CELEX: 62006CJ0428
State aid
Tax measures adopted by a regional or local authority
Selective nature

The present references for a preliminary ruling concern the interpretation of Article 87(1) EC.
The references have been made in the context of proceedings between, on the one hand, the Union General de Trabajadores de
La Rioja (General Union of Workers of La Rioja, ‘UGT-Rioja’) (C‑428/06), the Comunidad Autónoma de La Rioja (Autonomous Community
of La Rioja) (C‑429/06 to C‑431/06) and the Comunidad Autónoma de Castilla y León (Autonomous Community of Castilla y León)
(C‑432/06 to C‑434/06) and, on the other hand, the Juntas Generales del Territorio Histórico de Vizcaya (General Council of
the Historical Territory of Biscay (Vizcaya)), the Diputaciones Forales (Provincial Councils) of Álava, Vizcaya and Guipúzcoa,
which are the competent authorities for the Territorios Históricos de Vizcaya, Álava and Guipúzcoa (‘the foral authorities’),
along with the Cámara de Comercio, Industria y Navegación de Bilbao (Bilbao Chamber of Commerce, Industry and Shipping) and
the Confederación Empresarial Vasca (Basque Business Confederation, ‘Confebask’), concerning the tax law adopted by those
authorities.

National law

The Spanish Constitution of 1978
Articles 2, 31(1), 137 to 139 and 143(1) of the Spanish Constitution of 1978 (‘the Constitution’) are worded as follows:
‘Article 2
The Constitution is based on the indissoluble unity of the Spanish nation, the common and indivisible country of all Spaniards.
It recognises and guarantees the right to autonomy of the nationalities and regions of which it is composed, and the solidarity
among them all.
…
Article 31
1.      Everyone shall contribute to sustain public expenditure according to his or her economic capacity through a fair tax system
based on the principles of equality and progressive taxation, which shall not in any event be confiscatory in scope.
…
Title VIII – Territorial Organisation of the State
Chapter 1 – General Principles
Article 137
The State is organised territorially into municipalities, provinces and Autonomous Communities which may be constituted. All
these entities shall enjoy autonomy for the management of their respective interests.
Article 138
1.      The State shall guarantee the effective implementation of the principle of solidarity laid down in Article 2 of the Constitution
by endeavouring to establish a fair and adequate economic balance between the different parts of Spanish territory and taking
into special consideration the circumstances pertaining to those which are islands.
2.      The differences between the Statutes of the individual Autonomous Communities may not in any event imply economic or social
privileges.
Article 139
1.      All Spaniards have the same rights and obligations in any part of the State territory.
2.      No authority may adopt measures which directly or indirectly obstruct freedom of movement and establishment of persons or
free movement of goods throughout Spanish territory.
…
Chapter 3 – Autonomous Communities
Article 143
1.      In the exercise of the right to autonomy recognised in Article 2 of the Constitution, bordering provinces with common historical,
cultural and economic characteristics, the island territories and the provinces constituting a historical regional entity
may accede to self‑government and form Autonomous Communities in accordance with the provisions of [Title VIII] and the respective
Statutes [of Autonomy].’
Article 148 of the Constitution, which describes the matters in respect of which the autonomous communities may exercise competences,
is worded as follows:
‘1.      The Autonomous Communities may assume powers over the following matters:
…
(3)      town and country planning and housing;
(4)      public works of benefit to the Autonomous Community in its own territory;
(5)      railways and roads whose routes lie exclusively within the territory of the Autonomous Community and transport by the above
means or by cable fulfilling the same conditions;
(6)      ports of haven, recreational ports and airports and, in general, those which are not engaged in commercial activities;
(7)      agriculture and livestock raising, in accordance with general economic planning;
(8)      woodlands and forestry;
(9)      the management of environmental protection;
(10)      the planning, construction and exploitation of hydraulic projects, canals and irrigation of interest to the Autonomous Community;
mineral and thermal waters;
(11)      inland water fishing, the shellfish industry and aquaculture, hunting and river fishing;
(12)      local fairs;
(13)      the promotion of the economic development of the Autonomous Community in accordance with the objectives set by national economic
policy;
(14)      handicrafts;
…’
Article 149(1) of the Constitution states:
‘1.      The State shall have exclusive competence over the following matters:
(1)      regulation of the basic conditions guaranteeing the equality of all Spaniards in the exercise of their rights and in the fulfilment
of their constitutional duties;
…
(6)      commercial, criminal and prison legislation; procedural legislation, without prejudice to the necessary differences in these
fields deriving from the special characteristics of the substantive law of the Autonomous Communities;
(7)      labour legislation, without prejudice to its enforcement by the bodies of the Autonomous Communities;
…
(11)      monetary system: foreign currency, exchange and convertibility; bases for the regulation of credit, banking and insurance;
…
(13)      the bases for and the coordination of the general planning of economic activity;
(14)      general finances and the State Debt;
…
(17)      basic legislation and the financial system of the Social Security [Administration], without prejudice to the performance of
its services by the Autonomous Communities;
…
(24)      public works of general interest, the execution of which affects more than one Autonomous Community;
…’
Articles 156 to 158 of the Constitution are worded as follows:
‘Article 156
1.      The Autonomous Communities shall enjoy financial autonomy for the development and exercise of their powers, in conformity
with the principles of coordination with the State Treasury and solidarity amongst all Spaniards.
2.      The Autonomous Communities may act as delegates or agents of the State for the collection, management and settlement of the
latter’s tax resources, in conformity with the law and the Statutes [of Autonomy].
Article 157
1.      The resources of the Autonomous Communities shall consist of:
(a)      taxes wholly or partially assigned to them by the State; surcharges on State taxes and other shares in State revenue;
(b)      their own taxes, rates and special levies;
(c)      transfers from an inter-territorial compensation fund and other allocations to be charged to the State Budget;
(d)      revenues accruing from their property and private law income;
(e)      revenue from credit operations.
2.      Under no circumstances may the Autonomous Communities adopt measures which impose taxes on property located outside their
territory or which hinder the free movement of goods or services.
3.      Exercise of the financial powers set out in paragraph 1 above, rules for settling the conflicts which may arise and possible
forms of financial cooperation between the Autonomous Communities and the State may be laid down by a Basic Law.
Article 158
1.      An allocation may be made in the State Budget to the Autonomous Communities in proportion to the amount of State services
and activities for which they have assumed responsibility and to guarantee a minimum level of basic public services throughout
Spanish territory.
2.      With the aim of redressing inter‑territorial economic imbalances and implementing the principle of solidarity, a compensation
fund shall be set up for investment expenditure, the resources of which shall be distributed by the Cortes Generales [Spanish
Parliament] among the Autonomous Communities and provinces, as the case may be.’

