115

After describing the content of the measure at issue in recitals 113 to 123 of the contested decision, the Commission examined, in recitals 126 to 154 thereof, the applicability of the private investor test to that measure, in the following terms: ‘(126) To determine whether the principle of the prudent private investor in a market economy is applicable, an overall assessment must be made of whether the French Republic granted the tax exemption in its capacity as shareholder or in its capacity as public authority. In its judgment [in Case C‑124/10], the Court of Justice set out a number of factors that should be taken into account in this overall assessment. These factors, examined in more detail below in relation to the circumstances of the case, are: the Member State must, where there is doubt, establish unequivocally and on the basis of objective and verifiable evidence that the measure implemented falls to be ascribed to the State acting as shareholder; that evidence must show clearly that, before or at the same time as conferring the economic advantage, the Member State concerned took the decision to make an investment, by means of the measure actually implemented, in the public undertaking; in that regard, it may have to produce evidence showing that the decision was based on economic evaluations comparable to those which, in the circumstances, a rational private investor in a situation as close as possible to that of the Member State would have had carried out, before making the investment, in order to determine its future profitability; the Commission may refuse to examine evidence established after the decision to make the investment in question; the nature and subject matter of the measure are relevant in that regard, as is its context, the objective pursued and the rules to which the measure is subject; application of the private investor test must make it possible to determine whether, in similar circumstances, a private shareholder would have subscribed, to an undertaking in a situation comparable with that of EDF, an amount equal to the tax due. (127) In their comments of 11 December 2002 referred to in recital 42, the French authorities argued that it was thought to be more efficient and more neutral for EDF to allocate the grantor rights directly, and in their full amount, to own funds, without paying corporation tax. However, none of the documents prior to or contemporaneous with the supposed decision not to levy tax, that were submitted by [the French Republic] or EDF in support of their comments on the decision to extend the formal investigation procedure, made any direct or indirect mention of the supposed decision to invest, with its implications, benefits or costs, or of the corresponding decision to increase the amount of contributed capital by not levying tax. The documents submitted by the French authorities as described in recitals 87 to 108 do not mention, still less analyse, the benefits or costs for the State of the decision not to levy corporation tax on the part of the grantor rights reclassified as capital under [Law No 97-1026]. (128) It is for [the French Republic], in the event of any doubts, such as those formulated by the Commission, about the applicability of the prudent private investor in a market economy test, to establish unequivocally and on the basis of objective and verifiable evidence that the measure implemented falls to be ascribed to the State acting as shareholder. However, in the light of the evidence provided, the decision to make an investment by way of waiving the tax EDF should have paid must be deemed to have been taken tacitly, without a reasoned legal act that would reveal the precise content of the decision, its grounds and legal basis or by what authority and on what date it was taken. In the light of the factors set out by the Court of Justice for establishing the applicability of the prudent private investor in a market economy test, namely the need for objective and verifiable evidence, a measure that has actually been implemented or economic evaluations carried out in advance, the absence of references or material evidence must be regarded as an initial indication that the test is not applicable. (129) In the absence of any documentary evidence tracing the supposed decision, the investment measure that the French State might have taken needs to be described. In this case, the Court of Justice found that application of the private investor test must make it possible to determine whether, in similar circumstances, a private shareholder would have subscribed FRF 5.88 billion to an undertaking in a situation comparable to that of EDF. An investment by [the French Republic] would constitute waiving the collection of this amount with a view to making a profit greater than the resources initially invested. The analysis must therefore be made with reference to the amount of corporation tax due. (130) The absence of any specific studies, references or analyses of the profitability of the investment in the amount of the tax exemption makes it difficult to isolate the effects of the supposed investment in the information submitted by [the French Republic] or by EDF. This difficulty is not insurmountable if, for the purposes of analysing most of the factors relevant for determining the applicability and the application of the prudent private