State aid — Iceland — EFTA Surveillance Authority notice pursuant to Article 1(2) of Protocol 3 of the Surveillance and Court Agreement, to other EFTA States, EU Member States and interested parties concerning taxation of International Trading Companies in Iceland
Date: 2002-04-11
Institutions: EFTA Surveillance Authority
Subjects: European Economic Area, Iceland, State aid, control of State aid, multinational enterprise, tax relief

C 87/10

EN

Official Journal of the European Communities

11.4.2002

EUROPEAN ECONOMIC AREA

EFTA SURVEILLANCE AUTHORITY

STATE AID — ICELAND

EFTA Surveillance Authority notice pursuant to Article 1(2) of Protocol 3 of the Surveillance and
Court Agreement, to other EFTA States, EU Member States and interested parties concerning
taxation of International Trading Companies in Iceland

(2002/C 87/05)

By means of Decision No 392/01/COL of 6 December 2001,
the gist of which is reproduced below, the EFTA Surveillance
Authority initiated proceedings pursuant
to Article 1(2) of
the Surveillance and Court Agreement. The
Protocol 3 of
Icelandic Government has been informed by means of a
copy of the decision.

I. FACTS

1. Procedure

By letter dated 28 July 2000 (Doc. No 00-4830-D), the EFTA
Surveillance Authority informed the Icelandic Government that
it had become aware that Iceland had introduced a bill offering
favourable tax treatment for International Trading Companies
(ITCs). It also informed the Icelandic Government that, on the
basis of the information made available to the Authority, the
Competition and State Aid Directorate was of the view that the
tax treatment of ITCs may imply State aid in the meaning of
Article 61(1) of the EEA Agreement. The Authority requested
the Icelandic Government to submit comments and to provide
all
information necessary to reach a conclusion on the
question, whether the Icelandic tax measures for ITCs are
compatible with Article 61 of the EEA Agreement.

By letter dated 24 October 2000 (Doc. No 00-7751-A), the
Icelandic Government provided the requested information and
submitted its comments. According to the letter, the Icelandic
Government was of the view that the ITC legislation did not
confer any rights or advantages
to a selective group of
companies and thus, did not contain aid which would fall
within the scope of Article 61 of the EEA Agreement.

informed the

Icelandic Government

By letter dated 24 July 2001 (Doc. No 01-5609-D),
the
the
that
Authority
Competition and State Aid Directorate was of the preliminary
view that the tax measures concerning ITCs may imply State
aid within the meaning of Article 61(1) of the EEA Agreement.
If the Icelandic Government would not be able to remove the
doubts the State Aid Directorate had, concerning the compati-
bility of the tax measure for ITCs, the Directorate would feel
obliged to propose that the Authority opens an investigation
procedure as provided for in Article 1(2) of Protocol 3 to the
Surveillance and Court Agreement. The Icelandic Government

was invited to submit comments on the matter within two
months of receipt of the letter.

By letter dated 20 September 2001 (Doc. No 01-7477-A), the
Icelandic Government submitted its view on the compatibility
of the tax measures concerning ITCs. According to the letter,
the Icelandic Government was of the view that the tax regime
as regards ITCs did not constitute State aid.

2. Legislation and taxation of ITCs

According to the Act No 31 of 10 March 1999 on ITCs, ITCs
have to be public limited or private limited companies.
Commencement of
the
issuing of an operating licence. The Act limits which activities
an ITC can engage in.
ITCs can engage in the following
activities:

the operation of an ITC requires

— Trade in its own name with foreign entities outside Iceland,
or as an intermediary in such trading, in goods which are
not covered by the EEA Agreement and which do not
originate in Iceland.

— Act as an intermediary in the trading of services between

foreign entities outside Icelandic jurisdiction.

— Operate as a holding company that owns and invests in
foreign enterprises, or intangible assets, officially registered
outside of Iceland, such as trade marks, patents, design
rights and publishing rights.

— Own or control and register aircraft and vessels other than
fishing vessels in Iceland, provided that such aircraft and
vessels are only used for activities in which ITCs are
permitted to be engaged.

— Own or control and register aircraft or vessels other than
fishing vessels in Iceland, and lease or sub-lease to foreign
entities for transport outside Icelandic jurisdiction.

— It may not trade in its own name neither in goods with
parties in Iceland nor with parties outside Iceland, nor may
it serve as an intermediary in such trading and, it may not
process goods in Iceland partly or fully.

