2003/515/EC: Commission Decision of 17 February 2003 on the State aid implemented by the Netherlands for international financing activities (Text with EEA relevance) (notified under document number C(2003) 568)
Date: 2003-02-17
Institutions: European Commission
Subjects: International Finance Corporation, Netherlands, State aid, aid system, control of State aid, corporation tax, group of companies, tax system

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 17 February 2003

on the State aid implemented by the Netherlands for international financing activities

(notified under document number C(2003) 568)

(Only the Dutch text is authentic)

(Text with EEA relevance)

(2003/515/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) and having regard to
their comments,

Whereas:

1. PROCEDURE

(1)

In 1997, with a view to tackling harmful tax competi-
tion, the Ecofin Council approved a code of conduct for
business taxation (2) and set up an ad hoc group to
assess the tax measures that might be covered by it. In
accordance with the code of conduct,
in 1998 the
Commission issued a notice on the application of the
State aid rules to measures relating to direct business
taxation (3) in which it emphasised its commitment to
the strict application of the rules, subject to the principle
of equal treatment. The Commission has begun investi-
gating those measures regarded as harmful by the code
of conduct group on the basis of the State aid rules. The
Commission points out that the activities of the code of
conduct group serve the same purpose as the European

(1) OJ C 306, 31.10.2001, p. 6.
(2) OJ C 2, 6.1.1998, p. 1.
(3) OJ C 384, 10.12.1998, p. 3.

Union's State aid policy: both are designed to bring an
end to measures which distort or threaten to distort
competition in the internal market. The Commission has
also taken note of progress in combating harmful tax
competition, and in particular the steps taken by the
Member States to abolish the measures identified by the
code of conduct group or to deal with the harmful
aspects thereof.

(2)

(3)

(4)

(5)

By letter dated 12 February 1999 the Commission asked
the Dutch authorities for information on the scheme
concerning international
(group
financing activities, hereinafter referred to as the ‘gfa
scheme’). The Netherlands provided the requested infor-
mation by letter dated 8 March 1999.

financing activities

The Commission notified the Dutch authorities by letter
dated 11 July 2001 of its decision to institute the proce-
dure laid down in Article 88(2) of the EC Treaty.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Commu-
nities (4). The Commission invited interested parties to
submit their comments on the aid measure.

The Commission received comments from interested
parties and forwarded them to the Netherlands for
comments. The Dutch authorities responded by letter
dated 30 January 2002.

(4) See footnote 1.

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(6)

The Dutch authorities sent further information to the
Commission by letters dated 18 July and 3 October
2002. In the course of the procedure the Commission
and the Dutch authorities met on numerous occasions.

(12) Under Article 15b, the term ‘financial activities’ covers
the following: the financing of group companies' oper-
ating resources and activities, including the financing of
participations, and the use of, or the right to use, oper-
ating resources within the group and investments.

(7)

(8)

(9)

2. DETAILED DESCRIPTION OF THE AID

The rules governing the establishment of a reserve to
cover the risks associated with group financing activities
are laid down in Article 15b of the 1969 Corporate Tax
Act. That article was incorporated by the law of 13
December 1996, which
also includes provisions
restricting the scope for using artificial loan schemes to
interest associated with internationally active
deduct
corporate
financing activities
groups'
income. These provisions are designed to counter the
artificial erosion of the tax base of Dutch corporate
income tax.

from taxable

2.1. Purpose

(13)

(14)

Beneficiaries must be able to demonstrate that they are
regularly engaged in lending and placing funds and that
they are able to operate independently. Management
must have the resources and powers to take the neces-
sary measures
to that end. The activities must be
conducted exclusively from the Netherlands, without any
material interference from elsewhere. The company must
be involved in arranging and implementing financial
transactions on behalf of group companies on a non-
incidental basis.

Lastly, companies in the four countries must contribute
at least 5 % of taxable income from their financing activ-
ities. Each of the two continents must also contribute at
least 10 %. Furthermore, to reinforce the international
spread of activities, no more than 10 % of total capital
(debt and equity) used by the company for its financial
activities may be applied, directly or indirectly, in group
companies based in the Netherlands.

According to the Dutch authorities, the Dutch Parlia-
ment's aim in passing this legislation was to prevent
internationally active Dutch companies sheltering their
group financing activities in companies situated abroad,
including in tax havens.

