2003/438/EC: Commission Decision of 16 October 2002 on the aid scheme C 50/2001 (ex NN 47/2000) — Finance companies — implemented by Luxembourg (notified under document number C(2002) 3741) (Text with EEA relevance)
Date: 2002-10-16
Institutions: European Commission
Subjects: Luxembourg, State aid, control of State aid, financing, investment company

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COMMISSION DECISION

of 16 October 2002

on the aid scheme C 50/2001 (ex NN 47/2000) — Finance companies — implemented by
Luxembourg

(notified under document number C(2002) 3741)

(Only the French version is authentic)

(Text with EEA relevance)

(2003/438/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(3)

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

By letter of 25 April 2000 (D/51738), the Commission
asked for further information in view of the fact that,
although it had been withdrawn, the scheme might have
produced effects and/or still be producing effects. The
information was supplied to the Commission by letter
from the Luxembourg authorities dated 10 May 2000
(A/34012).

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

(4)

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

By letter SG(2001) D/289743 of 11 July 2001,
the
Commission informed Luxembourg that it had decided
to initiate the formal investigation procedure laid down
in Article 88(2) of the EC Treaty in respect of the tax
scheme
letter of 14
September 2001 (A/37233), Luxembourg submitted its
comments concerning the Commission's decision.

companies. By

finance

for

Whereas:

I. PROCEDURE

(1)

(2)

in this area (2). Further

In 1997 the Ecofin Council adopted a code of conduct
on direct business taxation with a view to putting a stop
to the
to unfair practices
undertaking contained in the code, the Commission in
1998 published a notice on the application of the state
relating to direct business
aid rules
taxation (3)
in
which it reaffirmed its determination to apply those
rules rigorously and in accordance with the principle of
equality of treatment. This procedure is covered by that
notice.

to measures
(hereinafter referred to as the notice),

asked

Luxembourg

letter of 12 February 1999 (D/50716),

the
By
information
Commission
concerning
finance
for
companies. By letter of 26 March 1999 (A/32604), the
Luxembourg authorities informed the Commission that
the scheme had been withdrawn on 20 February 1996.

for
scheme

Luxembourg

the

(1) OJ C 306, 31.10.2001, p. 2.
(2) OJ C 2, 6.1.1998, p. 1.
(3) OJ C 384, 10.12.1998, p. 3.

(5)

(6)

(7)

The Commission decision to initiate the procedure was
published in the Official
the European
Communities (4). The Commission invited interested
parties to submit their comments on the measure.
It
received no comments from interested parties.

Journal

of

By letter of 21 March 2002 (D/51274), the Commission
asked Luxembourg for further
information that was
provided by letter of 11 April 2002 (A/32745).

II. DESCRIPTION OF THE MEASURE

The status of finance companies is governed by Circular
LIR No 120 of 14 July 1989 (hereinafter referred to as
Circular 120 or the Circular). The Circular was repealed
by Circular LIR No 1120 of 20 February 1996. A total
of nine companies were approved as finance companies,
of which seven became operational.

(8)

An international group finance company is a resident
limited company which is fully liable to tax, is part of

(4) See footnote 1.

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using

refinanced

financial mechanisms

an international group and has as its sole purpose the
granting of loans to companies within the group that
are
and
instruments such as public issues, private borrowings or
bank loans. The bulk of the loans must be granted by
the finance company to companies within the same
the
group situated abroad. Within the meaning of
Circular,
to
group refers
foreign international
companies that are financially linked and incorporated
in at least two countries other than Luxembourg. The
finance company's parent company must be one of the
companies in the group and must have capital of at
least LUF 7,5 billion (approximately EUR 187,5 million)
or equivalent.

a

(9)

Finance-company status was, in principle, granted for an
unlimited duration.

(10)

To

that

end,

The Circular states that, for corporation tax purposes,
the loans granted by finance companies to companies
within the same group must generate an appropriate
trading profit in line with the normal behaviour of a
prudent manager in his relations with independent third
parties.
the minimum acceptable
commercial profit of a Luxembourg finance company
for tax purposes is ¼ % (0,25 %) of the amount of loans
granted and, if the financial risk is covered by statutory
collateral, may be further reduced to 1/8 % (0,125 %).
Each time a finance company enters margins resulting
in a trading profit greater than the minimum profit, it is
this trading profit that has to be used for the purpose of
taxing the finance company.

