On 4 March 2021, the European Court of Justice ("ECJ") handed down its much awaited judgment in the Fùtbol Club Barcelona ("FCB") case. It set aside the judgment of the General Court. As a result, the European Commission's decision classifying as State aid a tax scheme that was available to four Spanish professional football clubs has been reinstated.
What you need to know – key takeaways
- Aid schemes must be assessed by reference to circumstances at the time they are adopted even if they are examined by the European Commission after they have been put into effect.
- Where a "tax aid scheme applies on an annual or periodic basis", the European Commission is only required to demonstrate that, at the time of its adoption, the scheme was capable of conferring an advantage on its beneficiaries.
Background
The case concerns Spanish legislation introduced in 1990 requiring professional sports clubs to be reincorporated as so-called sports limited liability companies ("SLLCs") instead of non-profit entities. Clubs with positive financial balances (namely FCB and three other professional football clubs) were exempt from this obligation and could continue to enjoy a lower rate of income tax.
In 2016, the European Commission concluded that by introducing a preferential tax rate, Spain had granted incompatible State aid to four football clubs and ordered Spain to recover the illegal aid.
In 2019, the General Court upheld an appeal brought by FCB and ruled that the European Commission had failed to demonstrate that the exemption from the requirement to be incorporated as an SLLC conferred an "advantage" on the beneficiaries of that exemption. According to the General Court, the European Commission had not sufficiently considered whether the advantage resulting from the reduced tax rate could have been offset by a less favourable deduction rate for certain expenses. It noted, in particular, that Real Madrid had paid more tax as a non-profit entity than it would have done as an SLLC.
ECJ judgment
The ECJ first emphasised that the measure at stake constituted an "aid scheme" (as opposed to an "individual aid"). As regards "aid schemes", the examination of the existence of aid relates exclusively to the scheme itself and not to aid subsequently granted on the basis of the scheme. It follows that this necessitates an ex ante analysis at the time that the scheme is adopted.
The ECJ then accepted that, when assessing the "advantage" condition, the European Commission is required to take into account all the components of a national scheme (both favourable and unfavourable from the perspective of the beneficiaries).
However, where a "tax aid scheme applies on an annual or periodic basis", the ECJ held that the European Commission is only required to demonstrate that, at the time of its adoption, the scheme was capable of conferring an advantage on its beneficiaries. As a result, potentially unfavourable features whose actual impact depends on "random and variable circumstances" can be disregarded. Rather, these features are relevant when the European Commission is assessing the amount of aid that needs to be recovered from individual beneficiaries of the scheme. This is on the basis that the European Commission is required to determine whether that scheme has actually conferred an advantage on any of its beneficiaries.
In the present case, the ECJ found that the European Commission was right to consider that the lower tax rate for non-profit entities was capable of conferring an advantage. The European Commission was not obliged to examine the actual impact of the possibility of making tax deductions and whether it neutralised the advantage received from the reduced tax rate.
Comment
In its judgment, the ECJ carefully singled out the situation of "aid schemes" and its reasoning cannot be extended as such to individual aid measures. It is worth noting in this respect that in its recent Apple and Starbucks judgments – which concerned individual tax rulings - the General Court ruled that the European Commission must show that there is an actual reduction of the tax burden in order to establish the existence of an advantage.
With thanks to Jessica Bracker of Ashurst for her contribution.
