State aid — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty, concerning measure C 54/2001 (ex NN 55/2000) — Foreign income (Text with EEA relevance)
Date: 2001-11-01
Institutions: European Commission
Subjects: Ireland, State aid, control of State aid, corporation tax, foreign enterprise, tax system

C 308/2

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Official Journal of the European Communities

1.11.2001

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty, concerning measure
C 54/2001 (ex NN 55/2000) (cid:151) Foreign income

STATE AID

(2001/C 308/02)

(Text with EEA relevance)

By means of the letter dated 11 July 2001, reproduced in the authentic language on the pages following
this summary, the Commission notified to the Republic of Ireland of its decision to initiate the procedure
laid down in Article 88(2) of the EC Treaty concerning the abovementioned measure.

Interested parties may submit their comments within one month of the date of publication of this
summary and the following letter, to:

European Commission
Directorate-General for Competition
State Aid Greffe
Rue de la Loi/Wetstraat 200
B-1049 Brussels
Fax (32-2) 296 12 42.

These comments will be communicated to the Republic of Ireland. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

SUMMARY

The measure
concerned has not been notified to the
Commission in accordance with Article 88(3) and it has
therefore been entered into the register of non-notified aid
under aid NN 55/2000.

The measure seems to be of indefinite duration. It seems that
each exemption is granted without any deadline. Moreover it
seems that the advantage is not digressive over the period
concerned by the investment.

submits

for Finance

to the Minister

The measure was established by law in 1988 with reference to
foreign subsidiaries and in 1995 with reference to foreign
branches of Irish parent companies, and was not notified as
State aid. According to the measure, every Irish resident
an
company that
investment plan aimed to maintain or increase the employment
level within Ireland, can qualify for the measure. Once qualified
the Minister for Finance issues a certificate that allow the Irish
company exemption from the Irish corporation tax the
dividends or the profits coming from (cid:145)foreign trade(cid:146) subsidiaries
or branches located in a double treaty country. The exemption
replaces the normal double taxation relief, given by way of a
tax credit. This tax credit is subject to some limitations, such as
the amount of corporate tax due in Ireland on the foreign
income concerned.

The measure provides also an exemption on capital gains
arising in these foreign branches: such as for dividends and
branch trading profits,
the exemption replaces the normal
double taxation relief on capital gain, given in form of tax
credit within the limit of the tax due in Ireland.

The measure appears to constitute aid as it fulfils the four
relevant criteria.

Firstly, the measure affords the beneficiaries an advantage that
reduces the costs they normally bear in the course of their
business. According to point 9 of the Commission notice on
the application of the State aid rules to measures relating to
direct business taxation (1), the tax advantage may be granted
through different types of reduction in the company’s burden
and, in particular, through a reduction in the amount of tax.

the advantage must be granted by the State or
Secondly,
through State
resources. The grant of a tax reduction
involves a loss of tax revenue which, according to point 10
of the Commission notice on the application of the State aid
is
rules
equivalent to the use of state resources in the form of fiscal
expenditure.

relating to direct business

to measures

taxation,

(1) OJ C 384, 10.12.1998, p. 3.

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the measure must affect competition and trade
Thirdly,
between Member States. As explained at the point 11 of above-
mentioned Commission notice this condition is fulfilled if the
company concerned carries on activities that
involve inter-
national trade. In the present case, this is the only way to
obtain the benefit by the measure.

Lastly, the measure must be specific or selective in that it
favours (cid:145)certain undertakings or the production of certain
goods(cid:146). Only the companies that submit a plan to maintain
or increase the employment level within Ireland can qualify
for the exemption on income arising in foreign subsidiaries
or branches. According to the point 13, 16 and 18 (with
particular reference to the footnote 10 of point 18) of the
Commission notice, this criteria seems to be fulfilled.

The scheme does not seem to fall within the logic of the
system at
least because it allows a special double taxation
relief, that can involve a tax saving, only for those undertakings
that obtained the prescribed certification from the tax auth-
orities, which use still unclear criteria to issue it.