(11) Neither the borrowings taken up for financing loans to
interest paid on those
group members nor
borrowings are to be included for
the purposes of
municipal trade tax, which is assessed on the basis of
either operating capital or income.

the

(12) Outside

to the

finance available

company
temporarily may be entered into productive accounts
only on an exceptional basis and for a maximum of
eight days: any interest accruing must be added to the
commercial profit.

finance

(13) A finance company can deduct from its taxable profit
withholding taxes
countries on
interest payments to it. Tax on interest paid abroad by
group companies cannot be taken into account for the
and/or
Luxembourg
purposes of
deducted from trading profit.

imposed in other

corporation tax

(14)

(15)

(16)

(17)

III. GROUNDS FOR INITIATING THE PROCEDURE

from the

refinancing

the information supplied by the
In its evaluation of
the Commission examined
Luxembourg authorities,
the
whether the method of determining the margin,
exclusion of
calculation of
municipal tax and the exercise of possible discretionary
power by the administration might confer an advantage
on finance companies. It also took the view that such
an advantage might have been granted from State
resources, might affect competition and trade between
Member States, and might be selective. Finally,
it felt
that none of the exceptions to the general principle that
State aid is prohibited seemed to be applicable. These
doubts
led the Commission to initiate the formal
investigation procedure in this case.

IV. COMMENTS FROM LUXEMBOURG

comments

The
the
authorities may be summarised as follows.

submitted

by

Luxembourg

any

effects other

Since the scheme had been withdrawn, it was no longer
producing
than in respect of
enterprises to which the provisions of Circular 120
applied up to the end of 2001. The Luxembourg
authorities also pointed to the problems posed by
transfer prices and defended the solution adopted (5).
Finally, they did not consider the measure to constitute
aid within the meaning of Article 87 of the Treaty.

Transfer prices

least

in theory)

The links which exist between two enterprises within a
particular group enable them (at
to
determine conditions for supplying goods and services
between them which differ from those which would
have applied if the two parties had acted as independent
enterprises operating on free markets. Enterprises may
thus be tempted to allocate their profits within the
group in such a way as to minimise the total tax burden
on the group as a whole. In the case of multinational
groups, allocating profits in this way often results in the
tax base being increased in one country and reduced in
another. This explains the concern of governments to
ensure that transfer prices within a group are as close as
possible to market prices.

(5) Transfer prices are the prices at which a company invoices goods

or services to associated companies.

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(OECD),

(18) Within the Organisation for Economic Cooperation and
Development
to which the Member States
belong, the principle of full competition was adopted to
eliminate the impact of special conditions on the level
of profits. This principle, set out in Article 9 of the
OECD Model Tax Convention, serves a dual objective: to
ensure that tax is correctly assigned to each country
and, as far as possible, to avoid double taxation. It also
enables multinational
and independent
enterprises to be treated as equally as possible. The
methods used to determine transfer prices include the
‘comparable prices on the free market' method and the
cost-plus pricing method.

enterprises

(19)

(20)

It was in this context

Referring to the need to prevent tax avoidance and to
the principle of
the Luxembourg
full competition,
authorities point out that Article 164 of the Law of 4
December 1967 on income tax constitutes the legislative
basis for transfer prices.
that
Circular 120 was adopted to facilitate the taxation of the
administrative activities of
companies. The
Luxembourg administration normally tries to compare
prices charged within the same group with prices
charged
between
independent enterprises. This is not always possible,
however, because the relevant comparative data are not
available.

transactions

comparable

finance

for

for

Consequently, the Luxembourg administration opted in
this case for the cost-plus pricing method with a view
to determining transfer prices
the intra-group
services provided by finance companies of multinational
groups. On the basis of a uniform method such as that
recommended by the OECD, a minimum threshold for
determining taxable income equal
the
amount of loans granted (0,125 % if the financial risk
incurred is covered by statutory collateral) was laid
if a finance company realised a
down. Nevertheless,
than the minimum amount
trading profit greater
resulting from the application of Circular 120,
the
higher trading profit had to be taken into account for
the purposes of corporation tax.

to 0,25 % of

Circular 120 did not involve State aid within the meaning of
Article 87 of the Treaty

The measure must give rise to an advantage

method. Luxembourg points out that, in paragraph 13
of its notice, the Commission stressed that tax measures
of a purely technical nature, such as provisions to
prevent double taxation or
tax avoidance, do not
constitute State aid. Given that Circular 120 was a
general measure designed to prevent tax avoidance and
to produce an appropriate and fair trading profit for
finance companies, it did not constitute State aid.