(15)

Companies which do not meet the legal requirements
may not establish a risk reserve. Equally, as soon as they
cease to comply with these requirements, the risk reserve
is liberated and is liable to corporate tax at the full rate.

(16)

Company applications for the gfa scheme are handled by
the tax authorities. Permission is given for 10 years.

2.2. Conditions

Requests to establish a risk reserve are dealt with by a
coordinating committee specially set up for the purpose.
Neither the committee, the minister nor the Government
have discretionary powers. A decree (published on 2
October 1997) contains a number of provisions to
ensure correct application of the law and prevent abuse.

(10) Any company liable to tax, irrespective of whether the
company is of Dutch or foreign origin,
is entitled to
constitute a risk reserve, subject to compliance with the
law.

(11) A risk reserve can be set up by any company that carries
out financing activities for parts of the group in at least
four countries or on at least two continents. A company
is regarded as belonging to the same group as a Dutch
company where the two are linked through a share-
holding of over 33,33 % of capital. Shares not entitling
the shareholder to a percentage of the company's liqui-
dation proceeds are not taken into account in deter-
mining whether this condition is complied with.

2.3. Tax repercussions

(17) On condition that all

are met,

requirements

the
company is entitled to form a reserve for the special
risks associated with the group's international financing
activities. The yearly contribution to the reserve is
limited to a maximum of 80 % of profits from financing
activities (primarily interest and royalties) and income
from short-term portfolio investments kept with a view
to financing possible takeovers (hereinafter referred to as
‘finance profit’).

(18)

investments as a share of finance profit must
By law,
amount to no more than whichever of the following
values is smaller: either 25 % of the net value of the
group or the sum of all existing participations and
outstanding intra-group loans (Dutch participations up
to a maximum of 1/9 of the foreign participations). All
other business income is excluded.

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(19) Net finance profit is calculated after deduction of costs
relating to financing activities, including interest and a
proportionate share of general costs. Profits exempted
under the participation exemption and tax credits to
prevent double taxation of subsidiaries' revenue are not
regarded as finance profit. Nor are releases from the risk
reserve.

own resources. However, capital contributions of this
type will not qualify if they are in the form of loan
conversions (into share capital) or result in a permanent
establishment being converted into a subsidiary. The
group must hold the shares of the subsidiary in question
for at least five years, except in so far as alienation is
based predominantly on commercial grounds.

(20)

(21)

In addition, the annual contribution to the reserve is
limited by law to a maximum of 80 % of total taxable
income (including income that is not related to financial
activities). In this way, losses in other activities decrease
the proportion of the finance profit used to calculate the
maximum reserve to less than 80 %. For the purpose of
the 80 % rule, the taxable profit of the company is calcu-
lated before taking into account any contributions to or
losses carried
releases from the reserve.
forward from previous years must be deducted.

In addition,

Companies with an acquisition fund which have demon-
strated to the tax authorities that they intend to acquire
one or more companies may, subject to certain limits,
add the income from that fund to the net finance profit,
which forms the basis for calculating contributions to
the reserve. The fund,
to which the aforementioned
conditions apply, should be kept in liquid asset form so
that
it can be accessed at short notice. Acquisitions
should take the form of share capital purchases.

(25)

The risk reserve can be terminated voluntarily at any
time by filing a request to this effect even when no
acquisition or capital contribution has taken place. This
must take place in five equal instalments, all subject to
tax at a special rate of 10 %. During the five-year period
no further contributions to the reserve will be allowed
but releases in the context of capital contributions will
remain possible. However, the requirement that business
must be conducted exclusively from the Netherlands and
the foreign country conditions will continue to apply
unchanged. Any income during this period will be taxed
at the normal corporate tax rate and may not be added
to the reserve.

(26)

Losses associated with the risks for which the reserve
was set up (loan write-offs, liquidation losses and oper-
the
ating losses by permanent
company or group companies) give rise to a taxable
release from the reserve of an amount equivalent to the
losses incurred. If the reserve is insufficient, the amount
of losses in excess of the reserve is offset against profits.
The following risks/losses give rise to a release:

establishments of

(22)

The reserve can be released voluntarily or compulsorily.

