2003/601/EC: Commission Decision of 17 February 2003 on aid scheme C54/2001 (ex NN55/2000) Ireland — Foreign Income (Text with EEA relevance) (notified under document number C(2003) 569)
Date: 2003-02-17
Institutions: European Commission
Subjects: Ireland, State aid, corporation tax, double taxation, foreign enterprise, infringement of EU law, infringement procedure (EU), tax relief

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Official Journal of the European Union

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 17 February 2003

on aid scheme C54/2001 (ex NN55/2000) Ireland — Foreign Income

(notified under document number C(2003) 569)

(Only the English text is authentic)

(Text with EEA relevance)

(2003/601/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, 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),

Whereas:

I. PROCEDURE

(1)

the ECOFIN Council adopted a Code of
In 1997,
conduct for business taxation (2) with the objective of
tackling harmful tax competition; it subsequently estab-
lished a Group to assess tax measures that fall within the
scope of that Code. Following its commitment taken by
way of the Code, the Commission published in 1998 a
Notice on the application of State aid rules to measures
relating to direct business taxation (3), stressing its deter-
mination to apply them rigorously and to respect the
It was within this
principle of equality of treatment.
framework that
the Commission embarked upon its
examination of measures identified as harmful by the

(1) OJ C 308, 1.11.2001, p. 2.
(2) OJ C 2, 6.1.1998, p. 1.
(3) OJ C 384, 10.12.1998, p. 3.

(2)

(3)

Code of Conduct Group. In this context, the Commis-
sion notes the parallelism between the work of the Code
of Conduct Group and the Community's policy in
respect of State aid, which share a common goal of abol-
ishing measures which distort or threaten to distort
competition within the single market. The Commission
also notes the progress made towards achieving the ulti-
mate objective of eliminating harmful tax competition
and specifically the steps taken by Member States to
abolish, or to remove the harmful features from, those
tax measures identified as harmful.

By letter dated 29 May 2000 (D/53182), the Commis-
sion requested information on the so-called Foreign
Income scheme. Following an extension to the deadline,
Ireland replied by letter dated 19 July 2000 (A/36170).
A second request for information was sent on 8 August
2000, and a reminder was sent on 13 September 2000.
Ireland replied on 20 September 2000 (A/37792).

By letter dated 11 July 2001 (SG 2001 D/289754), the
Commission informed Ireland that
it had decided to
initiate the procedure laid down in Article 88(2) of the
EC Treaty in respect of the Foreign Income scheme. By
Ireland
letter dated 4 October 2001 (A/37839),
submitted its observations.

(4)

(5)

(6)

(7)

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The Commission Decision to initiate the formal investi-
gation procedure was published in the Official Journal of
the European Communities,
inviting interested parties to
their observations (4). No comments were
submit
received.

(9)

By letter dated 24 January 2002 (D/50287),
the
Commission sought further information. Following an
extension to the deadline, Ireland replied on 26 March
2002 (A/32369).

shares

No particular category of investment or employment is
specified, provided that the trading activities concerned
and the employment itself are in Ireland. The investment
may be made by the company in activities it carries out
directly or may be made indirectly — for example, by
in another company which
subscription for
would then make the investment. The employment may
either be new jobs in a new or expanding business, or
existing jobs in a business which, in the absence of the
investment, would probably close down or reduce the
size of the workforce. There is no requirement as to the
number of
jobs created or maintained. The amount
qualifying for exemption can be reduced where the full
amount of the dividends is not spent on the approved
investment plan.

II. DESCRIPTION OF THE MEASURE

In Ireland, double taxation relief is normally given to
companies via the credit system, under which Irish tax
on doubly taxed income and gains is reduced by the
foreign tax incurred on that income or those gains. The
tax credit cannot exceed the amount of
tax due in
Ireland on that foreign income or gains. However, under
the Foreign Income scheme, relief is instead provided by
exempting the foreign source income or gains from Irish
corporation tax. The Irish Foreign Income scheme
consists of two separate measures: one for foreign divi-
dends, the other for foreign branch profits and gains.
They are set out in sections 222 and 847 of the Taxes
Consolidation Act 1997.

