2003/512/EC: Commission Decision of 5 September 2002 on the aid scheme implemented by Germany for control and coordination centres (Text with EEA relevance) (notified under document number C(2002) 3298)
Date: 2002-09-05
Institutions: European Commission
Subjects: Germany, State aid, business management, control of State aid, foreign enterprise, supervisory power, tax system

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(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 5 September 2002

on the aid scheme implemented by Germany for control and coordination centres

(notified under document number C(2002) 3298)

(Only the German text is authentic)

(Text with EEA relevance)

(2003/512/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Com-
munity, and in particular the first subparagraph of Article
88(2) thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to the provisions cited above (1),

(5)

Whereas:

I. PROCEDURE

(1)

(2)

(3)

By letter dated 12 February 1999 (D/50716),
the
Commission asked Germany to submit more detailed
information on the scheme of direct company taxation
for control and coordination centres of foreign compa-
nies. The scheme had not been notified to the Commis-
sion. By letter EC3-714725/12 dated 26 May 1999,
Germany submitted a description of the scheme and
answered the points the Commission had made.

By letter dated 11 July 2001 (SG 2001 D/289745), the
Commission informed Germany that it had decided to
initiate the procedure laid down in Article 88(2) of the
EC Treaty in respect of the scheme. Germany submitted
its comments on 11 September 2001 by letter EC3-
F2516-101/01.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Commu-
nities (2). The Commission invited interested parties to
submit their comments on the scheme.

(4)

The Commission received no comments from interested
parties.

II. DETAILED DESCRIPTION OF THE MEASURE

The treatment of control and coordination centres of
foreign companies in Germany used to be governed by a
Federal Finance Ministry Order, the Administrative Order
for the treatment of control and coordination centres of
foreign companies in accordance with German double
taxation Treaties (hereinafter ‘the Order’; see letter of the
Federal Finance Minister dated 24 August 1984) (Verwal-
tungsanweisung für die Behandlung von Kontroll- und
Koordinierungsstellen ausländischer Konzerne nach den
deutschen Doppelbesteuerungsabkommen) (3). According
to information available, the Order was repealed with
effect from 31 December 2000.

(6)

(7)

The Order applies to control and coordination centres
that control and/or coordinate the activities of subsidi-
aries and permanent establishments of foreign compa-
nies in Germany and other countries.

The Order describes what kind of activities control and
coordination centres may carry on in order to be eligible
for special tax treatment. It is clear from the description
that the tasks allowed are exclusively activities to service
the needs of the group (e.g. accounting, consolidation
reports, marketing, production plans and research coor-
dination). The control and coordination centre cannot
act as headquarters of the group, such activity having to
be carried out by another entity within the group.

(1) OJ C 304, 30.10.2001, p. 2.
(2) See footnote 1.

(3) Bundessteuerblatt 1984, Part I, p. 458.

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(8)

(9)

The taxable profit of control and coordination centres is
not established according to the normal method, i.e. as
the difference between income and expenditure, but
according to the cost-plus method (1). This consists in
control and coordination centres applying to the costs
they bear a profit margin (mark-up). The resulting
amount is then subject to the standard corporate tax
rate. The Order sets the range of acceptable mark-ups
between 5 % and 10 %. This is, according to Germany,
in keeping with general practice in Germany.

In practice, it is the control and coordination centre itself
that first determines its mark-up within the 5 to 10 %
range. There is no advance agreement between the
taxpayer and the tax authorities on what rate to choose
within that range. A mark-up rate lower than 5 % is not
accepted. The tax authorities will in no case impose a
mark-up rate higher than 10 %, although the taxpayer is
free to choose such a rate. As a rule, all mark-up rates in
the 5 to 10 % range are checked retrospectively by the
tax authorities.

III. GROUNDS FOR INITIATING THE PROCEDURE

(10) On the basis of

the information submitted to it by
Germany in the course of the preliminary examination
provided for in Article 10 of Council Regulation (EC) No
659/1999 of 22 March 1999 laying down detailed rules
for the application of Article 93 of the EC Treaty (2), the
Commission came to the conclusion that the existence
of a maximum mark-up of 10 % might constitute State
aid since this upper limit could artificially reduce the tax
liability of control and coordination centres.

the preliminary

(11) On the basis of the information submitted in the course
of
the Commission
doubted in particular whether the exceptions laid down
in Article 87(2) and (3) of the EC Treaty were applicable
the
to the scheme.
compatibility of the scheme with the common market.

therefore had doubts about

examination,

It

(12) Accordingly,

the Commission initiated the procedure

laid down in Article 88(2) of the EC Treaty.