— risks in excess of losses in the value of the share

capital in a participation,

(23)

(24)

In the event of the acquisition of shares or a capital
contribution to a Dutch or foreign company, an amount
equal to 50 % of the acquisition price or the capital
contribution may be deducted from the reserve without
immediate taxation. However,
the
participations thus acquired is reduced by 50 %, thus
enabling possible liquidation losses to be anticipated in
fiscal terms. In the event of liquidation losses actually
occurring, they are reduced in fiscal terms by the extent
to which the reserve has already been decreased to cover
this risk.

the yield value of

— including loan write-offs, liquidation losses and oper-
ating losses offset against profits in the Netherlands,

— losses linked to writing off interests in associated
bodies not covered by the participation exemption,

— losses associated with managing a foreign company
via a permanent establishment abroad, in so far as
they were incurred anywhere within the Dutch part
of the group,

— forex losses.

If the Dutch Ministry of Finance deems that the com-
pany's activities or the place in which it is based entail
extraordinary risks (e.g. political or climatic), the percen-
tage of costs which can be deducted from the risk
reserve on a tax-free basis is increased to 100 %. Thus,
the reduction in the yield value of the participations
acquired. In such cases any future liquidation losses are
also reduced by the same amount. Although this has
never occurred in practice,
the same tax treatment
applies
for capital contributions enabling a group
subsidiary to meet obligations imposed on it by the
courts where it would be unable to comply using its

(27)

Lastly, compulsory release, taxable at the corporate tax
rate, will take place when the company is no longer
subject to tax in the Netherlands (liquidation or transfer
of its fiscal domicile to another country). This taxable
release is excluded from the finance profits and cannot
be used to create a new reserve. Equally,
failure to
comply with the requirement that transactions should be
effected from the Netherlands,
the foreign country
conditions or any other statutory conditions will result
in compulsory release with the same tax consequences.

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(28)

In the case of compulsory release within the five-year
voluntary release period, additional tax of 25 % will be
levied on all annual instalments which have been subject
to the special 10 % tax rate, thereby effectively raising it
to 35 %.

(33)

2.4. Cost of the scheme

(29) According to the Dutch Government, the gfa scheme is

budget neutral.

Second, the gfa scheme is not an aid measure because
the companies which make use of it have not derived
any advantage. Obviously,
in view of the mobility of
international financing activities, companies move to the
place where the most favourable tax arrangements apply.
Because the applicable rate in the Netherlands was 35 %
at the time, companies were tempted to transfer their
financing activities to other countries with more favour-
able arrangements. The Dutch authorities attempted to
stem this flight of capital by establishing the gfa scheme.
Therefore it cannot be argued that the companies which
make use of the scheme have an advantage, because if
the scheme had not existed they would have transferred
their financing activities to another country. Whether
there is an economic advantage or not therefore depends
on the actual tax burden on financing activities in the
country concerned. It is not the case that the scheme
reduces these companies' normal overheads.

(30)

(31)

3. GROUNDS FOR INITIATING THE PROCEDURE

Because the gfa scheme provides temporary or perma-
nent tax breaks only to multinationals operating in four
countries or on two continents, the Commission took
the view that the position of those multinationals had
been strengthened and that the scheme might constitute
State aid within the meaning of Article 86(1) of the
Treaty. Because the advantages offered by the gfa scheme
are not linked to employment-generating investments or
specific projects, their sole effect would appear to be
reducing overheads. The Commission therefore took the
view that they could be regarded as constituting oper-
ating aid and that none of the derogations enshrined in
Article 88(2) and (3) applied.

4. COMMENTS FROM INTERESTED PARTIES

and

the VNO-NCW (5)

59 companies
submitted
comments before the deadline expired. Most of the inter-
ested parties are companies which use or have used the
gfa scheme. The comments of three companies were not
forwarded to the Netherlands because
they were
submitted after the deadline had expired. However, on
the whole they tally with the observations submitted
before the deadline. Almost all the companies which
arguments put
submitted comments
forward by the VNO-NCW, which are summarised
below.

endorsed the

4.1. The gfa scheme is not an aid measure

(32)

First, the gfa scheme was introduced with a view to
combating capital flight from the Netherlands. The aim
was to deal with tax competition between different
countries, not to influence competition on the market
between different companies. Whether the scheme is
compatible with the Treaty should therefore be deter-
mined on the basis of Articles 96 and 97 rather than on
the basis of the State aid rules.