Section 222

The exemption for
foreign dividends was originally
introduced by section 41 of the Finance Act 1988, under
which dividends received by an Irish resident company
from its foreign subsidiaries are exempt
from Irish
corporation tax where those dividends are applied to an
investment plan. A ‘foreign subsidiary’ is a company resi-
dent in a State with which Ireland has a double taxation
Treaty and which is a 51 % subsidiary of the Irish resi-
dent company seeking the exemption. The investment
plan must be submitted in advance to the Irish authori-
ties who issue an exemption certificate in respect of a
specified amount of dividends if they are satisfied that
the investment is directed towards the creation or main-
tenance of employment in Ireland. The exempted divi-
dends must be applied for the purposes of the plan
within a three-year period, beginning one year before
and ending two years after their receipt in Ireland.

(8)

Section 40 of
the Finance Act 1991 amended the
measure to allow the submission of an investment plan
within one year of its commencement and to allow the
Irish authorities to extend the three-year period in which
the dividends may be applied.

(4) See footnote 1.

Section 847

(10)

The exemption for foreign branch profits and gains was
originally introduced by section 29 of the Finance Act
1995. Guidelines were issued in 1995.

(11)

(12)

In order to qualify for the exemption, a company must
submit an investment plan in advance setting out details
of the investment proposed by itself or by an associated
company.
Information submitted with the plan must
include, inter alia: a background note on the company;
details and nature of
the activities, both initial and
planned; the level and type of investment; timescale;
funding arrangements;
forecasts; projected
employment; and location of proposed activities.

financial

that

the employment
the

The Irish authorities may certify the company as a ‘quali-
fying company’ (and may accordingly grant the exemp-
tion) if they are satisfied that the plan is directed at the
creation of ‘substantial new employment’ in Ireland, that
the investment will be made,
the creation of
employment will be achieved and that the maintenance
of
in Ireland is dependent on the
foreign trading activities. The
carrying-on of
minimum level of sustainable employment created must
be of the order of 40 new, incremental jobs and must be
achieved at the latest by the end of a three-year period
starting from the start-up date specified in the exemp-
tion certificate. Substantial permanent capital
is such
amount as is considered ‘appropriate’ by the Irish autho-
rities and is specified in the exemption certificate. The
income and gains from foreign trading activities are only
in the
from tax where they are carried out
exempt
country specified in the exemption certificate.

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(13)

(14)

(15)

(16)

III. GROUNDS FOR INITIATING THE PROCEDURE

its preliminary investigation,
the

In its evaluation of the information submitted by Ireland
in the course of
the
Irish authorities
Commission considered that
conferred an advantage on particular companies by
exempting from Irish taxation certain dividends from
foreign subsidiaries or certain foreign branch profits and
gains. It considered that this advantage was granted via
State resources, affected trade between Member States,
and was selective. The Commission also considered that
none of the exceptions on the general prohibition on
State aid provided for in Article 87(2) and (3) of the EC
Treaty applied. On those grounds the Commission had
doubts as to the compatibility of the measure with the
common market and therefore decided to initiate the
formal investigation procedure.

working capital. At the time, the whole of Ireland was a
region falling within the scope of Article 87(3)(a) of the
Treaty. The measures are therefore compatible with the
common market. Most of
the companies to which
exemption certificates were issued were in the Dublin
region, but they involved investment in both Dublin and
other parts of Ireland. The remaining companies were
located in the South-East or Mid-West regions. Before 1
January 2000, the maximum State aid intensity for these
regions was 57 %. As the highest rate of corporation tax
in the period concerned was 43 % in 1989, this ceiling
could not have been breached, even though there were
no specific controls. Since the rate of corporation tax
has declined,
little or no tax relief would have been
granted in recent years.

IV. COMMENTS FROM IRELAND

Section 222

In their letter of 4 October 2001, apart from summar-
ising the requirements, respectively, of sections 222 and
847 of the Taxes Consolidation Act (see paragraphs 7 to
the Irish authorities made some general
12 above),
observations, added further comments on the two
measures, and sought to correct any inaccurate descrip-
tions or misinterpretations contained in the Commis-
sion's letter of 11 July 2001. They also provided argu-
ments on possible legitimate expectations of companies
granted relief under the schemes. In their letter of 26
March 2002, the Irish authorities provided further infor-
mation on the practical application of the two measures.
These comments can be summarised as follows.

General comments

Section 86 of the 2001 Finance Act abolished the tax
relief for foreign dividends granted by section 222, by
restricting the relief
to dividends certified before 15
February 2001. Section 89 of the 2001 Finance Act
provided that no company may avail itself of the relief
under section 847 unless it holds an exemption certifi-
cate issued before 15 February 2001.

