# L_2012261EN.01002101.xml

| 27.9.2012 | EN | Official Journal of the European Union | L 261/21 |
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27.9.2012

EN

Official Journal of the European Union

L 261/21

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EFTA SURVEILLANCE AUTHORITY DECISION

No 416/10/COL

of 3 November 2010

on the taxation of investment undertakings under the Liechtenstein Tax Act

(Liechtenstein)

THE EFTA SURVEILLANCE AUTHORITY (‘THE AUTHORITY’),

HAVING REGARD to the Agreement on the European Economic Area (‘the EEA Agreement’), in particular to Articles 61 to 63 and Protocol 26,

HAVING REGARD to the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice (‘the Surveillance and Court Agreement’), in particular to Article 24,

HAVING REGARD to Protocol 3 to the Surveillance and Court Agreement (‘Protocol 3’), in particular to Article 1(2) of Part I and Articles 4(4), 6, 7(5) and 14 of Part II,

HAVING REGARD to the consolidated version of the Authority’s Decision No 195/04/COL of 14 July 2004 on the implementing provisions referred to under Article 27 of Part II of Protocol 3 (‘the Implementing Provisions Decision’) (1),

HAVING called on interested parties to submit their comments pursuant to those provisions and having regard to their comments,

Whereas:

I.   FACTS

FACTS

1.   PROCEDURE

By letter dated 14 March 2007, the Authority sent a request for information to the Liechtenstein authorities, inquiring about various tax derogations for certain types of company apparently available under the Liechtenstein Tax Act. After various exchanges of correspondence, by letter dated 18 March 2009 the Authority informed the Liechtenstein authorities that it had decided to initiate the procedure laid down in Article 1(2) of Part I of Protocol 3 in respect of the taxation of investment undertakings. The Authority’s Decision No 149/09/COL to initiate the formal investigation procedure was published in the Official Journal of the European Union and the EEA Supplement to it, calling upon interested parties to submit comments (2). The Authority received comments from interested parties. By letter dated 26 January 2010 the Authority forwarded these to the Liechtenstein authorities, which were given the opportunity to respond. This was done by letter dated 17 March 2010.

Official Journal of the European Union

2

2.   DESCRIPTION OF THE MEASURE INVESTIGATED

2.1.   Title

Title

The investigation concerned the treatment of investment undertakings under the Liechtenstein Tax Act (Gesetz über die Landes-und Gemeindesteuern) (3), (‘the Tax Act’) between 1996 and 2006.

Gesetz über die Landes-und Gemeindesteuern

3

2.2.   Definition of investment undertakings

Definition of investment undertakings

The 1996 Liechtenstein Act on Investment Undertakings (Gesetz über Investmentunternehmen) (the ‘Investment Undertakings Act’) defined investment undertakings as:

Gesetz über Investmentunternehmen

‘assets raised from the public following public advertising for the purpose of a collective capital investment which are invested and managed for the collective account of the individual investors usually according to the principle of risk-spreading’
   (4).

4

Under Liechtenstein law, an investment undertaking could choose the form of a collective trust, called an investment fund (Anlagefonds) (5), or opt for the legal form of an investment company (Anlagegesellschaft) (6). In the case of an investment fund, the management of the fund is carried out by a separate entity (referred to as the ‘fund direction’) (7). In the case of an investment company, the management is undertaken by the investment company itself. Unlike an investment fund, therefore, the investment company constitutes one single entity. In both cases, the entities carrying out management functions undertake economic activities by providing services for a fee.

Anlagefonds

5

Anlagegesellschaft

6

7

Regardless of the organisational form, the assets managed on behalf of investors must be differentiated from the own assets of the management company. In return for management services, a management company is paid a management fee, which becomes part of its own assets. In addition, performance or other fees may be levied (8) which would also form part of a management company’s own assets.

8

3.   TAX PROVISIONS APPLICABLE TO INVESTMENT UNDERTAKINGS IN LIECHTENSTEIN

3.1.   Liechtenstein corporate taxation

Liechtenstein corporate taxation

3.1.1.   Income and capital tax

Income and capital tax

Sections 73 to 81 in Part 4, heading A, ‘Company Taxes’ (Die Gesellschaftssteuern) of the Tax Act provide for two forms of corporate taxation (9):

Die Gesellschaftssteuern

9

| — | A business income tax (Ertragssteuer), which according to Section 77 of the Tax Act is assessed on revenues less eligible expenditure (including write-offs). The income tax rate depends on the ratio of net income to taxable capital and ranges between 7,5 % and 15 % (10). This rate may be increased by between 1 and 5 percentage points depending on the ratio between dividends and taxable capital. The maximum income tax is therefore 20 %. |
| --- | --- |

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A business income tax (Ertragssteuer), which according to Section 77 of the Tax Act is assessed on revenues less eligible expenditure (including write-offs). The income tax rate depends on the ratio of net income to taxable capital and ranges between 7,5 % and 15 % (10). This rate may be increased by between 1 and 5 percentage points depending on the ratio between dividends and taxable capital. The maximum income tax is therefore 20 %.