(34)

Third, the scheme has yielded additional revenue, so it
cannot be said that public funds have had to be used to
fund its implementation.

(35)

(36)

Fourth, it is not a measure which favours certain compa-
nies or the production of certain goods, it is a general
measure. Any company operating in the Netherlands,
irrespective of its economic activity, can make use of it,
on condition that it is involved in international group
financing activities. In addition, the gfa scheme does not
comprise conditions concerning the company's size or
nationality. Contrary to what the Commission claims,
the scheme is not primarily intended for large Dutch
groups. It can therefore be compared with an Italian tax
scheme designed to promote the regularisation of busi-
nesses in the informal economy (6), which the Commis-
sion has long regarded as a general measure.

Fifth, the requirement for companies to be active in four
countries or on two continents does not detract from
the general nature of the measure. It is precisely the
companies which meet that criterion which incur the
greatest international financing risks, the risks that the
gfa scheme is designed to cover. Such risks are unlikely
to be incurred by companies operating in only one or
two countries. Whether the line should be drawn at
three, four or five countries is irrelevant, because the
limit set in Dutch law is reasonable in the light of the
objective pursued, and is therefore in keeping with the
nature and aims of the scheme.

(37)

the criteria used are objective and the Dutch
to allow

Sixth,
authorities have no discretionary powers
companies to participate in the gfa scheme or not.

(5) Verbond van Nederlandse Ondernemingen — Nederlands Christelijk

Werkgeversverbond.

(6) N 674/01.

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(38)

Seventh, even before the gfa scheme was introduced, it
was possible in certain circumstances under the Dutch
tax system to exempt reserves for specific risks from tax.
According to the VNO-NCW, this is true in particular of
the export risk reserve, which does not comprise any
element of State aid.

must therefore be regarded as existing aid because, like
the Belgian scheme,
it did not constitute aid when it
came into effect, but subsequently became aid as a result
of developments on the internal market.

(39)

(40)

(41)

4.2. If the scheme constitutes State aid, then it is

existing aid

constitute

the Commission made known its view that
First,
comparable measures did not
aid on
numerous occasions before the gfa scheme was intro-
duced in 1997. If the Commission changes its policy,
the general principles of legal certainty and care require
it to make this known in due time. If such notification is
not forthcoming, the Commission must take account of
the legitimate expectation that its action has created in
the Member States and companies concerned. First and
foremost, it should realise that a company's tax accounts
cannot be restructured with retroactive effect.

Second, the principle of equal treatment enshrined in
point J of the Resolution of the Council of 1 December
1997 on a code of conduct for business taxation (7)
(hereinafter referred to as the code of conduct) prevents
the Commission from regarding the gfa scheme as new
aid after classifying the Belgian coordination centres
scheme as existing aid. This is all the more true because
of the far-reaching legal consequences associated with
the procedure for new aid. The inevitable conclusion
must be that the Commission should process the gfa
scheme under the procedure for existing aid, and that
the decision of 11 July 2001 to institute the formal
investigation procedure cannot be maintained.

Third, from 17 July 2000 the Commission investigated
the coordination centres scheme again as existing aid on
the basis of Article 1(b)(v) of Council Regulation (EC) No
659/1999 (8)
(hereinafter, procedural regulation). That
Article states that existing aid is understood as meaning
aid for which ‘it can be established that at the time it
was put into effect it did not constitute an aid, and
subsequently became an aid due to the evolution of the
common market and without having been altered by the
In its letter dated 17 July 2000 the
Member State.’
Commission gives no indication of developments on the
internal market prior to 10 December 1998, the date of
publication of the Commission notice on the application
of the State aid rules to measures relating to direct busi-
ness taxation (9) (hereinafter, the notice). However, the
scheme was introduced on 1 January 1997,
i.e. two
years before the notice was published. The gfa scheme

(7) See footnote 2.
(8) OJ L 83, 27.3.1999, p. 1.
(9) See footnote 3.