In the evaluation (5) of the measure (both reliefs together)
by the Code of Conduct Group, the measure was not
considered to be in breach of any of the criteria under
paragraph B of the Code (6). The rationale used by the
Group does not relate to exemption of foreign branch
trading profits.

(18) At the time at which this relief was introduced in 1988,
the Irish economy was going through a very difficult
phase and had an unemployment rate as high as 16,3 %.
Dramatic remedial action was being taken to overcome
the severe imbalance in public finances. The aim of the
relief was to bring back dividends to Ireland so as to
help Irish employment. It was not intended to promote
the trading operations of
In
total, 12 certificates for the repatriation of specified divi-
In two
dends have been granted to Irish companies.
cases, the plan was not subsequently implemented and
no tax relief was claimed and in a third case it is possible
that the relief was never in fact claimed. In another, less
than 20 % of the approved relief was claimed. The first
certificate was issued on 1 February 1989 and the last
on 5 December 1996. All the investments made on the
basis of approved plans were executed before the end of
1999, when all of
Ireland was considered a region
covered by Article 87(3)(a).

the foreign subsidiaries.

(19)

If the dividends were not repatriated to Ireland, then no
Irish tax liability would arise in respect of the foreign
subsidiaries. The incentive was that no additional tax
would arise if the dividends were repatriated.

(17)

Both reliefs are investment aid, because both include
investment plans. Most of the sums relieved of tax were
and
invested in plant, machinery,

land, buildings

(5) Report of Code of Conduct Group (Business Taxation) to ECOFIN

Council, SN 1401/99, 23.11.1999.

(6) See footnote 2.

(20) Most of the companies granted relief were in the manu-
facturing sector and most of the repatriated dividends
were applied for investment in plant, machinery, build-
ings,
land and working capital. One company was a
major Irish bank. In that case, the dividends were lent
out for productive investment in the fishing, farming,
tourism, health and small business sectors as well as for
training courses and venture capital.

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(21) Only three companies definitely claimed relief for divi-
dends repatriated to finance investment plans in respect
of which a certificate was issued.

(25)

(22) No assessment was made of the dividend repatriation
history of the companies concerned at the time when
the reliefs were granted. It is not known whether the
exempted dividends would have been repatriated
without the relief.

(23) One major Irish multinational manufacturing group,
active in other sectors including forestry, tourism and
financial services, was issued certificates on seven occa-
sions between 1988 and 1996 in respect of a total of
dividends of IEP 99 million repatriated from subsidiaries
located in the United States. The approved plans related
to investments in, inter alia:

(a) new machinery, plant, equipment, vehicles and soft-

ware;

(b) forestry;

(c) certain group companies,

in the form of capital

injections;

(d) a new hotel and golf club;

(e) a golf club;

The Irish bank was granted a certificate in respect of
IEP 125 million repatriated from a subsidiary in the
United States. The approved plan involved subsidised
lending to various business
sectors under various
schemes, including:

(a) the Operational Programme for Small Business: this
provided loans to small- and medium-sized enter-
prises (SMEs)
in the services, manufacturing, food
and tourism sectors for the construction or refurb-
ishment of premises, the purchase of new or second-
hand plant and equipment, and the provision of
long-term working capital;

(b) loans to projects in certain seaside resorts:

these
provided loans for capital
investments in resort
accommodation and for the construction, renovation
and refurbishment of resort amenities;

(c) special loans for the purchase of milk quota: these
provided finance in 2000 for the purchase of milk
quota by farmers under the Irish Department of
Agriculture's EU Milk Quota Restructuring Scheme;

(d) enterprise loan scheme: this provided loans to start-
up and early stage companies in the period 1994-
2001;

(e) loans

initiatives:

for various Government

these
provide finance for rural
in the Upper
Shannon region (construction and refurbishment of
residential and commercial buildings), the construc-
tion or refurbishment of nursing homes and the
development of the Irish white-fish fleet;

renewal

(f) hotel and golf club developments, designed to offset

start-up losses;

(f) two venture capital funds.

(g) a timber processing plant, offsetting operating losses;

(26)

(h) existing group financial services companies and a

new financial services company;

(i) a special job creation enterprise fund;

(j) software;

The company for which it has not been possible to
establish whether the relief granted was in fact claimed
is a leisure company. The investment plan concerned the
development of a golf club and holiday villas. The
exemption covered only IEP 0,15 million of dividends:
the vast bulk of the project finance came from other
sources.

