion..............................................................................................39
5.1 Basic Concepts of General & Selective Measures......................................................................39
5.2 Material Selectivity ......................................................................................................................40
5.2.1 Specific Economic Sector .............................................................................................40
5.2.2 Companies of Different Sizes & Ages...........................................................................42
5.2.3 Discretionary Powers & Voluntariness of the Scheme ..................................................44
5.3 Geographic Selectivity .................................................................................................................45
5.3.1 The Basic Concept of Geographic Selectivity...............................................................45
5.3.2 Geographic Selectivity as opposed to Fiscal Autonomy ...............................................47
5.3.3 Implications of the Gibraltar Case for defining General Tax Systems ..........................49
6 The Fine Line between General & Selective Tax Benefits........................................50

II
6.1 General Tax Scheme & the Derogation Method........................................................................50
6.2 Corporations & Level of Assessment..........................................................................................54
6.2.1 Assessment of Individual Companies as opposed to Groups........................................54
6.2.2 Groepsrentebox & the Reconsidered Positions .............................................................57
6.3 Group Definition & Compulsion of Tax Benefit Scheme..........................................................59
6.3.1 Comparison of Hungarian Interest Income & Groepsrentebox.....................................59
6.3.2 Interpretation of Selectivity caused by Unharmonized Tax Laws.................................63
6.4 Tax Schemes favoring Multinationals & designed to attract Foreign Investments................65
6.4.1 Difficulties in evaluating Intragroup Cross-Border Tax Benefits..................................65
6.4.2 Foreign Ownership & Domicile....................................................................................66
6.4.3 Intragroup Services .......................................................................................................67
6.4.4 International Double Taxation – Tax Exemptions v Tax Credits...................................71
6.5 Tax Schemes favoring Ailing Companies ...................................................................................73
6.6 Specialized Investment Funds &Different Tax Rates within One Industry............................76
6.7 Finland & Corporate Tax Benefits..............................................................................................78
6.7.1 Finland & the Proactive Approach ................................................................................78
6.7.2 Åland Islands & Captive Insurance Companies............................................................79
6.7.3 Municipal & State Enterprises ......................................................................................81
6.7.4 Tonnage Tax ..................................................................................................................86
6.7.5 Real Estate Investment Trusts .......................................................................................89
6.7.6 The Mankala Principle ..................................................................................................94
6.7.7 Temporarily Accelerated Depreciation for Factories & Workshops............................100
6.8 Tax Benefits escaping Selectivity Criterion..............................................................................101
6.8.1 Non-Selective Qualification Criteria – Greater Benefits to Certain Undertakings......101
6.8.2 Intragroup Lending & Tax Benefits for Groups as opposed to Single
Undertakings ...............................................................................................................103
6.8.3 Conversion & Establishing of an Undertaking............................................................105
6.8.4 Eliminating Double Taxation ......................................................................................107
6.8.5 Transfer of Benefits.....................................................................................................109
6.8.6 Case in Point: The Belgian Notional Interest Deduction............................................. 110
6.9 Tax Benefits Compatible in means of Article 107(3) ............................................................... 113
6.9.1 Explicitly Compatible Tax Benefits ............................................................................ 113
6.9.2 Compatibility of Regional Aid .................................................................................... 115
6.9.3 Compatibility of Tax Benefits to “promote International Competitiveness”............... 119
7 Conclusions .................................................................................................................121

III
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VI
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ECR I-08365.

VII
Case C-382/99
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the form of a depreciation facility (96/369/EC), OJEU L 146 , 20 June 1996, pp. 42–48.

VIII
Commission Decision of 20 July 1999 on the state aid implemented by the Netherlands for
633 Dutch service stations located near the German border (notified under document
number C(1999) 2539) (1999/705/EC), OJEU L 280, 30 October 1999, pp. 87–121.
Commission Decision of 24 February 1999concerning State aid granted by Spain to
Daewoo Electronics Manufacturing España SA (Demesa) (notified under document number
C(1999) 498) (1999/718/EC), OJEU L 292, 13 November 1999, pp. 1–22.
Commission Decision of 22 December 1999, on the State aid implemented by Spain for
Ramondín SA and Ramondín Cápsulas SA (notified under document number C(1999)
5203) (2000/795/EC), OJEU L 318, 16 December 2000, pp. 36–61.
Commission Decision of 11 December 2001 on the tax measures for banks and banking
foundations implemented by Italy (notified under document number C(2001) 3955)
(2002/581/EC), OJEU L 184, 13 July 2002, pp 27–36
Commission Decision of 11 July 2001 on the State aid scheme implemented by Spain for
firms in Vizcaya in the form of a tax credit amounting to 45 % of investments (notified
under document number C(2001) 1765) (2003/27/EC), OJEU L 17, 22 January 2003, pp.
1–19
Commission Decision of 20 December 2001 on a State aid scheme implemented by Spain
in 1993 for certain newly established firms in Álava (Spain) (notified under document
number C(2001) 4475) (2003/28/EC), OJEU L 17, 22 January 2003, pp.20–39.
Commission Decision of 22 August 2002 on the aid scheme implemented by Spain in
favour of coordination centres in Vizcaya C 48/2001 (ex NN 43/2000) (notified under
document number C(2002) 3141) (2003/81/EC), OJEU L 031 , 6 February 2003, pp.26–31.
Commission Decision of 5 June 2002 on State aid granted by Italy in the form of tax
exemptions and subsidized loans to public utilities with a majority public capital holding C
27/99 (ex NN 69/98) (notified under document number C(2002) 2006) (2003/193/EC),
OJEU L 77, 24 March 2003, pp. 21–40.
Commission Decision of 11 December 2002 on the application by Portugal of the financial
and tax aid scheme for the free zone of Madeira in the period between 1 January and 31
December 2000 (notified under document number C(2002) 4825) (2003/294/EC), OJEU L
111, 6 May 2003, pp. 45–49.
Commission Decision of 16 October 2002 on the aid scheme C 50/2001 (ex NN 47/2000)
— Finance companies — implemented by Luxembourg (notified under document number
C(2002) 3741) (2003/438/EC), OJEU L 153, 20 June 2003, pp. 40–48.
Commission Decision of 11 December 2002 on the part of the scheme adapting the national
tax system to the specific characteristics of the Autonomous Region of the Azores which
concerns reductions in the rates of income and corporation tax (notified under document
number C(2002) 4487) (2003/442/EC), OJEU L 150, 18 June 2003, pp. 52–63.
Commission Decision of 16 October 2002 on the State aid scheme C 49/2001 (ex
NN46/2000) - Coordination Centres - implemented by Luxembourg (notified under
document number C(2002) 3740) (2003/501/EC), OJEU L 170, 9 July 2003, pp. 20–28.