(42)

(43)

(44)

4.3. In so far as the aid constitutes new aid,
incompatible with the general

recovery is

principles of Community law

First, on the basis of Commission decisions concerning
the Belgian coordination centres in the 1980s,
the
answer given by Commissioner Brittan to a parliamen-
tary question in 1990 and the Commission's failure to
take action on similar measures in other Member States,
the Dutch Government and a diligent operator could be
confident that the gfa scheme would not be regarded as
constituting State aid. This legitimate expectation that
the gfa scheme is compatible with the internal market
constitutes an obstacle to recovery of the aid up to the
date of the final decision. The Commission has itself
pointed out that initiating the procedure merely entails a
provisional assessment of whether the measure in ques-
tion should be regarded as constituting State aid.

Second, under the procedural regulation the Commission
is required to take action without delay if it receives
information concerning aid which may have been
granted unlawfully. As early as 1997 the Commission
received all the information it required from the Dutch
authorities. That is also demonstrated by the fact that all
the arguments put forward against the gfa scheme in the
notification of 11 July 2001 were derived from informa-
tion received previously. Therefore the Commission
cannot claim that it acted with the requisite speed. That
is reinforced by case-law in the RSV case (10), in which
the Court ruled that the Commission's abnormal delay in
taking action was one which could establish, on the part
of the beneficiary of the aid, a legitimate expectation that
no objection would be raised to the aid in question.

4.4. Other comments

Some companies have stated that they used to benefit
from the Belgian tax scheme for coordination centres
and that, in their view, strong similarities exist between
the two regimes. Others argue that the choice of the gfa
scheme was not based solely on tax considerations
because at the time there were other tax regimes within
or outside the Community which were more advanta-
geous. They maintain that their decision was based on a
whole
including the quality of
economic infrastructure in the Netherlands.

range of

factors,

(10) Case 223/85 RSV v Commission [1987] ECR 4617.

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5. COMMENTS FROM THE NETHERLANDS

(45)

First, the Dutch authorities point out that the Commis-
sion initiated the procedure on the basis of information
provided further to its request dated 12 February 1999,
whereas that information had already been sent to the
Commission by letters dated 21 March 1997 and 6
January 1998, further to the Commission's request of 5
March 1997.

5.1. Background to the introduction of the scheme

(50)

the scheme was
(46) According to the Dutch authorities,
introduced in response to the fact
international
that
groups were moving their financing activities abroad for
tax-related reasons. The tax authorities estimated that
assets in excess of NLG 15 billion had left the country
and were no longer subject to Dutch corporate tax. They
therefore decided to legislate to make it more attractive
for international groups based in the Netherlands to
bring their financing activities back to the country or
keep them there. The type of measure adopted reflects
the nature and aims of the 1969 Corporate Tax Act. It
concerns a reserve to cover certain risks, namely specific
risks related to international groups' activities, focusing
on financing activities and the holding of participations.
The Dutch authorities maintain that it does not consti-
tute a tax exemption because there is a real tax claim on
the reserve. The measure is not designed to attract the
group financing activities of
internationally active
companies to the Netherlands. However, companies of
that type can also benefit from it under exactly the same
conditions.

(47)

(48)

(49)

The Dutch authorities also stress that the scheme is
transparent and does not vest discretionary powers in
the inspector or any other executive body. The one
restriction to which the scheme is subject, namely that
companies must be active in at least four countries or
on two continents, is solely designed to ensure that only
companies which incur the risks for which the reserve
option was established make use of the scheme.

The Netherlands has also declared that
the measure
forms part of a package which clarifies the conditions
that a group financing company based abroad must
meet in order to qualify as a participation in the Nether-
lands within the meaning of the ‘participation exemp-
tion’, and which limits or otherwise curbs erosion of the
tax base by means of certain unjustified interest deduc-
tions within groups.

the Dutch authorities assert

Lastly,
the scheme
serves its intended purpose because if it did not exist the
group financing assets in question would be abroad

that

rather than concentrated in the Netherlands. Companies
which decided to remain or set up in the Netherlands
cannot be regarded as having received favourable treat-
ment, because they gave up secure, low rates of taxation
in other countries. The actual tax burden in the Nether-
lands depends on trends in group financing profits and
the losses which the reserve was established to cover.