(k) upgrading plant, equipment, machinery and soft-

Section 847

ware;

(l) computerisation.

(24) Another company group in the manufacturing sector
was granted a certificate in respect of IEP 10 million of
dividends from a subsidiary in the United States. The
approved plan related to investments in: the construc-
tion of a new liquid milk plant; the construction of a
new cheese plant; the total refurbishment of slaughtering
and meat-boning plants to meet Community and Irish
regulations; and the refurbishment of a cheese plant.

(27) Only three certificates have been granted. In one case,
the relief concerned branches located in a number of
countries, although branches were established in only
four countries: Germany, Italy, South Africa and Japan.
The certificate was issued in July 1999 and was effective
from September 1996.

(28)

In the two other cases, the relief has never been claimed,
in one case because no incremental Irish tax would have
been due and in the other because the foreign branches
concerned have never been established.

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Legitimate expectations

each individual case. The Commission does not know
the identity of the beneficiaries of the scheme, nor all
the relevant information in any individual case.

(29)

Companies could claim to have legitimate expectations
to receive the reliefs for which they qualified under the
legislation, as they were not aware until recently that no
State aid approval had been obtained for the measures.
They submitted plans, were granted certificates, and
incurred expenditure implementing their plans in the
belief that, having been certified by the Irish authorities,
they would be entitled to the relief in accordance with
the legislation. The companies could not reasonably have
foreseen a situation in which,
following substantial
investment and job creation, the relief would not be
allowed to run its course. The manner in which the
measures were amended by the 2001 Finance Act —
closing the section 847 relief to new entrants and effec-
tively abolishing the section 222 relief — acknowledges
the existence of companies' legitimate expectations.

Existence of State aid

(31)

the Irish
The Commission notes the observations of
authorities on the evaluation of
the Foreign Income
scheme by the Code of Conduct Group. However, this
evaluation has no bearing on the objective assessment of
the existence, or otherwise, of State aid.

(32)

In order to be considered State aid within the meaning
of Article 87(1), a measure must fulfil the following four
criteria:

V. ASSESSMENT OF THE MEASURE

(33)

(30) After having considered the observations of the Irish
authorities,
its position,
the Commission maintains
expressed in its letter of 11 July 2001 (7) to Ireland initi-
ating the procedure under Article 88(2) of the Treaty,
that the scheme under examination constitutes unlawful
State operating aid, within the scope of Article 87(1) of
the Treaty. In the assessment that follows, the Commis-
sion explicitly examines the scheme as formed by the
two individual measures set out in sections 222 and 847
of the Taxes Consolidation Act 1997. This assessment is
not intended to provide an assessment of any individual
grants of aid to particular undertakings under the two
measures. No individual case was notified to the
Commission with all the necessary information for the
Commission to assess it. The Commission is bound by
the very nature of the two measures to make a general
and abstract examination both on the existence of State
aid within the meaning of Article 87(1) and on the ques-
tion of
the
elements necessary to assess whether the Foreign Income
scheme involves State aid and whether it is compatible
with the common market can be found in the scheme
itself. The Treaty itself, Council Regulation (EC) No 659/
1999 of 22 March 1999 laying down detailed rules for
the application of Article 93 of the EC Treaty (8), and the
case law of
the European
Communities (9) empower the Commission to conduct
such an analysis. The Commission will not therefore
formally examine the application of the measures in

the compatibility of such aid. Thus, all

the Court of

Justice of

(7) See footnote 1.
(8) OJ L 83, 27.3.1999, p. 1.
(9) Judgments of

the Court of 14 October 1987 in Case 248/84
Germany v. Commission [1987] ECR 4013, at paragraphs 17-18; of 5
October 1994 in Case C-47/91 Italy v. Commission [1994] ECR I-
4635, at paragraphs 20-21; of 17 June 1999 in Case C-75/97
Belgium v. Commission [1999] ECR I-3671, at paragraph 48; of 19
October 2000,
Italy and
Sardegna Lines v. Commission [2000] ECR I-8855, at paragraph 51.