investor principle, the additional capital contribution to EDF equivalent to the amount of unpaid tax is regarded as benefiting from the rights attaching to all the capital contributions. So, if the capital contributions were remunerated at a certain rate, this rate had to be, and indeed was, applied to the amount of unpaid tax. If, on the other hand, the marginal or incremental effect is taken into account, the information provided by [the French Republic] or EDF does not at first sight demonstrate that the amount of contributed capital was increased by the amount of unpaid tax. (131) The non-collection of the tax had the effect of increasing the capital contribution to EDF, and thus EDF’s own funds, by an additional FRF 5.88 billion, within the overall amount of FRF 14.119 billion of reclassified provisions. These provisions, which did not correspond to a prior injection of fresh capital by the State as shareholder, were reclassified as capital contributions and posted under the corresponding item in the upper part of EDF’s balance sheet, together with the other equity items (paid-in capital, contributed capital, etc., see Table 2). Without the tax exemption, EDF’s own funds, which were to reach FRF 79.8 billion in 1997, would have reached FRF 72.1 billion, according to the documents examined at the time (see Table 2, recital 100). Instead of FRF 50.7 billion, the State contributions to EDF’s capital would have stood at FRF 44.8 billion. Supposed investment decision: factors for analysis (132) First, as pointed out by the French authorities, given that the amount in unpaid tax was included in the capital contribution base, and that this was remunerated at a fixed rate (3%), the absolute value of the remuneration to the State was increased by the tax exemption (or non-collection, see recital 83). However, the increase in the capital contribution by the amount of the tax exemption did not have the effect of increasing the State’s remuneration in relative terms. It is common ground that the remuneration for the capital contributed to EDF by the State was laid down as from Decree No 56-1360 of 30 December 1956 (recitals 18 and 103). Different types of remuneration were therefore included in the contracts which preceded and succeeded the 1997-2000 contract for services, as set out in recitals 93 and 102. The principle of remuneration pre-dated the supposed decision and was maintained afterwards. (133) Moreover, an examination of the facts demonstrates that the tax exemption had the effect of reducing the State’s return on its investment. The report produced by the National Assembly in September 1997 unequivocally shows that the increase in the total capital contribution was the reason for the reduction in the remuneration so as not to “increase the payment burden on EDF” (recital 103). The Senate report confirms this deliberate reduction by the public authorities (recital 108). (134) Between 1991 and 1996, EDF gave the State a higher return for a lower capital contribution base compared with what was offered between 1997 and 2000 for a higher base. The average annual remuneration in absolute terms of FRF 3.41 billion for 1991-1996, when the amount of the capital contribution came to FRF 36.6 billion, was well above the FRF 2.35 billion put in place for a base increased to FRF 50.7 billion during the 1997-2000 period (recitals 92 and 102-103, Table 3). It follows that the current marginal return on the FRF 5.88 billion increase in the amount of contributed capital expected in the 1997-2000 period by the State as shareholder was lower than in the period 1991-1996. (135) The French authorities saw to it that the remuneration paid to the State on its capital contribution fell, in absolute and relative terms, as the contribution base increased, as unequivocally established by the National Assembly and Senate reports. It follows that, by increasing the total capital contribution with a lower return than the contribution which pre-dated [Law] No 97-1026, the decision to grant a tax exemption did not necessarily constitute an investment. (136) Second, the way in which the remuneration on the increased capital contribution was determined is not what a prudent private investor in a market economy might have chosen. (137) As demonstrated by the references contained in the letters from the line ministers and the parliamentary reports referred to in recitals 97, 103 and 106, in making their 1997 scrutiny of the French State’s remuneration after the restructuring of EDF’s balance sheet, the French authorities took account both of the return on the capital contributions due to the State as shareholder in the strict sense, and of the expected amount of tax that the State, acting as a tax-raising public authority, would collect after 1997 following several years of tax loss carry-over. As set out in recital 93, the remuneration on the capital contributions was in its turn deductible from income tax, by way of exception to the ordinary law. (138) The concept examined and adopted by the French authorities in 1997 was therefore one of the overall amount collected from EDF, tax and shareholder remuneration combined. The overall amount of tax collected from EDF, above and beyond the contested exemption, under the State’s tax-raising powers, and the remuneration paid to the State as shareholder, are mixed up together in the