The requirement
that finance companies belong to a
large international group with own funds of at least LUF
7,5 billion (approximately EUR 187,5 million) made it
in most cases, the amount of
possible to ensure that,
payments was not too low because a higher rate would
otherwise be necessary to guarantee consistency with
market conditions.

that

the Commission is merely
Luxembourg notes
full
questioning the way in which the principle of
competition is complied with and the consideration
percentages are fixed and whether
is justified to
exclude refinancing from the calculation of municipal
tax.

it

that

consider

Luxembourg

The
the
authorities
Commission is criticising two aspects of the advantage
enjoyed by finance companies: on the one hand, the
practical application of the cost-plus pricing method as
compared with the use of the transfer prices actually
paid and, on the other,
that refinancing is
excluded from the calculation of municipal tax.

the fact

(22)

(23)

(24)

(25) As far as the first aspect

in fact,

is concerned, Luxembourg
it was only where the transfer prices
stresses that
charged by the enterprise were higher
than those
resulting from the application of the cost-plus pricing
method that the use of that method could have led to
an advantage for the enterprise as a result of a smaller
tax base being applied to it. Luxembourg takes the view
the minimum margin referred to in
that,
Circular 120 was, at most, greater
the margin
resulting from market conditions with the result that the
arrangements presented no attraction in tax terms to
finance companies. Should the Commission conclude
that
the application of Circular 120 in such cases
constituted unlawful State aid and demand its recovery,
the enterprises concerned would have to be identified
and an individual calculation made for each enterprise
on the basis of the real transfer prices.

that

(21)

The measure did not set out to lighten the tax burden
normally borne by finance companies but solely to
determine as accurately as possible a market price for
intra-group services by applying the cost-plus pricing

(26)

Luxembourg would point out
the Commission
accepts the use of methods such as the cost-plus pricing
method and that there would not be any advantage if
using such alternative methods resulted in taxation

that

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and

income

the Commission considers

charges. According
that

equal or at least comparable to that which could have
been arrived at between two independent operators
applying the traditional method whereby taxable profit
is calculated on the basis of the difference between the
to
enterprise's
an
Luxembourg,
advantage should be deemed to exist where the result of
applying the cost-plus pricing method is not sufficiently
comparable to that which would have been obtained by
means of
the
Commission is not concerned with the extent of any
such advantage, and Luxembourg considers that
the
cost-plus pricing method does not in any case give rise
to any advantage to the point where the taxable income
would no longer be comparable to that which could
have been obtained between two independent operators
by means of the traditional method.

traditional method. However,

the

(27) As for the second aspect, Luxembourg considers that
the Commission seems to be claiming that, by not
including refinancing in the municipal trade tax base, an
advantage might be conferred on finance companies.
However,
the Luxembourg authorities consider such
exclusions to be justified. This is due to the fact that,
until 1990, such charges were non-deductible for the
purpose of calculating municipal trade tax. The result
determined in accordance with the corporation tax rules
also serves, with a few additions and exclusions, as a
financial
basis for municipal
charges were added to that end.
Including financial
charges led to absurd situations in which the amount of
tax exceeded the actual profit. This justifies excluding
financial charges
the
purposes of municipal trade tax.

from the taxable income for

trade tax. Before 1990,

The advantage must be granted from State
resources

(28)

Luxembourg acknowledges that,
if any advantage was
conferred by Circular 120, it came from state resources.

The measure must be selective

(29) As

for

the alleged selectivity stemming from the
application of a discretionary practice, the Luxembourg
authorities confirm that
the administration does not
have any discretion to grant or refuse application of the
contrary,
scheme

companies. On the

finance

for

although such selectivity results from a legislative or
administrative exception to the tax provisions,
they
assert that the State aid rules have never been applied to
a situation comparable to this case. The Commission
has not cited any precedent.