Joined Cases C-15/98 and C-105/99,

First, the measure must afford the beneficiaries an advan-
tage that reduces the costs they normally bear in the
course of their business. Both tax credits and tax exemp-
tions are mechanisms for avoiding the double taxation
of corporate income. Where a foreign tax credit
is
granted, the taxes paid on the income in the foreign
jurisdiction is deducted from the liability to tax on that
income in the domestic tax jurisdiction, up to the limit
of that domestic tax liability. In contrast, where foreign
income is exempted, no domestic corporation tax is
payable. Thus, where the domestic tax liability is greater
than the tax paid in the foreign source jurisdiction,
under a credit system, further tax is payable, whereas
under an exemption system, no further tax is due. There-
fore, where a specific tax exemption for foreign income
rule
is granted under a system where the general
provides for a credit, this exemption constitutes a tax
advantage and reduces the beneficiary company's tax
burden.

(34) According to point 9 of the Commission Notice on the
application of the State aid rules to measures relating to
direct business taxation (10) (hereinafter ‘the Notice’), 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 Foreign
criterion. By
Income
exempting the foreign source income and gains from
any taxation in Ireland, the companies concerned and
the groups to which they belong are relieved, to the
extent to which it would otherwise occur, of the addi-
tional tax liability after the application of the generally
applied tax credit. The scheme is not a technical measure
applying to all firms without distinction, of the sort envi-
saged by point 13 of the Notice.

scheme

clearly

fulfils

this

(10) See footnote 3.

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(35)

The observation that if the dividends were not repa-
triated to Ireland, then no Irish tax liability would arise
in respect of the foreign subsidiaries does not alter the
fact that the measure grants a tax advantage to the bene-
ficiaries. Although the advantage under this measure is
granted in order to encourage a particular course of
action, this fact cannot affect the objective analysis of
whether the measure constitutes State aid.

(36)

Secondly, the advantage must be granted by the State or
through State resources. The grant of a tax reduction,
such as that conferred on companies under the Foreign
Income scheme by the Irish authorities, involves a loss
of tax revenue which, according to point 10 of the
Notice, is equivalent to the use of State resources in the
form of fiscal expenditure.

(37)

(38)

Thirdly, the measure must affect competition and trade
between Member States. As is explained in point 11 of
the Notice, this criterion is fulfilled if a company bene-
fiting from a measure carries on an economic activity
involving trade between Member States. Companies
granted tax relief under the Foreign Income scheme
necessarily form part of
international groups with
foreign subsidiaries or branches. On the basis of the
information supplied by the Irish authorities, it is clear
that at least some of the companies concerned, or the
groups to which they belong, were active in sectors
subject to intra-Community trade.

Lastly, the measure must be specific or selective in that
it favours ‘certain undertakings or the production of
certain goods’. The beneficiaries of the measure are only
those companies that have obtained an exemption certi-
ficate in accordance with the specific requirements of
either section 222 or section 847 (see paragraphs 7 to
12 above). The conditions set out in the legislation are
very restrictive. Accordingly, the Foreign Income scheme
cannot be considered a general measure but constitutes
a selective advantage to those few companies that satisfy
its requirements and therefore constitutes a State aid
scheme.

(39) However, notwithstanding this general assessment of the
scheme, the Commission notes the comments from the
Irish authorities to the effect that no new exemption

certificates can be delivered and that only one of the
three companies granted an exemption certificate under
section 847 has in fact claimed the tax exemption. The
Commission also notes that from the current financial
year, corporation tax is 12,5 % and that,
in principle,
such a rate is lower than those applied in those jurisdic-
tions where the branches of the relevant company are
the Commission accepts that,
established. Therefore,
under
exemption under
section 847 no longer confers an advantage on those
companies to which certificates have been granted.
Accordingly, in respect of those companies, the measure
no longer falls within the scope of Article 87(1) of the
Treaty.

the present circumstances,

Compatibility

(40)

In so far as the Foreign Income scheme constitutes State
aid within the meaning of Article 87(1) of the Treaty, its
compatibility must be evaluated in the light of
the
exceptions provided for in Article 87(2) and (3).

(41)

The exceptions provided for in Article 87(2), which
concern aid of a social character granted to individual
consumers, aid to make good the damage caused by
natural disasters or exceptional occurrences and aid
the Federal Republic of
granted to certain areas of
Germany, do not apply in this case.

(42)

The exception provided for in Article 87(3)(a) provides
for the authorisation of aid to promote the economic
development of areas where the standard of living is
abnormally low or where there is serious underemploy-
ment.

