Action brought on 2 September 1998 by the Government of Norway against the EFTA Surveillance Authority (Case E-6/98) (98/C 331/12)

An action against the EFTA Surveillance Authority was brought before the EFTA Court on 2 September 1998 by the Government of Norway, represented by Ingvald Falch, Advocate, Office of the Attorney General (Civil Affairs), and Jan-Bugge Mahrt, Assistant Director General, Royal Ministry of Foreign Affairs, PO Box 8012 Dep., 0030 Oslo, Norway, acting as agent and co-agent, respectively.

The applicant's claims are that:

'1. The decision of 2 July 1998 of the EFTA Surveillance Authority concerning the social security taxation scheme in Norway is annulled.

2. The EFTA Surveillance Authority shall bear the Applicant's costs connected with the action before the EFTA Court`.

Factual background

- Under the National Insurance Act of 28 February 1997 (Folketrygdloven), all persons working in Norway are subject to a compulsory insurance scheme under which employees and employers pay social security contributions, calculated based on gross salaries. The scheme covers benefits such as pensions, rehabilitation, medical care, wage compensation and unemployment benefits. Contributions to the scheme are collected in the form of a tax on income,

- a system of regionally differentiated tax rates for employers was introduced in 1975, dividing the country into five tax zones for the purpose of the scheme:

Zone 1: Central municipalities in southern Norway: 14,1 %

Zone 2: Rural districts in southern Norway: 10,6%

Zone 3: Coastal area mid-Norway: 6,4 %

Zone 4: Northern Norway (except zone 5): 5,1 %

Zone 5: Spitzbergen/Finnmark/Northern part of Troms: 0 %.

- the contribution rate is linked to the municipality in which the employee resides, and not the location of the employer. Thus, an employer may benefit from a lower contribution rate, despite being located in a higher contribution area,

- the scheme applies automatically on the basis of objective criteria and is not limited in time. Additionally, it applies without distinction to all sectors of economic activity, all sizes of enterprise, and to the public and private sector, except for the national government which pays the maximum, regardless of where the employee resides. The scheme also applies to non-Norwegian employees residing in Norway, provided they are covered under the Norwegian social security scheme. Foreign employers must also contribute if persons covered by the Norwegian social security scheme are working for them,

- in letters dated 16 June and 30 August 1995, the EFTA Surveillance Authority asked the Norwegian Government to submit full details on the existing scheme for social security taxation in Norway, in particular on the system of regionally differentiated social security contributions paid by employers, with a view to examining whether the scheme constituted State aid within the meaning of Article 61(1) of the EEA Agreement and, if so, whether it might be upheld under Article 61(3) of the EEA Agreement,

- the Norwegian Government responded in a letter of 19 September 1995,

- in the period between the spring of 1996 and the spring of 1997, the EFTA Surveillance Authority and the Norwegian authorities held a number of informal meetings aimed at elucidating the nature of the Norwegian scheme for social security taxation,

- in a letter dated 14 May 1997, the EFTA Surveillance Authority concluded that the scheme of regionally differentiated social security contributions in Norway constituted State aid within the meaning of Article 61(1) that could not be upheld under Article 61(3) EEA. In the same letter, the EFTA Surveillance Authority proposed a number of appropriate measures to make the scheme compatible with the Agreement by virtue of Article 61(3) EEA. The Norwegian Government was asked to notify its agreement or disagreement with the proposed measures within two months,

- in a letter dated 11 July 1997, the Norwegian Government stated that it did not concur with the position of the EFTA Surveillance Authority maintaining, inter alia that the differentiated social security contributions were part of the general taxation system and thus fell outside the scope of Article 61(1) EEA,

- following the reply from the Norwegian Government, the EFTA Surveillance Authority decided on 19 November 1997 to open the formal investigation procedure. The Norwegian Government was informed of the decision and invited to submit its comments. The Commission was also informed,

- the Norwegian Government submitted its comments in a letter of 23 January 1998,

- the Commission submitted comments in a letter of 5 March 1998,

- the Norwegian Government submitted comments to the comments of the Commission by letter of 25 March 1998,

- on 2 July 1998, the EFTA Surveillance Authority rendered Decision No 165/98/COL, in which it found that the scheme of regionally differentiated contribution rates for employers was incompatible with the EEA Agreement.