evidence submitted by the French authorities. Nevertheless, in their view, this evidence points to the existence of an investment decision. On the contrary, the fact that the payment of tax due by EDF to the State as revenue collector, including by the regularisation and discharge of the tax that had not been collected prior to [Law] No 97-1026, was constantly taken into account for the purposes of examining and setting the remuneration to the State as shareholder tends to indicate that the disputed tax exemption was adopted by the State acting as a public authority and not as an investor. (139) This impression is reinforced by the nature of the objectives set for EDF by the State in 1997 in the light of the concerns and goals of a public authority, not a shareholder. These concerns are reflected in the setting of EDF’s tariffs, as agreed in the 1997-2000 contract for services, under which the State as shareholder was remunerated. The State asked EDF to help boost the competitiveness of French industry and the purchasing power of French households. Not only would such concerns have been alien to a prudent private investor in a market economy, they would have run counter to the hypothetical investor’s financial interests. The same goes for the objective laid down for EDF in the 1997-2000 contract for services to put in place an ambitious policy to support economic activity and employment by helping local authorities (recitals 89 and 95). Economic evaluations to determine the profitability of the supposed investment (140) The contract for services between EDF and the State signed on 8 April 1997 contained a prior evaluation of the financial scenario, including projections of the return for the State as shareholder on the investment in the form of contributions to EDF’s capital (recital 92). The documents and analyses put forward by the French authorities relate to the expected effects of reclassifying all the provisions constituted by EDF, whether mandatory or not, whether resulting from [Law] No 97-1026 or not. The only systematic evaluation presented by the French authorities in the EDF memo of 18 February 1997 (recital 92) is general and confined to the statutory remuneration on the capital contributions, including those pre-dating the restructuring of EDF’s balance sheet, but excluding, for example, remuneration on other capital or own funds. (141) None of the documents submitted by France or by EDF demonstrate that the supposed investment decision, namely to make a bigger capital contribution to EDF by waiving tax on the reclassification, was the subject of specific scrutiny, study or analysis. However, given the amounts involved, a prudent private investor in a market economy would in all probability have conducted a financial and economic analysis of the investment before deciding whether, in view of the statutory return on the capital contributions, the amount of FRF 5.88 billion in tax exemption was needed for the undertaking to guarantee the long-term profitability of its overall investment and for the shareholder to be sufficiently remunerated. This type of prior economic study, cited by the Court of Justice in paragraph 84 of [the judgment in Case C‑124/10] as one of the conditions for the private investor test to apply, is absent. (142) It is particularly striking that, apart from the remuneration to be paid to the State over the 1997-2000 period, no study of the remuneration or return in the longer term was carried out, although [the French Republic] claims precisely to have made a long-term investment. However, a prudent private investor in a market economy would not have neglected to conduct an analysis of the profitability of the investment for the period after the year 2000. (143) While it is reasonable to suppose that a prudent private investor in a market economy would have taken into account the effects of the reduction in EDF’s debt ratio, it must be noted that the advantage to EDF of lower-cost borrowing on account of an improved debt/equity ratio is referred to in general terms in some of the documents furnished by [the French Republic] (recitals 101 and 105) and EDF. However, none of the documents mentions the advantages and the profitability for the State as shareholder of a reduction in EDF’s borrowing costs or a lower debt ratio. According to the figures produced at the time as set out in recital 101, EDF’s net debt/equity ratio was to drop to 148% as a result of the new capital contribution overall, which came to FRF 50.7 billion, including the FRF 5.88 billion by way of the contested exemption. Without the tax exemption, the ratio would have been around 163%, or some three times lower than the ratio of 480% before [Law] No 97-1026. Considered separately from the other effects of the reclassification of the various provisions, the contribution of the tax exemption to the improvement in the ratio is negligible and it is very doubtful that it had a real effect in terms of reducing the cost of borrowing for EDF (recitals 170 to 172). In any event, the documents submitted by the French authorities do not mention or analyse in investment terms the return for the shareholder resulting from a ratio of 148%, still less a ratio of 163%. In this connection, there are no prior economic evaluations comparable to those which a rational private investor in a market economy would have