(30)

to some of

their
certain goods

Luxembourg points out that,
in paragraph 20 of the
notice, the Commission explains that some tax benefits
to certain types of
are on occasion restricted
undertaking,
to the
therefore
production of
constitute State aid. However, Luxembourg indicates
that there is no example of a decision or judgment of
the Court of Justice of the European Communities in
which a measure has been deemed to be selective
because it applied only to some types of undertaking or
to some of their functions.

functions or
and may

(31) According to Luxembourg, the specificity criterion is
not met because Circular 120 stems from the normal
application of the Luxembourg tax rules. The Circular
applies to all
international groups of a sufficient size
and forms part of efforts to combat abnormally low
transfer prices. The only conditions imposed relate to
the size of the group and to its establishments in several
countries. Such limitations are necessary in order to
guarantee that serious operations are managed from
Luxembourg in a volume which is sufficient to give rise
to difficulties in determining the transfer prices of the
enterprises concerned. The principles to be applied in
determining the taxable result of a finance company, as
proposed in the Circular, are based on the rules for
transfer prices set out by the OECD, which are general
in scope and applicable to all taxpayers encountering
intra-group invoicing. The Circular does not involve the
application of a lower tax rate to finance companies
but, at most,
lays down how the tax base is to be
calculated, taking account of the specific characteristics
of multinational companies.

and general

(32) As an ancillary argument, Luxembourg takes the view
that, even if the arrangements for finance companies
were considered by the Commission to be a derogation
from the normal arrangements, they are justified by the
system. The
nature
the
Luxembourg
principles of
to the
legal certainty with
commercial balance sheet and of
that of full competition. For the reasons outlined above,
they chose the cost-plus pricing method in order to give
the taxpayers concerned a point of reference by laying
down a minimum threshold for declaring profits earned
on internal operations.

scheme of
authorities wanted
linking the tax balance sheet

the
to reconcile

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The measure distorts competition and affects trade
between Member States

Impossibility of recovering the alleged aid

(38)

(33)

Since the rules on transfer prices are designed to
prevent disguised transfers of profits abroad by means
of inappropriate invoicing methods, Circular 120 was
addressed to international groups. The aim was not to
permit an overall reduction of taxable profits within
tax avoidance.
international groups but
Therefore,
the Circular
cannot be considered to confer an advantage which
improves the competitive position of
the enterprises
making up such groups within the common market.

according to Luxembourg,

to prevent

is in fact

that, where it

Luxembourg considers that there is consistent case law
to the effect
impossible to
recover illegal aid, a Member State may not be required
to recover it. This is the situation in which Luxembourg
finds itself in this case. A figure cannot be put on the
amount of the aid because it would not be possible to
establish the real transfer prices which should have been
charged by finance companies or to envisage using any
other of the methods described by the OECD.

V. ASSESSMENT OF THE MEASURE

The principle of legitimate expectations

(34)

In Luxembourg's view, the taxpayers to which Circular
120 was applicable had legitimate expectations which
militate against the repayment of any State aid resulting
from application of the Circular. There is no precedent
for applying the State aid rules to the choice of methods
for calculating the tax base. Applying them in this way
would involve a radical and unforeseeable extension of
the current scope of Article 88 of the Treaty.

(35) Moreover, the Commission considered at the time that
rules governing the taxation of European headquarters
of multinational groups did not fall within the scope of
the Treaty's provisions on State aid (6). Consequently,
Luxembourg had legitimate grounds for believing that
the Circular was legal.

(40)

(36) Moreover, until publication of

the notice in 1998,
Community policy on State aid was unclear. Recovery
could at most extend to the advantages obtained after
the date on which the notice was published.