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ITCs are taxed
According to the information submitted,
differently than other undertakings with limited liability. As
the Authority understands, the differences are:

The Icelandic Government argues that undertakings registered
as ITCs would, in absence of the regime, not be established in
Iceland and thus not be liable to pay taxes
in Iceland.
Consequently, there is no effect of net tax loss.

— The corporate income tax at 5 % instead of the general tax

rate of 30 %.

— ITCs are exempted from net wealth tax. Normally Icelandic

companies are subject to a net wealth tax of 1,2 %.

— ITCs are partially exempted from stamp duty.

is also of

the opinion that

The Icelandic Government
the
criteria of the de-minimis principle, as laid down in Chapter
12 of the Authority's State aid guidelines, are met in this
case. Hence, should the Authority reach a finding that State
aid is involved, such aid would be below the de-minimis ceiling
and should be considered not to have an appreciable effect on
trade and competition within the EEA.

— To receive an operating licence, the ITCs are subject to a
charge of ISK 100 000. They are also subject to an annual
ISK 100 000 which other under-
surveillance charge of
takings are not subject to.

II. APPRECIATION

To be considered as State aid under Article 61(1) of the EEA
Agreement, a measure must fulfil the four following criteria.

— Special rules apply to taxation of dividends from an ITC to
rule on
an Icelandic resident shareholder. The general
taxation of dividends in Iceland is that dividends paid
from a limited liability company to another company are
tax exempted, but dividends paid to individuals are taxed
by a final withholding tax of 10 %. If the company, which
the recipient must pay the
pays dividends,
income tax in full whether
it be an individual or a
limited liability company.

is an ITC,

Firstly, the measure must confer the beneficiaries an advantage
that reduces the costs they normally bear in course of the
business. According to Chapter 17B.3.(2) of the Authority's
State aid guidelines the advantage may be provided through
a reduction in the firm's tax burden in various ways including
inter alia ‘a total or partial reduction in the amount of tax (such
as exemption or a tax credit)’.

3. Comments submitted by the Icelandic Government

The Icelandic Government argues in its letters, dated 24
October 2000 (Doc. No 00-7751-A) and 20 September 2001
(Doc. No 01-7477-A), that the mere fact that different tax
regimes exist for different forms of undertakings, cannot in
itself
form a basis for a presumption that such different
treatment constitutes aid. It emphasised that the Icelandic tax
regime, as regards ITCs, is neither sector-specific nor does it
favour certain geographical areas. Furthermore it is argued that
the ITC regime permits a wide range of activities and all under-
takings within the EEA, operating in these fields, can take
advantage of the regime, regardless of the founder's domicile
or other such factors. The conditions for the establishment of
ITCs are open to all persons and undertakings within the EEA.
The regime is thus of a general nature and cannot be char-
acterised as ‘providing in favour of certain undertakings an
exception of the application of the tax system’.

is

the

that

ITCs

in fiscal

treatment of

Icelandic Government,

The Icelandic Government points out that one of the main
differences
the
corporate income tax is 5 % instead of the general tax rate
of 30 %. According to the
this
difference should not be looked upon in isolation. The 5 %
corporate income tax is strictly a deferral of taxation until
profits are distributed as dividends, due to the special rules
on distributed dividends. Therefore,
factors into
consideration and keeping in mind the net effects of the tax
regime, the Icelandic Government is of the view that ITCs are
not recipients of a tax credit and therefore do not enjoy
favourable tax treatment.

taking all

The main advantage for ITCs is the lower corporate tax of 5 %
instead of 30 %. As pointed out by the Icelandic Government,
this is a deferral of taxation until profits are distributed as
dividends, due to the special rules on distributed dividends.
the ITCs.
this could imply a tax credit
Nevertheless,
Taking all the elements of the tax regime into account the
taxation of
implies a
in the view of
favourable tax treatment for ITCs.

the Authority,

ITCs,

for

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 Chapter
17B.3.(3) of the Authority's State aid guidelines, is equivalent
to consumption of State resources in form of fiscal expen-
diture.

to some of

Thirdly, the measure must be specific or selective in that it
favours ‘certain undertakings or the production of certain
goods’. According to Chapter 17B.3.2(4) of the Authority's
State aid guidelines on direct business taxation:
‘Some tax
benefits are on occasion restricted to certain types of under-
their functioning (intra-group services,
takings,
intermediation coordination) or
to production of certain
goods. In so far as they favour certain undertakings or the
production of certain goods, they may constitute State aid as
referred to in Article 61(1)’. The favourable tax treatment
the condition in
applies only to undertakings, which fulfil
the Act on ITCs.
in the Authority's view,
It
selective because it favours only undertakings engaged in the
limited activities provided for in the Act.