Statute of Autonomy
In accordance with Article 2, Chapter 3 of Title VIII (Articles 143 to 158) and the First Additional Provision and Second
Transitional Provision of the Constitution, the Basque Country constitutes an Autonomous Community within the Kingdom of Spain.
The Autonomous Community of the Basque Country is governed by the Statute of Autonomy of the Basque Country (‘Estatuto de
Autonomía del País Vasco’), which was approved by Basic Law 3/1979 of 18 December 1979 of the Cortes Generales (BOE No 306
of 22 December 1979, ‘the Statute of Autonomy’).
The Autonomous Community of the Basque Country is made up of three Territorios Históricos (territorial administrative bodies,
‘the Historical Territories’) which are themselves formed of the Municipios (municipalities). The institutional political
structure of that Autonomous Community is comprised of two different levels, namely, that of institutions common to the whole
territory of the Basque Country (autonomous government and parliament) and that of ‘foral’ institutions and bodies, the competence
of which is restricted to the Historical Territories.
Article 37 of the Statute of Autonomy is worded as follows:
‘1.      The traditional legal institutions of the Historical Territories shall be governed by the judicial regime exclusive to each.
2.      The provisions of this Statute shall not entail any alteration of the nature of the special “foral” system based on traditional,
regional law or of the jurisdiction of the particular regimes of each Historical Territory.
3.      In all cases they shall have exclusive competence within their respective territories for the following matters:
(a)      the organisation, system and functioning of their own institutions;
(b)      the drawing up and approval of their budgets;
(c)      territorial demarcations of supra‑municipal scope not going beyond provincial boundaries;
(d)      the system of provincial and municipal property, in the public domain or of a heritage nature or their own and community property;
(e)      the municipal electoral system;
(f)      all other areas of competence specified in this Statute or which are transferred to them.
4.      They shall also be responsible for the development of legislation and for implementation within their territory in respect
of the matters which the Basque Parliament shall indicate.’
Article 40 of the Statute of Autonomy states that, for the proper exercise and financing of its powers, the Basque Country
is to ‘have its own Autonomous Treasury’.
Article 41 of the Statute is worded as follows:
‘1.      Tax relations between the State and the Basque Country shall be regulated by the traditional “foral” system of the Economic
Agreement [“Concierto Económico”] or Conventions [“Convenios”].
2.      The content of the regime of the Agreement shall comply with and be adapted to the following principles and guidelines:
(a)      The competent institutions of the Historical Territories may maintain, establish and regulate, within their own territory,
the tax system, bearing in mind the general tax structure of the State, the rules contained in the Economic Agreement itself
for coordination, fiscal harmonisation and cooperation with the State, and those which the Basque Parliament may adopt for
the same purposes within the Autonomous Community. The Economic Agreement shall be adopted by legislation.
(b)      The levying, management, liquidation, collection and inspection of all taxes, except customs duties and those currently collected
by means of tax monopolies, shall be carried out, within each Historical Territory, by the respective Diputaciones Forales,
without prejudice to cooperation with the State and its inspection service.
(c)      The competent institutions of the Historical Territories shall adopt the relevant agreements, with the object of applying
within their respective territories whatever exceptional or provisional tax rules the State may decide to enforce in the common
territory. Such rules shall remain in force for the same length of time as indicated for those State rules.
(d)      The Basque Country’s contribution to the State shall consist of an overall quota, made up of the individual quotas of each
of its territories, as a contribution towards all State burdens that are not assumed by the Autonomous Community.
(e)      In order to determine the quotas for each Historical Territory which makes up the abovementioned overall quota, a Joint Committee
shall be set up, consisting, on the one hand, of one representative of each Diputación Foral and the same number of representatives
of the Basque Government, and on the other, of an equal number of representatives of the State Administration. The quota thus
set shall be adopted by law at intervals to be determined in the Economic Agreement, without prejudice to its annual adjustment
by a procedure likewise to be established in the Agreement.
(f)      The system of [Economic] Agreements shall be applied in accordance with the principle of solidarity to which Articles 138
and 156 of the Constitution refer.’

The Economic Agreement
The Economic Agreement between the Autonomous Community of the Basque Country and the Kingdom of Spain was adopted by Law 12/2002
(Ley 12/2002 por la que se aprueba el Concierto Económico con la Comunidad Autónoma del País Vasco) of 23 May 2002 (BOE No 124
of 24 May 2002, ‘the Economic Agreement’).
Articles 2 to 4 of the Economic Agreement are worded as follows:
‘Article 2 General Principles
1.       The tax system established by the Historical Territories shall comply with the following principles:
(1)      Respect for the principle of solidarity in the terms laid down in the Constitution and in the Statute of Autonomy.
(2)      Compliance with the general tax structure of the State.
(3)      Coordination, fiscal harmonisation and cooperation with the State, in accordance with the rules laid down in the present Economic
Agreement.
(4)      Coordination, fiscal harmonisation and mutual cooperation between the institutions of the Historical Territories pursuant
to the provisions enacted by the Basque Parliament for those purposes.
(5)      Submission to the international treaties or agreements signed and ratified by the Spanish State or to those to which it is
a party.
In particular, it shall comply with the provisions laid down in the international agreements signed by Spain for the avoidance
of double taxation and the fiscal harmonisation rules of the European Union, and shall be responsible for making the refunds
to be made as a result of the application of those agreements and rules.
2.      The rules laid down herein shall be interpreted in accordance with the provisions of the Tax Code for the interpretation of
tax law.
Article 3 Fiscal Harmonisation
In drafting their tax legislation, the Historical Territories shall:
(a)      respect the Tax Code in matters of terminology and concepts, without prejudice to the special circumstances laid down in the
present Economic Agreement;
(b)      maintain an overall effective fiscal pressure equivalent to that in force in the rest of the State;
(c)      respect and guarantee freedom of movement and of establishment of persons and free movement of goods, capital and services
throughout the territory of Spain, without giving rise to discrimination or a restriction of the possibility of commercial
competition or distortion in the allocation of resources;
(d)      use the same system for classifying livestock, mining, industrial, commercial, service, professional and artistic activities
as is used in the common territory, without prejudice to further classification of those activities that might be made.
Article 4 Principle of cooperation
1.      The competent institutions of the Historical Territories shall inform the State Administration, giving due advance notice,
of any draft tax legislation.
Similarly, the State Administration shall inform the aforementioned institutions of any such drafts.
2.      The State shall develop mechanisms for allowing the institutions of the Basque Country to participate in any international
agreements affecting the application of the present Economic Agreement.
3.      The State and the Historical Territories, in the exercise of functions within their powers regarding the administration, inspection
and collection of taxes, shall, without delay and in due form, exchange any information and records deemed necessary with
a view to levying them more efficiently.
In particular, both Administrations shall:
(a)      provide each other, through their data‑processing centres, with any information they may require. To this end, the necessary
technical connections between them shall be set up. A jointly coordinated fiscal data‑processing system plan shall be drawn
up on a yearly basis;
(b)      The inspection services shall draw up joint inspection plans for coordinated selective objectives, sectors and procedures,
and for taxable persons who have changed their place of residence, undertakings declaring under the tax transparency system
and companies subject to corporation tax proportionate to turnover.’
Articles 48 to 60 of the Economic Agreement govern the financial relations between the State and the Basque Country. Articles
48 to 50 of that agreement are worded as follows:
‘Article 48 General Principles
The financial relations between the State and the Basque Country shall be governed by the following principles:
1.      Fiscal and financial autonomy of the institutions of the Basque Country in the regulation and implementation of their powers.
2.      Respect for the principle of solidarity in the terms laid down in the Constitution and the Statute of Autonomy.
3.      Coordination and cooperation with the State in matters of budgetary stability.
4.      Contribution by the Basque Country to State burdens not assumed by the Autonomous Community, in the form determined by the
present Economic Agreement.
5.      The faculties of financial supervision developed by the State at any time in matters concerning local or regional authorities
shall be enjoyed by the competent institutions of the Basque Country, without this being construed to mean, in any way, that
the Basque local or regional authorities have a lower level of autonomy than that enjoyed by those under the common regime.
Article 49 Quota
The Basque Country’s contribution to the State shall consist in an overall quota, comprising the quotas from each of the Historical
Territories as the Basque Country’s share of all State burdens not assumed by the Autonomous Community of the Basque Country.
Article 50 Frequency and adjustment of the quota
1.      Every five years, by means of a Law passed by the Cortes Generales, subject to the prior approval of the Joint Committee on
the Economic Agreement, the methodology to be used in setting the quota for the following five‑year period shall be determined
in accordance with the general principles laid down herein, and the quota for the first year of the five‑year period shall
be approved.
2.      In each of the years following the first, the Joint Committee on the Economic Agreement shall adjust the quota by applying
the methodology approved in the Law referred to in the preceding subparagraph.
3.      The principles underlying the methodology for determining the quota and contained herein may be amended in the Law on the
quota [for the following five‑year period], when circumstances and the experience acquired in its application make this advisable.’
The Economic Agreement provides for the intervention of two committees composed of an equal number of representatives. Pursuant
to the first paragraph of Article 61 of that agreement, the Joint Committee is to be composed, on the one hand, of a representative
of the respective governments of each of the Historical Territories and, on the other hand, of the same number of representatives
of the State Administration.
Article 62 of the Economic Agreement lays down that the purpose of the Joint Committee is to include, in particular, reaching
agreement on amendments to that agreement, undertakings of cooperation and coordination in relation to budgetary stability
as well as the methodology for calculating the quota for each five-year period and concluding agreements which may be necessary
at any time concerning fiscal or financial matters for the application and proper operation of the provisions of the Agreement.
Article 63 of the Economic Agreement provides for the constitution of the Comisión de Coordinación y Evaluación Normativa
(Coordination and Legislative Evaluation Committee), composed of four representatives of the State Administration and four
representatives of the Autonomous Community of the Basque Country. The latter are designated by the Basque Government, three
of whom are each appointed on the proposal of one each of the Diputaciones Forales.
The areas of competence conferred on the Coordination and Legislative Evaluation Committee by Article 64 of the Economic Agreement
include, first, evaluating, prior to publication, whether fiscal legislation complies with the agreement. Article 64(a) of
that agreement expressly states, to that end, that ‘when, as a result of the substitution of draft legislation pursuant to
Article 4(1) of the present Economic Agreement, observations are drafted concerning the proposals contained therein, any of
the institutions and administrations represented may request, in writing stating grounds, the convocation of that committee,
which shall meet within a maximum period of 15 days from the date of the convocation request, and shall proceed to analyse
whether the proposed legislation complies with the Economic Agreement and shall seek, prior to the publication of the corresponding
provisions, to bring about an agreement between the institutions and the administrations concerning the possible disagreements
as to the content of the tax legislation’.