IX
Commission Decision of 5 September 2002 on the aid scheme implemented by Germany
for control and coordination centres (notified under document number C(2002) 3298)
(2003/512/EC), OJEU L 177, 16 July 2003, pp. 17–21.
Commission Decision (2003/515/EC) of 17 February 2003 on the State aid implemented by
the Netherlands for international financing activities (notified under document number
C(2003) 568) (2003/515/EC), OJEU L 180, 18 July 2003, pp. 52–66.
Commission Decision of 17 February 2003 on aid scheme C-54/2001 (ex NN55/2000)
Ireland — Foreign Income (notified under document number C(2003) 569) (2003/601/EC),
OJEU L 204, 13 August 2003, pp. 51–59.
Commission Decision of 17 February 2003 on the aid scheme implemented by Belgium for
coordination centres established in Belgium. (notified under document number C(2003)
564) (2003/755/EC), OJEU L 282, 30 October 2003, pp. 25–45.
Commission Decision (2004/343/EC) of 16 December 2003 on the aid scheme
implemented by France for the takeover of firms in difficulty (notified under document
number C(2003) 4636) (2004/343/EC), OJEU L 108, 16 April 2004, pp. 38–48.
Commission Decision of 30 March 2004 on the aid scheme implemented by the United
Kingdom in favor of Gibraltar Qualifying Companies (notified under document number
C(2004) 928) (2005/77/EC), OJEU L 29, 2 February 2005, pp. 24–38.
Commission Decision of 30 March 2004 on the aid scheme which the United Kingdom is
planning to implement as regards the Government of Gibraltar Corporate Tax Reform
(notified under document number C(2004) 929) (2005/261/EC), OJEU L 85, 2 April 2005,
pp. 1–26.
Commission Decision of 9 March 2004 on an aid scheme implemented by Austria for a
refund from the energy taxes on natural gas and electricity in 2002 and 2003. (notified
under document number C(2004) 325) (2005/565/EC), OJEU L 190, 22 July.2005, pp. 13–
21.
Commission Decision of 8 September 2004 on the aid scheme implemented by Italy
providing for tax credits for investments (notified under document number C(2004) 2638)
(2005/655/EC), OJEU L 241, 17 September 2005, pp. 59–62.
Commission Decision of 6 September 2005 on the aid scheme implemented by Italy for
certain undertakings for collective investment in transferable securities specialised in shares
of small- and medium-capitalisation companies listed on regulated markets (notified under
document number C(2005) 3302) (2006/638/EC), OJEU L 268, 27 September 2006, pp. 1–
11.
Commission Decision of 4 July 2006 on State Aid No C 30/2004 (ex NN 34/2004)
implemented by Portugal exempting from corporation tax on capital gains certain
operations/transactions by public undertakings (notified under document number C(2006)
2950) (2006/748/EC), OJEU L 307, 7 November 2006, pp. 219–225.
Commission Decision of 19 July 2006 on aid scheme C 3/2006 implemented by
Luxembourg for ‘1929’ holding companies and ‘billionaire’ holding companies (notified
under document number C(2006) 2956) (2006/940/EC), OJEU L 366, 21 December 2006,

X
pp. 47–61.
Commission Decision of 18 July 2007, on State aid C 37/05 (ex NN 11/04) implemented
by Greece — tax-exempt reserve fund (notified under document number C(2008) 3251)
(2008/723/EC), OJEU L 244, 12 September 2008, pp. 11–33.
Commission Decision of 11 December 2007 on the aid No C 7/06 (ex NN 83/05)
implemented by Finland for Tieliikelaitos/Destia (notified under document number
C(2007) 6073) (2008/765/EC), OJEU L 270, 10 October 2008, pp. 1–30.
Commission Decision of 2 July 2008 on the measures C 16/04 (ex NN 29/04, CP 71/02 and
CP 133/05) implemented by Greece in favour of Hellenic Shipyards (notified under
document C(2008) 3118) (2009/610/EC), OJEU L 225, 27 August 2009, pp. 104–179.
Commission Decision of 8 July 2009 on the groepsrentebox scheme which the Netherlands
is planning to implement (C 4/07 (ex N 465/06)) (notified under document C(2009) 4511)
(2009/809/EC), OJEU L 288, 4 November 2009, pp. 26–39.
Commission Decision of 6 November 2008 on State aid C 19/05 (ex N 203/05) granted by
Poland to Stocznia Szczecińska (notified under document C(2008) 6770) (2010/3/EC),
OJEU L 5, 8 January 2010, pp. 1–41.
Commission Decision of 30 September 2009 on aid scheme No C2/09 (ex N 221/08 and N
413/08) which Germany intends to grant to modernise the general conditions for capital
investments (notified under document C(2009) 7387) (2010/13/EC), OJEU L 6, 9 January
2010, pp. 32–45.
Commission Decision of 23 September 2009 on the aid which Poland is planning to
implement for Dell Products (Poland) Sp. z o.o. C 46/08 (ex N 775/07) (notified under
document C(2009) 6868) (2010/54/EC), OJEU L 29, 2 February 2010, pp. 8–33.
Commission Decision of 28 October 2009 on State aid C 10/07 (ex NN 13/07)
implemented by Hungary for tax deductions for intra-group interest (notified under
document C(2009) 8130) (2010/95/EC), OJEU L 42, 17 February 2010, pp. 3–19.
Joined Cases T-127/99, T-129/99 and T-148/99
The Court of First Instance, 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, 6 March 2002. ECR II-01275.
Joined Cases T-269/99, T-271/99 and T-272/99
The Court of First Instance, 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. 23 October 2002. ECR II-04217.
Joined Cases T-92/00 and T-103/00
The Court of First Instance. 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, 6 March 2002. ECR II-01385.
Joined Cases C-428/06 to C-434/06
The Court of Justice, 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, 11 September 2008, ECR I-6747.

XI
Joined Cases T-211/04 and T-215/04
The Court of First Instance, Joined Cases T-211/04 and T-215/04. Government of Gibraltar
and United Kingdom of Great Britain and Northern Ireland v Commission, 18 December
2008. ECR II–3745.
Opinion of AG Darmon, Joined Cases C-72/91 and C-73/91
The Court of Justice, Joined Cases C-72/91 and C-73/91. Firma Sloman Neptun Schiffahrts
AG v Seebetriebsrat Bodo Ziesemer der Sloman Neptun Schiffahrts AG, 17 March 1993.
ECR I-887.
State Aid Case E/2/98 (98/C 395/09)
State Aid E/2/98 – Ireland (98/C 395/09) – Proposal for appropriate measures under Article
93(1) of the EC Treaty concerning Irish corporation tax (ICT), published in OJEU C 395,
18 December 1998, pp. 19–23.
State Aid Case N53/99
Letter to the Member State on 22 June 1999. Subject: temporary ceiling for 1999-2000, the
Danish government.
State Aid Case N 555/99 (SG(2000) D/102578)
Letter to the Member State on 23 March 2000. Subject: Auxílio estatal N 555/99 - Portugal.
Regime de auxílios fiscais ao investimento na Região Autónoma da Madeira. SG(2000)
D/102578. Decision made on 14 March 2000 and published in OJEU C 266, 16 September
2000, p. 4.
State Aid Case N 20/2000 (SG(2000) D/ 103619)
Letter to the Member State on 12 May 2000. Subject: Steunmaatregel nr. N 20/2000 –
Nederland Vrijstelling onroerende zaakbelasting voor substraatteelt. SG(2000) D/ 103619.
Decision made on 11 April 2000 and published in OJEU C 169, 17 June 2000, p. 5.
Letter to the Member State on 2 August 2000. Subject: State aid N55/2000, Tax reductions
scheme, SG(2000) D/105762. Decision made on 1 August 2000 and published in OJEU C
266, 16 September 2000, p. 7.
Letter to the Member State on 13 July 2000. Subject: State aid N96/2000, Tax reductions to
promote investment in Madeira, SG(2000) D/104920. Decision made on 28 June 2000 and
published in OJEU C 266, 16 September 2000, p. 6.
State Aid Case N 226/2000 (SG(2000) D/ 108799)
Letter to the Member State on 28 November 2000. Subject: Aide d'Etat n° N 226/2000 –
Belgique Régime d’aide à finalité régionale de la loi du 30 décembre 1970 sur l’expansion
économique (Région wallonne), SG(2000) D/ 108799. Decision made on 18 October 2000
and published in OJEU C 37, 3 February 2001, p. 48.
State Aid Case N 643/2000 (SG (2001) D/289096)
Letter to the Member State on 11 June 2001. Subject: State aid N643/2000, Accelerated
depreciation in certain regions 2001 to 2003 – Finland, SG (2001) D/289096. Decision
made on 11 June 2001 and published in OJEU C 263, 19 September 2001, p. 10.
State Aid Case N 222 A/01 (2003/C 65/07)
Authorisation for State aid pursuant to Articles 87 and 88 of the EC Treaty – Cases where
the Commission raises no objections (2003/C 65/07). Decision made on 11 December 2002
and published in OJEU C 65, 19 March 2003, p. 23.
State Aid Case N195/2002 (C(2002)3576fin)
Letter to the Member State on 16 October 2002. Subject: State Aid N:o N195/2002 – Act
on Taxation of Shipping (Tonnage Tax Act) Decision made on 16 October 2002 and
published in OJEU C 28, 31 January 2004, p. 2.
State Aid Case N 398/2005 (C(2006)1835
Letter to the Member State on 16 May 2006. Subject: State aid n° N 398/2005 – Hungary
Development Tax Benefit for Broadband, C(2006)1835. Decision made on 16 May 2006