Furthermore, the State aid in question does not appear to fall
within any of the exceptions laid down in Article 87(2) and (3)
of
the EC Treaty. With regard to the creation of new
employment, the Commission is wondering if the level of aid
does not exceed that which is necessary to provide an incentive
to create jobs (point 21 of the Commission guidelines on aid to
employment (2). The level of
to
the advantage seems not
depend on the number of
jobs created but rather on the
amount of dividends or income repatriated.

the present stage,

Moreover with regard to the maintenance of the employment,
at
the measure seems to constitute an
operating aid (as laid down in points 31 and 32 of Commission
notice on the application of the State aid rules to measures
relating to direct business taxation and guidelines on aid to
employment with particular
to its point 22).
Therefore, in the context of its preliminary assessment under
Article 6 of Council Regulation (EC) No 659/1999 laying down
detailed rules for the application of Article 93 of the EC Treaty,
the Commission has doubts as regards the compatibility of this
tax measure.

reference

In accordance with Article 14 of Regulation (EC) No 659/1999,
all unlawful aid can be subject to recovery from the recipient.

TEXT OF THE LETTER

(cid:145)The Commission wishes
to inform Ireland that, having
examined the information supplied by your authorities on
the aid/measure referred to above,
it has decided to initiate
the procedure laid down in Article 88(2) of the EC Treaty.

taxation with the objective of

In 1997, the Ecofin Council adopted a code of conduct for
direct business
tackling
harmful tax competition (3). Following the commitment taken
by way of this code, the Commission published in 1998 a
notice on the application of State aid rules to measures
stressing its deter-
relating to direct business
mination to apply them rigorously and to respect
the
principle of equality of treatment. The current procedure is
carried out within this framework.

taxation (4)

I. PROCEDURE

1. By letter dated 29 May 2000, the Commission requested
information concerning the foreign income measure giving
a delay of 20 working days. Following your request, the
Commission allowed an extension of the time limit of a
further 20 working days. The Commission received your
for
answer dated 19 July 2000. A second request
information was sent on 8 August 2000, and a reminder
was
sent on 13 September 2000. The Commission
received your second answer dated 20 September 2000.

2. The measure concerned has not been notified to the
Commission in accordance with Article 88(3) and it has
therefore been entered into the register of non-notified aid
under aid NN 55/2000.

II. DESCRIPTION OF THE MEASURE

3. According to the information available to the Commission,
the measure was introduced by law in 1988 with regard to
foreign dividends from foreign subsidiaries of companies
resident in Ireland. The law underwent some clarifying
amendments in 1991.

4. With reference to foreign profits from foreign branches of
Irish companies, the measure was introduced by law in
treatment
1995. This law introduces also a special
for
the
foreign branches
arising
concerned by the measure.

in the

capital

gains

5. Neither part of the scheme is restricted to companies that
carry on particular activities. Both parts apply to all
companies, providing that
in Ireland
and that the subsidiary or the branch concerned is in a
country which has entered into a double taxation treaty
with Ireland.

they are resident

6. In order to qualify, the company has to obtain a certificate
from the Ministry of Finance on the basis of an investment
plan that must be directed towards the creation of at least
40 jobs or the maintenance of employment in Ireland by
trading operations carried on by the foreign subsidiary or
branch.

(2) OJ C 334, 12.12.1995.

(3) OJ C 2, 6.1.1998.
(4) OJ C 384, 10.12.1998, p. 3.

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7. The tax benefit consists in the tax exemption of

the
dividends or profits paid to the parent company resident
in Ireland by the foreign subsidiary or branch. Double
taxation relief
the credit
system. This means that Irish tax on income and gains is
reduced by the foreign tax paid on the income or gains,
within the limit of the tax amount due in Ireland on the
foreign income or gains concerned.

is normally given by way of

In fact

their business.

the measure allows them to
of
exempt such foreign incomes instead of having the credit
system relief for the tax burden suffered abroad. According
to point 9 of the Commission notice on the application of
the State aid rules to measures relating to direct business
the tax advantage may be granted through
taxation,
different
types of reduction in the company’s burden
and, in particular, through a reduction in the amount of
taxes.

exemption replaces

8. The measure provides an exemption on capital gains
like for dividends and
arising in these foreign branches:
branch trading profits,
the
the
normal double taxation relief on capital gain, given in
the tax due in
form of
Ireland. Moreover if the tax burden suffered abroad on
the capital gain concerned is less than the Irish tax, the
excess of
the Irish tax over the foreign tax would be
payable. The measure allows avoiding these limitations of
the credit system.

tax credit within the limit of

9. The measure provides an advantage in cases where the
effective tax expenditure of
the foreign company or
branch is lower than the effective tax level applied to
the Irish parent company. The advantage is different case
by case following the tax expenditure of each case, the
amount of the benefits of the foreign entity (subsidiary/
branch) and the amount of dividends or profits repatriated.
It is not the official tax rate that affects the benefit level
but rather the effective tax expenditure of
the entities
involved case by case.

