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Aid that pre-exists the entry of a Member State into the EU is “existing” and does not have to be recovered. VAT exemptions authorised by the EU are not State aid. National courts must disregard national legal provisions that prevent them from acting against illegal aid.

 

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Introduction

This article examines a variety of issues: when State aid is existing aid; when an authorised VAT exemption is State aid; and when national courts are allowed not to stop implementation of non-notified (illegal) aid. The short answers are i) when aid is “old”, ii) never and iii) never.

i) New v existing aid

The procedural regulation [Regulation 2015/1589 which replaced Regulation 659/1999] makes a distinction between new and existing State aid. This is because Article 108(3) makes the granting of new aid without prior notification to and authorisation by the Commission [or exemption under a Block Exemption Regulation] automatically illegal.

Existing aid is considered to be:

  1. Aid that existed before the establishment of the EEC or the accession of a country to the EEC/EC/EU.
  2. Aid that has been approved or is deemed to have been approved by the Commission.
  3. Aid that, because of the state of evolution of the internal market, was not aid when it was implemented.
  4. Aid that was granted more than ten years before it came to the attention of the Commission [aid for which the limitation period of ten years has expired].

The Commission, in its decision SA.33206, had to deal with State aid that was granted to the German Youth Hostel Association in 1953.[1] The Association has enjoyed a privileged tax status in Germany. This is because it is entrusted with the public mission of facilitating the development of activities which are beneficial to young persons. The Association is completely exempted from corporate, local and property taxes and VAT.

The Commission devotes a substantial part of its decision presenting and explaining the tax status of the Association. One gets the impression that it prepares the ground to argue that the Association is not an undertaking, or that it carries out a public service mission that can be considered to be a service of general economic interest or that the preferential tax treatment can be justified on the logic of the reference tax system. However, in the end it follows none of these three options [this is probably right because it appears that the Association does carry out economic activity, that there is no well-defined act of entrustment as required by SGEI rules and that the exemptions cannot be justified by the logic of the reference system].

Instead, the Commission concludes that the aid is existing because it is based on an act that was adopted before the establishment of the European Economic Community. What is rather unusual is that it does not propose to Germany any appropriate measures to abolish or modify the tax status of the Association.

ii) VAT exemption

Another interesting aspect of the decision concerns the assessment of the VAT exemption. Undertakings regularly ask whether exemption from VAT or the levying of a reduced rate constitutes State aid. Here is what the Commission had to say on this issue.

“(27) National VAT exemptions may only be granted within the framework of the VAT Directive. Pursuant to Article 132(1)(h) of the VAT Directive ‘Member States shall exempt the following transactions: (…) the supply of services and goods closely linked to the protection of children and young persons by bodies governed by public law or by other organisations recognised by the Member State concerned as being devoted to social well-being’.”

“(28) Germany transposed this provision in the national VAT code. Pursuant to § 4 No. 24 of the German VAT Code, services provided by German youth hostels are exempted from VAT.”

“(29) Considering the fact that Article 132(1)(h) of the VAT Directive imposes on Member states a clear and precise obligation to exempt the supply of services and goods closely linked to the protection of children and young persons by bodies governed by public law or by other organisations recognised by the Member State concerned as being devoted to social well-being, in transposing the exemption into national law Germany is only implementing Union provisions in accordance with its obligations stemming from the Treaty. The Commission considers, in line with the jurisprudence of the Court of Justice, that the degree of latitude that the Member States have to ensure the implementation of the VAT Directive does not affect the unconditional nature of the obligation imposed by that provision to grant exemption as laid down in Article 132(1)(h) of the VAT Directive. Therefore the exemption of DJH from VAT under German law is not imputable to Germany and therefore does not constitute State aid in the meaning of Art. 107(1) TFEU.” [Emphasis added]

Therefore, if a Member State exempts a product or activity from VAT or levies a reduced rate in compliance with the obligations imposed on it by the VAT directive, it does not grant State aid for the reason that the decision cannot be attributed to be imputed to a national public authority.

iii) The duty of national courts to protect competitors from illegal State aid

On 11 November 2015, the Court of Justice rendered its judgment in case C-505/14, Klausner Holz Niedersachsen v Land Nordrhein-Westfalen.[2]

The request for a preliminary ruling was made in the context of proceedings between Klausner Holz Niedersachsen and the Land Nordrhein-Westfalen [Land] concerning a failure by the Land to execute agreements that had been concluded with Klausner Holz. The subject of the agreements was the supply wood from forests managed by the Land to Klausner Holz.