XII
and published in OJEU C 207, 30 August 2006, p. 3.
State Aid Case N 151/2006 (C(2006)1853 final)
Letter to the Member State on 16 May 2006. Subject: State aid No N 151/2006 - Ireland
Tax relief for investment in film - Modification of scheme N 387/04, C(2006)1853 final.
Decision made on 16 May 2006 and published in OJEU C 242, 7 October 2006, p. 18.
Letter to the Member State on 16 May 2006. Subject: Aide d’Etat n° N 45/2006 – France
Crédit d’impôt à la production phonographique, C(2006)1858 final. Decision made on 16
May 2006 and published in OJEU C 242, 2 December 2006, p. 6.
State Aid Case N715/2006 (C(2007) 4297 final)
Letter to the Member State on 25 September 2007. Subject: State aid N715/06, Finland.
Tax Exemption to Finnvera Oyj, C(2007) 4297 final. Decision made on 25 September 2007
and published in OJEU C 307, 18 December 2007, p. 6.
State Aid Case N 421/2006
Letter to the Member State, Decision made on 27 June 2007. Subject: State Aid N 421/2006
– Portugal – Zona Franca da Madeira, C (2007). Decision made on 27June 2007 and
published in OJEU C 240, 12 October 2007, p. 1.
State Aid Case N 816/2006 (C(2008)2416)
Letter to the Member State on 30 May 2008. Subject: State aid N 816/2006 – UK – R&D
Tax Credits for SMEs; State aid N 33/2007 – United Kingdom – R&D Tax Credits for
SMEs: extension to cover clinical trials volunteer costs; State aid N 34/2007 – United
Kingdom - Vaccine Research Relief scheme: extension to cover clinical trial volunteer
costs, C(2008)2416. Decision made on 30 May 2008 and published in OJEU C 178, 15
July 2008, p. 1.
State Aid Case N 217/07 (K(2007) 6052 endg)
Letter to the Member State on 11 December 2007. Subject: State aid N 217/2007 –
Germany – SME-bonus for Signet Solar GmbH, K(2007) 6052 endg. Decision made on 11
December 2007 and published in OJEU C 157, 21 June 2008, p. 17.
State Aid Case C 4/2007 (2007/C 66/12)
State aid No C 4/07 (ex N 465/06) — Interest Group Box. Invitation to submit comments
pursuant to Article 88(2) of the EC Treaty (2007/C 66/12), published in OJEU C 66, 22
March 2007, pp. 30–34.
State Aid Case C 4/2007 (C(2007)308)
Letter to the Member State on 7 February 2007. Subject: State aid No C 4/2007 (ex N
465/2006) – The Netherlands. Interest group box (Groepsrentebox), C (2007)308. Decision
made on 8 July 2009 and published in OJEU L 288, 4 November 2009, pp. 26–39.
Letter to the Member State on 13 February 2008. Subject: State aid N 480/2007 - Spain -
The Reduction of Tax from Intangible Assets, C(2008)467 final. Decision made on 13
February 2008 and published in OJEU C 80, 1 April 2008, p. 3.
State Aid Case N 621/2007 (C (2008) 1358)
Letter to the Member State on 7 April 2008. Subject: State aid N 621/2007 - Austria
Tax Incentives for Mid-Sized Business Financing Companies
(Mittelstandsfinanzierungsgesellschaften), C(2008)1358. Decision made on 7 April 2008
and published in OJEU C 134, 31 May 2008, p. 2.
State Aid Case N 806/2006 (C(2007)2105)
Letter to the Member State on 8 May 2007. Subject: State aid N 806/2006 – Poland
Innovation Funds created by R&D centres, C(2007)2105. Decision made on 8 May 2007
and published in OJEU C 139, 23 June 2007, p. 14.
State Aid Case C 46/2008 (COM (2009/C 25/04))
State Aid — Poland – State aid C 46/08 (ex N 775/07) — Large Investment Project — Aid
to Dell Products Poland – Invitation to submit comments pursuant to Article 88(2) of the

XIII
EC Treaty (2009/C 25/04) published in OJEU C 25, 31 January 2009, pp. 9–26.
State Aid Case NN 32/2009 (C(2009) 5082 final)
Letter to the Member State on 13 July 2009. Subject: State aid NN 32/2009 – United
Kingdom Enterprise Management Incentives (EMI), C(2009) 5082 final. Decision made on
13 July 2009 and published in OJEU C 235, 30 September 2009, p. 1.
Letter to the Member State on 12 May 2010. Subject: State Aid N 131/2009 – Finland
Residential Real Estate Investment Trust (REIT) Scheme, C (2010) 2974 final. Decision
made on 12 May 2010 and published in OJEU C 178, 3 July 2010, p. 1.
State Aid Case N 159/2009 (C (2009) 7674 final)
Letter to the Member State on 14 October 2009. Subject: State Aid N159/2009 – Finland
Temporary Accelerated Depreciation for productive investments, C (2009) 7674 final.
Decision made on 14 October 2009 and published in OJEU C 283, 24 November 2009, p.
1.
State Aid Case C7/2010 (C(2010) 970 final)
Letter to the Member State on 24 February 2010. Subject: State aid C7/2010 (ex
NN5/2010) – Scheme on the fiscal carry-forward of losses ("Sanierungsklausel") C (2010)
970 final. Decision to initiate formal investigation procedure made on 24 February 2010
and published in OJEU C 90, 8 April 2010, pp. 8–14.
Publications, Letters, Press releases and Guidelines by the European Union
Almunia, Answer to Written Question, 30 April 2010.
Almunia, Joaquín, 30 April 2010. Parliamentary questions – Answer given by Mr Almunia
on behalf of the Commission, E-2217/2010. [Online] Available at:
http://www.europarl.europa.eu/sides/getAllAnswers.do?reference=E-2010-
2217&language=ET [Accessed 8 August 2010]
C(2004) 434
Commission’s Report on the implementation of the Commission notice on the application
of the state aid rules to measures relating to direct business taxation, 9 February 2004.
Code of Conduct (1997)
Information of the Council. Conclusions of the Ecofin Council Meeting on 1 December
1997 concerning taxation policy (98/C2/01). Annex 1: Resolution of the Council and the
Representatives of the Governments of the Member States, meeting within the Council of 1
December 1997 on a code of conduct for business taxation. OJEU C 2, 6 January 1998, pp.
1–6.
COM(96/C 68/06)
Commission notice on the de minimis rules for State aid. OJEU C 68, 6 March 1996, pp. 9–
10.
COM(96/280/EC)
Commission Recommendation of 3 April 1996 concerning the definition of small and
medium-sized enterprises. OJEU L 107, 30 April 1996, pp. 4–9.
COM(97/C 205/05)
Community guidelines on State aid to maritime transport (97/C 205/05). OJEU C 205, 5
July 1997, p. 5.
COM(97) 564 final.
Communication from the Commission to the Council and the European Parliament - A
package to tackle harmful tax competition in the European Union. COM(97) 564 final.
COM(98/C 74/06)
Guidelines on National Regional Aid (98/C 74/06). OJEU C 74, 10 March 1998, pp. 9–31.
COM(98/C 384/03)
Commission notice on the application of the State aid rules to measures relating to direct