(43)

The Commission notes the observations from the Irish
authorities that the Foreign Income scheme constitutes
investment aid rather than operating aid, that all the
investments aided by the section 222 measure were
made before the end of 1999, at a time when the whole
of Ireland was considered as an Article 87(3)(a) region
for State aid purposes, and that all the applications and
section 847 were also finalised
certifications under
before the end of 1999.

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and

initial

capital

operating

job creation,

(44) At first sight, section 222 might appear to be an invest-
ment aid measure. However, nothing in the legislation
or in the information provided by the Irish authorities
demonstrates that the criteria for granting the tax relief
satisfy the regional aid guidelines in force at the time (11).
To the extent that these guidelines provide for aid to be
granted for
the
investment or
Commission notes that, according to Ireland, tax relief
inter alia, working capital,
was granted in respect of,
injections,
losses,
start-up
upgrading of plant, machinery and software, and refurb-
ishment of facilities. As the Commission has consistently
ruled in previous decisions, none of these is normally
considered to constitute initial investment or job crea-
tion for which State aid may be granted. Similarly, the
Commission notes that section 222 provides for tax
relief for the maintenance of employment as well as for
its creation. This is borne out by information provided
by Ireland on the practical application of section 222.
Similarly, nothing in the legislation or in the information
provided by the Irish authorities demonstrates that
controls were in place to ensure compliance with other
rules on State aid, notably aid to sensitive sectors, aid to
companies in difficulty and cumulation of aid. In parti-
cular, the Commission notes that relief was given in
respect of production and processing of goods featuring
in Annex I to the EC Treaty and in respect of operations
which, according to the Irish authorities, would other-
wise have been unviable.

(45)

The Commission therefore concludes that section 222
grants operating aid to those companies awarded a tax
exemption for dividends repatriated from foreign subsi-
diaries. Although operating aid may be granted in the
areas envisaged in Article 87(3)(a), such aid is subject to
strict conditions. In particular, the aid must be limited in
time and designed to overcome the structural handicaps
of enterprises located in such regions (12). Although aid
granted under section 222 is, in principle, limited to a
duration of three years, nothing in the legislation or in
the information provided by Ireland demonstrates that
the tax relief granted is designed to overcome the struc-
tural handicaps of enterprises located in Ireland. In this
the measure is
respect,
narrow in scope. Rather than helping to offset the struc-
tural handicaps faced by enterprises in Ireland in general,
it is targeted at a very restricted group of companies that
have foreign subsidiaries in certain tax jurisdictions
taxation is lower than in
where the overall rate of
Ireland. It is hard to establish what,
if any, particular
structural handicaps these firms faced. It also appears

the Commission notes that

that in some cases at least, the aid granted through the
tax relief was not a critical factor in determining whether
the investment would take place. The Commission also
notes that the investment supported by the relief can be
made indirectly through subscription to shares in a
company which would then undertake the investment.
However, it is not clear that this mechanism acts as an
incentive for the creation or maintenance of employ-
ment. In order for this to be the case, the Irish authori-
ties would have to be sure that in the absence of the
specific subscription to shares the investment would not
take place, and that the subscription would not materia-
lise unless the tax relief was granted. Nothing in the
legislation or in the information provided by Ireland
demonstrates that such control mechanisms were in
place.

(46) As was mentioned in paragraph 30, the Commission
makes no specific assessment as to whether an aid
element is present in the individual tax reliefs granted
under the Foreign Income scheme, nor whether those
reliefs are compatible. However, in respect of the bank
granted tax relief under section 222, the Commission
would make the following observations. Regardless of
the purpose to which the repatriated dividends were
applied, the tax relief must be viewed as operating aid to
the bank. Even if some aid was passed on by the bank to
its customers as part of new lending, by increasing the
resources of the bank available for lending, the relief
would have strengthened the competitive position of
both the bank itself and the international group to which
it belongs. The Commission also notes that no controls
were put in place to ensure that the lending of the bank
under the approved investment plan itself satisfied the
requirements of the relevant State aid rules. By way of
example, the Commission would note that, as it has
consistently held in previous decisions, State aid for the
purchase of milk quota is
incompatible with the
common market (13).