had carried out, as referred to by the Court of Justice in paragraph 84 of [the judgment in Case C‑124/10]. (144) The economic study submitted by EDF in support of its comments (recitals 69-70) does not find that [the French Republic] acted as an investor rather than a public authority. The study was produced after the supposed investment decision taken in 1997 and was not examined by the authorities responsible for taking such a decision. For this reason alone, the study is not admissible as evidence, as set out by the Court of Justice (recital 126, paragraph 104 of the judgment [in Case C‑124/10]). The fact that the study used authentic basic data available at the time does not invalidate this conclusion. The study was commissioned to support the case following the extension of the investigation procedure in May 2013 and the conclusions it would reach were apparently known to EDF in July 2013, although the study dates from October 2013. Other grounds also invalidate the quantified findings of the study, and consequently undermine the conclusions that EDF draws from it in support of its comments; these grounds are: the study uses basic data almost exclusively from the time and applies widely recognised methodological approaches for evaluating enterprise value, subject to the major reservations set out below. For all that, it constitutes a particularly complex economic evaluation, following relatively thorough data research, which took some three months to carry out and validate. This complex process comprised successive and various methodological choices, some of which are questionable. Without this process, it is quite impossible, from the basic data drawn from scattered and diverse sources, to form an overall view or make a quantified projection of the profitability that the French State could expect in 1997, as the study does. However, the Court of Justice requires the private investor test to be based on evaluations which were foreseeable at the time when the decision to make the investment was taken (paragraph 105 of the judgment [in Case C‑124/10]). Contrary to what is claimed by EDF, the very fact that, with data available in 1996-1997, the relevant authorities of the French State did not themselves carry out or commission a study on this scale and with this level of complexity indicates that the profitability of the investment for the shareholder was not the sole relevant consideration for the French authorities when they took their decision; the study analyses the conduct of the French State in the light of the private investor principle using information and hypotheses that are very different from those outlined in recitals 87 to 108 and which, according to the French authorities, formed the basis for the supposed decision. However, it is not EDF which took the investment decision, and, according to the Court of Justice (paragraphs 82 and 83 of its judgment [in Case C‑124/10]), it falls to [the French Republic] to produce evidence of the nature and context of the decision taken. Since [the French Republic] alleges that it was in the light of the information and data submitted by it that it took its decision, the study, and EDF, are de facto substituting themselves for the alleged investor and claiming to know better than the French State the concerns and information that supposedly underpinned the decision taken and the hypotheses used to reach it. As such, the study is based on speculation and conjecture with respect to the data, information and hypotheses that the French authorities might have taken into account (among other possible options) in 1997 and has no force as evidence in 2015 (or October 2013, when it was carried out) to explain the decision taken by the French authorities in 1997, which these authorities themselves explain with reference to different data and hypotheses; the study’s value as evidence is undermined still further by the fact that, to reach the findings outlined in recital 70, the study relies on hypotheses which are arbitrary or random, or uncorroborated by the facts, or counter to the information contained in the evidence provided by the French authorities and which, according to them, illustrates that the private investor test is applicable and does in fact apply in this case. So, first, the study conjectures that after 2000, the remuneration paid to the State as shareholder would not be regulated by decree and contained in a contract between the State and EDF but would be set by reference to the dividends which other undertakings in the sector paid in 1996-1997. However, the remuneration on the capital contributions to EDF had been regulated by decree since 1956 (recital 102) and was statutory and reflected in the multiannual contracts before and after 1997, in the light of considerations unrelated to the dividends paid by undertakings in the sector operating in markets other than France (recitals 94 and 95). Likewise, and in second place, the study, with no good reason, reintroduced into EDF’s income statement provisions from EDF’s company accounts worth FRF 11.6 billion (before tax) and FRF 7.3 billion (after tax), artificially increasing EDF’s value by that amount without taking account of the information which was available and the developments which were foreseeable in 1997 with respect to EDF’s commitments under its staff pension scheme (recitals 