(39) After considering the comments

It

the

authorities,

expressed in that

takes the view that

submitted by the
Luxembourg
Commission would
confirm its initial position as set out in its letter to
Luxembourg of 11 July 2001 initiating the formal
investigation procedure laid down in Article 88(2) of
the Treaty (7).
the comments
submitted by Luxembourg have not enabled the doubts
to be dispelled and,
letter
it
consequently,
review
scheme under
tax
constitutes State aid within the meaning of Article 87(1)
of the Treaty. Moreover, it deems the aid in question to
be illegal and to constitute operating aid which cannot
be declared compatible with the common market.
Nevertheless, it considers that, in this case, Luxembourg
and the recipient enterprises were justified in having
legitimate expectations and that
the aid need not
therefore be recovered.

that

the

comments

concerning

the Commission is able to accept
To begin with,
Luxembourg's
the problems
posed by transfer prices in an international context.
There is nothing to prevent tax administrations from
using a cost-plus pricing method to determine the tax
base
intra-group services provided by finance
companies. This system can be likened to a tax measure
of a technical nature, as referred to in the second indent
of paragraph 13 of the notice. Nevertheless, some of the
rules for applying the method in this case suggest that
the possible granting of aid cannot be ruled out.

for

The principle of non-retroactivity of tax laws

(41)

In order to be regarded as aid within the meaning of
Article 87(1) of the Treaty, a measure must meet all of
the four criteria set out below.

(37)

Luxembourg takes the view that a request for recovery
of the alleged aid would be tantamount to a retroactive
amendment of the ordinary tax rules that would run
counter
constitutional principle of
non-retroactivity of tax laws. The Commission cannot
reasonably impose recovery where aid results from a
general
tax scheme contested after the event by the
Commission.

to the basic

Advantage

(42)

Firstly,
advantage which relieves

the measure must confer on recipients an
them of charges that are

(6) Written Question No 1735/90 (OJ C 63, 11.3.1991, p. 37).

(7) See footnote 1.

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is calculated on the basis of

normally borne from their budgets. The objective of
using
taxable
alternative methods of determining
income in order to prevent certain transactions from
hiding undue advantages or donations with the sole
purpose of avoiding taxation must normally be to
achieve taxation comparable to that which could have
been arrived at between independent operators on the
the traditional method, whereby the taxable
basis of
profit
the difference
between the enterprise's
income and charges. This
complies with the principle of full competition. In the
area of transfer prices, this international principle is set
out in Article 9 of the OECD Model Tax Convention
(and, in more detail, in the 1995 OECD Transfer Pricing
Guidelines). Since an analysis requires individual facts
and circumstances to be taken into account, the OECD
Guidelines do not recommend the use of ‘safe harbours'
(such as fixed margins).

application of

with the level of taxation which would have resulted
from the
traditional method.
Consequently, the Commission takes the view that the
conduct of
the tax administration had the effect of
conferring an advantage.

the

(45) As for the exclusion of refinancing from the municipal
trade tax base, the Commission is able to accept the
arguments put forward by Luxembourg.

Competition and trade between Member States are
affected

(43)

it

the

that

is clear

argument

The Luxembourg authorities have not provided any
information on how the margins used to establish the
tax base for finance companies under
the cost-plus
pricing method are determined in practice. While the
Commission can accept
the
administration did not have any discretionary power to
grant or refuse the application of the scheme for finance
companies,
from the answers given by
Luxembourg that
the administration did have such
power when it came to determining the margins to be
applied. Circular 120 laid down a minimum rate of
0,25 % of the amount of loans granted (0,125 % if the
financial
statutory
collateral). Nevertheless, it did not lay down any rules or
guidelines on how to determine the margin in practice.
Indeed, the Luxembourg authorities expressly indicated
that only the minimum rates (0,25 % in one case and
0,125 % in six cases) recommended in the Circular were
applied. The Commission thus concludes that finance
companies and the groups to which they belong were
able to derive an advantage by dint of the fact that, in
the
practice,
minimum rate
it
corresponded to the economic reality of the underlying
services.

granted
checking whether

risk incurred was

systematically

Luxembourg

covered by

without

(46)

(47)

with

same

firms

other

group

situated

competing

abroad. Moreover,

trade has been affected.