Ertragssteuer

10

| — | A capital tax (Kapitalsteuer), which according to Section 76 of the Tax Act is levied against paid-up capital stock, joint stock, share capital, and initial capital as well as the reserves of a company constituting company equity. Taxes are assessed at the end of the company’s financial year (generally on 31 December). The rate is 2 ‰ (0,2 %). |
| --- | --- |

—

A capital tax (Kapitalsteuer), which according to Section 76 of the Tax Act is levied against paid-up capital stock, joint stock, share capital, and initial capital as well as the reserves of a company constituting company equity. Taxes are assessed at the end of the company’s financial year (generally on 31 December). The rate is 2 ‰ (0,2 %).

Kapitalsteuer

According to Section 73 of the Tax Act, legal persons operating commercial businesses in Liechtenstein pay both income and capital tax. The same applies to foreign companies operating a branch in Liechtenstein.

3.1.2.   Coupon tax

Coupon tax

Part 5 of the Tax Act provides for a coupon tax. According to Section 88(a)(1) of the Tax Act, Liechtenstein levies a tax on the coupons of securities (or documents equal to securities) issued by ‘a national’. This notion includes any person who has a place of residence, domicile or statutory seat in Liechtenstein. It also covers undertakings that are registered on the public register of Liechtenstein. The coupon tax applies to companies the capital of which is divided into shares, for example, companies limited by shares and companies with limited liability (11). It is levied at the rate of 4 % on any distribution of dividends or profit shares (including distributions in the form of shares).

11

3.2.   The taxation of investment undertakings between 1996 and 2006

The taxation of investment undertakings between 1996 and 2006

3.2.1.   The taxation of the assets managed on behalf of investors

The taxation of the assets managed on behalf of investors

From 1996, with the introduction of Section 84(5) of the Tax Act, the assets managed by investment undertakings were taxed in the same way as domiciliary companies (Sitzgesellschaften) (12). As domiciliary companies did not pay income tax, the assets managed by investment undertakings were also not subject to income tax. According to Section 84(1) of the Tax Act, only a reduced capital tax of 1 ‰ (instead of 2 ‰) was applied (13). This rate was further reduced to 0,4 ‰ for the capital of investment undertakings exceeding CHF 2 million in accordance with Section 85(2) of the Tax Act (14). The coupon tax on the distribution of profits generated from the fund capital was also abolished in 1996 (15).

Sitzgesellschaften

12

13

14

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3.2.2.   The taxation of the own assets of the management company

The taxation of the own assets of the management company

3.2.2.1.   The taxation of the management side of investment funds

Like any other company operating in Liechtenstein, the fund direction of an investment fund (the management side of the fund) was fully liable to pay income, capital as well as coupon tax on its own income and capital. The fund direction had also been fully taxed prior to 1996 in accordance with Section 84(2) of the Tax Act 1961.

3.2.2.2.   The taxation of the management side of investment companies

In the case of investment companies, however, no distinction was made for tax purposes between the management company’s own assets and the managed assets. The investment companies’ own assets were therefore also subject to the rules applying to domiciliary companies, in accordance with Section 84(2) of the Tax Act. This meant that no income tax was levied on the management activities or on the managed assets; capital tax was payable at 1 ‰ instead of 2 ‰ (and reduced further for any capital exceeding CHF 2 million in accordance with Section 85(2) of the Tax Act); and no coupon tax was levied. The tax situation from 1996 to 2006 for investment funds and investment companies can be illustrated as follows:

| Investment Fund
  (Anlagefond) |
| --- |
| Fund direction (own assets)

  Income tax
  Full capital tax
  Coupon tax | Fund capital, i.e. managed assets

  No income tax
  Reduced capital tax
  No coupon tax |

Investment Fund

(Anlagefond)

Anlagefond

Fund direction (own assets)

Fund direction (own assets)

Income tax

Full capital tax

Coupon tax

Fund capital, i.e. managed assets

Fund capital, i.e. managed assets

No income tax

Reduced capital tax

No coupon tax

| Investment Company
  (Anlagegesellschaft) |
| --- |
| Own assets of the management company

  No income tax
  Reduced capital tax
  No coupon tax | Fund capital, i.e. managed assets

  No income tax
  Reduced capital tax
  No coupon tax |

Investment Company

(Anlagegesellschaft)

Anlagegesellschaft

Own assets of the management company

Own assets of the management company

No income tax

Reduced capital tax

No coupon tax

Fund capital, i.e. managed assets

Fund capital, i.e. managed assets

No income tax

Reduced capital tax

No coupon tax

3.3.   The situation from 2006 until today

The situation from 2006 until today

Legislation introduced in 2005 required investment companies to record and hold their own assets and managed assets separately. The Tax Act was also revised and a new Section 73(f) was inserted, which required both the fund direction of an investment fund and investment companies to pay income, capital, and coupon taxes in relation to their own assets (16).