XIV
business taxation (98/C 384/03). OJEU C 384, 10 December 1998, pp. 3–9.
COM(1999/C 288/02)
Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty
(Notice to Member States including proposals for appropriate measures) (1999/C 288/02)
OJEU C 288, 9 October 1999, pp. 2–18.
COM(2001/C 235/03)
Communication from the Commission on State aid and Risk Capital (2001/C 235/03),
OJEU C 235, 21 August 2001, pp. 3–11.
COM(2001) 260 final.
Communication from the Commission to the Council, the European Parliament and the
Economic and Social Committee – Tax policy in the European Union – Priorities for the
years ahead. COM(2001) 260 final. OJEU C 284, 10 October 2001, pp. 6–19.
COM(2001) 534 final
Communication from the Commission to the Council, the European Parliament, the
Economic and Social Committee and the Committee of the Regions on certain legal aspects
relating to cinematographic and other audiovisual works. COM(2001)534 final. OJEU C
43, 16 February 2002, pp. 6–17
COM(2003/361/EC)
Commission Recommendation of 6 May 2003 concerning the definition of micro, small
and medium-sized enterprises (notified under document number C(2003) 1422)
(2003/361/EC), OJEU L 124, 20 May 2003, pp. 36–41.
COM(2004/C 13/03)
Communication from the Commission C(2004) 43 – Community guidelines on State aid to
maritime transport (2004/C 13/03). OJEU C 13, 17 January 2004, pp. 3–12.
COM(2004/C 244/02)
Communication from the Commission – Community Guidelines on State aid for Rescuing
and Restructuring Firms in Difficulty (2004/C 244/02), OJEU C 244, 1 October 2004, pp.
2–17.
State aid action plan - Less and better targeted state aid : a roadmap for state aid reform
2005-2009 (Consultation document) (presented by the Commission){SEC(2005) 795}, 7
June 2005.
COM(2005) 436 final
Communication from the Commission Consultation Document on State Aid for Innovation,
COM(2005) 436 final, 21 September 2005.
COM(2006/C 194/02)
Community Guidelines on State Aid to Promote Risk Capital Investments in Small and
Medium-Sized Enterprises (2006/C 194/02), OJEU C 194, 18 August 2006, pp. 2–21.
COM(2006) 823 final
European Economic and Social Committee - Coordinating Member States' direct tax
systems in the Internal Market. COM(2006) 823 final, 19 December 2006.
COM(2006/C 54/08)
Guidelines on National Regional Aid for 2007-2013 (2006/C 54/08). OJEU C 54, 4 March
2006, pp. 13–45.
COM(2006/C 323/01)
Community Framework for State aid for Research and Development and Innovation
(2006/C 323/01). OJEU C 323, 30 December 2006, pp. 1–26.
Economic and Social Committee – Implementing the Community Programme for improved
growth and employment and the enhanced competitiveness of EU business: Further

XV
Progress during 2006 and next steps towards a proposal on the Common Consolidated
Corporate Tax Base (CCCTB). COM(2007) 223 final, 2 May 2007.
Report from the Commission - State Aid Scoreboard - Report on State aid granted by the
EU Member States - Autumn 2009 Update -{SEC(2009) 1638}, COM (2009) 661 final. 7
December 2009.
DG IV/310/95-EN
DG IV Working paper on the difference between state aid and general measures,
IV/310/95-EN Rev. 1.
Hassi – Hautala, Written Question, 9 April 2010
Hassi, Satu and Hautala, Heidi, 9 April 2010. Parliamentary questions – Written Question
by Satu Hassi (Verts/ALE) and Heidi Hautala (Verts/ALE) to the Commission, E-2217/10.
[Online] Available at: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-
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IP/03/242
Europa – Press Releases – RAPID. Press Release IP/03/242, 18 February 2003. Final
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Europa – Press Releases – RAPID. Press Release IP/05/979, 20 July 2005. State aid:
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Europa – Press Releases – RAPID. Press Release IP/06/641, 17 May 2006. State aid:
Commission endorses media support schemes in Poland, Ireland, France and Denmark.
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IP/10/180
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IP/10/183
Europa – Press Releases – RAPID. Press Release IP/10/183, 24 February 2010. State aid:
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IP/10/529
Commission requests France to comply with Court judgment on recovery of incompatible
tax exemptions for takeover of ailing companies. [Online] Available at:

XVI
IP/10/559
Commission approves tax exemptions for Finnish Real Estate Investment Trusts (REITs).
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Flanders Investment & Trade – Press Release, 28 May 2010.
Flanders Investment & Trade, 28 May 2010. Press Release: Notional interest deduction
proves popular in Belgium. [Online] Available at:
http://www.investinflanders.com/en/news_details/default.aspx?id=5113236a-52b8-47a5-
8f26-
ae553e3c448f&news=Notional+interest+deduction+proves+popular+in+Belgium&parent=
58a62f14-211c-43f6-8ef3-1544bab7b04c [Accessed 5 August 2010]
International Tax Review – Press Release, October 2008.
International Tax Review, October 2008. Press Release, PricewaterhouseCoopers:
European Union: European Commission's proposal for CCCTB delayed. [Online]
Available at:
http://www.internationaltaxreview.com/?ISS=25039&PUBID=35&Page=10&SID=712176
&TYPE=20 [Accessed 15 August 2010]
International Tax Review – Weekly News, 19 February 2009.