The Law of 2002 on the quota for 2002 to 2006
By Law 12/2002 of 23 May 2002 the methodology for determining the quota for the Basque Country for 2002 to 2006 was adopted
(BOE No 124, p. 18636, ‘the Law of 2002 on the quota’). Articles 3 to 7 of that Law state:
‘Article 3 Determination of the quota for the base year
The net quota for the base year of the five‑year period from 2002 to 2006 shall be determined by applying the attribution
rate to the total amount of the burdens not assumed by the Autonomous Community and by making the relevant adjustments and
compensations, as provided for in the following articles.
Article 4 State burdens not assumed by the Autonomous Community
1.      State burdens not assumed by the Autonomous Community are those which correspond to areas of competence the exercise of which
has not actually been assumed by the Autonomous Community.
2.      In order to determine the total amount of such burdens, the entire budget allocation which, at State level, corresponds to
the areas of competence assumed by the Autonomous Community from the date of entry into force of the transfer established
in the corresponding Royal Decrees shall be deducted from the total State budget expenditure.
…
Article 5 Adjustments
1.      Without prejudice to the provisions of Articles 14 and 15 below, the figures resulting from the attribution referred to in
Article 4(4) shall be adjusted to improve the accuracy of the estimated income from direct taxes attributable to the Basque
Country and to the rest of the State territory pursuant to Article 55 of the Economic Agreement.
…
Article 6 Compensation
1.      From the quota corresponding to each Historical Territory shall be deducted the following items:
(a)      the attributable portion of non‑transferred taxes;
(b)      the attributable portion of budgetary income not from taxes;
(c)      the attributable portion of the deficit figuring in the general State budget.
…
Article 7 Attribution rate
The attribution rate referred to in Articles 4 and 6 above, set essentially in accordance with the income of the Historical
Territories in proportion to that of the State, shall be 6.24% for the current five‑year period.’
According to Annex I to the Law of 2002 on the quota, laying down the provisional quota for the Autonomous Community of the
Basque Country for the base year 2002, the amount to be paid by the Historical Territories was EUR 1 034 626 080.

The tax legislation at issue in the main proceedings
In Cases C‑428/06, C‑429/06 and C‑434/06, the actions for annulment brought in the main proceedings concern the Foral Law
of the Juntas Generales de Vizcaya 7/2005 of 23 June 2005, Article 2 of which amends Foral Law 3/1996 of 26 June 1996 on corporation
tax. The first two of those actions seek annulment of Article 2(4), (6) and (7), whilst the third seeks annulment of Article 2(4)
and (6) only.
Article 2(4) of Foral Law 7/2005 amends Article 29 of Foral Law 3/1996 and sets the rate of corporation tax ‘generally at
32.5%’. The national court states that, according to common State legislation, namely Article 28(1) of the consolidated text
of the Law on Corporation Tax, adopted by Royal Legislative Decree 4/2004 of 5 March 2004, the basic rate of corporation tax
is 35%.
Article 2(6) of Foral Law 7/2005 amends Article 37 of Foral Law 3/1996 and provides that investments made in new tangible
fixed assets and intended for the economic operation of an undertaking may be deducted at a rate of 10%. Article 2(7) amends
Article 39 of Foral Law 3/1996 and provides for a deduction equal to 10% of the amount resulting from the accounting income
for the financial year and capable of serving as a ‘reserve for production investments and/or as a reserve for environmental
conservation and improvement and energy saving’. The national court states that there are no such deductions under Spanish
corporation tax law.
In Cases C‑430/06 and C‑433/06, the actions for annulment brought in the main proceedings concern Decreto Foral Normativo
de Urgencia Fiscal 2/2005 del Consejo de Diputados de Álava of 24 May 2005, validated by the agreement of the Juntas Generales
de Álava of 13 June 2005, paragraphs 4 and 5 of the sole article of which amend Articles 29 and 37 of Foral Law 24/1996 of
5 July 1996 on corporation tax. The content of the contested law in those actions is the same as that of the law at issue
in the action in the main proceedings leading to the reference for a preliminary ruling in Case C‑434/06.
In Cases C‑431/06 and C‑432/06, the actions for annulment brought in the main proceedings concern Decreto Foral 32/2005 of
the Diputación foral de Guipúzcoa, of 24 May 2005, paragraphs 3 and 4 of the sole article of which amend Articles 29 and 37
of Foral Law 7/1996 of 4 July 1996 on corporation tax. The content of the law contested in those actions is the same as that
of the law at issue in the action in the main proceedings which led to the reference for a preliminary ruling in Case C‑434/06.

The actions in the main proceedings and the questions referred for preliminary ruling
It is apparent that the contested provisions in the cases in the main proceedings were adopted by the foral authorities after
the Tribunal Supremo (Supreme Court) (Spain), by judgment of 9 December 2004 in appeal (cassation) No 7893/1999, declared
numerous similar provisions adopted by the same authorities to be automatically invalid on the ground that, as those measures
were capable of constituting State aid, they should have been notified to the Commission of the European Communities pursuant
to Article 88(3) EC. However, the defendants in the main proceedings state in their written observations submitted to the
Court that, in view of the fact that the Tribunal Supremo gave judgment without making a preliminary reference to the Court
of Justice and for other reasons, a ‘recurso de amparo’ (constitutional complaint) has been brought before the Tribunal Constitucional
(Constitutional Court) (Spain) against that judgment.
In the context of the actions for annulment in the main proceedings, the national court asks whether tax legislation which
is adopted with general application and which does not confer an advantage on certain undertakings or the production of certain
goods, is to be regarded as ‘selective’ and subject to the provisions of Articles 87 EC and 88 EC, solely on the ground that
the effects and effectiveness of that legislation are limited exclusively to the territorial jurisdiction of an infra‑State
authority with autonomy in tax matters.
The national court mentions in that regard the judgment in Case C‑88/03
Portugal
v
Commission
[2006] ECR I‑7115, concerning tax measures adopted by the Autonomous Region of the Azores and refers to the three conditions
of institutional, procedural and economic autonomy laid down by the Court in paragraph 67 of that judgment.
Examining whether the Basque Country and its Historical Territories fulfil those three conditions, the national court states
that it has no doubt as to the existence of institutional autonomy.
The national court asks, however, whether the formal procedure for drawing up the tax legislation in the Basque Country satisfies
the procedural autonomy criterion. Although that procedure is not subject to direct intervention by the central government,
it does entail mechanisms based on non‑coercive conciliation, reciprocity and the equal representation of both sides, for
the purpose of examining whether draft legislation, once it is known, is compatible with the Economic Agreement between the
parties, in order to ensure that legislation to be enacted by both parties accords with what has been agreed and has attained
the force of law between the authorities concerned. In addition, from the perspective of the objectives pursued by the autonomous
tax legislation and the Basque administration’s obligation to ‘take the national interest into account when setting the tax
rate’, Article 3 of the Economic Agreement sets negative thresholds relating to the real global tax burden, to freedom of
movement and establishment, and to the absence of discriminatory effects. Those limits may give rise
a posteriori
to judicial review of implemented tax provisions in order to determine whether they comply with the legal rules or guidelines
mentioned above.
As regards the economic autonomy criterion, the national court asks whether, despite being the responsible tax body, the Basque
Country nevertheless has sufficient powers to satisfy that criterion. The national court states in that regard that, although
the Basque Country has a very high level of autonomy compared with other examples of regional autonomy within the European
Union, that autonomy is nevertheless limited by the fact that the State has exclusive powers in certain areas which have an
economic impact on the Basque Country, such as, inter alia, the other areas of competence set out in Article 149 of the Spanish
Constitution, the monetary system, basic rules and coordination of general economic planning, financial rules governing the
social security system, and public works of general benefit. Accordingly, the existence of a distinct economic framework in
the Basque Country must be viewed in context and by reference to certain essential requirements, such as market unity and
economic unity, which are an intrinsic feature of the Spanish system of autonomous communities according to the Tribunal Constitucional
(see, inter alia, judgments of the Tribunal Constitucional No 96/1984 of 19 October 1984 and No 96/2002 of 25 April 2002).
Against that background, the Tribunal Superior de Justicia de la Comunidad Autónoma del País Vasco (Supreme Court of Justice
of the Autonomous Community of the Basque Country) decided to stay the proceedings and to refer the following question, which
is formulated in identical terms in Cases C‑428/06, C‑429/06 and C‑434/06, to the Court of Justice for a preliminary ruling:
‘Must Article 87(1) EC be construed as meaning that, by providing for a rate of tax lower than the basic rate set in Spanish
State legislation and for deductions from the amount of tax payable which do not exist in State tax legislation, provisions
in the field of taxation adopted by the Juntas Generales del Territorio Histórico de Vizcaya amending Articles 29(1)(a), 37
and 39 of the Provincial Law on Company Tax, which take effect in the jurisdiction of that infra-State autonomous body, must
be regarded as selective and as covered by the definition of State aid enshrined in Article 87(1) EC and, accordingly, must
be notified to the Commission pursuant to Article 88(3) EC?’
In Cases C‑430/06 to C‑433/06, the question referred for a preliminary ruling is the same as that set out in the preceding
paragraph, save that it refers to the relevant foral laws of Álava and Guipúzcoa.
By order of the President of the Court of 30 November 2006, Cases C‑428/06 to C‑434/06 were joined for the purposes of the
written and oral procedure and of the judgment.