10. The measure seems to be of indefinite duration.

11.

It seems that the creation of a minimum of 40 jobs has to
be forecasted in the investment plan in order to obtain the
specific certificate from the Ministry of Finance. However
it
it happens in the cases of
investment plans for the maintenance of the employment
level.

is not still clear what

12. The amount of the benefit varies from case to case and

seems undetermined about the total worth.

13.

It seems that each exemption is granted without any
deadline. Moreover it seems that
the advantage is not
digressive over the period concerned by the investment.

III. ASSESSMENT OF THE MEASURE

17. Secondly, the advantage must be granted by the State or
through State resources. If the grant of a tax reduction
involves a loss of tax revenue, as explained in point 10
of the Commission notice on the application of the State
aid rules to measures relating to direct business taxation, it
is equivalent to the use of State resources in the form of
fiscal expenditure.

18. Thirdly, the measure must affect competition and trade
between Member States. As explained in point 11 of
abovementioned Commission notice this condition is
the company concerned carries on activities
fulfilled if
that involve international trade. In the present case, this
is the only way to obtain a benefit by the measure. In fact
the measure concerns not the benefits arising directly in
Ireland from export activities, but the profits repatriated
from foreign subsidiaries or branches involved in inter-
national trade activities. Moreover as explained in point
11 of the abovementioned Commission notice, the fact
that a measure strengthens the position of a competitor
compared with that of other
in intra-
community trade, is deemed to be understood as fulfilling
the requirement of affectation of intra-Community trade.

competitors

19. Lastly, the measure must be specific or selective in that it
favours (cid:145)certain undertakings or the production of certain
goods(cid:146). Only the companies that submit a plan to maintain
or increase the employment level within Ireland and obtain
the prescribed certification qualifies for the exemption on
income arising in foreign subsidiaries or branches. As
explained in points 13, 16 and 18 (with particular
reference to footnote 10 of point 18) of the Commission
notice, this limitation seems to remove the possibility that
this exemption could be considered a general measure.

20. It appears that the measure can affect the pattern of trade
within the EU,
in the aim to increase the employment
level, by promoting the export of goods or services by
way of foreign subsidiaries or branches.

14. The stated purpose of
of

this regime is to maintain or
increase
by
promoting trading operations carried on by foreign
subsidiaries or branches of Irish parent companies.

employment

in Ireland

level

the

15. The measure appears to constitute an aid, as it seems to

fulfil the four relevant criteria.

16. Firstly, the measure affords the beneficiaries and the group
of companies to which they belong an advantage that
reduces the tax costs they normally bear in the course

21. The scheme seems not

least because

to fall within the logic of

the
system at
it allows a special double
that can involve a tax saving, only for
taxation relief,
those undertakings that obtained the prescribed certifi-
cation from the tax authorities. The issue of such a certifi-
cation depends upon still unclear discretionary powers of
the tax authorities in evaluating a proposed investment
plan. As explained in points 21 and 22 of the abovemen-
tioned Commission notice on application of State aid rules
to direct business taxation, any discretionary power must
that can benefit an individual undertaking must be
analysed in details.

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22. It is therefore necessary to determine if such a scheme is
compatible with the common market under the exceptions
laid down in Article 87(2) and (3) of the EC Treaty.

23. It appears that the exceptions under Article 87(2) of the
EC Treaty cannot be applied in this case, as the scheme is
not aimed at the objectives listed in these provisions.