XVIII
International Tax Review, 19 February 2009. Press Release: Commission criticises
Belgium's notional interest deduction regime. [Online] Available at:
http://www.internationaltaxreview.com/default.asp?Page=9&PUBid=210&ISS=25285&SI
D=717613 [Accessed 5 August 2010]
International Tax Review – Press Release, April 2009.
International Tax Review, April 2009. Press Release, KPMG: Belgium: EU forces
government to broaden notional interest deduction. [Online] Available at:
http://www.internationaltaxreview.com/?Page=10&PUBID=35&ISS=25352&SID=718867
&TYPE=20 [Accessed 5 August 2010]
International Tax Review – Press Release, February 2010.
International Tax Review, February 2010. Press Release, Borenius & Kemppinen: Finland:
Carry forward of capital losses extended. [Online] Available at:
http://www.internationaltaxreview.com/?Page=10&PUBID=35&ISS=25564&SID=724396
&TYPE=20[Accessed 29 August 2010]
Kauppalehti – Press Release, 24 August 2010.
Kauppalehti, 24 August 2010. Press Release: Voimayhtiöiden ansiottomien voittojen verotus
ei toteudu. [Online] Available at:
http://www.kauppalehti.fi/5/i/talous/uutiset/stt/uutinen.jsp?selected=paauutiset&oid=50411
766 [Accessed 24 August 2010]
Notional Interest Deduction: an innovative Belgian tax incentive (2009)
Federal Public Service Finance of Belgium, 2009. Notional Interest Deduction: an
innovative Belgian tax incentive. Brussels. [Online] Available at: www.invest.belgium.be
OECD (1984)
The Organization for Economic Co-operation and Development (OECD), 1984. Tax
Expenditures: A Review of Issues and Country Practices. Paris: OECD.
OECD (1996)
The Organization for Economic Co-operation and Development (OECD), 1996. Tax
Expenditures: Recent Experiences. Paris: OECD.
OECD (1998)
The Organization for Economic Co-operation and Development (OECD), 1998. Harmful
Tax Competition – An Emerging Global Issue. Paris: OECD
OECD (2010a)
The Organization for Economic Co-operation and Development (OECD), 2010, Tax
Expenditures in OECD Countries. Paris: OECD
OECD (2010b)
The Organization for Economic Co-operation and Development (OECD), 18 August 2010,
Promoting Transparency and Exchange of Information for Tax Purposes - A Background
Information Brief. Paris: OECD. [Online] Available at:
http://www.oecd.org/dataoecd/32/45/43757434.pdf [Accessed 18 August 2010]
OECD – Innovation Strategy – Getting a Head Start on Tomorrow– Executive Summary (2010)
The Organization for Economic Co-operation and Development (OECD), 2010, The OECD
Innovation Strategy: Getting a Head Start on Tomorrow – Executive Summary. [Online]
Available at:
http://www.oecd.org/document/15/0,3343,en_2649_34273_45154895_1_1_1_1,00.html
OECD – Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations –
New Material (2010).
The Organization for Economic Co-operation and Development (OECD), 2010, Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations – New Material.
[Online] Available at:
http://www.oecd.org/document/24/0,3343,en_2649_33753_1915490_1_1_1_1,00.html

XIX
PriceWaterhouseCoopers - Real Estate Tax Services Newsalert BELGIUM, 21 January 2010.
PriceWaterhouseCoopers, Belgium, 21 January 2010. Press Release: Real Estate Tax
Services Newsalert BELGIUM: Several important changes to Belgian corporate tax law
enacted in December. [Online] Available at: http://www.pwc.com/be/en/real-estate-tax-
services-newsletter [Accessed 5 August 2010]
State Aid Register (2010)
State Aid Cases – Search for a State aid case [Online] (Updated 19 June 2010) Available at:
http://ec.europa.eu/competition/elojade/isef/index.cfm?clear=1&policy_area_id=3
The Finnish Ministry of Finance, Publication 33/2010
Ministry of Finance. May 2010. Local government operations in a competitive market
environment and corporatization of operations. Helsinki: Ministry of Finance publications
33/2010.
The Finnish Ministry of Finance, Publication 35/2010.
Ministry of Finance. June 2010. Interim Report of the Working Group for Developing the
Finnish Tax System. Helsinki: Ministry of Finance publications 35/2010.
The Finnish Ministry of Finance – Press Release, 8 April 2010
The Finnish Ministry of Finance, 8 April 2010. Pellon luovutusvoiton verovapautta ei
toteuteta. [Online] Available at:
http://www.vm.fi/vm/fi/03_tiedotteet_ja_puheet/01_tiedotteet/20100408Pellon/name.jsp
The Finnish Regional Forestry Network – Press Release, 1 August 2008.
The Finnish Regional Forestry Network, 1 August 2008. Puun myyntitulojen verotus
kevenee. [Online] Available at:
http://www.metsakeskus.fi/web/fin/uutiset/2008_uutiset/elokuu/
Interviews
Interview with Rehbinder, 2 August 2010.
Interview with Rehbinder, Maria (LL.D.), Head of Mergers Unit E/4, Directorate-General
for Competition, Commission of the European Union, 2010. Interviewed by Mäkisalo,
Aino [telephone] Helsinki, 2 August 2010.
Interview with Viitala, 4 August 2010.
Interview with Viitala, Tomi (D.Sc.), Tax Director at the Central Chamber of Commerce of
Finland. 2010. Interviewed by Mäkisalo, Aino [face-to-face meeting] Helsinki, 4 August
2010.
Interview with Upola and Vanhanen, 13 August 2010.
Interview with Upola, Minna, Senior Advisor, the Ministry of Finance and Vanhanen,
Jukka, Ministerial Advisor, the Ministry of Finance. 2010. Interviewed by Mäkisalo, Aino
[face-to-face meeting] Helsinki, 13 August 2010.
Interview with Linnanvirta, 20 August 2010.
Interview with Linnanvirta, Reima (LL.M.), Alder & Sound Attorneys, 2010. Interviewed
by Mäkisalo, Aino [face-to-face meeting] Helsinki, 20 August 2010.
Abbreviations
ACE = Allowance for Corporate Equity

XX
CCCTB = Common Consolidated Corporate Tax Base
CELF =Centre d'exportation du livre français
Code of Conduct, Code = Resolution of the Council and the Representatives of the Governments
of the Member States, meeting within the Council of 1 December 1997 on a code of
conduct for business taxation
CUP = Comparable Unrelated Price method
EPRA = European Public Real Estate Association
ESA = EFTA Surveillance Authority
FNE = the French National Employment Fund
FTA = Free Trade Agreement
FZM = the Free Zone of Madeira
GBER = Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain
categories of aid compatible with the common market in application of Articles 87 and 88
of the Treaty (General block exemption Regulation)
GFA = Group Financing Activities scheme
ICT = Irish Corporation Tax scheme
IFRS = International Financial Reporting Standards
MEPs = Members of the European Parliament
MoRaKG = Bill to Modernise the General Conditions for Capital Investments
MRECs = Mutual Real Estate Companies
NID= notional interest deduction
Notice = Notice on the application of the state aid rules to measures relating to direct business
taxation, COM(98/C 384/03).
R&D&I Framework, Framework = Framework for State aid for Research and Development and
Innovation
RC Guidelines = Guidelines for Aid for Risk Capital
REIT = Real Estate Investment Trust
Report =Report on the implementation of the Commission notice on the application of the state
aid rules to measures relating to direct business taxation, C(2004) 434
RGA = Regional Aid Guidelines
R&R = Guidelines for Rescuing and Restructuring firms in difficulty
SAC = Supreme Administrative Court of Finland
SGEI = Service of General Economic Interest
SMEs = Small and medium-sized enterprises
TFEU = the Treaty on the Functioning of the European Union

XXI
Tonnage Tax Act = the Act on Taxation of Shipping
VCC = venture capital company

1
1 Introduction
1.1 Background
The concept of State aid has mainly been studied as a part of the European Union's competition
policy with a focus on classifying measures either as compatible or incompatible with the
Common Market of the EU. The discussion has traditionally concentrated on direct subsidies and
money payments, which the Member States have granted to their national enterprises. The
general attitude towards such grants has been critical, since the payments have been regarded to
violate the principle of free markets and to hamper European integration. Likewise, it has been
commonly acknowledged among the EU legislators since the beginning of 1960s that State aid
rules also apply to taxes and that selective tax benefits conferring an unfair advantage to the
beneficiaries should be viewed as State aid.1
Therefore it is somewhat surprising that it has not
been until the late 1990s and the 21st
century when the Commission has established a systematic
approach for addressing the question of State aids and tax expenditures.2
During this same period of time there appears to be an increase in the number of Commission’s
decisions and Courts’ ruling regarding direct corporate tax benefits that have been examined
under the State aid regulation. The first and foremost reason for this ostensible increase is the
systematic approach and the Commission’s intensified efforts in harmonizing direct taxation
during the tenure of Mario Monti.3
Mr. Monti was the Commissioner for the Common Market in
1994-1999 and the Competition Commissioner in 1999-2004. The second reason for this
development is that Member States have become increasingly aware of the fact that tax benefits
are no different from other measures in light of State aid regulation. This has rendered the
Member States more careful in introducing national tax measures before first consulting the
Commission.4
The intensified harmonization efforts partly manifest in the “expanded” concept of State aid and
in the Commission addressing beneficial tax provisions not only as a part of the fight against
harmful tax competition but also under Article 107(1) of the TFEU. Article 107(1) is the most
significant legal provision the Commission has in the fight against harmful tax competition: it is
1
Aldestam (2005), p. 19.
2
Schön (1999), p. 911.
3
Schön (1999), pp. 911-912.
4