Admissibility of the requests for a preliminary ruling

Observations submitted to the Court
The Comunidad Autónoma de La Rioja submits that the requests for a preliminary ruling are not admissible since the answer
to the question referred is not necessary in order to enable the national court to deliver judgment. By order of 14 November 2005,
confirmed by subsequent order of 17 March 2006, both adopted in the context of proceedings for the enforcement of the judgment
of the Tribunal Supremo of 9 December 2004 (Enforcement No 3753/96‑1), the Tribunal Superior de Justicia de la Comunidad Autónoma
del País Vasco had already annulled certain of the provisions contested in the main proceedings, namely Article 29 of the
respective amended foral laws on the rate of corporation tax and Article 39, as amended, of Foral Law 3/1996, taking the view
that they were counter to that judgment and had been adopted with the aim of avoiding the enforcement thereof. Regarding the
two orders mentioned above, they were currently subject to appeals in cassation.
By letter of 23 January 2008, the Comunidad Autónoma de La Rioja informed the Court, however, that it was withdrawing its
application for a declaration that the references for a preliminary ruling were inadmissible.
UGT-Rioja also claims that those references are inadmissible on the ground that there is absolutely no doubt that the tax
measures at issue in the main proceedings constitute State aid. It refers in that regard to the judgment of the Tribunal Supremo
and to certain Commission decisions concerning tax provisions adopted by the Historical Territories and which are similar
to the measures in question.
Confebask also claims that the references for a preliminary ruling were not necessary since the judgment in
Portugal
v
Commission
is very clear and that there can be no doubt that the tax measures at issue in the main proceedings do not constitute State
aid.

Findings of the Court
It is clear from both the wording and the scheme of Article 234 EC that a national court or tribunal is not empowered to bring
a matter before the Court of Justice by way of a reference for a preliminary ruling unless a case is pending before it in
which it is called upon to give a decision which is capable of taking account of the preliminary ruling (see, to that effect,
Joined Cases C‑422/93 to C‑424/93
Zabala Erasun and Others
[1995] ECR I‑1567, paragraph 28; Case C‑314/96
Djabali
[1998] ECR I‑1149, paragraph 18; and Case C‑225/02
García Blanco
[2005] ECR I‑523, paragraph 27).
As the Court’s jurisdiction is dependent on the existence of an action in the main proceedings, the Court may verify it of
its own motion. Consequently, the Comunidad Autónoma de La Rioja’s withdrawal of its claim that the reference for a preliminary
ruling is inadmissible has no effect on that verification.
In the present case, it is not apparent from any of the evidence submitted to the Court that, following the annulment of certain
of the provisions contested therein, the cases in the main proceedings no longer serve any purpose or that the answer to the
references for a preliminary ruling is no longer needed by the national court to enable it to deliver judgment in the cases
before it.
Regarding the claim that the answer to the question referred is clear, it should be pointed out that, where the answer to
a question referred to the Court for a preliminary ruling may be clearly deduced from existing case-law and where it leaves
no scope for any reasonable doubt, first, a court or tribunal against the decisions of which there is no judicial remedy under
national law is not required, in certain circumstances, to make a preliminary reference (see, to that effect, Case 283/81
Cilfit and Others
[1982] ECR 3415, paragraphs 14 and 16 to 20) and, second, this Court may give its decision by reasoned order pursuant to
Article 104(3) of its Rules of Procedure.
However, those circumstances in no way prevent a national court from making a reference for a preliminary ruling to this Court
(see, to that effect,
Cilfit and Others
, paragraph 15) and do not have the effect of depriving this Court of jurisdiction to rule on such a question.
In any event, it should be pointed out that, for UGT-Rioja, the tax measures at issue in the main proceedings unquestionably
constitute State aid, whereas, for Confebask, they definitely do not constitute State aid. Those contradictory assessments
of the tax measures in the light of the provisions of the EC Treaty are sufficient to establish the need to reply to the requests
for a preliminary ruling.

The question referred for a preliminary ruling
By its question the national court essentially asks whether Article 87(1) EC must be interpreted as meaning that tax measures
such as those at issue in the main proceedings, which were adopted by infra‑State bodies, are to be considered to be selective
measure and, accordingly, State aid within the meaning of that provision on the sole ground that they do not apply to the
whole territory of the Member State concerned.
As the Court indicated at paragraph 56 of its judgment in
Portugal
v
Commission
, in order to determine whether the measure at issue is selective, it is appropriate to examine whether, within the context
of a particular legal system, that measure constitutes an advantage for certain undertakings in comparison with others which
are in a comparable legal and factual situation.
In that connection, the reference framework need not necessarily be defined within the limits of the Member State concerned,
so that a measure conferring an advantage in only one part of the national territory is not selective on that ground alone
for the purposes of Article 87(1) EC (
Portugal
v
Commission
, paragraph 57).
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 (
Portugal
v
Commission
, paragraph 58).
The Court described, at paragraph 65 of the judgment in
Portugal
v
Commission
, the situation in which a regional or local authority adopts, in the exercise of sufficiently autonomous powers in relation
to the central power, a tax rate lower than the national rate and which is applicable only to undertakings present in the
territory within its competence.
In the latter situation, the legal framework appropriate to determine the selectivity of a tax measure may be limited to the
geographical area concerned where the infra-State body, in particular on account of its status and powers, occupies a fundamental
role in the definition of the political and economic environment in which the undertakings present on the territory within
its competence operate (
Portugal
v
Commission
, paragraph 66).
In order that a decision taken by a regional or local authority can be regarded as having been adopted in the exercise of
sufficiently autonomous powers, that authority must first have, from a constitutional point of view, a political and administrative
status which is distinct from that of the central government. Next, the decision must have been adopted without the central
government being able to intervene directly as regards its content. Finally, the financial consequences of a reduction of
the national tax rate for undertakings in the region must not be offset by aid or subsidies from other regions or central
government (
Portugal
v
Commission
, paragraph 67). Those three conditions are commonly considered to be the criteria of institutional, procedural, and economic
and financial autonomy.
The Court found, in paragraph 68 of its judgment in
Portugal
v
Commission
, that a political and fiscal independence of central government which is sufficient as regards the application of Community
rules on State aid presupposes not only that the infra‑State body 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 also that,
in addition, it assumes the political and financial consequences of such a measure.

