On 3 December 2020, Advocate General (“AG”) Kokott issued a favorable opinion about the appeal lodged by the E.U. Commission against the General Court’s judgment of 14 February 2019 in the so-called Belgian “Excess Profit Rulings” cases (T-131/16 and T-263/16). According to the AG, the E.U. Commission rightfully earmarked the Belgian practice of making downward adjustments to profits of Belgian corporate taxpayers forming part of a multinational group as a State aid-scheme. With her opinion, Ms. Kokott recommends that the European Court of Justice (“ECJ”) sets aside the judgment of the General Court (“GC”) and refers the case back to the GC for a second review.
Observation for our (non-European) readers: the AG assists the ECJ and provides an independent opinion on each case. These opinions offer impartial advice to the Judges of the Court and help them reach their decision. However, the opinion of the AG is not binding – even where the Court reaches the same conclusion, it may do so for different reasons. Often, the AG’s opinion is either presented as a judgment of the Court or as something the Court will almost certainly follow. Neither assertion is true.
1. The Belgian “Excess Profit Rulings” Saga
From 2004 through 2014, the Belgian Ruling Commission delivered so-called Excess Profit Rulings (“EPR”) to 55 Belgian corporate taxpayers forming part of a multinational group. The EPRs allowed the addressee taxpayers to make downward adjustments to their taxable profits of between 50 and 90 per cent. Many household names appear among the beneficiaries of the regime, such as AB InBev, Atlas Copco, BASF, and Pfizer. The rationale behind the regime was the following: a stand-alone Belgian corporation suffers expenses to acquire reputation, know-how, or client-supplier networks. Conversely, the Belgian subsidiary of a multinational group often benefits from group synergies or economies of scale and gets these intangibles from other group entities for free. The absence of deductible expenses generates “excess profits” and might lead to international double taxation. Therefore, in accordance with the internationally accepted arm’s length principle, Article 185(2)(b) of the Belgian Income Tax Code (“BITC”) allowed a downward adjustment of profits between two entities belonging to the same group if the conditions agreed between them were not the same as those which would have been agreed upon between independent entities.
In 2013, the E.U. Commission began investigating whether Advance Tax Rulings (“ATRs”) granted by EU Member States offering a favorable tax treatment to certain corporations might qualify as State-aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union (“TFEU”). The European watchdog then adopted a series of infamous negative decisions, such as the ones against Starbucks in the Netherlands or Apple in Ireland.
On 11 January 2016, the Commission adopted a negative decision against the Belgian EPR regime and earmarked it as an incompatible and unlawful State aid-scheme. Consequently, the E.U. Commission ordered Belgium to recover the alleged aid (approx. €900 million in the aggregate) from the beneficiaries. The distinguishing feature of the Belgian decision was that, unlike the one brought against Starbucks or Apple, the E.U. Commission challenged the ATRs on a collective basis (“aid-scheme”) and did not examine each ruling individually (“individual aid”). Belgium and Magnetrol International (one of the alleged aid beneficiaries) lodged and appeal before the GC, arguing that the E.U. Commission wrongly characterized the regime as an “aid-scheme”.
On 14 February 2019, the GC sided with Belgium and found that the EPR regime does not qualify as an “aid-scheme” within the meaning of Article 1(d) of Regulation 2015/1589. The E.U. Commission then lodged an appeal before the ECJ, and in the context of this appeal, AG Kokott has now delivered her opinion.
The crux of the appeal (and of the opinion of the AG) is not whether the EPR regime constitutes incompatible or unlawful State aid. The question is whether – and if so, under what conditions – the E.U. Commission could earmark a sample of ATRs as an “aid-scheme”. Since 28 other actions lodged by other alleged aid beneficiaries are currently pending before the ECJ, the ruling has a significant practical importance.
2. The Opinion of Advocate General Kokott
Under Article 1(d) of Regulation 2015/1589, the existence of an “aid-scheme” is subject to a threefold requirement: (i) the existence of an act, (ii) the granting of an individual aid without the need for further implementing measures, and (iii) the identification of beneficiaries in a general and abstract manner in the act. In her Opinion, the AG backed the E.U. Commission’s claim that the Belgian EPR regime meets all three requirements:
- The existence of an “act” – In the judgment under appeal, the GC acknowledged that the concept of “act” encompasses “consistent administrative practices”. However, the GC took the view that the E.U. Commission failed to demonstrate the existence of such consistent administrative practice in the case at hand. In particular, the E.U. Commission examined a sample of 22 out of the 66 ATRs and did not explain either the criteria underlying its choice of that sample or why it had been considered representative of all the ATRs.
For the AG, the E.U. Commission is perfectly allowed to examine a sample to establish the existence of an aid-scheme, to the extent that such a sample is sufficiently representative. In casu, the E.U. Commission examined (i) one-third of the ATRs (22 out of the 66), (ii) all issued by the Belgian Ruling Commission, (ii) all including profit adjustments in favor of corporate taxpayers that were part of a multinational group, and (iv) during different years (2004, 2007, 2010 and 2013). Hence, according to the AG, the GC erred in law by wrongly classifying the sample as not sufficiently representative to the requisite legal standard and not sufficient to demonstrate a “consistent administrative practice”.
- The granting of an individual aid without the need for “further implementing measures” – In the judgment under appeal, the GC stated that the existence of further implementing measures, within the meaning of Article 1(d) of Regulation 2015/1589, entails a degree of discretion on the part of the tax authority adopting the measures in question, allowing it to influence the amount or the characteristics of the aid or the conditions under which it is granted. By contrast, the mere technical application of the act does not constitute a further implementing measure. Thus, the decisive question is whether the authorities have a real decision-making discretion or only a bound decision-making competence. For the GC, the Belgian Ruling Commission enjoyed a margin of discretion concerning, inter alia, the amount of the excess profit and the conditions under which the exemption was granted. In the words of the GC, downward profit adjustments resulted from a qualitative and quantitative case-by-case assessment and not from a mere technical application of the relevant regulatory framework.
Again, the AG disagrees with the GC and states that the downward profit adjustments were always made using the same method, without any exception. Nothing indicates that the Belgian Ruling Commission could make different profit adjustments for two identical corporate taxpayers under similar circumstances. In particular, the Belgian Ruling Commission itself told the E.U. Commission that they never rejected any corporate taxpayer's application for an ATR. Hence, for the AG, the GC erred in law in finding that further implementing measures were required.
- The identification of beneficiaries in a “general and abstract manner” in the act – In the judgment under appeal, the GC concluded that further implementing measures were required to define the beneficiaries. Indeed, the beneficiaries could not be identified on the sole basis of Article 185(2)(b) BITC since this code section explicitly requires an advance tax ruling from the Belgian Ruling Commission in order to be allowed to make use of the excess profit exemption.
For the AG, the GC erred in law also in this regard. The AG stated that a detailed description of the beneficiaries is part of the “act” itself, namely the “consistent administrative practice” (see point A. above), and the regime is limited to entities forming “part of a multinational group”.
In conclusion, the AG held that the E.U. Commission sufficiently demonstrated that the Belgian EPR regime meets the threefold requirement of an “aid-scheme” within the meaning of Article 1(d) of Regulation 2015/1589 and the appeal of the E.U. Commission is therefore well founded.
3. What’s Next?
The Opinion of the AG, no matter how useful, is not binding for the ECJ. Under Article 61 of the Statute of the Court of Justice of the European Union, the ECJ can thus (i) either confirm the GC’s judgment (which will then become settled case law), or (ii) quash it (which might then be referred back to the GC for a second review, this time including the most sensitive pleas that have not been examined).