2
the only provision that gives the Commission the power to forbid tax exemptions, tax credits, tax
allowances and other types of tax benefits that selectively result in a loss of tax revenues. Tax
benefits that fall under the exceptions of Articles 107(2)-(3) are the only tax benefits the
Commission cannot forbid.5
On the other hand, the Commission enjoys quite a broad discretion
in developing the common European tax policies and it thereby has the authority to categorize tax
benefits into State aid compatible and State aid incompatible with the Common Market.6
Regardless of strong harmonization efforts urged especially by the larger Member States, direct
corporate taxation has long remained almost within the exclusive competence of the individual
Member States. Currently it would be more truthful to state that direct taxation falls under the
divided competence of the EU and the Member States. While there are detailed studies of direct
taxation within the European Union, the topic has not yet been vastly explored in light of the
State aid regulation. Reasons behind this lack or research are most likely related to the difficulties
in making a straightforward categorization of tax benefits that should be viewed as general and
tax benefits that should be classified as selective under the State aid provisions. This study
nevertheless aims to examine the nature of direct corporate tax benefits that are classified as State
aid with a special focus on State aid that is regarded as incompatible with the Common Market.
1.2 Research Problem, Objectives and Scope of the Study
This study focuses on direct corporate taxation within the European Union and tax benefits,
which the Member States have granted to undertakings in one form or another. The study
evaluates the decisions of the Commission and the rulings of the European Court instances
regarding a variety of tax benefits that have been assessed in light of State aid, such as tax
allowances, tax base and tax rate reductions, tax deferments and other forms of tax exemptions.
The main research question focuses on determining the key characteristics of direct corporate tax
benefits granted by Member States that are classified as State aid in accordance with Article
107(1) of the Treaty of the Functioning of the European Union (“TFEU”). The primary objective
of the study is to examine whether there are common and distinguishable features in direct
corporate tax benefits that are generally viewed as State aid and whether there is the Commission
and the Courts have followed a coherent policy in assessing these tax benefits.
Thus, the main research problem of the thesis is:
5
Schön (1999), p. 912.
6
Rehbinder (2007), p. 371.

3
"What types of direct corporate tax benefits constitute State aid incompatible with the Common
Market in accordance with Article 107(1) of the TFEU?”
The research problem may be divided into the following sub-questions:
- What types of direct corporate tax benefits are regarded as selective in accordance with
Article 107(1) of the TFEU?
- What types of direct corporate tax benefits are regarded as general measures and are
therefore not classified as State aid in accordance with Article 107(1) of the TFEU?
The objective of these sub-questions is to evaluate the nature of the tax benefits by examining the
relevant primary and secondary legislative materials of the European Union as well as the
relevant case law. The focus will be on the cases where the Commission and / or the Court of
Justice of the European Union and the General Court have viewed direct corporate tax benefits as
selective and provided justifications that most likely have an impact on how to classify tax
benefits as State aid in the future.
The State aid procedure including the recovery of illegal State aid has been excluded from the
scope of the study in order to maintain the focus on the nature of the different corporate tax
benefits and tax regimes. Personal direct tax benefits and indirect tax benefits have also been
excluded from the scope of the study in their entirety.
1.3 Methodology
The research concentrates on examining how the Commission of the European Union and the
European Courts have interpreted certain tax provisions in light of the European State aid
regulation. The purpose of the study is to evaluate what kind of tax provisions are to be
interpreted as State aid in the meaning of Articles 107 – 109 of the TFEU. The study will start by
examining the two main documents in the field of State aid and direct taxation in the EU: the
Commission’s notice on tax measures published in 1998 and the Commission’s report on the
implementation of the notice, published in 2004. The emphasis of the study is to establish some
common principles for evaluating direct business taxation benefits from the perspective of State
aid regulation. The focus is on the analysis of the relevant regulations, communications and
reports published by the EU institutions as well as on the relevant case law with a special focus
on the Commission’s decisions and on the Courts’ rulings. Furthermore, some relevant people
will be interviewed for the study in order to gain a deeper understanding of the subject.

4
The study has a multidisciplinary approach. It combines EU legislation and national tax laws in
order to discover common principles behind the decisions and rulings where direct corporate tax
benefits have been classified as State aid in the means of Article 107(1) of the TFEU. The focus
of the methodology shall be on examining the Commission’s State aid decisions regarding direct
corporate tax benefits and comparing the reasoning of these decisions with the basic principles of
the EU law and the relevant notices, communications and other forms of soft-law7
in the field of
prohibited direct corporate tax benefits. In addition to the Commission’s decisions, the relevant
rulings of the Court of Justice and the General Court shall be examined in order to determine the
de facto compliance of the EU instances with the established and commonly accepted guidelines.
The consistency of the interpretations by the Commission and the Courts shall likewise be
examined. The State aid decisions on direct corporate tax benefits that have not been viewed as
State aid shall be compared to the negative State aid decisions where such benefits have been
classified as State aid. These negative State aid decisions shall be further explored in order to
evaluate the differences between tax measures compatible and tax measures incompatible with
the Common Market. In addition to the European perspective, the study aims to provide a more
national perspective by examining some of the most important decisions concerning Finland and
tax benefits that the Commission has evaluated under the State aid regulation.
2 The Concept of Fiscal State Aid in the European Union
2.1 Evolvement of the State Aid Policies
Fiscal aid is a commonly used tool for supporting specific industries or companies. It is less
noticeable than soft loans or direct subsidies and in the long term it may even prove beneficial for
the State’s budget in the form of higher tax revenues and accelerated economic development.
State aid may well have overall positive impacts on the individual Member State’s national
economy and it therefore often appears as an attractive opportunity for the Member State.8
Why
does State aid control then exist in general?
The founding principles in the European Union are the free movement of goods, services, capital
and people. These freedoms are fundamental to the Common Market and the free trade between
the Member States. However, free intra-EU trade creates incentives for the Member States to use
7
Soft law refers to instruments that do not have any legally binding force or have a weaker binding force than the binding
force of traditional law.
8
Di Bucci (2006), p. 73.