The lack of a precondition
Contrary to the Commission’s contention, paragraphs 58 and 66 of the judgment in
Portugal
v
Commission
do not lay down any precondition for the operation of the three criteria set out in paragraph 67 of that judgment.
The actual wording of paragraph 58 of that judgment is unequivocal in that regard. The Court states therein that an infra-State
body may enjoy a legal and factual status which makes it sufficiently autonomous in relation to the central government, with
the result that it is that body which plays a fundamental role in the definition of the political and economic environment
in which undertakings operate.
Expressed differently, where an infra‑State body is sufficiently autonomous, in other words, when it has autonomy from the
institutional, procedural and economic points of view, it plays a fundamental role in the definition of the political and
economic environment in which the undertakings operate. That fundamental role is the consequence of the autonomy and not a
precondition for that autonomy.
Paragraph 66 of
Portugal
v
Commission
also expresses that idea of consequence, since the Court refers therein to the situation in which an infra‑State body, ‘in
particular on account of its status and powers’, occupies a fundamental role in the definition of the political and economic
environment in which the undertakings present on the territory within its competence operate.
Paragraph 66 is a sufficient clarification of paragraph 67 of that judgment, which describes the criteria which a decision
must satisfy in order for it to be considered to have been adopted in the exercise of sufficiently autonomous powers, in other
words, in circumstances such as those referred to in paragraph 66.
That interpretation of the principle laid down by the Court in paragraphs 54 to 68 of
Portugal
v
Commission
is supported by an examination of the review effected by the Court in that judgment. In that regard, it should be pointed
out that in paragraph 70 of that judgment the Court examined the criteria for institutional autonomy and procedural autonomy
and in paragraphs 71 to 76 the economic autonomy criterion.
As the Advocate General stated at point 70 of her Opinion, it is not, however, in any way apparent from the review effected
by the Court that it examined whether the precondition the existence of which is alleged by the Commission was satisfied.
It follows that the only conditions which must be satisfied in order for the territory falling within the competence of an
infra‑State body to be the relevant framework in order to assess whether a decision adopted by that body is selective in nature
are the conditions of institutional autonomy, procedural autonomy and economic and financial autonomy as set out in paragraph 67
of
Portugal
v
Commission
.

The infra‑State body to be taken into consideration
Observations submitted to the Court
In order to verify whether the measures at issue in the cases in the main proceedings were adopted by a ‘sufficiently autonomous’
infra‑State body, it is necessary first to determine which body is to be taken into consideration.
Although the question referred for a preliminary ruling in each of Cases C‑428/06 to C‑434/06 concerns the tax measures adopted
by one specific Historical Territory, it should be pointed out that, in its reasoning explaining why an answer to such a question
is necessary, the national court refers to the Autonomous Community of the Basque Country and to the Historical Territories.
Before the Court, the Comunidad Autónoma de La Rioja, the Comunidad Autónoma de Castilla y León and the Commission submitted
that only the Historical Territories should be taken into consideration, since they are the bodies which adopted the measures
at issue in the main proceedings. In that regard, they stress the limited competence of those bodies and, therefore, the selective
nature of the contested foral laws.
Like the national court, the foral authorities and the Spanish Government refer to the same infra‑State body as both the Historical
Territories and the Autonomous Community of the Basque Country, according to whether they are referring to the authority competent
in tax or other matters.
The Court’s reply
As is apparent from the national rules set out in this judgment, the institutional system of the Kingdom of Spain is particularly
complex. Moreover, the Court does not have jurisdiction to interpret national law. The interpretation of Article 87(1) EC,
however, makes it necessary to identify the infra‑State body which must be taken into consideration when an assessment is
made as to the selective nature of a tax measure.
The Autonomous Community of the Basque Country is made up of three provinces: Álava, Vizcaya and Guipúzcoa. The boundaries
of those provinces coincide with those of the Historical Territories, bodies which enjoy rights of ancient origin called ‘fueros’,
entitling them to levy and collect tax. However, many other areas of competence, in particular those of an economic nature,
are exercised by the Autonomous Community.
There appears to be little doubt that, considered as such, the Historical Territories do not enjoy sufficient autonomy within
the meaning of the criteria set out in paragraphs 67 and 68 of
Portugal
v
Commission
. The existence of political and fiscal autonomy requires that the infra‑State body assume responsibility for the political
and financial consequences of a tax reduction measure. That cannot be the case where the body is not responsible for the management
of a budget, in other words, where it does not have control of both revenue and expenditure. It appears that that is the situation
in which the Historical Territories find themselves, as they are competent only in tax matters and the other areas of competence
belong to the Autonomous Community of the Basque Country.
It does not, however, appear to be indispensable when assessing whether an infra‑State body satisfies the autonomy criteria,
to take into consideration only the Historical Territories or, alternatively, only the Autonomous Community of the Basque
Country.
It follows from the explanations submitted to the Court that there are historical reasons why the areas of competence exercised
in the geographical territory corresponding both to the Historical Territories and the Autonomous Community of the Basque
Country are organised in such as way that competence for tax matters is vested in the Historical Territories and that for
economic matters is vested in the Autonomous Community.
In order to prevent this leading to incoherent situations, this sharing of areas of competence necessitates close collaboration
between the different bodies.
Thus, the Statute of Autonomy deals with the areas of competence of the Autonomous Community of the Basque Country, but also
sets out, in Article 41(2), the fundamental principles which the foral authorities must comply with and which are more fully
covered by the Economic Agreement.
That Economic Agreement, adopted by statute, was concluded between the Autonomous Community of the Basque Country and the
Spanish State. It does not, however, deal only with the areas of competence of the Autonomous Community, but includes numerous
provisions concerning the Historical Territories, which have competence in numerous tax matters.
The proper enforcement of the Economic Agreement is reviewed by the Joint Committee. According to the first paragraph of Article 61
of that agreement, that committee is made up, on the one hand, of a representative of the respective territorial governments
of each of the Historical Territories and, on the other, of the same number of representatives of the State Administration.
Likewise, the composition of the Coordination and Legislative Evaluation Committee is evidence of the close cooperation between
the Historical Territories and the Autonomous Community of the Basque Country. According to Article 63 of the Economic Agreement,
that committee is composed of four representatives of the State Administration and four representatives of the Autonomous
Community designated by the Basque Government, three of whom are each appointed on the proposal of one each of the Diputaciones
Forales.
Thus, it is both to the Historical Territories and to the Autonomous Community of the Basque Country that reference must be
made for the purpose of determining whether the infra‑State body made up of those Historical Territories and that Community
enjoys sufficient autonomy to constitute the reference framework in the light of which the selectivity of a measure adopted
by one of those Historical Territories should be assessed.

The relevance of judicial review
Before examining whether the three autonomy criteria set out in paragraph 67 of
Portugal
v
Commission
are satisfied in the cases in the main proceedings, it is also necessary to state on what basis review by national courts
should be taken into account. Certain of the parties to the main proceedings which have submitted observations claim that
the foral laws have the status of administrative provisions and are subject to judicial review by the administrative courts,
which has an effect on the procedural autonomy of the Historical Territories. Other parties contend, on the contrary, that
that review is not relevant for the assessment of the autonomy criteria.
In that regard, it must be pointed out that, in the context of Article 234 EC, the Court does not have jurisdiction to apply
Community law, but solely to interpret it or to assess its validity.
It is, thus, not appropriate to ask whether the foral laws at issue in the cases in the main proceedings constitute State
aid within the meaning of Article 87(1) EC, but rather to interpret that provision in order to verify whether legislation
such as the foral laws adopted by the Historical Territories within the limits of their areas of competence may be termed
rules of general application within the meaning of the concept of State aid arising from that provision or whether those laws
are selective in nature.
It is apparent that the boundaries of the areas of competence of the Historical Territories are laid down in the Constitution
and in other provisions, such as the Statute of Autonomy and the Economic Agreement. In that regard, it is necessary to take
into account those provisions as interpreted and enforced by the national courts. It is not the review by the national court
which is relevant for the purpose of verifying the existence of autonomy, but the criterion which that court uses when carrying
out that review.
The purpose of reviewing the legality of acts is to enforce compliance with the pre‑established limits on the areas of competence
of the different State authorities, organs or bodies, not to determine those limits. As the Spanish Government stated at the
hearing, the existence of judicial review is inherent in the existence of the rule of law.
Although the case‑law of the courts of a Member State is important in order to ascertain the limits of an intra‑State body’s
areas of competence, this is because the interpretation of case‑law forms an integral part of the laws defining those areas
of competence. However, the review decision is limited to interpreting the law establishing the limits of the areas of competence
of such a body and cannot generally call into question the exercise of those powers within those limits.
It follows that it is the applicable laws as interpreted by the national courts which determine the limits of the areas of
competence of an infra‑State body and which must be taken into account for the purpose of verifying whether that body has
sufficient autonomy.
Consequently, it cannot validly be found that an infra‑State body lacks autonomy solely on the ground that the acts which
it adopts are subject to judicial review.