This criteria is met in that the bulk of loans had to be
granted by the finance company to companies within
in
the
accordance with the case law of the Court of Justice (8)
and as stressed in paragraph 11 of the notice, the mere
that a measure strengthens a firm's position
fact
compared
in
intra-Community trade is enough for it to be concluded
that
In this particular case,
finance companies or enterprises in the groups to which
they belong might have found their position to have
been strengthened as a result of the reduced tax burden
of their company in Luxembourg. Assuming this to be
the case, and taking account of the possibility that the
groups in question are active in sectors characterised by
the existence of
the
Commission takes the view that the measure is liable to
affect such trade.

trade between Member States,

Even if, as the Luxembourg authorities claim, the main
objective of Circular 120 was not to allow an overall
to prevent
reduction in taxable profit but
disguised transfers,
assessed
according to its effects and not according to its
objectives. As consistently confirmed by case law (9), the
objective pursued by the scheme in question cannot
prevent it from being classified as State aid within the
meaning of Article 87(1) of the Treaty.

a measure must be

rather

(44)

the traditional method. The extent of

It should be noted that,
in the case of cross-border
intra-group services, it is not necessary to compare the
cost-plus pricing system with real transfer prices but to
ensure that
the system results in taxation which is
comparable to what would have been obtained by
means of
the
advantage derived from the
system need not be
determined at this stage of the analysis but only for the
purpose of recovering the aid, if this proves necessary:
the Commission notes that the minimum rate of 0,25 %
of the amount of loans granted (0,125 % if the financial
risk incurred was covered by statutory collateral) was
systematically applied in this case. Luxembourg has not
provided any indication of the existence of checks to
ensure that the application of the minimum rate tallied

Selectivity

(48) Given that

the tax provisions in question concerned
only finance companies belonging to multinational

(8) Case 730/79 Philip Morris v Commission [1980] ECR 2671.
(9) Case C-75/97 Belgium v Commission [1999] ECR I-3671,

paragraph 25.

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least

in at

two countries other than
groups present
Luxembourg, only some enterprises had access to the
advantages described above. As for the requirement that
finance companies belong to a large international group
with a minimum capital, the Commission notes that
Luxembourg has not provided any proof demonstrating
that, without such a threshold, a higher rate would be
necessary
consistency with market
conditions. Moreover, as stated in paragraph 20 of the
notice, some tax advantages are on occasion restricted
to certain functions, such as intra-group services. This
also holds for
finance
companies. The criterion of selectivity is thus met.

the Luxembourg scheme for

guarantee

to

(49) Another aspect of selectivity stems from the fact that
the finance company's parent company must have own
funds of at least LUF 7,5 billion (approximately EUR
187,5 million). This implies selectivity in favour of large
groups in so far as groups which had been unable to
achieve the minimum capital expenditure threshold
would have been excluded from equal treatment under
the
Luxembourg
authorities themselves admit that the requirement that
finance companies belong to a large international group
was such as to ensure a sufficient volume of activity in
Luxembourg.

pricing method.

cost-plus

The

(50)

rise

to give

sufficient

In particular,

to difficulties

transfer prices of
The

The Commission considers these aspects of selectivity to
be unjustified by the nature or general scheme of the
Luxembourg tax system.
it does not
consider such limitations to be necessary to ensure that
serious operations are managed from Luxembourg in a
in
volume
enterprises
determining the
concerned (10).
the
determination of transfer prices apply in principle to all
associated
services
supplied
companies. While the international nature of
such
supplies is likely to increase those difficulties, they are
faced not only by companies belonging to a large-scale
the difficulties in
multinational group.
question are not
the Luxembourg
authorities systematically applied a minimum rate to
calculate cost-plus prices.

In any case,
since

the
linked

difficulties

between

relevant

goods

or

to

(51) As regards Luxembourg's comment to the effect that
there is no precedent in the form of a Court decision or
judgment, the Commission would merely point out that
such precedents are not necessary. Classification of the
scheme for finance companies as State aid stems directly
from Article 87(1) of the Treaty. However, it should be
noted that, according to recent case law, tax measures
are selective and constitute State aid where they apply

(10) See recital 31: argument put forward by Luxembourg.

investments
solely to undertakings which carry out
exceeding a certain amount or create a certain number
of jobs (11). The Commission takes the view that the
same reasoning must be applied in this case.