IV. COMMENTS FROM GERMANY

(13)

that

Firstly, Germany considers
the scheme is not
intended to confer any tax benefit. The setting of a
ceiling below which no objections will be raised serves
only to ease administration and create legal certainty by
avoiding disputes.

(1) On the use of alternative methods of taxation, see point 27 of
Commission notice 98/C 384/03 on the application of the State aid
rules to measures relating to direct business taxation (OJ C 384,
10.12.1998, p. 3).

(2) OJ L 83, 27.3.1999, p. 1.
(3) Transfer prices are the prices at which an enterprise transfers
physical goods and intangible property or provides services to asso-
ciated enterprises (see preface to the 1995 OECD transfer pricing
guidelines).

(14) On the basis of the reports by the Länder tax administra-
tions covering the period from 1 January 1996 to 31
December 2000, Germany argues that the Order did not
actually result in taxable persons deriving any benefit
from the fact that profit was not determined on the basis
of an arm's-length price. It claims in particular that there
is no evidence of cases where a mark-up over 10 %
would have been necessary.

(15) According to Germany, from 1996 onwards there were
only seven identified cases involving group control and
coordination centres within the meaning of the Order.
In three cases, the transfer price (3) had been determined
without applying the Order, either by using a different
attribution method or by basing the price on arm's-
length transactions with foreign companies.

(16) Germany considers that, of the four cases in which the
Order was applied, a mark-up within the range was
accepted without an individual check being carried out
in only one case. In the three remaining cases, the mark-
up was checked during a company audit. In one of these
three cases, an objection was made and the transfer price
was recalculated on the basis of experience with other
transfer price cases, producing a result within the 5 to
10 % range.
the company auditors
accepted the result without correction, while in the
remaining one (where activities ceased in the first
quarter of 1996) the company auditors fixed a mark-up
rate of 5 %.

In another case,

(17)

In Germany's view, these figures reflect the limited mate-
rial scope of the Order, covering only group establish-
ments which perform a support function in relation to
the group headquarters and for which,
in accordance
with the
arm's-length principle, only small profit
margins are justified. According to Germany, the small
number of cases found shows that taxable persons have
not viewed the scheme as a tax concession comparable
to State aid. This is demonstrated by the case of the
coordination centre which ceased its activities in the first
quarter of 1996 despite the fact that the mark-up was
set at the low threshold rate of 5 %.

(18) As regards the information requested by the Commission
on its selective character, Germany argues that
the
scheme does not contain any criteria for geographical or
material demarcation such as would make the scheme
selective.

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(19) Germany

it

considers

impossible

to recover

any
amounts. The arguments put forward are as follows. The
tax assessment becomes definitive one month after it has
been issued; re-assessment of the tax retrospectively in
such cases is impossible. Tax offices would accordingly
be unable to recover taxes in the one (and only) estab-
lished case where the rules contained in the Order were
applied without examining the individual case and
where,
the
therefore,
too low. Moreover, Germany
mark-up had been set
would have to prove that
the arm's-length principle
provided for in section 1 of the German Foreign Tax
Relations Act had not been observed. In conclusion, it
considers that there is no practical or legal possibility of,
or necessity for, reversing the application of the Order.

is theoretically possible that

it

V. ASSESSMENT OF THE AID

1. Applicability of Article 87(1) of the EC Treaty

(20) Under Article 87(1) of the EC Treaty, State aid granted
by a Member State 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 Member States, be incompatible with the
common market.

(21)

To be caught by the prohibition under Article 87(1), a
measure must fulfil the following four criteria:

(a) the measure must confer on recipients an advantage
that relieves them of charges that are normally borne
from their budgets;

(b) the

advantage must be granted through State

resources;

(c) the measure must affect competition and trade

between Member States;

(d) the measure must be specific or selective in that it
favours certain undertakings or the production of
certain goods.

(22)

Firstly, as regards the requirement that the measure must
afford beneficiaries an advantage, the Commission takes
the view that the existence of an upper limit of 10 % for
the determination of
the mark-up in the cost-plus
method can confer an advantage on control and coordi-
nation centres and the multinational groups to which
they belong. This limitation to 10 % may artificially
reduce the tax burden of control and coordination
centres in cases where actual margins exceed 10 %.

(23) Germany's argument that the existence of a ceiling is not
intended to create a tax benefit but serves only to ease
administration and create legal certainty by avoiding
disputes cannot be accepted. While the Commission

does not deny that tax administrations are entitled, and
must be in a position, to guarantee legal certainty for
taxpayers, this should not result in a reduction in the tax
base. By setting an upper limit for the mark-up, the
Order assured the taxpayer that, in cases where a retro-
spective check showed the need for a mark-up higher
than 10 % to reflect the economic reality of the transfer
price, the tax authorities would agree to a 10 % mark-
up. This automatic acceptance of an undervalued mark-
up corresponds to an artificial reduction in the tax base
for the control and coordination centre which cannot be
justified by the need for legal certainty.

