Azores: regional tax rates and EC State aid rules

European Court of Justice judgment (about 17 pages) dismissing an appeal by Portugal against a Commission decision finding that the application of reduced tax rates to the financial sector and to head offices of large corporations in the Azores constituted State aid incompatible with the State aid rules under Article 87 of the EC Treaty.

The UK intervened in the case in support of Portugal, in order to protect the constitutional arrangements in Scotland and Northern Ireland.

The court states that:

58. It is possible that an infra-State body 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 such a case it is the area in which the infra-State body responsible for the measure exercises its powers, and not the country as a whole, that constitutes the relevant context for the assessment of whether a measure adopted by such a body favours certain undertakings ...

The court adopts as its test of sufficient autonomy (seemingly in line with the UK's submission):

68 ... that the infra-State body not only has powers in the territory within its competence to adopt measures reducing the tax rate, regardless of any considerations related to the conduct of the central State, but that in addition it assumes the political and financial consequences of such a measure.

In the case of the Azores, fiscal solidarity between central and regional governments meant that the last condition was not met. The court rejected Portugal's submissions as to the reasonableness of the Commission's demand for evidence that the aid in question “is justified in terms of its contribution to regional development and that its level is proportional to the additional costs it is intended to offset”. It affirmed the Commission's decision that Portugal had failed to establish the proportionality of the aid under Article 87(3)(a) in respect of the financial sector and "intragroup services".

For further information or advice please contact Franck Latrémolière.

Filed under ECJ/CFI, State aid.

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