Pleas in law and main arguments adduced in support

- The applicant argues that, unlike the EC Treaty, the EEA Agreement does not contain any provisions for harmonisation of the tax schemes of the Contracting Parties. In the absence of common rules, each State may draw up and implement a tax scheme according to its own policy choices. A social security taxation scheme may fall within the scope of Article 61(1) of the EEA Agreement, but does not automatically do so, and it does not in any event apply to the Norwegian system,

- the EFTA Surveillance Authority has applied the criteria of 'general measure` under Article 61(1) of the EEA Agreement incorrectly to the Norwegian social security taxation scheme. The case law of the European Court of Justice regarding State aid has consistently held that a fundamental and crucial element in the notion of aid is the involvement of some sort of tangible and gratuitous benefit or advantage for someone. Taxation is not usually viewed as conferring a benefit for private parties; on the contrary, it is considered by most to be a burden,

- furthermore, taxation schemes often involve distinctions and differential treatment which can vary according to sector, region or other factors. These selective elements, which are present in all modern States, are not only normal but are necessary and inherent elements of any taxation system, as they enable the State in question to pursue policy objectives it has set out for itself. The policy choices of a State do not fall within the scope of Article 61(1) of the EEA Agreement,

- Article 61(1) of the EEA Agreement does not prohibit selective taxation, although it does impose some limits as to what criteria a given form of selective taxation may be based on. A justification test has emerged in the case law of the European Court of Justice, under which the object and general structure of the taxation are examined to determine whether there is objective justification for the scheme in question,

- Article 61(1) of the EEA Agreement prohibits State aid which distorts competition 'by favouring certain undertakings or certain goods`, which could be interpreted as favouring undertakings or goods in particular areas. However, the European Court of Justice has never ruled that a taxation measure is automatically prohibited under Article 61(1) EEA because it applies only to a particular geographical area. Consequently, the EFTA Surveillance Authority is wrong in stating that the selectivity criterion is fulfilled,

- the Commission has also interpreted the State aid rules to mean that a measure will not automatically fall within the scope of the State aid rules simply because it favours certain firms or sectors more than others. The assessment must be made on a case-by-case basis, according to the nature and general scheme of the system,

- thus, the fact that the Norwegian scheme creates different effects for different enterprises does not automatically make it fall foul of the State aid rules. One of the main objectives of the Norwegian social security taxation scheme is to create more equal standards of living regardless of place of residence, including promoting employment and settlement in outlying areas. Granting employers lower social security tax rates helps to fulfil that objective. The goals of maintaining settlement patterns, income equalisation and employment equalisation throughout the country must be viewed as a legitimate aim capable of being justified, despite the fact that the effects of the scheme may differ from one undertaking to another,

- it must be borne in mind that the Contracting Parties to the EEA Agreement have retained the power of exercising taxation and labour policy. There can be no doubt that the scheme is an appropriate means of pursuing these policy considerations. Additionally, there are no alternative means which are less restrictive of trade that might be employed to equal effect,

- as regards the criterion that the aid is prohibited 'in so far as it affects trade between Contracting Parties`, the EFTA Surveillance Authority has misinterpreted that it is fulfilled, since in many cases trade between Contracting Parties will not be affected and, even if it is in other cases, the effect on intra-EEA trade will fall below the minimum thresholds. Moreover, the fact that some undertakings may benefit to an extent above the thresholds while others fall below those thresholds does not automatically invalidate the entire scheme,

- as regards the criterion 'distorts competition`, the EFTA Surveillance Authority has incorrectly assumed that all undertakings which benefit from the lighter tax burden in certain regions of Norway are in fact exposed to competition. Large segments of the public sector and undertakings operating under legal monopolies are cases in point,

- the EFTA Surveillance Authority has exceeded its powers, since it has used Article 62 of the EEA Agreement and Article 1 of Protocol 3 to the Surveillance and Court Agreement to declare that the Norwegian Government was under an obligation to notify aid that in fact falls outside the scope of Article 61(1) EEA. The consequences of this decision are quite significant, inter alia, because it would impose on Norway the obligation to notify regional aid, including transport aid, which is unquestionably compatible with the EEA Agreement,

- the EFTA Surveillance Authority has also failed to state adequately the reasons for its decision, as required by Article 16 of the Surveillance and Court Agreement. It has not explained why the system is not sufficiently general in nature and has not set out why aid to undertakings sheltered from international competition is incompatible with the EEA Agreement. Thus an essential procedural requirement has been infringed within the meaning of Article 36 of the Surveillance and Court