If legal certainty is to be ensured, it must be in relation
to the elements that will be taken into consideration for
taxation and not in relation to the maximum mark-up
rate that will be applied. The existence of an upper limit
cannot be justified in terms of administrative simplifica-
tion, since control and coordination centres are, in any
event, subject to retrospective checks by the tax adminis-
tration.

In addition, as Germany pointed out in its comments of
11 September 2001 (1), in at least one case the margin
for the control and coordination centre was determined
without any retrospective check being carried out and
was therefore left to the discretion of the tax authorities.
This clearly shows that the application of the scheme,
even if it was not intended to, gave rise at least once to
use by the tax administration of its discretionary power
possibly to grant an advantage to a control and coordi-
nation centre.

In the area of transfer pricing, the internationally agreed
standard is the arm's length principle as set out in Article
9 of the OECD Model Tax Convention on income and
on capital and further elaborated on in the 1995 OECD
transfer pricing guidelines. This principle provides that
taxable profits on cross-border activities between asso-
ciated enterprises should be calculated as if the transac-
tion had been carried out between unrelated parties
under market conditions. The OECD guidelines do not
recommend the use of minimum or maximum mark-ups
as in the present case (also known as ‘safe harbours’)
since these may not reflect the nature of the transactions
at issue.

(24)

(25)

(26)

(27) Moreover, according to the information available, the
tax administration has used its discretionary power to
grant an advantage in at least one case, which is in
contradiction with the arm's
length principle. The
Commission cannot rule out the possibility that there
may have been other, comparable cases before 1996, i.e.
at a time for which Germany has provided no informa-
tion but which, pursuant to Article 15 of Regulation
(EC) No 659/1999, is covered by this examination.

(1) See paragraph 16.

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The Commission therefore considers that both the exis-
tence of an upper limit for the mark-up and the use by
the tax administration of its discretionary power confer
an advantage on the relevant undertakings and to the
groups to which they belong within the meaning of
Article 87(1) of the EC Treaty.

(34)

(28)

(29)

(30)

(31)

(32)

Secondly, the advantage must be granted through State
resources in any form whatsoever. According to point
10 of Commission notice 98/C 384/03, the loss of tax
revenue deriving from the reduction in the tax base is
equivalent to consumption of State resources in the form
fiscal expenditure. As confirmed by the Court of
of
Justice of the European Communities (1), this principle
also applies to aid granted by regional or local bodies in
Member States.

the aid must distort or threaten to distort
Thirdly,
competition. The Court of
Justice has consistently
ruled (2) that intra-Community trade is to be deemed to
be affected from the moment the beneficiary firm carries
out an economic activity which is the subject of trade
between Member States.

The Commission takes the view that the scheme in ques-
tion is capable of affecting competition and trade
between Member States since it is open to all sectors of
In addition, control and coordination
the economy.
centres belong to multinational groups which may be
active in other Member States. This criterion is therefore
fulfilled.

Fourthly, the aid must favour certain undertakings or the
production of certain goods. Germany considers that
there is no selectivity since all sectors of the economy
qualify for the aid. The Commission cannot share this
view because the benefit of the scheme is, in fact, limited
to companies belonging to groups with foreign head-
quarters. German resident companies were explicitly
excluded from the benefit of the scheme. Furthermore,
in the present case, the benefit of the scheme was limited
to intra-group activities and could not, as Commission
notice 98/C 384/03 requires, be justified by the logic of
the tax system. Germany has not provided the Commis-
sion with any such justification as required by point 23
of the notice.

considers that neither the small number of beneficiaries
nor the level of the advantage is relevant in the context
of the assessment of the aid character of a scheme.

The Order therefore satisfies the criteria equating it to an
aid scheme in two respects. Firstly, it confers on the tax
authorities a discretionary power to accept a mark-up
without carrying out any retrospective check and,
secondly, it prevents them from demanding the applica-
tion of the real mark-up where this is higher than 10 %.
The Commission has therefore to examine whether the
aid can be considered compatible with the common
market under the exceptions laid down in Article 87(2)
and (3) of the EC Treaty.

2. Compatibility of the aid measure with the EC

Treaty

(35) Measures caught by Article 87(1) of the EC Treaty are
incompatible with the common market unless they
qualify for one of the exceptions in Article 87(2) or (3).

(36) As far as Article 87(2) is concerned, the Commission
considers that, inasmuch as it is not aimed at the objec-
tives listed there, the aid measure contained in the tax
scheme does not fall under that provision.

(37) Nor can the measure be considered compatible with the

common market pursuant to Article 87(3).

