Member States have discretion to impose taxes that penalise environmentally harmful activities. Exemption of undertakings whose activities do not harm the environment does not constitute State aid whenever the exempted undertakings are not in a comparable situation.


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The concept of selectivity is tricky, especially when applied to measures of economic policy which are intended to remedy market failure at a regional level. On 26 April 2018, the Court of Justice provided some guidance on how to design such measures so that they do not constitute State aid. This article analyses the reasoning of the Court and concludes by considering the implications for Member States of the standard of proof set by the Court.

The guidance provided by the Court was in three preliminary rulings that had been requested by the Spanish Supreme Court. The requests concerned case (i) C‑233/16, Asociación Nacional de Grandes Empresas de Distribución v Generalitat de Catalunya[1], (ii) joined cases C‑234/16 and C‑235/16, Asociación Nacional de Grandes Empresas de Distribución v Consejería de Economía y Hacienda del Principado de Asturias and Consejo de Gobierno del Principado de Asturias[2] and (iii) joined cases C‑236/16 and C‑237/16, Asociación Nacional de Grandes Empresas de Distribución v Diputación General de Aragón[3].

In all three groups of cases, the Spanish Supreme Court asked the Court of Justice whether certain regional taxes infringed Articles 49 and 54 TFEU and whether exemptions from those taxes constituted State aid in the meaning of Article 107(1) TFEU.

Article 49 TFEU prohibits any restriction to the right of establishment, regardless of the form of the establishment (e.g. agency, branch, subsidiary). Article 54 TFEU requires that all EU companies are treated equally (national treatment).

The three groups of cases are reviewed in two parts. This week, part I summarises briefly the findings of the Court of Justice with respect to Articles 49 and 54 and then examines in more detail the reasoning of the Court on the application of Article 107(1) to the tax levied in Catalonia. Part II, that will be published next week, identifies the similarities and differences with the taxes levied in Asturias and Aragon, respectively.



Part I


Three Spanish autonomous communities, Catalonia (case (i)), Asturias (cases (ii)) and Aragon (cases (iii)) introduced regional taxes on large retailers. The taxes were intended to offset the potential negative impact (i.e. externalities) of large retail operations on local activities and the environment. The revenue from those taxes was to be used to fund environmental protection projects and improve local infrastructure.

In Catalonia, the chargeable event was the use of sales areas equal to or greater than 2500m2 by individual large retail establishments. However, establishments which pursued the business of a garden centre or of selling vehicles, construction materials, machinery or industrial supplies were exempt from the tax. In addition, the taxable amount was reduced by 60% for retail establishments involved in the sale of furniture, sanitary ware, and doors and windows, and do-it-yourself stores.

In Asturias, the tax was chargeable on retailers with sales area equal to or greater than 4000m2. Individual large establishments with sales area not exceeding 10000m2 which pursued the business of a garden centre or of selling vehicles, construction materials, machinery or industrial supplies were exempted.

In Aragon, retail establishments with sales area greater than 500m2 were subject to the tax, but because of the method of calculation of the tax, the taxable amount was zero when the sales area was less than 2000m2. However, retail establishments that sold the following products were exempted from that tax: machinery, vehicles, tools and industrial supplies; construction materials, plumbing materials, doors and windows, for sale only to professionals; nurseries for gardening and cultivation; fittings for individual, ‘conventional’ and specialist establishments; motor vehicles, in dealerships and repair workshops; motor fuel.

The Asociación Nacional de Grandes Empresas de Distribución (ANGED), a national association of large distribution companies, challenged the lawfulness of the taxes before Spanish courts. The national cases eventually reached the supreme court of Spain which lodged the requests for preliminary ruling.

It should also be noted that in the meantime the regional laws underpinning the tax measures had been amended. Nonetheless, the referring court considered that there were issues that still needed to be settled.

Freedom of establishment and national treatment

On whether the taxes infringed Articles 49 and 54 TFEU the Court of Justice was brief but unambiguous. The taxes did not amount to discriminatory treatment that was contrary to the freedom of establishment and the right of national treatment.

The reasoning of the Court was identical in all three cases. The paragraphs cited below are from the Catalonia judgment. The Court first explained that “(29) freedom of establishment aims to guarantee the benefit of national treatment in the host Member State to nationals of another Member State … by prohibiting any discrimination based on the place in which companies have their seat”. “(30) The rules regarding equal treatment forbid not only overt discrimination based on the location of the seat of companies, but also all covert forms of discrimination which, by the application of other criteria of differentiation, lead in fact to the same result”. In the case of taxes, such covert discrimination occurs when “(31) a tax based on an apparently objective criterion of differentiation … disadvantages in most cases, given its features, companies whose seat is in other Member States and … are in a comparable situation to companies whose seat is situated in the Member State where that tax is charged”.