(47)

The Commission notes the comments from Ireland that,
once granted, the tax relief under section 847 applies on
an ongoing basis if the conditions continue to be met
and that there is, at present, no closing date for the
reliefs already granted. The Commission also notes that,
according to the wording of section 847, one of the
conditions of the relief is that the maintenance of the
employment created depends on the carrying-on of
foreign trading activities in respect of which the exemp-
tion is granted. It is therefore clear that rather than grant
investment aid, section 847, which was conceived at a

(11) Commission Communication on the method for the application of
Article 92(3)(a) and (c) to regional aid: OJ C 212, 12.8.1988, p. 2.
(12) Point 6, first indent, of the 1988 Communication on regional aid.

(13) See for example Commission Decisions 1996/616/EC, OJ L 274,
26.10.1996, p. 26 and 2002/411/EC, OJ L 144, 1.6.2002, p. 49.

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time when the rate of corporation tax in Ireland was
much higher than it is now, constituted an operating aid
measure, the benefit of which would cease as soon as it
was withdrawn. Since tax relief granted under section
847 applied on an ongoing basis without a closing date,
it fails to meet the requirement that operating aid under
Article 87(3)(a), where given, is limited in time (14).

(48) According to Ireland, the investment plan of the one
company to have claimed section 847 relief
‘was
prepared in September 1994 and commitments were
given by the Irish Authorities in December 1994 to
bring in the tax relief in question’. In this respect, given
these circumstances as well as the narrow scope and
very limited uptake of
the
Commission notes that an individual ad hoc aid payment
made to a single firm, or aid confined to one area of
activity, may have a major impact on competition in the
relevant market and that its effects on regional develop-
ment are likely to be too limited for the purposes of its
Guidelines on National Regional Aid (15).

the section 847 relief,

(49) According to point 33 of the Notice,

in order to be
considered compatible with the common market, State
aid intended to promote the economic development of
particular areas must be in proportion to, and targeted
at, the aims sought. The Irish authorities have provided
little evidence to demonstrate that either section 222 or
section 847 meets these requirements. Very few applica-
tions for aid were made. In a number of cases, either the
tax relief was not fully taken up, being incidental to the
execution of the investment plan, or the investment was
not executed. The Irish authorities have also admitted
that although reliefs were granted, little or no tax relief
would have been claimed in recent years. The Commis-
sion also notes that both reliefs were open to companies
in the financial services sector. The Commission's prac-
tice in previous decisions, consistent with point 33 of
the Notice, has been to exclude financial services from
the scope of operating aid measures (16).

(52)

(53)

remedy to a serious disturbance in the economy of
Ireland. Nor is it intended to promote culture or heritage
conservation.

Finally, the Foreign Income scheme must be examined in
the light of Article 87(3)(c), which provides for the
authorisation of aid to facilitate the development of
certain economic activities or of certain economic areas,
where such aid does not adversely affect trading condi-
tions to an extent
is contrary to the common
interest. As was established in paragraphs 43 to 46, the
tax advantages granted by the Foreign Income scheme
are operating aid, the benefits of which cease as soon as
the aid is withdrawn. According to previous decisions of
the Commission, such aid cannot be considered to facili-
tate the development of certain activities or of certain
economic areas.

that

The Irish authorities have not attempted to argue that
the Foreign Income scheme complies with the Guidelines
on aid to employment (17) under which certain aid
measures may be considered compatible with the
common market by virtue of Article 87(3)(c). However,
the Commission notes that to the extent that section
222 is aimed at the maintenance of employment, the
measure does not grant aid to a firm to persuade it not
to lay off its workers, with the subsidy being calculated
on the basis of the number of employees at the time the
aid is granted. To the extent that both section 222 and
section 847 are aimed at job creation, neither provision
provides that the amount of aid per worker must be
justified, nor that
too high a
proportion of the firm's production costs. The Foreign
Income scheme cannot therefore be regarded as falling
within the scope of the Guidelines on aid to employ-
ment.

it shall not represent

(50)

Therefore, tax relief under sections 222 and 847 cannot
be held to be compatible with the common market in
accordance with Article 87(3)(a).

(51)

The exceptions laid down in Article 87(3)(b) and (d) do
not apply to the Foreign Income scheme. It does not
have the objective either to promote the execution of an
important project of common European interest or to

Legitimate expectations and recovery

(54) Where illegally granted State aid is found to be incompa-
tible with the common market, the natural consequence
of such a finding is that the aid should be recovered
from the beneficiaries (18). Through recovery of the aid,
the competitive position that existed before the aid was
granted is restored as far as is possible. However, Article
14(1) of Regulation (EC) 659/1999 (19) states that ‘the
Commission shall not require the recovery of the aid if
this would be contrary to a general principle of Commu-
nity law’. The case law of the Court of Justice and the

(14) Point 6, first indent, of the 1988 Communication on regional aid.
(15) OJ C 74, 10.3.1998, p. 9; see heading 2.
(16) See for example Article 2 of Commission Decision on the Fiscal

Regime in the Azores, SG (2002) 233143.