(52) When it comes to reconciling the principles of linking
the tax balance sheet to the commercial balance sheet
and of legal certainty with that of full competition and
providing taxpayers with a point of reference, there is
nothing to prevent tax administrations from opting for
the cost-plus pricing formula. The Commission is not
system as a means of
criticising the use of
that
for
transfer prices
facilitating the determination of
transactions between associated entities. Nevertheless, in
the case at
the
minimum rate must be regarded as a derogation from
the correct use of the cost-plus pricing method which is
conferred an advantage on some
liable
enterprises without being justified by the nature or
general scheme of the system.

the systematic application of

to have

issue,

State resources

(53)

In this case, the reduction in the amount of tax resulting
from the
a
reduction in tax revenues, which constitute State
resources.

application of Circular 120 involves

Compatibility

(54)

(55)

the compatibility of

The Luxembourg authorities have not challenged the
preliminary assessment of
the
scheme for finance companies, which is set out in the
investigation
the
to
decision
formal
initiate
procedure (12)
and which the Commission hereby
confirms. That assessment may be summarised as
follows:

The derogations provided for in Article 87(2) of the
Treaty regarding aid having a social character granted to
individual consumers, aid to make good the damage
caused by natural disasters or exceptional occurrences,
and aid granted to certain regions of
the Federal
Republic of Germany are not applicable in this case.

(11) Joined Cases T-127/99, T-129/99 and T-148/99 Territorio
Histórico de Álava — Diputación Foral de Álava and others v
Commission, paragraph 157, and Joined Cases T-92/00 and
T-103/00, paragraphs 39 and 40 and 49 and 50, not yet
published.
(12) See footnote 1.

20.6.2003

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Official Journal of the European Union

L 153/47

(56)

The derogation provided for in Article 87(3)(a) regarding
aid to promote the economic development of areas
living is abnormally low or
where the standard of
where there is serious underemployment
is also not
applicable.

choices concerning methods of calculating the tax base
nor the alleged lack of clarity of Community State aid
policy would justify an exemption from this basic
principle.

(57)

(58)

(59)

Likewise, the scheme for finance companies does not
important projects of
fall within the category of
common European interest eligible for the derogation
provided for in Article 87(3)(b) and, given that it is not
designed to promote culture and heritage conservation,
cannot qualify for the derogation provided for in Article
87(3)(d).

to

aid

facilitate

authorises

the derogation provided for

the scheme is
It should also be examined whether
in Article
eligible for
87(3)(c), which
the
development of certain economic activities or of certain
economic areas
in cases where such aid does not
adversely affect trading conditions to an extent contrary
to the common interest. The tax advantages granted
under the scheme are not
job
creation or specific projects. They merely constitute
ongoing tax relief and must consequently be classified as
operating aid. The Commission thus takes the view that
the aid in question is liable to adversely affect trading
conditions
to an extent contrary to the common
interest.

linked to investment,

Recovery

The measures in question may not be regarded as
existing aid within the meaning of Article 88(1) of the
Treaty and Article 1(b) of Council Regulation (EC) No
659/99 of 22 March 1999 laying down detailed rules
for the application of Article 93 of the EC Treaty (13)
(now Article 88 of the EC Treaty). This is because they
the
were implemented after the entry into force of
Treaty, have never been notified to the Commission as
required by Article 88(3) of the Treaty, are not covered
by a limitation period and constituted aid from the
moment
into effect. They therefore
constitute new aid. Where State aid granted illegally is
found to be incompatible with the common market, the
natural consequence is that the aid must be recovered
from the recipients in accordance with Article 14 of
Regulation (EC) No 659/99. The purpose of recovery is
to restore as far as possible the competitive situation
which existed before the aid was granted. Neither the
absence of precedent for applying the State aid rules to

they were put

(13) OJ L 83, 27.3.1999, p. 1.

the relevant case law indicates

recovery to be deemed to be

(60) As for the claim that it would be impossible to recover
the aid and the principle of the non-retroactivity of tax
that, even if
laws,
recovery of a tax credit presents difficulties from an
administrative point of view, that fact is not such as to
enable
technically
impossible (14). Moreover, as consistently confirmed by
case law, a Member State may not plead provisions,
practices or circumstances existing in its internal legal
system in order to justify a failure to comply with its
obligations under Community law.
In particular, a
provision laying down a time-limit for the revocation of
an administrative
relevant
provisions of national law, be applied in such a way that
the
recovery required by Community law is not
rendered practically impossible and the interests of the
Community are taken fully into consideration (15). If this
were not the case, Member States could escape effective
monitoring of State aid by not complying with their
obligation under Article 88(3) of the Treaty to notify in
advance plans to grant aid.

act must,

like

the

all

Legitimate expectations

(61) Nevertheless, Article 14(1) of Regulation (EC) No
659/1999 lays down that ‘the Commission shall not
require recovery of the aid if this would be contrary to
a general principle of Community law'. The case law of
the Court of Justice and the Commission's own practice
in previous decisions have established that recovery
would be contrary to a general principle of Community
law if, following the Commission's action, the recipient
had legitimate expectations that the aid was granted in
accordance with Community law.