The three autonomy criteria
The institutional autonomy criterion
–       Observations submitted to the Court
The foral authorities, Confebask and the United Kingdom state that they agree with the national court’s analysis in respect
of institutional autonomy. Likewise, the Spanish Government is of the view that the first condition is satisfied.
The Comunidad Autónoma de Castilla y León claims that the Historical Territories do not have complete institutional autonomy,
since they must contribute to the cost of Spanish State burdens. The Comunidad Autónoma de La Rioja states that is necessary
to draw a distinction between the foral authorities, which adopted the tax measures at issue in the main proceedings, and
the Autonomous Community of the Basque Country. The Autonomous Community of the Basque Country, like the other autonomous
communities, must exercise the powers conferred on it by the State within the framework of national economic policy objectives
or those of the general organisation of the economy as defined by the State, whereas the foral authorities do not have areas
of competence of an economic nature. Without, however, contesting the existence of institutional autonomy, the Commission
also refers to the reduced areas of competence of the foral authorities, which essentially act as tax collectors for other
administrations.
–       The Court’s reply
To the requisite extent, the different arguments in this case have been set out. However, as already indicated in paragraph 75
above, it is necessary to take into account the infra‑State body made up of both the Historical Territories and the Autonomous
Community of the Basque Country.
In that regard, it is apparent from an examination of the Constitution, the Statute of Autonomy and the Economic Agreement
that infra‑State bodies such as the Historical Territories and the Autonomous Community of the Basque Country, since they
have a political and administrative status which is distinct from that of central government, satisfy the institutional autonomy
criterion.
The procedural autonomy criterion
–       Observations submitted to the Court
The Comunidad Autónoma de La Rioja and the Comunidad Autónoma de Castilla y León, along with the Commission, claim that the
foral authorities are limited in the exercise of their powers, with regard to both the central State and the Autonomous Community
of the Basque Country and between themselves. Prior review exists in that regard in accordance with the principle of cooperation
with the State. The Comunidad Autónoma de Castilla y León stresses the role of the Coordination and Legislative Evaluation
Committee, which is referred to in Articles 63 and 64 of the Economic Agreement.
Those parties to the main proceedings also claim that the foral authorities must comply with numerous constitutional and other
principles, subject to review by the administrative courts. Those principles constitute significant material limits on the
powers of those authorities. That is the case of the principle of solidarity, enshrined in Article 138 of the Constitution,
the principle of fiscal harmonisation, the requirements of which are set out in Article 3 of the Economic Agreement, and the
principles of equality, expressed, in particular, in Article 31 of the Constitution, and market unity.
The foral authorities and Confebask claim that the State does not intervene in the adoption of foral laws. There is a mechanism
for reciprocal communication, but this is merely informative in nature. Even if the Coordination and Legislative Evaluation
Committee were to issue a negative decision, that would not prevent the foral laws adopted from entering into force, and that
entry into force could not be contested before the national courts.
The United Kingdom, along with the Italian Government, is of the view that conciliation measures are not incompatible with
the recognition of procedural autonomy. According to the United Kingdom, what is important is that the consent of the State
is not required for the adoption of a regional tax measure, and that the State has no power to veto that measure or override
the position of the regional authority.
Confebask bases its argument – that, when verifying the procedural autonomy criterion, it is of little importance that the
local authority is required to take into account national interests – on the difference between the formulation in the Opinion
of Advocate General Geelhoed in
Portugal
v
Commission
and the wording of the judgment in that case. In point 54 of the Opinion, it is written that ‘... The decision must be taken
by the local authority pursuant to a procedure where the central government does not have any power to intervene directly
in the procedure of setting the tax rate, and without any obligation on the part of the local authority to take the interest
of the central State into account in setting the tax rate’. However, in paragraph 67 of the judgment, the Court did not retain
the last part of the sentence just quoted, limiting itself to indicating that the measure must have been adopted ‘without
the central government being able directly to intervene as regards its content’.
The Commission contends, contrary to Confebask, that the fact of taking into account the interests of the State is important.
According to the Commission, the condition of procedural autonomy is not satisfied if the infra‑State body is subject to the
procedural obligation to consult the central government and/or the material obligation to take into account the repercussions
of its decisions on the whole territory, for example, for the purpose of complying with the principles of equality, solidarity
and equivalence of fiscal pressure.
The Commission bases its argument in that regard on the final sentence of paragraph 68 of
Portugal
v
Commission
, according to which the infra‑State authority must have fiscal competence ‘regardless of any considerations related to the
conduct of the central State’, a detail in the light of which the second condition set out in paragraph 67 of that judgment
must be interpreted, namely the condition that the decision taken by the infra‑State body must have been adopted ‘without
the central government being able to directly intervene as regards its content’.
–       The Court’s reply
As is apparent from paragraph 67 of
Portugal
v
Commission
, in order to be adopted in the exercise of powers which are sufficiently autonomous, a decision of an infra‑State authority
must have been taken without the central government being able directly to intervene as regards its content.
Such procedural autonomy does not preclude the establishment of a conciliation procedure in order to avoid conflicts, provided
that the final decision taken at the conclusion of that procedure is adopted by the infra‑State body and not by the central
government.
In that regard, it is apparent from Article 4(1) of the Economic Agreement that the foral authorities notify the State administration
of drafts of foral laws in the area of taxation and that the State administration does likewise in respect of those authorities.
In accordance with Article 64 of that agreement, a Coordination and Legislative Evaluation Committee composed of an equal
number of representatives of the State administration and representatives of the Autonomous Community of the Basque Country
may examine draft foral laws and seek, by negotiation, to eliminate any divergences between those draft laws and the tax legislation
applicable in the rest of the Spanish territory.
As the Advocate General rightly stated in point 87 of her Opinion, it is not apparent from the Economic Agreement that, in
the absence of agreement within the committee, the central government is able to impose the adoption of a law with a particular
content.
It is necessary to point out, in addition, that the Coordination and Legislative Evaluation Committee may examine not only
draft foral laws, but also drafts sent by the State Administration. That possibility suffices to show that that committee
is merely a consultation and conciliation body rather than a mechanism by which the central government, in the case of a conflict
between a draft foral law and the tax legislation of the Spanish State, could impose its own decision.
As to the different principles relied on by the Comunidad Autónoma de La Rioja, the Comunidad Autónoma de Castilla y León
and the Commission, it does not appear that they call into question the decision‑making autonomy of the Historical Territories,
but rather that they define the limits of that autonomy.
Thus, the principle of solidarity, defined in Article 138 of the Constitution and according to which the State is to ‘guarantee
the effective implementation of the principle of solidarity laid down in Article 2 of the Constitution by endeavouring to
establish a fair and adequate economic balance between the different parts of Spanish territory …’, does not appear to call
into question the procedural autonomy of the Historical Territories.
The requirement for an infra‑State body to take into account the economic balance between the different parts of the national
territory when adopting tax legislation defines the limits of that body’s powers, even if the concepts used to define those
limits, such as that of economic balance, may be developed in the context of interpretation as part of judicial review.
However, as stated in paragraph 81 above, the fact that pre‑established limits must be complied with when a decision is adopted
does not, in principle, call into question the decisional autonomy of the body adopting that decision.
As for the principle of fiscal harmonisation laid down in Article 3 of the Economic Agreement, it is necessary, in particular,
to maintain ‘an overall effective fiscal pressure equivalent to that in force in the rest of the State’ and to respect and
guarantee ‘freedom of movement and of establishment of persons and free movement of goods, capital and services throughout
the territory of Spain, without giving rise to discrimination or a restriction of the possibility of commercial competition
or distortion in the allocation of resources’.
While it appears to result from that principle that the Historical Territories do not have very extensive competence in respect
of the overall fiscal pressure liable to be established by foral laws, since that pressure must be equivalent to that which
exists in the rest of the Spanish State, it is, however, not in dispute that overall fiscal pressure is only one of the elements
to be taken into consideration when tax laws are being adopted. Provided that they comply with that principle, the Historical