16

The tax situation for investment funds and investment companies from 2006 onwards can be illustrated as follows:

| Investment Fund
  (Anlagefond) |
| --- |
| Fund direction (own assets)

  Income tax
  Capital tax
  Coupon tax | Fund capital, i.e. managed assets

  No taxation |

Investment Fund

(Anlagefond)

Anlagefond

Fund direction (own assets)

Fund direction (own assets)

Income tax

Capital tax

Coupon tax

Fund capital, i.e. managed assets

Fund capital, i.e. managed assets

No taxation

| Investment Company
  (Anlagegesellschaft) |
| --- |
| Own assets of the management company

  Income tax
  Capital tax
  Coupon tax | Fund capital, i.e. managed assets

  No taxation |

Investment Company

(Anlagegesellschaft)

Anlagegesellschaft

Own assets of the management company

Own assets of the management company

Income tax

Capital tax

Coupon tax

Fund capital, i.e. managed assets

Fund capital, i.e. managed assets

No taxation

3.4.   Grounds for initiating the procedure

Grounds for initiating the procedure

In its decision opening the formal investigation, the Authority raised doubts regarding the compatibility with the State aid rules of the exemption from taxation of the own assets of investment companies. Contrary to the arguments brought forward by the Liechtenstein authorities, the Authority took the initial view that the tax legislation provided a selective advantage to investment companies which distorted competition and affected trade across the EEA. On this basis, the Authority could not exclude that the tax rules applicable to the own assets of investment companies (full exemption from payment of income and coupon tax and a partial exemption from payment of capital tax) constitute State aid within the meaning of Article 61(1) of the EEA Agreement. The Authority also had doubts that these measures could be considered compatible with the State aid provisions of the EEA Agreement, in particular Article 61(3)(c).

4.   COMMENTS FROM THIRD PARTIES

The comments from third parties can be summarised as follows:

| — | Referring to decisions of the European Commission on an Irish Company Holding Regime (17) and a tax reduction from revenue from certain intangible assets in Spain (18), the third parties argued that any natural or legal person could establish an investment undertaking and therefore benefit from the tax exemptions; on that basis the tax exemption does not constitute a selective measure. |
| --- | --- |

—

Referring to decisions of the European Commission on an Irish Company Holding Regime (17) and a tax reduction from revenue from certain intangible assets in Spain (18), the third parties argued that any natural or legal person could establish an investment undertaking and therefore benefit from the tax exemptions; on that basis the tax exemption does not constitute a selective measure.

17

18

| — | In 1996 when the legislation was enacted, it was not clear that the State aid rules would be applicable to tax measures. |
| --- | --- |

—

In 1996 when the legislation was enacted, it was not clear that the State aid rules would be applicable to tax measures.

| — | If the Authority concludes that the exemptions were aid, they had been in place since 1996 and should constitute an existing aid measure. |
| --- | --- |

—

If the Authority concludes that the exemptions were aid, they had been in place since 1996 and should constitute an existing aid measure.

| — | With reference to Article 15 of Protocol 3 (according to which recovery shall be subject to a limitation period of 10 years), the third parties argued that no recovery of aid can be required because the tax exemption was introduced in 1996. |
| --- | --- |

—

With reference to Article 15 of Protocol 3 (according to which recovery shall be subject to a limitation period of 10 years), the third parties argued that no recovery of aid can be required because the tax exemption was introduced in 1996.

| — | Recovery, it was argued, would contravene the principles of legitimate expectations and legal certainty. |
| --- | --- |

—

Recovery, it was argued, would contravene the principles of legitimate expectations and legal certainty.

| — | In some cases, no recovery could be required as the amount of the tax exemptions would fall within the de minimis rule. |
| --- | --- |

—

In some cases, no recovery could be required as the amount of the tax exemptions would fall within the de minimis rule.

de minimis

5.   COMMENTS BY THE LIECHTENSTEIN AUTHORITIES

In letters dated 17 March 2010 and 16 July 2010, the Liechtenstein authorities commented as follows:

| — | The tax exemption does not involve State aid within the meaning of Article 61(1) of the EEA Agreement as it is not selective in nature. In support of this argument reference was again made to two decisions of the European Commission, on the Irish Company Holding Regime and a tax reduction from revenue from certain intangible assets in Spain. |
| --- | --- |

—

The tax exemption does not involve State aid within the meaning of Article 61(1) of the EEA Agreement as it is not selective in nature. In support of this argument reference was again made to two decisions of the European Commission, on the Irish Company Holding Regime and a tax reduction from revenue from certain intangible assets in Spain.

| — | In the alternative it is argued that any aid is existing aid on the basis of the 10 year limitation period set out in Article 1(b)(iv) in conjunction with Article 15 of Part II of Protocol 3; and on the basis that the measure only became aid as a result of the evolution of the European Economic Area (Article 1(b)(v) of Part II of Protocol 3). |
| --- | --- |

—

In the alternative it is argued that any aid is existing aid on the basis of the 10 year limitation period set out in Article 1(b)(iv) in conjunction with Article 15 of Part II of Protocol 3; and on the basis that the measure only became aid as a result of the evolution of the European Economic Area (Article 1(b)(v) of Part II of Protocol 3).

| — | Finally the Liechtenstein authorities argue that if this is not accepted the Authority should not order recovery of aid on the basis that this would be contrary to general principles of EEA law, specifically the protection of legitimate expectations and legal certainty. |
| --- | --- |

—

Finally the Liechtenstein authorities argue that if this is not accepted the Authority should not order recovery of aid on the basis that this would be contrary to general principles of EEA law, specifically the protection of legitimate expectations and legal certainty.

II.   ASSESSMENT

ASSESSMENT

1.   THE PRESENCE OF STATE AID

Article 61(1) of the EEA Agreement provides that:

‘Save as otherwise provided in this Agreement, any aid granted by EC Member States, EFTA States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Contracting Parties, be incompatible with the functioning of this Agreement.’