On the basis of the above principles, the Court found that a criterion relating to the sales area of the establishment did not give rise to any direct discrimination. Nor, was there any evidence that that criterion disadvantaged in most cases nationals or companies from other Member States (Paragraphs 32 & 33). The Court did not consider as sufficient the fact submitted by ANGED that more than 60% of the large establishments originated from other Member States.

On the face of it, it appeared that the regional taxes hit disproportionately foreign companies. But perhaps at that market segment, where large up-front investments were needed, competition was European and, therefore, the presence of more foreign companies was a natural consequence.



Application of Article 107(1) to the Catalonian tax

In the case of Catalonia, the tax exempted retailers with less than 2500m2 and retailers of any size if they were garden centres, car dealers or sellers of construction materials, machinery or industrial supplies. In addition, there was a 60% reduction of the taxable amount for suppliers of furniture, sanitary ware, and doors and windows, and do-it-yourself stores. The Court focused its attention on whether the tax exemptions were selective and in this connection it referred extensively to the principles emanating from the judgment of December 2016 in joined cases C‑20/15 P and C‑21/15 P, Commission v World Duty Free Group.

It first recalled that “(38) in order to assess [whether a measure is selective] it is necessary to determine whether, under a particular legal regime, the national measure in question is such as to favour ‘certain undertakings or the production of certain goods’ over others which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and which accordingly suffer different treatment that can, in essence, be classified as ‘discriminatory’”.

“(40) In order to classify a tax as ‘selective’, the ordinary or ‘normal’ tax system applicable in the Member State concerned must first be identified and it must then be demonstrated that the tax being examined is a derogation from that system, in so far as it differentiates between operators who, in the light of the objective pursued by that ordinary tax system, are in a comparable factual and legal situation.”

Then the Court explained that in the case of regional measures “(41) the legal reference framework for the purpose of assessing the selectivity of a measure must not necessarily be determined within the territory of the Member State concerned, but may be that of the territory within which a regional or local authority exercises the powers conferred on it by the constitution or by law. Such is the case when that entity enjoys a legal and factual status which makes it sufficiently autonomous in relation to the central government of a Member State, with the result that, by the measures it adopts, it is that body and not the central government which plays a fundamental role in the definition of the political and economic environment in which undertakings operate”.

In other words, selectivity is determined within the jurisdiction of the public authority that adopts the measure in question. For example, the scope of application of a property tax levied by a municipality is the area of jurisdiction of that municipality.

“(42) A measure that differentiates between undertakings which, in the light of the objective pursued by the legal regime concerned, are in a comparable factual and legal situation and is, therefore, a priori selective, does not, however, constitute State aid within the meaning of Article 107(1) TFEU where the Member State concerned is able to demonstrate that the differentiation is justified since it flows from the nature or overall structure of the system of which it forms part”.

“(43) A measure which creates an exception to the application of the general tax system may be justified by the nature and overall structure of the tax system if the Member State concerned can show that the measure results directly from the basic or guiding principles of its tax system. In that connection, a distinction must be made between, on the one hand, the objectives attributed to a particular tax scheme and which are extrinsic to it and, on the other, the mechanisms inherent in the tax system itself, which are necessary for the achievement of those objectives”.

“(44) It should also be borne in mind that although, in order for a tax to be established as being selective, it is not always necessary that it should derogate from a tax system considered to be an ordinary tax system, the fact that it can be so characterised is highly relevant in that regard where its effect is that two categories of operators are distinguished and are subject, a priori, to different treatment, namely those who fall within the scope of the derogating measure and those who continue to fall within the scope of the ordinary tax system, although those two categories are in a comparable situation in the light of the objective pursued by that system”.

In the case of Catalonia, the Court noted that the territorial reference framework was that of Catalonia itself. Then it observed that since Article 107(1) defined state interventions on the basis of their effects, independently of the techniques used, it could not be excluded a priori retailers with less than 2500m2 derived an advantage. For that reason it had to be determined whether the retail establishments excluded from the scope of the tax were in a comparable situation to the establishments the were taxed.

The Court highlighted that, in the absence of specific EU rules, it fell within the competence of Member States to designate bases of assessment and to spread the tax burden across the various factors of production and economic sectors. Interestingly, it cited paragraph 156 of the Commission’s Notice on the Notion of State aid according to which “Member States are free to decide on the economic policy which they consider most appropriate and, in particular, to spread the tax burden as they see fit across the various factors of production [...] in accordance with Union law”.