5
public resources to promote their domestic economic activities or to protect their own national
industries in order to improve their competitive status. The objective of the State aid control is to
ensure that government interventions do not distort competition or affect trade between the
Member States. State aid control ensures the effective functioning of the market and enables the
Member States to carry out rational decisions. Furthermore, it prevents the States from interfering
with the functioning of the Common Market and harming the competitiveness of European
companies in general.9
On the other hand, a complete prohibition of fiscal State aids would
attenuate the competitiveness of the European markets in industries that are heavily supported in
non-Member States. Some scholars have even argued that a complete prohibition of fiscal State
aids would undermine the principle of market efficiency and weaken the decision-making
capacity of the Member States.10
Irrespective of the possible positive impacts State aids may have on a national economy, the
Commission and the EU Courts have firmly argued that the fiscal nature of a measure does not
render the aid compatible with the Common Market. The Commission stated in its decision in
1973 that the aim of Article 107(1) of TFEU (former Article 87(1) of the EC Treaty) is to prevent
the trade between Member States from being distorted by benefits granted by the public
authorities to certain undertakings and that the Article does not distinguish between the measures
of State intervention based on their objectives but only based on their effects. Therefore the fiscal
nature or a social aim of the measure is not enough to shield it from applying Article 107(1).11
Whether the State aid assessment is always purely effects-based, is yet another issue.
The primary objective of the State aid regulation has been to guarantee the fundamental freedoms
for all citizens and undertakings in the Common Market and ensure that these freedoms are not
negatively affected by any unfair, protectionist actions.12
State aid policy has been an important
part of the EU competition policy for maintaining a level playing field for all undertakings and
for preserving the competitiveness of the Common Market. State aid is regulated in Articles 107 –
109 of the TFEU. State aid that is deemed incompatible with the Common Market is generally
prohibited in the European Union as it can distort fair and effective competition. The
compatibility of the State aid can be evaluated by interpreting Article 107 of the TFEU. Article
107(1) defines State aid as follows:
“Save as otherwise provided in the Treaties, any aid granted by a Member State or through state
9
Mamut (2008), p. 67.
10
Parikka – Siikavirta (2010), p. 11.
11
Case 173-73, point 13.
12
Alkio – Wik (2009), p. 1029.

6
resources in any form whatsoever which distorts or threatens to distort competition by favoring
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.”
Not all State aid is considered to be incompatible with the Common Market. Articles 107(2) – (3)
of the TFEU regulate these exemptions. Article 107(2) provides a list of State aid that is
automatically viewed as compatible with the internal market. Among the most important
elements of the list are aid of a social character and aid provided as a remedy for natural disasters
or exceptional occurrences. While aids under Article 107(2) are automatically compatible, the
Commission enjoys a broad discretion in determining the aids that fulfill at least one of the
several alternate conditions and objectives of Article 107(3) and should therefore be deemed
compatible with the Common Market.13
The Article covers aids such as aid offered to
undeveloped areas and aid facilitating the development of certain economic activities without
negatively affecting intra-EU trade. In general, aid in means of Article 107(3) should have a
structural and positive impact on achieving the policy objectives described therein.14
It must be underlined that despite the lists provided in Articles 107(2)-(3), all State aid is by
default prohibited if not specifically permitted by the TFEU. This baseline is a strong indication
of the European Union’s traditionally critical stance towards State aid. Especially State aid
provided to a group of public or private companies has been disapproved of, since it is regarded
to bring unfair advantage to the recipient company and thereby having harmful effects on the
market and consumers. Another indication of the EU institutions’ unfavorable position towards
State aid is the obligatory pre-notification procedure, which is set to ensure that the Commission
is able to monitor the nature of support provided by the Member States so that no State aid
deemed incompatible with the Common Market will be granted. In addition to Articles 107(2)-
(3), there are some other special forms of acceptable State aid such as aid granted for agricultural
products in accordance with Article 42, aid granted for transport in accordance with Article 92
and aid granted for services of general economic interest in accordance with Article 106(2) of the
TFEU.15
However, due to their specific nature, these exemptions shall not be further examined in
this study.
The State aid reform was one of the EU’s Competition Commissioner Kroes’s top priorities
during her tenure in 2004-2009. The reform was set to bring State aid policy a clearer meaning
and a better direction with the regime described by the two main principles of “efficiency” and
13
14
Luja (2003), p. 68.

7
“equity”.16
The State Aid Action Plan for 2005–200917
set guidelines for the reform package of
the State aid rules with the aim for “less and better targeted state aid”. The reform particularly
mentioned objectives such as a refined economic approach, more effective and transparent State
aid procedures, higher predictability and better enforcement of the Commission’s decisions and
the Courts’ rulings and a mutual responsibility of the Commission and the Member States to carry
out the reform.18
In the action plan, the Commission expressed its intention to revise its Notice on
the application of the state aid rules to measures relating to direct business taxation (“Notice”)
that had been published in 1998, “in particular to examine whether it should be extended to
indirect taxation”.19
The particular reference to taxation in this context may well be seen as a
signal of the Commission’s less tolerant attitude towards State subsidies in general and as its urge
to remind the Member States of the fact that tax benefit similarly to all other forms of fiscal aid
are covered by the State aid regulation.20
The State Aid Action Plan that was established as a part of the reform introduces the so called
balance test, which aims to balance the positive impacts of the aid in achieving a common interest
objective against its potentially negative side effects of distorting trade and competition. The
Action Plan takes a three-step approach in this assessment and may be used in both, evaluating
individual State aid cases and compiling different State aid guidelines. The balancing test has
been utilized in guidelines such as the R&D&I Framework for State aid21
and in the Guidelines
on State aid to promote risk capital investments in small and medium-sized enterprises.22
2.2 Legal and Illegal State Aid –Notification Procedure
In order to ensure a unified and equal treatment of all the market players within the EU, the
Commission is responsible for monitoring the compliance of State aids with EU legislation. The
procedure firstly depends on whether the question concerns an existing aid in which case the
Commission is obliged to keep the nature of the aid under constant review and, if necessary, in
accordance with Article 108 of the TFEU either propose measures to render the aid compatible
with the Common Market or to order the abolishment of the aid. In accordance with Article 1(v)
15
Hartikainen (2008), p. 391.
16
Kroes, SPEECH/05/347 (2005), p. 3.
17
18
COM(2005) 107 final, point 18.
19
COM(2005) 107 final, point 64.
20
See e.g. Luja (2006), p. 1.
21
COM(2006/C 323/01)
22
COM(2006/C 194/02)

8
of Regulation 659/1999, a measure which did not constitute aid at the time when it was put into
effect may have become aid due to the evolution of the Common Market. It must be noted,
though that a decision opening the procedure in respect of existing aid does not have immediate
legal effects and is therefore not a challengeable act: only final decisions of the Commission
produce legal effects.23
If the case on the other hand concerns a new aid the State is about to grant
or an existing aid the State is about to alter, then the State must comply with the notification
procedure set out in Article 88(3) of the TFEU. Unlike decisions opening the procedure in respect
of existing aid, decisions opening the formal procedure regarding a new aid are challengeable
acts.24
Member States must actively update their national laws in order to comply with the valid
EU State aid regulations. Finland for example updated its legislation in 2008 in order to ensure
the effective implementation of the Regulation 659/1999.25
In accordance with Article 108(1), the Commission must in cooperation with the Member States
constantly review the national aid systems. The Commission has the authority to propose any
appropriate measures it deems necessary for the progressive development or for the functioning
of the Common Market. The notification procedure for new aid or for the modification of existing
aid is regulated in Article 108(3) according to which the Member States must inform the
Commission sufficiently in advance in order for the Commission to have time to submit its
comments regarding the nature of the State aid. Even State aid that would appear to be
compatible with the Common Market must be pre-notified to the Commission well in advance of
granting the aid.26
If the Commission considers that the State aid plans are incompatible with the
Common Market according to Article 107(1), it initiates the formal investigation procedure while
the Member State is prohibited from putting its measures into effect until the formal investigation
procedure has reached a final decision.
It is important to differentiate between the concepts of illegal State aid and State aid incompatible
with the Common Market. The legality of the State aid only depends on whether or not the State
has followed the legally-binding steps of the notification procedure as stated in Article 108(3) of
the TFEU. If the State has followed the notification procedure, the State aid is constituted as legal
whereas a failure to comply with the legally defined steps automatically results in the State aid
being regarded as illegal. In other words, the legality or illegality of the State aid only depends on
whether the Member State has complied with this notification procedure or not, regardless of the
23
See e.g. Case C-312/90, points 17-22 and Case C-47/91, points 25-28.
24
See e.g. Case T-276/02, point 28.
25
Parikka – Siikavirta (2010), p. 5.
26
See e.g. Hartikainen (2008), p. 392.