1.1.   Presence of State resources

Presence of State resources

The aid measure must be granted by the State or through State resources.

The granting of a full or partial tax exemption involves a loss of tax revenues for the State which is equivalent to consumption of State resources in the form of fiscal (tax) expenditure (19). The Liechtenstein authorities forego revenue corresponding to the non-payment of income, capital and coupon taxes.

19

For these reasons, the Authority considers that the tax rules applicable to investment companies involve the use of State resources.

1.2.   Favouring certain undertakings or the production of certain goods

Favouring certain undertakings or the production of certain goods

Firstly, the aid measure must confer on the beneficiaries advantages that relieve them of charges that are normally borne from their budgets.

By not being obliged to pay any income or coupon tax and only a reduced capital tax on their own assets, investment companies receive an advantage in comparison to other undertakings that are subject to ordinary taxation on revenues from their business activities.

The advantage is selective as it was granted only to investment undertakings organised in the form of investment companies. The Authority does not accept arguments put forward by the Liechtenstein authorities and third parties that each undertaking in Liechtenstein carrying out such economic activity is in principle free to choose the most advantageous legal form and consequently profit from the tax concessions. A tax benefit which is limited to a specified group of undertakings cannot be characterised as a general measure on the basis that any interested undertaking could fulfil specified criteria and qualify if it organised itself in a particular form (20).

20

By reference to the European Court of Justice’s conclusions in the GIL Insurance (21) case, ‘Article 87(1) EC requires it to be determined whether, under a particular statutory scheme, a State measure is such as to favour “certain undertakings or the production of certain goods” in comparison with others which, in the light of the objective pursued by the system in question, are in a comparable legal and factual situation’. The Authority concludes that the undertakings in the same legal and factual position in this case are all those who pay the (full) income, capital and coupon taxes in Liechtenstein — and in comparison to those, investment companies in Liechtenstein receive a selective advantage. More specifically, the investment companies benefit in comparison to the fund direction of undertakings organised as investment funds, which engage in the same activity but are subject to tax like all other undertakings in Liechtenstein.

21

A specific tax measure can nevertheless be justified by the logic of the tax system. The specific tax rules applicable to investment companies would not be selective in the sense of Article 61(1) of the EEA Agreement if the rule is justified by the nature and general scheme of the Liechtenstein tax system (22). Unlike certain recent complex fiscal aid cases, the objectives of the tax system in question are straightforward. The objective, or logic, of the taxes is to generate revenue for the State. According to the Liechtenstein Tax Act, legal entities that operate in Liechtenstein must pay income tax on their revenues and a capital tax on the capital held as the company’s own equity. Companies divided into shares must also pay a coupon tax on dividends. Investment companies are legal entities incorporated under Liechtenstein law in the form of companies limited by shares. As such, they are subject to the generally applicable tax provisions of the Liechtenstein Tax Act concerning income, capital and coupon tax. The Authority considers that the tax relief for the management company’s own assets falls neither within the logic of the general tax system in Liechtenstein, nor within any specific logic of the taxation of investment undertakings. In the view of the Authority, there is nothing in the organisational form of investment companies which would justify a special tax derogation in favour of the management activities of an investment company in comparison with the management activities of an investment fund (23). The reduction and exemptions applicable to domiciliary companies (24) and investment companies were designed to encourage these activities in Liechtenstein. In the Authority’s view, therefore, the tax relief on the management company’s own assets cannot be justified by the nature and overall scheme of the Liechtenstein taxation system.

22

23

24

In 2006, the legislation was changed and investment companies were subject thereafter to ordinary business taxation in the same way as the fund direction of investment funds and any other legal entity operating a business in Liechtenstein. In view of the Liechtenstein authorities this eliminated the ‘inconsistency’
   (25) of not levying any taxes on the own assets before.

25

For these reasons, the Authority considers that the measures constituted a selective advantage to investment companies, which was remedied by the legislation effective from 2006 onwards.

Thirdly, the aid measure must favour undertakings engaged in economic activities. In the BBL (26) case, the European Court of Justice considered the activities of investment companies (‘SICAVs’ under Belgian law) which undertook collective investment with the aim of producing income on a continuing basis in transferable securities from capital raised from the public. The Court held that this constitutes an economic activity within the meaning of Article 4(2) of the Sixth VAT Directive. Investment companies are active in assembling and managing the assets of various investors with the intention of making profits via various fees for the services provided. The Authority consequently considers that management companies carry out economic activities in the form of asset management and are thus undertakings within the meaning of Article 61(1) of the EEA Agreement (27).

26

27

1.3.   Distortion of competition and effect on trade between Contracting Parties

Distortion of competition and effect on trade between Contracting Parties

The aid measure must distort competition and affect trade between the Contracting Parties to the EEA Agreement.

According to established case-law, the prohibition under Article 61(1) of the EEA Agreement applies to any aid which distorts or threatens to distort competition, irrespective of the amount, in so far as it affects trade between the Contracting Parties (28). The Commission has also concluded that investment vehicles operate in international markets and pursue commercial and other economic activities in markets where competition is intense (29). The Authority takes the view, therefore, that the tax concessions on the own assets of investment companies from 1996 to 2006 strengthened the competitive position of those investment companies within the EEA, as these tax concessions reduced the ordinary operational costs of these companies compared to others (30). Investment companies compete with other financial undertakings and operate in an open market characterised by substantial intra-EEA trade. Trade between the Contracting Parties is also affected (31).