The purpose of that tax was to contribute towards environmental protection and town and country planning and to correct and counteract the environmental and territorial consequences of the activities of the large retail establishments, caused, inter alia, from the increase in traffic. The revenue from the tax was intended to contribute to the financing of environmental action plans and improvements of infrastructure networks.

This reasoning is based on solid economic theory which suggests that the most efficient way to remedy negative externalities is through a tax that internalises the external costs.

Then the Court made an important observation. “(53) It is not disputed that the environmental impact of retail establishments is largely dependent on their size. The larger the sales area, the higher the attendance of the public, which results in greater adverse effects on the environment. Consequently, a condition relating to sales area thresholds, such as that adopted by the national legislation at issue in the main proceedings, in order to distinguish between undertakings with a greater or lesser environmental impact, is consistent with the objectives pursued.”

There is a defect in the reasoning in this paragraph. A simple turnover tax levied on all retailers would catch the external negative effects and would apply proportionately to the size of the retail activities. The larger the retail activities, the larger the revenue from the tax. However, there can be two exceptions to this principle. First, a larger tax on larger retailers can be justified when the externalities they cause are disproportionately larger. A tax with just one rate that jumps from zero to something does not appear to have been designed to address disproportional effects. But, this is an empirical issue that needs to be proven on the basis of credible evidence. Second, an exemption from the tax for small retailers can also be justified if the costs of collecting the tax are larger than the expected revenue itself. Again, this is an empirical issue that needs to be proven.



The Court went on to conclude that “(55) in those circumstances, a condition under which the imposition of a tax is based on the sales area of an undertaking, […], differentiates between categories of establishments that are not in a comparable situation in the light of the objectives pursued by the legislation that imposed that condition.” “(56) Therefore, the tax exemption received by the retail establishments whose sales area is less than 2500 m2 cannot be regarded as conferring a selective advantage on those establishments and, therefore, is not capable of constituting State aid within the meaning of Article 107(1) TFEU.”

The Court of Justice also examined whether the total tax exemption granted to retail establishments pursuing the business of a garden centre or of selling vehicles, construction materials, machinery or industrial supplies, as well as the 60% reduction of the tax base for establishments selling furniture, sanitary ware and doors and windows and those that were do-it-yourself stores, constituted advantage in the meaning of Article 107(1). The Court noted that those measures derogated from the framework established by the tax.

In this connection, the government of Catalonia argued that the activities of those retail establishments required, “by their very nature”, large sales areas that were not intended to attract the greatest number of consumers or increase flows of customers who travelled there by private vehicle. Thus, they had fewer adverse effects on the environment and on town and country planning than the activities of establishments subject to the tax. The Court acknowledged that “(60) that factor may be such as to justify the distinction adopted in the contested legislation in the main proceedings, which, accordingly, would not result in selective advantages being given to the retail establishments concerned. It is, however, for the referring court to determine whether in fact that is the case.”

What is striking is that the reasoning in paragraph 60 that focuses on number of visitors appears to contradict the reasoning in paragraph 53 that focuses on the size of sale area. Instead of considering an exception to size according to area, the Court could have considered that size according to visitors could apply uniformly to all retailers.

Another striking aspect of the judgment in paragraph 60 is that the Court recognised that the impact of size on the environment was an empirical issue that had to be confirmed with data. In this connection, one wonders why the threshold of 2500m2 below which the tax was not applied was not also referred to the national court for verification on the basis of actual data.

More importantly, if the real harm was caused by the number of visitors or the number of visitors by car, why the Court did not question the tax base which was linked to sale area rather than number of visitors? Indeed, according to the logic of the Court in paragraph 60, the size of the parking area would probably be a better proxy for the impact on the environment than the size of the sales area.

The Court of Justice also examined whether the other criteria of Article 107(1) were applicable. The Catalonia government disputed that the tax had any impact on trade. The Court responded by reiterating established case law that “(64) it is necessary not to establish that the aid has a real effect on trade between Member States and that competition is actually being distorted, but only to examine whether that aid is liable to affect such trade and distort competition”.

 “(65) It is not necessary that the beneficiary undertakings themselves be involved in trade between Member States. Where a Member State grants aid to undertakings, internal activity may be maintained or increased as a result, so that the opportunities for undertakings established in other Member States to penetrate the market in that Member State are thereby reduced”.

 The Court also referred to settled case law according to which “(66) aid intended to release an undertaking from costs which it would normally have to bear in its day-to-day management or normal activities distorts the conditions of competition”.



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

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

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



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Phedon Nicolaides

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

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