A higher German court had already adjudicated conclusively the dispute between Klausner Holz and the Land and had found that the agreements were valid. Klausner Holz then brought an action against the Land before the referring court seeking payment for damages.

What makes this case interesting is that the referring court had to take into account the fact that a higher court had decided on the validity of the agreements. In legal terminology that aspect of the case was “res judicata”; i.e. it was settled and could not be re-opened by another court. However, the “res judicata”, instead of making the task of the referring court easier, it created a dilemma. This is because the Land argued that the agreements contained illegal State aid; i.e. the aid was not notified on the basis of Article 108(3) TFEU. How could the referring court enforce agreements that, on the one hand, were declared to be valid, yet, on the other, they contained illegal aid and therefore could not be enforced?

The main aspects of the ruling

The Court of Justice resolved the dilemma as follows. First, it recalled the principle that only aid that is compatible with the internal market may be implemented. If a public authority has any doubt as to the compatibility of the aid, it must suspend the aid measure until the Commission decides.

Although the assessment of the compatibility of aid measures belongs to the exclusive competence of the Commission, national courts must protect the rights of individuals. This is the purpose of the prior notification of all aid that is imposed on Member States by Article 108(3).

National courts are entrusted with the task of interpreting the concept of aid contained in Article 107(1) TFEU in order to determine whether a public measure constitutes State aid and therefore should have been notified to the Commission. National courts protect the rights of individuals by annulling or suspending aid measures, ordering recovery of aid or taking interim measures.

Then the Court of Justice turned its attention to the facts of the present case. “27 In the present case, the referring court, […], has held that the contracts at issue constitute State aid, which has been implemented in breach of the third sentence of Article 108(3) TFEU. However, it considers itself prevented from satisfying its obligation to draw all the consequences from that breach because of the declaratory judgment of the [Higher Regional Court] confirming that the contracts at issue remained in force is res judicata.”

After having considered what a national court could do in such conflicting circumstances, the Court of Justice stated that “34 […] it must be borne in mind that the principle that national law must be interpreted in conformity with EU law also requires national courts to do whatever lies within their jurisdiction, taking the whole body of domestic law into consideration and applying the interpretative methods recognised by it, with a view to ensuring that EU law is fully effective and to achieving an outcome consistent with the objective pursued by it.”

The Court of Justice acknowledged that “40 in the absence of EU legislation in this area, the rules implementing the principle of res judicata are a matter for the national legal order, in accordance with the principle of the procedural autonomy of the Member States.” At the same time, however, the Court of Justice recognised that res judicata can also be interpreted in such a way that it can frustrate the application of EU law by making it impossible for national courts to fulfil their duty to ensure compliance with Article 108(3).

The Court of Justice was concerned that in such an eventuality, “43 […] State authorities and the recipients of State aid would be able to circumvent the prohibition laid down in the third sentence of Article 108(3) TFEU by obtaining, without relying on EU law on State aid, a declaratory judgment whose effect would enable them, definitively, to continue to implement the aid in question over a number of years. Thus, in a case such as that at issue in the main proceedings, a breach of EU law would recur in respect of each new supply of wood, without it being possible to remedy it.”

The Court considered that “44 […] such an interpretation of national law is likely to deprive of any useful effect the exclusive power of the Commission, […], to assess, […], the compatibility of aid measures with the internal market. If the Commission, […], should conclude that it is incompatible with the internal market and order its recovery, execution of its decision must fail if a decision of the national court could be raised against it declaring the contracts forming that aid to be ‘in force’.”

Therefore, the Court of Justice concluded that “45 […] a national rule which prevents the national court from drawing all the consequences of a breach of the third sentence of Article 108(3) TFEU because of a decision of a national court, which is res judicata, given in a dispute which does not have the same subject-matter and which did not concern the State aid characteristics of the contracts at issue must be regarded as being incompatible with the principle of effectiveness. A significant obstacle to the effective application of EU law and, in particular, a principle as fundamental as that of the control of State aid cannot be justified either by the principle of res judicata or by the principle of legal certainty”.

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[1] The full text of the decision can be accessed at:

http://ec.europa.eu/competition/state_aid/cases/260436/260436_1698296_81_2.pdf.

[2] The text of the judgment can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=&docid=171283&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=526452.

 

[Photo by Tax Credits from flickr.com]

 



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Professor at the College of Europe, Bruges, and at the University of Maastricht, and Academic Director at lexxion training

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