28

29

30

31

The Authority is therefore of the view that the tax concessions distort or threaten to distort competition and affect trade between the Contracting Parties.

1.4.   Conclusion

Conclusion

The Authority therefore concludes that the reduced taxation of management companies’ own assets under the Liechtenstein Tax Act between 1996 and 2006 was State aid within the meaning of Article 61(1) of the EEA Agreement.

2.   PROCEDURAL REQUIREMENTS

Pursuant to Article 1(3) of Part I of Protocol 3, ‘the EFTA Surveillance Authority shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid (...). The State concerned shall not put its proposed measures into effect until the procedure has resulted in a final decision’. The Liechtenstein authorities did not notify the aid measures to the Authority. The Liechtenstein authorities have argued that the aid is existing aid as the measures only became aid due to an evolution of the EEA and/or as a result of Articles 1(b)(iv) and 15 of Part II of Protocol 3 which provides that the powers of the Authority to recover aid shall be subject to a limitation period of 10 years. The Authority is of the view, however, that the European Court of Justice made it clear as early as the 1970s that tax exemptions of the nature of those under assessment could be State aid. The Court held in 1974 (32) that any measures intended to exempt firms in a particular sector from the charges arising from the normal application of a tax system (without there being any justification for this exemption on the basis of the nature or general scheme of this system) constituted State aid. In 1987 (33) the Court explicitly stated that a loss of tax revenue was equivalent to consumption of State resources in the form of fiscal expenditure.

32

33

This approach is also reflected in decisions of the Authority prior to the implementation of the Liechtenstein Tax Act, where it concluded that exemptions from the tax payable by undertakings was (incompatible) State aid in Finland in 1994 (34) and in Norway in 1995 (35) and 1997 (36). On 1 December 1997, following a wide-ranging discussion on the need for coordinated action at Community level to tackle harmful tax competition, the European Council of Ministers adopted a series of conclusions and agreed a resolution on a code of conduct for business taxation (37). As part of the agreement reached, the Commission undertook to contribute to the objective of tackling harmful tax competition by implementing a notice (38) on the application of the State aid rules to measures relating to direct business taxation and committed itself ‘to the strict application of the aid rules concerned.’ When published in December 1998, the notice stated that ‘According to well-established practice and case-law (39), a tax measure whose main effect is to promote one or more sectors of activity constitutes aid’
   (40). The Commission, therefore, committed itself to the stricter application of rules which already existed (41).

34

35

36

37

38

39

40

41

The Authority does not accept that the arguments put forward by the Liechtenstein authorities and third parties show that the criteria for establishing selectivity applied by the Commission (or the Authority) in its assessment of tax issues has changed since the adoption of the tax measures under investigation. The Commission’s notice on business taxation, and the Authority’s corresponding guidelines, are based on the long-established case-law of the Court of Justice and of the Court of First Instance, and confirm that Articles 107 and 108 TFEU and Article 61(1) EEA (respectively) apply to tax measures. Further, in line with case-law, even if it could be established that there had been such a change of practice, the argument that the tax measures are existing aid still could not be accepted, for it fails to show that any change in the criteria for ascertaining selectivity applied by either the Commission or the Authority is attributable to the ‘evolution of the European Economic Area’ within the meaning of Article 1(b)(v) of Part II of Protocol 3 (42).

42

The Authority does not accept, therefore, that the measures can be defined as existing aid implemented prior to an evolution of the EEA Agreement. The measure is therefore new aid which was not notified to the Authority. The Liechtenstein authorities did not, therefore, comply with their obligations under Article 1(3) of Part I of Protocol 3.

In so far as the 10 year limitation period is concerned, the Authority accepts that aid paid prior to 15 March 1997 cannot be recovered by virtue of Articles 1(b)(iv) and 15 of Part II of Protocol 3. However the Authority does not accept that the mere fact that the relevant statutory provisions were implemented before 15 March 1997 means that all aid paid thereafter is existing aid. In cases where aid is paid repeatedly (such as a scheme or tax provision such as the case in hand), the limitation period begins on the day each individual aid is granted (as opposed to when the tax measure or scheme was first put into effect). As stated by the Court of First Instance (43), ‘In the case of an aid scheme introduced more than 10 years before the first interruption of the limitation period, the unlawful aid incompatible with the common market granted under that scheme during the last 10 years is therefore subject to recovery’.

43

3.   COMPATIBILITY OF THE AID

Support measures designated as State aid under Article 61(1) of the EEA Agreement are generally incompatible with the functioning of the EEA Agreement, unless one of the exemptions in Article 61(2) or (3) of the EEA Agreement applies. The derogation of Article 61(2) is not applicable to the aid in question, which is not designed to achieve any of the aims listed in this provision. Nor do Article 61(3)(a) or Article 61(3)(b) of the EEA Agreement apply.

The aid in question is not linked to any investment in production capital. It merely reduces the costs which companies would normally have to bear in the course of pursuing their day-to-day business activities, and is consequently to be classified as operating aid. Operating aid is normally not considered suitable to facilitate the development of certain economic activities or of certain regions as provided for in Article 61(3)(c) of the EEA Agreement. Operating aid is only allowed under special circumstances (for example for certain types of environmental or regional aid), when the Authority’s Guidelines provide for such an exemption. None of these Guidelines apply to the aid in question.