(62)

In Van den Bergh and Jurgens (16) the Court stated that:

‘The Court has consistently held that any trader in
regard to whom an institution has given rise to

(14) Case C-280/95 Commission v Italy [1998] ECR I-259, paragraph
23, and Case 378/98 Commission v Belgium [2001] ECR I-5107,
paragraph 42.

(15) Case C-5/89 Commission v Germany [1990] ECR I-3437,

paragraphs 18 and 19.

(16) Case C-265/85 Van de Bergh and Jurgens
Commission [1987] ECR 1155, paragraph 44.

and others v

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Official Journal of the European Union

20.6.2003

VI. CONCLUSION

The Commission finds that the Luxembourg scheme for
finance companies constitutes State aid within the
meaning of Article 87(1) of the Treaty and that none of
the derogations provided for in Article 87(2) or (3) are
applicable.
It also finds that Luxembourg unlawfully
implemented the system in question in breach of Article
88(3) of
the
system was withdrawn on 20 February 1996 and that
the tax advantages granted to beneficiaries ceased on 31
December 2001. Lastly,
the
it
beneficiaries had legitimate expectations such as to rule
out recovery of the State aid found to be incompatible
with the common market. Consequently,
is not
requiring that the aid be recovered,

the Treaty. Nevertheless,

it notes that

acknowledges

that

it

HAS ADOPTED THIS DECISION:

Article 1

The tax scheme for finance companies implemented by the
Grand Duchy of Luxembourg by means of Circular LIR No
120 of 12 June 1989 constitutes State
aid which is
incompatible with the common market.

Article 2

This Decision is addressed to the Grand Duchy of Luxembourg.

Done at Brussels, 16 October 2002.

For the Commission

Mario MONTI

Member of the Commission

the
justified hopes may rely on the principle of
protection of legitimate expectation. On the other
hand, if a prudent and discriminating trader could
have
a Community
measure likely to affect his interests, he cannot plead
that principle if the measure is adopted.'

foreseen the

adoption of

(63)

(64)

laws (17),

it notes that,

corporation tax

In Commission Decision 2001/168/ECSC of 31 October
the
2000 on Spain's
Commission noted the similarities between the Spanish
system and a French system it had approved on the
basis that it did not constitute aid within the meaning
of Article 92(1) of the EEC Treaty (now Article 87(1) of
in
In the present case,
the EC Treaty).
some respects,
finance
the Luxembourg scheme for
companies resembles the scheme introduced in Belgium
by Royal Decree No 187 of 30 December 1982 on the
taxation of coordination centres. Both schemes relate to
intra-group activities and use the cost-plus pricing
method to determine the tax base. In its decision of 2
May 1984,
the
scheme did not involve state aid within the meaning of
the EEC Treaty. Even though that
Article 92(1) of
decision was not published,
the
the
Commission did not raise any objection to the Belgian
scheme was made public at
the time in the XIVth
Report on Competition Policy and in an answer to a
Parliamentary question (18).

the Commission took the view that

that

fact

that

finance companies.

the beneficiaries of

entry into force of

the Commission notes

In this connection,
its
decision on the Belgian scheme for coordination centres
the
was adopted before
the
Luxembourg scheme for
It also
the scheme were
notes that all
approved as finance companies before the Commission's
decision of 11 July 2001 to initiate
formal
investigation procedure. It would further point out that
Circular 120 was repealed on 20 February 1996 and
that it has not applied to the beneficiaries since 31
December 2001. Consequently, the Commission accepts
the arguments put forward by Luxembourg concerning
the beneficiaries'
legitimate expectations and waives
recovery of the aid granted.

the

(17) OJ L 60, 1.3.2001, p. 57.
(18) See footnote 6.