Territories thus have the power to adopt tax provisions which differ in many respects from the provisions applicable in the
rest of the State.
In any event, as is apparent from paragraph 67 of
Portugal
v
Commission
, the essential criterion for the purpose of determining whether procedural autonomy exists is not the extent of the competence
which the infra‑State body is recognised as having, but the possibility for that body, as a result of that competence, to
adopt a decision independently, in other words, without the central government being able directly to intervene as regards
its content.
It follows that an infra‑State body’s obligation to take into consideration the State interest in order to respect the limits
of the areas of competence which are accorded to it, does not, generally, constitute an element calling into question the
procedural autonomy of that body where it adopts a decision within those limits.
In the cases in the main proceedings, it is necessary to find – as is apparent from the applicable national provisions and,
in particular, from Articles 63 and 64 of the Economic Agreement – that it does not appear that the central government is
able directly to intervene in the process of adopting a foral law in order to ensure compliance with principles such as the
principle of solidarity, that of fiscal harmonisation or the other principles as relied on by the applicants in the main proceedings.
However, whilst the Court has jurisdiction to interpret Community law, it is the national court which has jurisdiction to
identify the national law applicable and to interpret it, as well as to apply Community law to the cases before it. It is
thus to the national court that it falls, on the basis of the evidence examined and all other evidence which it considers
relevant, to determine whether the second criterion laid down in paragraph 67 of
Portugal
v
Commission
, namely the procedural autonomy criterion, is satisfied in the cases in the main proceedings.
The economic and financial autonomy criterion
–       Observations submitted to the Court
With regard to this criterion, it is apparent from the observations submitted to the Court that their authors are referring
to paragraphs 67 and 68 of
Portugal
v
Commission
. The Court held there, first, that the financial consequences of a reduction of the national tax rate for undertakings in
the region must not be offset by aid or subsidies from other regions or central government and, second, that economic autonomy
exists only where the infra‑State body assumes the political and financial consequences of a tax reduction measure. A number
of the observations submitted to the Court deal with the determination of the quota and the inferences to be drawn from it
concerning the economic and financial autonomy of the Autonomous Community of the Basque Country as well as of the Historical
Territories.
The Comunidad Autónoma de La Rioja and the Comunidad Autónoma de Castilla y León claim that the Historical Territories do
not have economic autonomy, in particular because of the different principles imposed by the Constitution and the Economic
Agreement.
The foral authorities, by contrast, contend that the tax system of the Historical Territories is based on two pillars, the
first of which represents autonomy and responsibility and the second of which represents the principle of unilateral risk.
Examining the grounds of the orders for reference, Confebask states that, according to the national court, the economic autonomy
criterion requires there to be economic differentiation between the autonomous territory and the rest of the Spanish State
in the field of taxation, inasmuch as any principle of market unity may call into question the existence of genuine autonomy.
Confebask states, however, that the judgment in
Portugal
v
Commission
in no way requires the presence of an element such as a ‘distinct economic framework’, something not even present among the
Member States of the European Community, which constitutes a substantially integrated economic and social unit. The only relevant
element is that the lower tax applicable in a particular region must not be financed by a transfer from the central government,
which implies that the political and economic risks of the decision taken in the tax field by the infra‑State body are assumed
by the latter, a requirement referred to in Spanish law as the ‘principle of fiscal responsibility’. That, it is submitted,
is the case with regard to the Historical Territories, fiscal responsibility being inseparable from the rules contained in
the Economic Agreement itself.
The Spanish Government examines the quota system and states that, although various financial flows exist between the Spanish
State and the Autonomous Community of the Basque Country, a net contribution also exists benefiting the Spanish Ministry of
Finance, which is earmarked for the financing of matters assumed by the State and not by the Basque Country. It stresses the
point that the tax changes adopted by the competent institutions of the Historical Territories do not alter either the financial
flows between the State and the Basque Country or the quantum of services provided by the State. It concludes from this that,
from both the political and the economic points of view, the Historical Territories assume the consequences of their decisions
in the tax field.
The Italian Government is of the view that the fact that the Spanish State may have exclusive competence in sectors such as
the monetary system, basic rules and coordination of general economic planning, financial rules governing the social security
system, and public works of general benefit does not call into question the existence of a sufficient degree of economic and
financial autonomy.
The United Kingdom is of the view that the fact that the Spanish State retains some control over the general economic framework
and that a quota contributing to the cost of burdens assumed by that State exists does not appear to be incompatible with
the economic and financial autonomy criterion, inasmuch as the tax rate has no effect on the amount of that quota.
The Commission claims, first, that, where it is a question of examining whether or not a tax measure constitutes State aid,
it is not appropriate to take into account the ‘call effect’, namely the creation of undertakings and thus, the tax revenue
growth which a reduction in taxes might lead to, an effect which could not be determined
a priori
. In any event, the question whether a measure constitutes State aid must be examined on a case‑by‑case basis, at the level
of the beneficiary company at a particular time. Second, it claims that the examination of the economic autonomy of a given
territory calls for an analysis of all the financial transfer mechanisms and the solidarity mechanisms, even if they are not
presented as such (for example, the single social security fund mechanism, the State’s guarantee of a minimum public service,
etc.). Third, the Commission claims that, rather than the objective pursued by State interventions, it is the effects of a
tax measure which must be taken into account in order to verify whether a tax measure constitutes State aid. It points out,
in that context, that the fact that a territory is endowed with very extensive areas of competence in the tax field and has
control of its revenue does not necessarily imply that it plays a fundamental role in defining the political and economic
environment.
The Commission emphasises in that regard the importance of the constitutional principle of solidarity, which constitutes a
limit to the financial autonomy of the Historical Territories and must guarantee a minimum level of services throughout Spanish
territory.
The Commission examines more specifically the Inter‑territorial Compensation Fund, provided for in Article 158(2) of the Constitution.
According to the Commission, the very existence of that fund indicates that the Historical Territories do not assume the financial
consequences of a decision to reduce the tax rate or to increase authorised deductions. As regards the quota, the Commission
concludes from analysis of the quota mechanism that it is calculated with reference to the revenue of the Historical Territories
in relation to that of the State and that, consequently, it constitutes a solidarity mechanism. Moreover, there are other
financial transfers, such as the adjustments and compensations in respect of direct and indirect taxes, which are also solidarity
mechanisms, since certain forms of compensation are calculated with reference to that revenue of the Historical Territories.
With regard to social security, the Commission relies on a report of the Ministry of Employment and Social Affairs relating
to the years 1999‑2005. In the pensions field, for example, in 2005, the system showed a deficit of EUR 311 million in the
Autonomous Community of the Basque Country. The Commission concludes from this that social security services and benefits
are financed by the other Autonomous Communities. As the financing of deficits forms part of the non‑assumed powers, the Autonomous
Community of the Basque Country contributes to them through the quota. Since that quota is calculated on the revenue relating
to that Autonomous Community, the system established in order to compensate for the social security deficit constitutes a
solidarity mechanism.
Having regard to all of the foregoing, the Commission concludes that the Historical Territories do not assume all the financial
consequences of measures to reduce the tax rate or to increase authorised deductions. Consequently, the third condition set
out in paragraph 67 of
Portugal
v
Commission
is not satisfied.
–       The Court’s reply
As is apparent from paragraph 67 of
Portugal
v
Commission
, one condition for an infra‑State body to enjoy economic and financial autonomy is that the financial consequences of a reduction
of the national tax rate for undertakings in the region must not be offset by aid or subsidies from other regions or central
government.
The financial transfers between the Spanish State and the Autonomous Community of the Basque Country are governed by the Economic
Agreement and the Law of 2002 on the quota. It is necessary, therefore, to examine those provisions first, in order to ascertain
whether they may have the effect of compensation, by the State, for the financial consequences of a tax measure adopted by
the foral authorities.
The method of calculating the quota is particularly complex. The first stage of that calculation consists in evaluating the
amounts of the burdens assumed by the State in the whole of the Kingdom of Spain concerning the areas of competence which