The Authority therefore concludes that the aid paid through special tax rules applicable to investment management companies is not compatible with the EEA Agreement.

4.   LEGITIMATE EXPECTATIONS AND LEGAL CERTAINTY

The Liechtenstein authorities and third party recipients of aid have argued that recovery of aid would breach fundamental principles of EEA law, arguing that actions of the European Commission created an expectation on the part of beneficiaries that the aid had been lawfully granted. It has also been argued that when Liechtenstein became a party to the EEA Agreement the taxation of investment companies did not involve State aid, nor was it foreseeable.

The fundamental legal principles of legitimate expectations and legal certainty can be invoked by beneficiaries of aid to challenge an order for recovery of unlawfully granted State aid. The principles only apply, however, in exceptional circumstances and an undertaking cannot normally entertain legitimate expectations that aid is lawful unless it has been granted in accordance with the procedure for notifying the aid to the Authority (or the European Commission as the case may be (44)). This is a principle recently re-affirmed by the Court of Justice as follows: ‘In a situation such as that in the main proceedings, the existence of an exceptional circumstance also cannot be upheld in the light of the principle of legal certainty, since the Court has already held, essentially, that, so long as the Commission has not taken a decision approving aid, ...the recipient cannot be certain as to the lawfulness of the aid, with the result that neither the principle of the protection of legitimate expectations nor that of legal certainty can be relied upon’
   (45). In principle, the case-law of the Court of Justice has stated that a legitimate expectation that aid is lawful cannot be invoked unless that aid has been granted in compliance with the procedure laid down in Article 1(3) in Part I of Protocol 3 (46), remarking that a diligent business man should normally be able to determine whether that procedure has been followed (47).

44

45

46

47

Notwithstanding this, the Court has also accepted that in exceptional circumstances a recipient of aid which is granted unlawfully because it was not notified may rely on legitimate expectations that the aid was lawful in order to oppose its repayment (48). The Court of Justice has held that an entity may rely on the principle of the protection of legitimate expectations where a Community authority has caused it to entertain expectations which are justified (49). This means in this context that a State or beneficiary must have relied on the previous actions of the Authority (or the European Commission) in, for example, approving the same or a similar aid measure. Neither the Authority nor the Commission has taken such action, and indeed the decisions of the Authority in disallowing fiscal aid measures in Finland and Norway shortly before the implementation of the Liechtenstein Tax Act should have made it clear that tax measures favouring certain companies or groups of companies should be notified to the Authority (50).

48

49

50

Finally, the Authority does not accept that any arguments relating to legal certainty can be valid in this case given the jurisprudence of the court and the wide ranging applicability of Articles 61 (of the EEA Agreement) and 107 (TFEU). A conclusion that the tax measures under investigation could involve State aid was clearly foreseeable at all times.

The Authority does not accept therefore that this Decision breaches fundamental principles of EEA law.

5.   CONCLUSION

The Authority concludes that the Liechtenstein authorities have unlawfully implemented the aid in question in breach of Article 1(3) of Part I to Protocol 3.

The aid is not compatible with the functioning of the EEA Agreement for the reasons set out above,

HAS ADOPTED THIS DECISION:

Article 1

The aid measures implemented by the Liechtenstein authorities in favour of investment companies, and which were repealed with effect from 30 June 2006, are not compatible with the functioning of the EEA Agreement within the meaning of Article 61(1) of the EEA Agreement.

Article 2

In view of the failure by the Liechtenstein authorities to comply with the requirement to notify the Authority before implementing aid in accordance with Article 1(3) of Part I of Protocol 3, the measures involved unlawful State aid.

Article 3

The Liechtenstein authorities shall take all necessary measures to recover from the investment companies the aid referred to in Article 1 and unlawfully made available to the beneficiaries from 15 March 1997 until the date in which beneficiaries last benefitted from the tax exemptions following their repeal in 2006.

Article 4

Recovery shall be effected without delay, and in any event by 3 March 2011, and in accordance with the procedures of national law, provided that they allow the immediate and effective execution of the decision. The aid to be recovered shall include interest and compound interest from the date on which it was at the disposal of the beneficiaries until the date of its recovery. Interest shall be calculated on the basis of Article 9 of the Implementing Provisions Decision.

Article 5

The Liechtenstein authorities shall inform the Authority, within two months of notification of this Decision, of the measures taken to comply with it.

Article 6

This Decision is addressed to the Principality of Liechtenstein.

Article 7

Only the English language version of this Decision is authentic.

Done at Brussels, 3 November 2010.

For the EFTA Surveillance Authority

Per SANDERUD

President

Sverrir Haukur GUNNLAUGSSON

College Member

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(1)  Available at: http://www.eftasurv.int/media/decisions/195-04-COL.pdf

1

(2)  
  OJ C 236, 1.10.2009 and EEA Supplement No 51, 1.10.2009.

2

(3)  
  Liechtensteinisches Landesgesetzblatt 1961, Nr. 7, with subsequent amendments.

3

Liechtensteinisches Landesgesetzblatt

(4)  Section 2(1) of the 1996 Investment Undertakings Act.