(17) OJ C 334, 12.12.1995, p. 4.
(18) See for example case C-169/1995, Spain v. Commission ECR [1997]

I 135, paragraph 47.

(19) See footnote 8.

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Commission's own practice have established that where,
as a result of the Commission's actions, a legitimate
expectation exists on the part of the beneficiary of a
measure that the aid has been granted in accordance
with Community law, then an order to recover the aid
would infringe a general principle of Community law.

(55)

In the judgment on the Van den Bergh en Jurgens case (20),
the Court ruled:

(56)

‘The Court has consistently held that any trader in
regard to whom an institution has given rise to justi-
fied hopes may rely on the principle of protection of
legitimate expectation. On the other hand,
if a
prudent and discriminating trader could have fore-
seen the adoption of a Community measure likely to
affect his interests, he cannot plead that principle if
the measure is adopted.’

the Commission notes that

In the present case,
the
scheme introduced in Belgium by Arrêté royal No 187
of 30 December 1982 dealing with the tax treatment of
coordination centres (21),
like the Irish Foreign Income
scheme, is a measure which affects the taxation of multi-
national companies and concerns rules that are designed
to avoid double taxation. In its decision of 2 May 1984,
the Commission considered the Belgian scheme not to
be an aid within the meaning of Article 92(1) of the EEC
Treaty (now Article 87(1) of the EC Treaty). Even if this
Decision was not published, the fact that the Commis-
sion had not raised any objections to the Belgian coordi-
nation centres scheme was publicised both in the XIVth
Competition Report and in an answer to a parliamentary
question (22). In particular, in this answer, the Commis-
sion stated that ‘such rules do not fall within the scope
of Articles 92 and 93 of the EEC Treaty (now Articles
87 and 88 of the EC Treaty)’.

(57) Accordingly, the Commission accepts that the benefici-
aries of the measures were entitled to entertain a legiti-
mate expectation that the measures did not constitute
State aid. These considerations therefore prevent
the
Commission from ordering the recovery of any aid
granted.

VI. CONCLUSIONS

(58)

The Commission finds that Ireland has illegally imple-
mented the Foreign Income scheme as set out in sections
222 and 847 of the Taxes Consolidation Act 1997. The

Commission concludes that the tax reliefs in question
constituted a scheme of operating aid that was not
covered by any of the derogations to the prohibition on
State aid set out in Articles 87(2) and 87(3) of the EC
Treaty and is therefore incompatible with the common
market. The Commission notes that section 222 has in
effect been abolished and that since section 847 was
introduced, the rate of corporation tax has fallen to the
extent that section 847 no longer constitutes State aid
with respect to the companies which currently benefit
from it. The Commission also concludes that to the
extent that aid was granted by sections 222 and 847,
the beneficiaries were entitled to entertain legitimate
expectations that the Irish Foreign Income scheme did
not constitute State aid. Therefore, the Commission does
not require recovery of any aid granted,

HAS ADOPTED THIS DECISION:

Article 1

The State aid scheme in the form of tax exemptions, unlawfully
put into effect by Ireland, in breach of Article 88(3) of the EC
Treaty, through section 41 of the Finance Act 1988 and section
29 of the Finance Act 1995, consolidated under sections 222
and 847 of the Taxes Consolidation Act 1997, is incompatible
with the common market.

Article 2

Outstanding tax exemption certificates issued under section
847 of the Taxes Consolidation Act 1995 shall not be consid-
ered State aid within the meaning of Article 87(1) of the
Treaty.

Article 3

This Decision is addressed to the Republic of Ireland.

Done at Brussels, 17 February 2003.

For the Commission

Mario MONTI

Member of the Commission

(20) Case C-265/85, Van den Bergh en Jurgens BV v. Commission [1987]

ECR 1155, at paragraph 44.

(21) Moniteur belge, 13.1.1983 (Dossier No 1982-12-30/69).
(22) Written question No 1735/90, OJ C 63, 11.3.1991, p. 37.