9
nature of the aid. The compatibility of the aid with the Common Market on the other hand only
depends on the nature of the aid: State aid that fulfills the requirements of Articles 107(2)-(3) can
be regarded as compatible with the Common Market.27
This means that also previously
unnotified – and therefore illegal – State aid may be regarded as compatible whereas legally
notified State aid may be deemed incompatible aid.
The notification procedure is the main reason for the ostensible increase in tax measures that have
been assessed under the State aid regulation during the recent decades. The Member States have
become more active in notifying tax measures to the Commission and thereby ensuring the
compatibility of the measure with the Common Market before actually introducing the measure.28
In spite of this increased activity, there are undoubtedly many tax benefits that still remain
unnotified either due to the State’s reluctance or ignorance. The States may not want to abolish
tax benefits they see as favorable to their national economies in spite of acknowledging that the
measures violate State aid regulations. Alternatively, some tax benefits are left unnotified, since
the States simply do not recognize that the measures may fall under Article 107(1). This
demonstrates the problematic features of tax benefits: while the Commission and the European
Courts assume that taxpayers are able to recognize which tax measures may be classified as State
aid and therefore obediently follow the legal State aid procedure, this is not always the case.29
2.3 Recovery Procedure
Council Regulation 659/1999 lays down detailed rules for applying Article 108 of the TFEU. The
Commission’s decision alternatives after a formal investigation procedure are regulated in Article
7 of the Regulation. The Commission may come to the conclusion that the aid does not constitute
State aid in the first place. It is noteworthy that this is the reason for there being very little case
law of the Courts accepting justifications based on the nature or general scheme of the system: in
such cases, it is sufficient for the Commission to publish its decision where it states that the
measure shall not be classified as State aid or can be approved in a short summary notice.30
Secondly, the Commission may reach a positive decision meaning that the measure is classified
as State aid but it is deemed compatible with the Common Market, which means that the Member
State may proceed with its aid program. Thirdly, the Commission may reach a conditional
27
See e.g. Hartikainen (2008), p. 392.
28
29
Luja (2009) in Pistone, p. 255.
30
Aldestam (2005), p. 32.

10
decision, which means that the State aid is viewed to be compatible with the Common Market if
the Member State agrees to alter the measure under certain conditions.
The Commission may alternatively reach a negative decision, meaning that the State aid is
deemed incompatible with the Common Market in which case the aid program may not be
continued. If reaching a negative decision, the Commission has the option to make the decision
with or without recovery, which is regulated in Article 14 of the Regulation. The basic
assumption is that State aid that has been deemed incompatible with the Common Market shall be
recovered in its entirety. The question whether also unlawfully granted aid that has nevertheless
afterwards been deemed compatible with the market, should also be recovered, was somewhat
unclear prior to the Court ruling in the Centre d'exportation du livre français (“CELF”) case in
2008. Till then the Commission had stated that only incompatible aid can be recovered.31
However, in the CELF case, the Court ruled that although the national court is not bound to order
the recovery of unlawfully granted aid, it must order the aid recipient to pay interest in respect of
the period of the unlawfulness.32
This confirmed the conception that the full recovery only applies
to State aid that is classified as incompatible with the Common Market.
Member States tend to try to resort to the same few similar arguments in order to avoid the
recovery of the aid. The first arguments refer to the “intolerable financial consequences”33
or “an
absolute impossibility”34
of recovering the aid. The Commission’s regular response to the first
argument appears to be that Member States may only use the argument of an ‘”absolute
impossibility” as their defense not to recover the aid and financial difficulties do not constitute
such absolute impossibility35
. The Commission has further stated several times that
administrative difficulties do not mean that the recovery would be technically impossible.36
The
second argument the Member States try to use in order to forego the recovery process is the
principle of legitimate expectations37
. This argument is more likely to succeed than the previous
one: Article 14(1) of the Council Regulation 659/1999 offers a backdoor for the recipient stating
that the Commission shall not require recovery of the aid if this would be contrary to a general
principle of Community law – with this “general principle” mainly referring to the principle of
legitimate expectations. In its decision on a tax scheme implemented by Austria, the Commission
31
Commission Decision (2008/723/EC), point 158.
32
Case C-199/06, point 1 of the ruling.
33
34
See e.g. Case C 49/2001 (ex NN 46/2000), point 42.
35
See e.g. C 37/2005 (ex NN 11/2004), point 161.
36
See e.g. Case C 49/2001 (ex NN 46/2000), point 65; Case C-280/95, point 23 and Case C-378/98 point 42.
37
See e.g. Case C-54/2001 (ex NN55/2000), point 29.

11
stated that when the national measure was first introduced, there was no established practice
regarding the legal assessment of such a tax scheme and that the wording of a Court’s previous
ruling may have led some beneficiaries to believe in good faith that the national measures would
not have constituted State aid. Therefore, the Commission decided not to recover the aid.38
In
another case regarding taxation and State aid the Commission stated that the similarities between
two tax regimes made it difficult for an undertaking to anticipate that they would be subject to
different State aid procedures and therefore, the recovery was viewed contrary to the general
principle of the Community law.39
Member States have also tried to avoid the recovery by referring to the principle of the non-
retroactivity of tax laws. The Commission has rejected this argument consistently by stating that
Member States may not plead provisions, practices or circumstances of their own internal legal
system in order to justify a failure to comply with its obligations under the EU law.40
The
Commission’s stance appears to be legitimate, since if it were not the case Member States would
always have the option to refer to their own national laws in order to avoid the compliance with
the superior EU legislation. Therefore it is understandable that the Commission has consistently
rejected references to general principles inherent in a Member States’ national legislation. It must
nevertheless be noted that references to the State’s general tax system in order to justify tax
benefit schemes does not fall under this prohibited “category” of internal “provisions, practices or
circumstances”. Quite on the contrary, as may be perceived later on, tax benefit schemes by
default need to be a part of the State’s general tax system in order to escape State aid assessment.
Tax benefits have several problematic features in light of State aid assessment. One of these
features is that their exact amount is difficult to determine, which makes it somewhat more
complicated to issue a recovery order for tax measures than for direct subsidies.41
However,
irrespective of these calculation difficulties and regardless of the few cases where the
Commission has foregone the recovery of the unlawful and incompatible aid, it is necessary to
stress that in most cases the Commission and the Court have firmly rejected the States’ references
to legitimate expectations, financial difficulties or an absolute impossibility of the recovery. In the
often cited Van den Bergh and Jurgen case in 1987, the Court argued how it has consistently held
that “any trader in regard to whom an institution has given rise to justified hopes may rely on the
principle of the protection of legitimate expectation”. However, the Court continued, in case a
38
39
40
Case C-54/2001 (ex NN55/2000), point 65.
41
Rehbinder (2007), p. 370.

Aino Mäkisalo - Master_s Thesis - Direct Corporate Tax Benefits and the Concept of Fiscal State Aid.PDF

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