(38)

There are no indications that the conditions of Article
87(3)(a), (b), (d) and (e) are fulfilled. According to Article
87(3)(c), aid may be authorised if it serves to facilitate
the development of certain economic activities or of
certain economic areas. The Commission has acknowl-
edged in several Community frameworks that the condi-
tions for such an exemption may be fulfilled if the aid
serves to pursue a certain objective.

(39) However,

the tax provision in question serves

to
promote neither investment nor employment nor any
other recognised Community objective. The aid cannot
therefore be authorised under the Treaty provisions.

(40)

The Commission finds that the measure thus constitutes
incompatible aid.

(33)

Finally, Germany claims that the small number of cases
found shows that taxable persons have not viewed the
scheme as a tax concession comparable to State aid,
especially in the case of the control and coordination
centre which ceased its activities in the first quarter of
1996, despite the fact that the mark-up was at the low
threshold rate of 5 %. On this point, the Commission

(1) Case 248/84 Germany v Commission [1987] ECR 4013, paragraph

17.

(2) Case 730/79 Philip Morris v Commission [1980] ECR 2671 and Case

142/87 Belgium v Commission [1990] ECR I-959.

3. Legitimate expectations

(41)

In its letter of 11 July 2001, the Commission invited
Germany and interested parties to submit comments on
possible legitimate expectations of the sort that would
present an obstacle to the recovery of the aid in the
event of its being classified as illegal and incompatible
with the common market.

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(42)

(43)

In its answer, Germany argued that recovery cannot take
place because a tax assessment becomes definitive one
month after it has been issued. In such cases it is impos-
sible to reassess the tax retrospectively. Therefore, the
German tax authorities would be unable to recover taxes
in the one (and only) case established where the rules
contained in the Order were applied without examining
the individual case and where, therefore, it is theoreti-
cally possible that the tax had been set too low. The
Commission does not share this view. According to the
case law of the Court of Justice (1), the existence of a
time limit laid down under national law in the interests
of
legal certainty does not constitute an insuperable
obstacle to the recovery of aid.

In the present case the Commission notes, however, that
the German Order has some features in common with
the scheme introduced in Belgium by Royal Decree No
187 of 30 December 1982 concerning the tax treatment
of coordination centres. Both measures concern intra-
group activities and both use cost-plus methods that lead
to a reduced tax base. In its decision of 2 May 1984, the
Commission came to the conclusion that the Belgian
scheme did not constitute aid within the meaning of
Article 87(1) of the EC Treaty. Although this decision
was not published, it was stated in the 14th Competition
Report and in an answer to a parliamentary question (2)
that the Commission had no objections. In this context,
it can be argued that this 1984 Commission Decision on
the Belgian scheme, which was adopted before the entry
into force of the German Order, conferred a legitimate
expectation on Germany and on the aid beneficiaries,
who could consider, on the basis of the Commission
Decision, that the Order did not constitute State aid.
Moreover, in the answer to the abovementioned parlia-
mentary question, the scheme under examination was
referred to and classified as not falling under Articles 92
and 93 (now 87 and 88) of the EC Treaty. Accordingly,
Germany and the beneficiaries can be considered to have
in accor-
legitimate expectations, with the result that,

dance with Article 14(1) of Regulation (EC) No 659/
1999, recovery of the aid would be contrary to a general
principle of Community law.

VI. CONCLUSION

(44)

In the light of the information provided by Germany,
the Commission concludes that Germany has imple-
mented the Order in breach of Article 88(3) of the EC
Treaty. It also finds that the measure favours control and
coordination centres and does not satisfy any of the
conditions in Article 87(2) and (3). The measure is there-
fore incompatible with the common market. However,
since it has been established that both Germany and the
beneficiaries under
the scheme have had legitimate
expectations, recovery of the aid will not be effected,

HAS ADOPTED THIS DECISION:

Article 1

The aid which Germany has granted under the Administrative
Order for the treatment of control and coordination centres of
foreign companies in accordance with German Double Taxa-
tion Treaties (Verwaltungsanweisung für die Behandlung von
Kontroll- und Koordinierungsstellen ausländischer Konzerne
nach den deutschen Doppelbesteuerungsabkommen) (see letter
of
is
the Federal Finance Minister dated 24 August 1984)
incompatible with the common market.

This Decision is addressed to the Federal Republic of Germany.

Article 2

Done at Brussels, 5 September 2002.

For the Commission

Mario MONTI

Member of the Commission

(1) See, inter alia, Case C-24/95 Land Rheinland Pfalz v Alcan Deutschland

GmbH [1997] ECR I-1591.

(2) Written Question No 1735/90 (OJ C 63, 11.3.1991).