is therefore,

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11.4.2002

The Authority finds it hard to see that the favourable tax
treatment of ITCs falls within the logic of the tax system. In
the Icelandic Government has not
the Authority's view,
this derogation from the
provided any justification for
the nature or general
general
scheme of the system (1).

tax system on the basis of

that

In this context,

the measure must affect competition and trade
Fourthly,
between the Contracting Parties.
ITCs can trade in goods,
which are not covered by the EEA Agreement, and which do
not originate in Iceland. But the trading activity as such may be
considered as a service falling inside the scope of the EEA
Agreement.
it may also be referred to the
ITCs can act as intermediaries in the trading of
fact
services between foreign entities outside Icelandic jurisdiction.
ITCs can also own or control and register aircraft provided that
these are being used for activities in which ITCs are permitted
to be engaged. Furthermore,
ITCs can own or control and
register aircraft and lease or sub-lease such aircraft to foreign
entities for transport outside Iceland. These are services which
are covered by the EEA Agreement.

the EEA Agreement.

is therefore necessary to
61(1) of
determine if such an aid is compatible with the functioning
of the EEA Agreement under the exceptions laid down in
Article 61(2) and (3).

It

It appears that the exceptions under Article 61(2) cannot be
applied in this case, since they cover different cases.

Under Article 61(3)(a) an aid may be considered compatible
with the EEA Agreement when it is designed to promote the
economic development of areas where the standard of living is
abnormally low or where there is serious underemployment.
Since the measure in question is not limited to such areas this
provision seems not to apply. Also the exception laid down in
Article 61(3)(b) seems not to be applicable. Lastly, as regards
exemption laid down in Article 61(3)(c), it also seems that the
aid cannot be considered to facilitate the development of
certain economic activities or of certain economic areas.
the
Consequently the aid seems not
exemptions provided for
the EEA
Agreement.

to qualify for any of

in Article 61(3) of

ITCs can own or control and register vessels
Moreover,
provided that
these are being used for activities in which
ITCs are permitted to engage, and ITCs can own or control
and register vessels and lease or sub-lease such vessels to
foreign entities for transport outside Iceland. Such services
are covered by the EEA Agreement.

According to Chapter 17B.3.(4) of the Authority's State aid
guidelines,
‘[u]nder settled case-law, for the purposes of this
provision, the criterion of trade being affected is met if the
recipient firm carries on an economic activity involving trade
between Contracting Parties’. It follows from the description
above that the main activities ITCs can be involved in are
international
the measure
affects competition and trade between the Contracting Parties.

activities. Consequently,

trade

The Icelandic Government has argued that as of today only ten
ITCs have been granted operating licences, and some of these
are inactive. According to the Icelandic Government, the aid is
at present not capable of affecting trade between Member
States, due to its minuscule extent and therefore the criteria
of the de-minimis principle, as laid down in Chapter 12 of the
Authority's State aid guidelines, are met in this case. There
appears to be no guarantee in the tax legislation on ITCs
that
rule is exceeded
further aid may not be granted.

the threshold in the de-minimis

if

In light of the foregoing considerations, the Authority is of the
view that the tax measure concerning ITCs may imply State aid
within the meaning of Article 61(1) of the EEA Agreement.
Consequently, and in accordance with point 5.2 of Chapter 5
of the Authority's State aid guidelines, the Authority is obliged
to open the procedure provided for in Article 1(2) of Protocol
3 of the Surveillance and Court Agreement. The decision is
without prejudice to the final decision of the Authority.

the Authority draws the attention of

Finally,
the Icelandic
Government to Chapter 6 of the State aid guidelines (‘Speci-
ficities regarding aid unlawful on procedural grounds’). The tax
regime was introduced after the entry into force of the EEA
Agreement and could therefore be qualified as new aid. In this
respect, no notification was received. According to point
in negative decisions on cases of unlawful aid, the
6.2.3(1),
Authority orders, as a rule,
the EFTA State concerned to
reclaim aid from the recipient.

The EFTA Surveillance Authority hereby gives the EFTA States,
EU Member States and interested parties notice to submit their
comments on the measure in question within one month from
the publication of this notice to:

EFTA Surveillance Authority
Rue de Trèves/Trierstraat 74
B-1040 Brussels.

Based on the foregoing considerations the taxation of ITCs
appears to constitute operating aid in the meaning of Article

The Comments will be
Government.

communicated to the

Icelandic

(1) See in this context: Case 173/73 Italy v Commission [1974]

ECR 709.