24. Under Article 87(3)(a), aid is considered compatible with
the common market when it is designed to promote the
economic development of areas where the standard of
living is abnormally low or where there is serious under-
employment. Since the aim to promote the employment is
not linked to a particular region of Ireland with a low
standard of
this
living or a high unemployment
to apply. With regard to the
provision seems not
exception laid down in Article 87(3)(a),
the
beginning of 2000 Ireland is no more entirely eligible
for this Article (letter SG D1617 24 February 1998). The
new Irish regional aid map (State aid N 523/1999)
confirms this situation.

level,

since

25. Moreover at

the present stage,

the measure seems to
constitute an operating aid (as explained in points 31
and 32 of the Commission notice on the application of
the State aid rules to measures relating to direct business
taxation and the guidelines on aid to employment (5), with
particular reference to point 22). Operating aid is normally
allowed only in Article 87(3)(a) regions. At present
it
seems that the part of the scheme oriented to the main-
tenance of the employment level can be compatible only
within Article 87(3)(a) exemptions, considering also that it
does not result any link between the amount of aid
granted by the measure
jobs
involved. Moreover at present
result any
cutoff date in the scheme. These criteria are normally
requested in employment
(Commission
guidelines on aid to employment).

and the number of
it does not

aid schemes

26. As regard to the exceptions laid down in Article 87(3)(b)
and (d), the scheme in question does not result to promote
the execution of an important project of common
European interest or to remedy to a serious disturbance
in the economy of Ireland, nor is it intended to promote
culture or heritage conservation.

27. With regard to the creation of new employment,

the
Commission is wondering whether the level of aid does
not exceed that which is necessary to provide an incentive
to create jobs (point 21 of the Commission guidelines on
aid to employment). The level of the advantage does not
seem to depend on the number of jobs created but rather
on the amount of dividends or income repatriated.

28. As regard to the exceptions laid down in Article 87(3)(c)
the measure does not seems to fall within them. They state
that it may be considered compatible aid to facilitate the
development of certain economic activities or of certain
economic areas where such aid does not adversely affect

(5) OJ C 334, 12.12.1995.

that

trading conditions to an extent contrary to the common
interest. At present these condition seems not to be met.
The scheme does not facilitate any particular economic
activity. With regard to the creation of new jobs it
it does not exist any link between the
seems
amount of aid granted by the measure and the creation
of jobs concerned. Moreover it does not result any degres-
sivity in the aid level during the period of existence of the
aid. These criteria are normally requested in employment
to
schemes
aid
employment).

(Commission

guidelines

aid

on

29. Finally it does not result any other appropriate categories
of aid established by a Council decision in accordance with
Article 87(3)(e) that could apply.

30. Since the scheme seems not to be justified by the logic of
the system and also seems not to qualify for any of the
exceptions provided for in the Treaty, in the context of its
preliminary assessment as provided by Article 6 of Council
Regulation (EC) No 659/1999, the Commission has doubts
about the compatibility of the scheme with the common
market.

31.

the

light of

foregoing

considerations,

In the
the
Commission, acting under the procedure laid down in
Article 88(2) of the EC Treaty, requests to the Republic
of Ireland to submit its comments and to provide all such
information as may help to assess the measure, with
particular reference to any information concerning the
criteria of evaluation of the investment plans oriented to
obtain the special foreign income relief, within one month
of the date of receipt of this letter. The Commission would
in addition like to gather the observations of Ireland and
interested parties on possible legitimate expectations of the
sort that would pose an obstacle to the recovery of aid, in
the event that this aid would be qualified as being illegal
and incompatible. It requests your authorities to forward a
copy of this letter to the potential recipient of the aid
immediately.

32. The Commission wishes to remind to the Republic of
Ireland that Article 88(3) of the EC Treaty has suspensory
effect, and would draw its attention to Article 14 of Regu-
lation (EC) No 659/1999, which provides that all unlawful
aid may be recovered from the recipient.

Journal of

it in the Official

33. The Commission warns the Republic of Ireland that it will
inform interested parties by publishing this letter and a
meaningful summary of
the
also inform interested
It will
European Communities.
parties in the EFTA countries, which are signatories to
the EEA Agreement, by publication of a notice in the
EEA Supplement
the European
inform the EFTA Surveillance
and will
Communities
this letter. All such
Authority by sending a copy of
interested parties will be
their
comments within one month of the date of such publi-
cation(cid:146).

invited to submit

to the Official

Journal of