4

(5)  See Section 3(2) of the 1996 Investment Undertakings Act.

5

(6)  See Section 3(3) of the 1996 Investment Undertakings Act.

6

(7)  See Section 39(2) of the 1996 Investment Undertakings Act.

7

(8)  The Liechtenstein authorities have stated that it is impossible to list these fees exhaustively as a fund direction (or the management side of the investment company) is free to levy fees at its own discretion.

8

(9)  Private persons are subject to income tax (Erwerbssteuer) and property tax (Vermögenssteuer), which are not relevant for this investigation.

9

Erwerbssteuer

Vermögenssteuer

(10)  The net profit is set in relation to the taxable capital. The tax rate is then set at half the percentage which the net profit constitutes of the taxable capital. However, there is a minimum level of 7,5 % and a maximum ceiling of 15 %, see Section 79(2) of the Tax Act.

10

(11)  Section 88(d) of the Tax Act.

11

(12)  Domiciliary companies are legal entities registered in the public register which only have their seat or an office in Liechtenstein, but do not exercise any commercial or business activity in Liechtenstein.

12

(13)  The tax derogation in favour of domiciliary companies pre-dates the entry of Liechtenstein to the EEA Agreement and is therefore not part of this Decision, which deals only with tax derogations introduced after 1.5.1995, the date of Liechtenstein’s entry to the EEA.

13

(14)  Cf. Section 85(2) of the Tax Act in the form of the 1996 amendment, LGBL 1996 Nr. 88.

14

(15)  Sections 88(f), 88(g), 88(h)(3), 88(i)(2) of the 1961 Tax Act, which dealt with the coupon taxation of investment funds were repealed. See Government Bill No 69/1995, p. 10, in which it was stated that the repeal of the coupon tax on ‘their’ distributions was a pre-condition for the foundation of investment undertakings. Regarding the entry into force, see Gesetz vom
  3.5.1996
  über die Abänderung des Steuergesetzes, LGBl. Nr. 88 of 10.7.1996.

15

Gesetz vom

über die Abänderung des Steuergesetzes

(16)  The Act was also the repeal of Section 84(5) and the insertion of a new Section 86(2), which provided that the managed assets of both types of investment undertakings were explicitly exempted from payment of the capital tax.

16

(17)  Commission Decision of 22 September 2004, State aid N 354/04.

17

(18)  Commission Decision of 13 February 2008, State aid N 480/07.

18

(19)  See point 3(3) of the Authority’s State Aid Guidelines to Business Taxation.

19

(20)  The Court of First Instance has, for example, recognised that a fiscal measure does not lose its character as being selective just because it is based on objective criteria, see judgment of the CFI of 6.3.2002, T-127/99,T-129/99 and T-148/99, Diputación Foral de Álava e.a. v Commission [2002] ECR II-1275.

20

Diputación Foral de Álava e.a

Commission

(21)  Case C-308/01 GIL Insurance and Others [2004] ECR I-4777, paragraph 68. See also Case C-143/99 Adria-Wien Pipeline [2001] ECR I-8365, paragraph 41, Case C-409/00 Spain v Commission [2003] ECR I-1487, paragraph 47.

21

GIL Insurance and Others

Adria-Wien Pipeline

Spain

Commission

(22)  Joined Cases E-5/04–E-7/04 Fesil and others v the Authority, cited above, paragraphs 82 et seq.

22

Fesil and others

the Authority

(23)  Both types of investment undertakings must keep the company’s own assets separate from the managed assets of the investors, held in the deposit bank; and in bankruptcy proceedings, the own assets are at the disposal of the creditors for both investment funds and investment companies.

23

(24)  Favourable tax rates for domiciliary companies have not been the subject of an investigation by the Authority as the provisions pre-dated the EEA Agreement.

24

(25)  Quoted from an expert opinion submitted by the Liechtenstein authorities on the legal forms of investment undertakings and the respective taxation they were subject to (Section DII, b.ii.3).

25

(26)  Case C-8/03, Banque Bruxelles Lambert SA (BBL) v Belgian State [2004] ECR. I-10157, paragraphs 42 and 43. The judgment was given in the area of taxation, however the Authority considers that the problem in question is the same under the State aid rules. See also Commission Decision of 6 September 2005 on the Italian scheme for collective investments in transferable securities (OJ L 268, 27.9.2006, p. 1) (hereafter Italian collective investment scheme).

26

Banque Bruxelles Lambert SA (BBL)

Belgian State

(27)  See also Commission Decision of 6 September 2005 on the Italian scheme for collective investments in transferable securities (OJ L 268, 27.9.2006, p. 1) and Case T-445/05 Associazione Italiana del risparmio gestito, e.a. v Commission, paragraphs 127 ff.

27

Associazione Italiana del risparmio gestito, e.a.

Commission

(28)  Case T-214/95 Vlaamse Gewest v Commission [1998] ECR II-717, paragraph 46. Case T-424/05, Italy v Commission, judgment of 4 March 2009, paragraphs 154 ff.

28

Vlaamse Gewest

Commission

Italy

Commission

(29)  See Italian collective investment scheme, paragraph 45, upheld by the Court of First Instance in Case T-445/05 Associazione italiana del risparmio gestito v Commission cited above, and T-424/05 Italy v Commission.