168-169); thirdly, the increase in the value of EDF resulting from the increase in return and results is calculated in the study on the basis of the “market expectations” in 1997. However, the French authorities had specific and quantified projections for EDF’s revenue and income for 1997 to 2000, validated as part of the process of drawing up the contract for services for the same period and stated that they relied on these projections and data to take their decision (recitals 78-79, 90, 94, 96); they also had in 1997 detailed knowledge of the undertaking and its financial prospects (recital 77). The use of “market expectations” from third parties to estimate EDF’s value in these circumstances is neither reliable nor consistent with the arguments put forward by [the French Republic] to explain the decision which its authorities are supposed to have taken, all the more so since the French authorities argue that most of EDF’s business in 1997 was conducted in France subject to regulated tariffs (recital 85). Moreover, these tariffs were set at a low level with a view to boosting the competitiveness of French industry and the purchasing power of French households (recitals 89 and 95). The study fails to explain, still less to justify, why the remuneration, dividends and results of listed companies which had no significant presence in France and operated in markets subject to different competitive and regulatory constraints (such as Endesa, Gas Natural and Union Fenosa in Spain, RWE, EON and Verbund in Germany, Fluxys in Belgium, etc.) should determine the results, remuneration and dividends of EDF, which is one of the hypotheses on which the findings set out in recital 70 are based; lastly, and in fourth place, the study postulates with no justification that increasing the capital contribution to EDF in 1997 was, at least potentially, equivalent to acquiring a liquid financial asset. However, in 1997 EDF was a public industrial and commercial establishment with no share capital (recital 19), with the French authorities and EDF affirming at the time that it would retain this status in the future (recitals 95, 105). The arbitrary nature of this postulation, on which the findings of the study none the less crucially depend, is demonstrated in more detail in recitals 179 to 181. Nature and subject matter of the measure, its context and the rules to which it is subject (145) The Court of Justice states that the nature of the measure is one of the relevant factors to take into account when ascertaining whether the private investor principle is applicable (paragraph 86 of [the judgment in Case C‑124/10]). The decision to contribute additional capital to EDF by waiving the tax on the reclassification of the irregular RAG provisions is both an accounting decision on moving amounts between different items on EDF’s balance sheet (recitals 100 and 105) and a tax decision, since the authorities responsible deemed that the corporation tax should be levied before reclassification (recital 35), even though tax was paid on other reclassified accounting provisions. Contrary to what is claimed by the French authorities, it has not been established that the two accounting and tax strands are indissociable within a single measure put in place by [Law No 97-1026]. (146) Article 4(2) of the [law] provides that the value of the assets in kind allocated under concession to the RAG and appearing as liabilities on EDF’s balance sheet should be entered, net of the corresponding revaluation reserves, under the item “contributed capital” (recital 28). It could be concluded that, under the [law], any revaluation reserves aside, no further accounting or tax treatment was to reduce the value entered as a capital contribution to EDF. However, in accordance with Article 34 of the … Constitution [of the French Republic], the decision to levy tax or not is not a matter regulated by law, and [Law] No 97-1026 could not therefore legitimately settle this question. Under this article, Parliament’s legislative powers in tax matters are confined to setting the base, rates and collection procedures for tax of all kinds. EDF paid corporation tax on some accounting provisions and not on others following the same reclassification operation provided for in the [law]. (147) Furthermore, the preparatory documents submitted by the French authorities and referred to in recital 104 show that the Council of State took the view in 1997 that non-legislative provisions should be eliminated from the draft law; a draft amendment designed to limit the amounts that the State could collect from EDF under the [law] was also rejected. Lastly, the line ministers took the view in April 1997 that the detailed arrangements for implementing EDF’s restructuring, on both the accounting and the tax fronts, should be the subject of further discussions between the supervising authorities and the undertaking (recital 98). (148) These implementation arrangements, detailed and quantified in the [letter of 22 December 1997], following the adoption of the [law] (recital 31), suggest that the tax elements were dissociable from the provisions of [Law No 97-1026]. In their letter the ministers explain the restructuring of the upper part of EDF’s balance sheet pursuant to Article 4 of [Law No 97-1026] and appear to reach a tacit decision on the tax implications of the restructuring, without