are not assumed by the Autonomous Community of the Basque Country. An attribution rate is applied to that amount which must,
generally, reflect the relative weight of the Basque economy within the whole Kingdom of Spain. Lastly, various adjustments
are made which are designed to perfect the estimate of the revenue received by the different entities with regard to various
taxes.
It is apparent from the observations submitted to the Court that the amount of the tax revenue of the Historical Territories
does not have any impact on the first stage of the calculation, which consists exclusively of an assessment of the various
burdens assumed by the Spanish State. With regard to the adjustments, it is only indirectly that they might be affected by
a foral law establishing an income tax structure which is more favourable for taxpayers to whom that law applies.
One of the essential data for the calculation of the quota is the attribution rate, currently set at 6.24%. In that regard,
it is clear from the arguments presented to the Court that, although that rate is determined on the basis of economic data,
it is, however, set during what are essentially political negotiations between the Spanish State and the Autonomous Community
of the Basque Country. A decision to reduce the tax rate thus does not necessarily have an impact on the level of that rate.
At the hearing, the Commission called into question the current attribution rate, contending that it was undervalued and that,
consequently, the Historical Territories contribute less that they should to State burdens. It is necessary, however, to point
out once again that the Court has jurisdiction only to interpret Article 87(1) EC and not to decide, in the main proceedings,
whether the attribution rate calculated pursuant to the Law of 2002 on the quota was correctly calculated from the economic
perspective, or whether it was undervalued.
It is necessary, however, to point out that an undervaluation of the attribution rate is capable of constituting merely an
indicator that the Historical Territories lack economic autonomy. There must be compensation, namely, a causal relationship
between a tax measure adopted by the foral authorities and the amounts assumed by the Spanish State.
As has been stated before the Court, the attribution rate is set on the basis of economic data during political negotiations
in which the Spanish State participates and in the context of which it defends the national interest and that of the other
regions of the Kingdom of Spain. It is for the national court to determine whether that process of setting the rate has the
aim of permitting the central government to compensate the cost of a subsidy or a tax measure adopted by the Historical Territories
which is of benefit to undertakings.
Likewise, it is for that court to examine the effects of that process and to verify whether, because of the methodology adopted
and the economic data taken into account, the setting of the attribution rate and, more generally, the calculation of the
quota may have the effect of causing the Spanish State to compensate the consequences of a tax measure adopted by the foral
authorities.
In its written observations, the Commission also contends that a number of other financial transfers which compensate for
tax measures reducing taxes also exist, such as those resulting from the existence of a single social security fund, a minimum
public service guaranteed by the State or the Inter‑territorial Compensation Fund. Moreover, at the hearing, the Commission
referred to transfers and subsidies of considerable amounts to public authorities of the Autonomous Community of the Basque
Country which are not taken into account in the calculation of the quota.
In that regard, if financial compensation may be declared and specific, it may also be hidden and result only from the actual
examination of the financial flows existing between the infra‑State body concerned, the Member State which it comes under
and the other regions of that Member State.
That examination may indicate that a tax reduction decision adopted by the infra‑State body results in larger financial transfers
in its favour, because of the calculation methods used in order to determine the amounts to be transferred.
However, as the Advocate General stated in point 109 of her Opinion and contrary to what the Commission appears to be claiming,
the mere fact that it appears from a general examination of the financial relations between the central State and its infra‑State
bodies that there are financial transfers between the former and the latter, cannot, in itself, suffice to demonstrate that
those bodies do not assume the financial consequences of the tax measures which they adopt and, accordingly, that they do
not enjoy financial autonomy, since such transfers may take place for reasons unconnected with the tax measures.
In the main proceedings, it is common ground that the areas of competence of the Historical Territories are limited by, inter
alia, the different principles relied on before the Court and, more specifically, by that of fiscal harmonisation.
Having regard to those limits, it is necessary to examine whether the foral laws adopted by the Historical Territories may
result in hidden compensation in sectors such as social security, the guarantee of minimum public services by the Spanish
State, or in the functioning of the Inter‑territorial Compensation Fund, as the Commission in particular asserts. In that
regard, it is necessary to observe that the Commission has failed to give precise details of its allegations.
Lastly, with regard to the Commission’s argument, stated at the hearing, that the tax measures in dispute do not apply to
all undertakings established in or to all production of goods carried out in the Historical Territories, suffice it to state
that this cannot affect the foregoing analysis since it is not contested that, in accordance with the Court’s findings at
paragraph 62 of
Portugal
v
Commission
, those measures apply to all the undertakings or all production of goods coming, in accordance with the rule on allocation
of fiscal powers used by the Member State concerned and that infra‑State body, within the competence of the latter.
In any event, it is not for this Court to declare whether the foral laws at issue in the main proceedings constitute State
aid within the meaning of Article 87(1) EC. Such a classification implies that the Court proceeds to determine, interpret
and apply the relevant national law and to examine the facts, tasks which fall within the jurisdiction of the national court,
whilst this Court has sole jurisdiction to interpret the concept of State aid within the meaning of Article 87(1) EC in order
to provide the national court with the criteria which will enable it to decide the cases before it.
It must thus be held that, on the basis of the elements examined and all the other elements which the national court considers
relevant, it is for that court to determine whether the Historical Territories assume the political and financial consequences
of a tax measure adopted within the limits of the powers conferred on them.
Conclusion as to the three criteria set out in paragraph 51 above
In order to determine whether the foral laws adopted by the Historical Territories constitute State aid within the meaning
of Article 87(1) EC, it is necessary to establish whether those Historical Territories and the Autonomous Community of the
Basque Country have sufficient institutional, procedural and economic autonomy for a law adopted by those authorities within
the limits of the powers conferred on them to be considered as being of general application within that infra‑State body and
as being non‑selective within the meaning of the notion of State aid referred to in Article 87(1) EC.
That verification may be carried out only after prior review in order to ensure that the Historical Territories and the Autonomous
Community of the Basque Country respect the limits of their areas of competence since the rules on, in particular, financial
transfers have been drawn up on the basis of those areas of competence as defined.
The finding of infringement of the limits of those areas of competence could call into question the results of the analysis
carried out on the basis of Article 87(1) EC, since the reference framework for assessing whether the law of general application
in the infra‑State body is selective is no longer necessarily constituted by the Historical Territories and the Autonomous
Community of the Basque Country, but could, where appropriate, be extended to the whole Spanish territory.
In the light of all of the foregoing, the answer to the question referred must be that Article 87(1) EC is to be interpreted
as meaning that, for the purpose of assessing whether a measure is selective, account is to be taken of the institutional,
procedural and economic autonomy enjoyed by the authority adopting that measure. It is for the national court, which alone
has jurisdiction to identify the national law applicable and to interpret it, as well as to apply Community law to the cases
before it, to determine whether the Historical Territories and the Autonomous Community of the Basque Country have such autonomy,
which, if so, would have the result that the laws adopted within the limits of the areas of competence granted to those infra‑State
bodies by the Constitution and the other provisions of Spanish law are not of a selective nature within the meaning of the
concept of State aid as referred to in Article 87(1) EC.

Costs
Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court,
the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs
of those parties, are not recoverable.
On those grounds, the Court (Third Chamber) hereby rules:
Article 87(1) EC is to be interpreted as meaning that, for the purpose of assessing whether a measure is selective, account
is to be taken of the institutional, procedural and economic autonomy enjoyed by the authority adopting that measure. It is
for the national court, which alone has jurisdiction to identify the national law applicable and to interpret it, as well
as to apply Community law to the cases before it, to determine whether the Historical Territories and the Autonomous Community
of the Basque Country have such autonomy, which, if so, would have the result that the laws adopted within the limits of the
areas of competence granted to those infra‑State bodies by the Spanish Constitution of 1978 and the other provisions of Spanish
law are not of a selective nature within the meaning of the concept of State aid as referred to in Article 87(1) EC.
[Signatures]
*
Language of the cases: Spanish.