29

Associazione italiana del risparmio gestito

Commission cited above

Italy

Commission

(30)  See Case T-424/05, cited above, paragraph 156.

30

(31)  In line with case-law (see Case T-424/05, cited above, paragraph 160), the Authority need not demonstrate that all investment companies operate in international markets. It is sufficient in the assessment of aid schemes to assess their general characteristics without examining each individual application.

31

(32)  Case 173/73 Italy v Commission [1974] ECR 709.

32

Italy

Commission

(33)  Case 248/84 Germany v Commission [1987] ECR 4013.

33

Germany

Commission

(34)  Where tax reliefs on industrial production were abolished following a decision of the Authority dated 1 December 1994, No 213/94/COL.

34

(35)  Authority Decision No 106/95/COL concerning a tax exemption from a basic tax for glass packaging dated 31 October 1995.

35

(36)  Authority Decision No 145/97/COL of 14 May 1997 concerning appropriate measures regarding regionally differentiated social security taxation.

36

(37)  
  OJ C 2, 6.1.1998, p. 1.

37

(38)  The Commission issued its notice in November 1998 (OJ C 384, 10.12.1998). A similar notice was incorporated into the Authority’s State Aid Guidelines as Chapter 17B in June 1999.

38

(39)  See, among others, Case C-387/92 Banco Exterior de España SA v Ayuntamiento de Valencia [1994] ECR I-877.

39

Banco Exterior de España SA

Ayuntamiento de Valencia

(40)  Paragraph 18 of the notice.

40

(41)  See Section J of the Code of Conduct.

41

(42)  Joined Cases T-346/99, T-347/99 and T-348/99 Territorio Histórico de Álava and others v Commission, paragraph 84.

42

Territorio Histórico de Álava and others

Commission

(43)  Joined Cases T-254/00, T-270/00 and T-277/00 Hôtel Cipriani v Commission, Judgment of the Court of First Instance, 28.11.2008 (citing joined Cases T-195/01 and T-207/01 Government of Gibraltar v Commission [2002] ECR II 2309, paragraph 130).

43

Hôtel Cipriani

Commission

Government of Gibraltar

Commission

(44)  Case C-5/89, Commission v Germany [1990] ECR I-3437, paragraph 14; Case C-169/95, Commission v Spain [1997] ECR I-135, paragraph 51; Case C-24/95, Land Rheinland-Pfalz v Alcan Deutschland GmbH [1997] ECR I-1591, paragraph 25.

44

Commission

Germany

Commission

Spain

Land Rheinland-Pfalz

Alcan Deutschland GmbH

(45)  Case C-1/09 Centre d'Exportation du Livre Français (CELF), Ministre de la Culture et de la Communication v Société Internationale de Diffusion et d'Édition, judgment of 11.3.2010. See also Case C-91/01 Italy v Commission [2004] ECR I-4355, paragraphs 66 and 67.

45

Centre d'Exportation du Livre Français (CELF), Ministre de la Culture et de la Communication

Société Internationale de Diffusion et d'Édition

Italy

Commission

(46)  Case C-5/89 Commission v Germany [1990] ECR I-3437, paragraph 14 and Regione Autonoma della Sardegna v Commission [2005] ECR II-2123, paragraph 64.

46

Commission

Germany

Regione Autonoma della Sardegna

Commission

(47)  Case C-5/89 Commission v Germany [1990] ECR I-3437, paragraph 14, Case C-169/95 Spain v Commission [1997] ECR I-135, paragraph 51.

47

Commission

Germany

Spain

Commission

(48)  Joined Cases C-183/02 P and C-187/02 P Demesa and Territorio Histórico de Álava v Commission [2004] ECR I-10609, paragraph 51.

48

Demesa and Territorio Histórico de Álava

Commission

(49)  Case T-290/97, Mehibas Dordstelaan v Commission [2000] ECR II-15 and Cases C-182/03 and C-217/03, Belgium and Forum 187 ASBL v Commission [2006] ECR I-05479, paragraph 147.

49

Mehibas Dordstelaan

Commission

Belgium and Forum 187 ASBL

Commission

(50)  According to the report to the Liechtenstein Parliament regarding the EEA Agreement (Bericht und Antrag der Regierung an den Landtag des Fürstentums Liechtenstein betreffend das Abkommen über den Europäischen Wirtschaftsraum vom 2. Mai 1992
  ) the Liechtenstein authorities acknowledge that in principle tax reductions constitute State aid within the meaning of Article 61(1) of the EEA Agreement and that a notification of tax measures in Liechtenstein may be necessary under certain circumstances (page 134). See also explanations in the report to the Liechtenstein Parliament regarding the participation in the European Economic Area (Bericht und Antrag der Regierung an den Landtag des Fürstentums Liechtenstein betreffend die Teilnahme am Europäischen Wirtschaftsraum (EWR) 2. Teil, Nr. 1995/1), page 168.

50

Bericht und Antrag der Regierung an den Landtag des Fürstentums Liechtenstein betreffend das Abkommen über den Europäischen Wirtschaftsraum vom 2. Mai 1992

Bericht und Antrag der Regierung an den Landtag des Fürstentums Liechtenstein betreffend die Teilnahme am Europäischen Wirtschaftsraum (EWR) 2. Teil

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