there being any question of a profitable investment or of any mandatory requirements of the law. (149) As regards the context of the measure, this being one of the factors cited by the Court of Justice for the purposes of ascertaining the applicability of the private investor test, the preparatory meetings and supporting documents dating from the period, and which resulted in the contract for services between the state and EDF signed on 8 April 1997, demonstrate that the reclassification of the provisions took place in the light of the prospect of the partial liberalisation of energy markets in the [European Union], planned as from 1996. Hence the concern for EDF’s activities to become more international evident in the 1997-2000 contract and the preparatory documents, as well as the parliamentary documents. The contract itself presupposes that its implementation will require a regularising legislative measure such as that laid down in [Law] No 97 1026, thereby establishing a de facto link between the objectives of the contract and of the legislator. However, neither the contract concluded in April 1997 nor the preparatory documents or exchanges with EDF’s line ministries take a position on the precise amount of tax. (150) This context, outlined by the evidence cited by [the French Republic] in its comments, does not, however, establish beyond doubt that the measure could be ascribed to a shareholder making an investment. The need to correct the irregularities identified by the Court of Auditors in October 1994 is also part of the picture. While, on one side, there was a need to correct an accounting irregularity that had allowed EDF to avoid paying corporation tax for years, on the other, the French authorities stressed that the measure did not call into question EDF’s monopoly (recital 105) and that the stable framework allowed by the liberalisation of the market should be maintained (recital 95). Although liberalisation opened up possibilities for expansion into the national markets of other Member States and some measures were included in the 1997-2000 contract for services so that EDF could become more international, the concern of the public authorities to place national undertakings at an advantage through financial support in the early stages of liberalisation was not confined to public undertakings; nor does it constitute typical behaviour by a prudent investor in a public undertaking (151) Lastly, the Court of Justice states that the rules to which the disputed measure is subject are relevant for determining whether it constitutes an investment by the State as shareholder or a prerogative of a public authority. Classing the measure as one or the other may therefore take account of compliance with the rules governing it. The rules governing the investment of tax resources in undertakings like EDF must therefore be examined. Without the measure, the revenue from the uncollected corporation tax would have been paid into the general revenue of the budget of the French State in 1997. Under Article 18 of Order No 59-2 of 2 January 1959 laying down an organic law for budget laws, which was in force at the time of the facts, as all revenue is used to implement all expenditure, all revenue and all expenditure of the State are posted to a single account, called the General Budget. So, tax revenue is posted to the budget for the benefit of the State, and not for the benefit of public undertakings. (152) The budget is subject to the constitutional principle of universality, whereby all revenue and all appropriations are posted as two separate blocks, with no specific link made, for example, between revenue from corporation tax and an allocation such as a capital contribution to a public undertaking like EDF. Of course, the pre-allocation of a tax resource to a legal person other than the State in the form of a subsidy or an investment is possible under French law, where expressly provided for. Article 18 of Order No 59-2 thus provided that, apart from in the case of loans and advances in particular, the allocation of State resources was exceptional and could take place only pursuant to a provision of a budget law, which was for the government to adopt. (153) However, [Law No 97-1026] was not a budget law and as such could not allocate a tax resource to EDF’s capital. Moreover, there do not appear to have been any specific government initiatives to adopt budget-law provisions applicable to the 1997 budget with a view to pre-allocating the revenue from the tax owed by EDF to expenditure by the French State on any investment in EDF’s capital as part of the same budget. The rule allowing the investment of a tax resource constituted for the benefit of the State in a legal entity distinct from the State, such as EDF, does not seem to have been applied here. (154) The vast majority of the evidence described above clearly shows that [the French Republic] did not, either before or at the same time as conferring the economic advantage resulting from the non-payment of the corporation tax, take a decision to make an investment in EDF by way of the tax exemption. Accordingly, the prudent private investor in a market economy principle does not appear to be applicable to this measure. The considerations set out below on the application of the private investor test are therefore provided in the alternative.’