5.2. The scheme as aid within the meaning of

Article 87 of the EC Treaty

First, the Dutch authorities take the view that the gfa
scheme, as per Article 15b of the 1969 Corporate Tax
Act, is not aid within the meaning of Article 87 of the
EC Treaty. In particular, they consider that the scheme is
not financed through State resources, that it is a general
measure and that it accords with the nature and aims of
the system enshrined in the aforementioned law.

5.2.1. The gfa scheme is not financed through State resources

(51)

It follows from Court of Justice case-law that only advan-
tages funded through State resources should be regarded
as aid within the meaning of Article 87 of
the EC
Treaty (11). However, the gfa scheme is not funded with
State resources because it was designed to be at least
budget neutral when it was set up. The scheme involves
assets and liabilities.

(52) After the gfa scheme was introduced, an amount of
almost EUR 10 billion which had previously been
invested outside the country and did not contribute
anything to the Dutch treasury was transferred to the
Netherlands in 1998. The scheme's introduction halted
the trend for financing activities to be moved abroad. To
that extent,
it had a positive impact on Dutch tax
revenue. As regards the advantage which the scheme
represents,
the Dutch authorities have estimated the
average tax burden on financing activities under the
scheme at 15 %, to which must be added tax on the risk
reserve and on profits from other activities taxed at the
standard rate.
to determine
whether the scheme is more or less advantageous than
the tax arrangements from which the companies bene-
fited abroad before the scheme was introduced in 1997.

therefore difficult

is

It

5.2.2. The scheme is a general measure

(53)

The scheme is not limited to specific sectors or regions
and does not have a time limit either (12). Nor does it
attribute discretionary powers to the State.

(11) Case C-379/98 Preussen Elektra v Schleswag [2001] ECR I-2099,

paragraph 59.

(12) See Commission Decision 96/369/EC of 13 March 1996 (OJ L

146, 20.6.1996, p. 42).

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(54) As the Commission acknowledges in its notice, the fact
that some firms benefit more than others from a tax
measure does not necessarily mean that they are caught
by the State aid rules (13). According to the Netherlands,
the Commission's view that the scheme is designed for
large Dutch groups is incorrect as regards the alleged
selectivity. In practice, there are at least 16 companies
whose worldwide workforce is less than 1 000 (10 of
them have fewer than 500 employees) and, at the same
time, at least 16 companies whose assets used for group
financing activities amount to less than EUR 27 million
(for nine of those companies these assets amount to less
than EUR 7 million). Of the 87 companies approved
under the scheme, only 20 are listed on the Amsterdam
stock exchange as AEX or Midkap funds.

(55)

The two continents/four countries requirement cannot
be regarded as a selectivity criterion but is a reasonable
instrument for identifying the kind of activities for which
risks are sufficiently real. An objective legal instrument
which provides sufficient certainty for the kind of activ-
for
ities in question is a much better option than,
instance, discretionary powers for inspectors, subject to
supervision by the national courts.
is a necessary
implementing provision which fits with the system
enshrined in Article 15b of the 1969 Corporate Tax Act
and which, in addition, cuts administrative costs.

It

5.2.3. The gfa scheme is in keeping with the nature and aims
of the system enshrined in the 1969 Corporate Tax
Act

(56)

its purpose, namely to prevent

further
In terms of
erosion of the tax base, the scheme is necessary for and
operational within the system enshrined in the 1969
Corporate Tax Act and is justified by the nature and
aims of the system. The requirements governing imple-
mentation of the gfa scheme (concerning substance, the
two continents/four countries and distribution respec-
tively) are necessary to ensure the efficiency of the gfa
scheme,
to realise its objectives (authorisation of a
reserve for risks associated with international group
activities) and to prevent discretionary powers. What is
more, these requirements cannot be regarded as selective
or extremely strict.

(57)

The Dutch Government also argues that a system in
which a reserve is constituted to cover future losses is
characteristic of the Dutch system for calculating annual
tax revenue. As such, this system is barely different from
the reserve to cover costs referred to in Article 13 of the
Income Tax Act, which also applies to the corporate tax
system.

(13) See point 14 of the notice.

(58) Another characteristic of the Dutch income tax system is
the freedom of choice usually available to companies
within the framework of determining (annual) profits
(albeit always subject to certain conditions and within
certain limits). In certain circumstances, for stock valua-
tion purposes, companies can choose between different
systems with various fiscal repercussions (cost price or
lower market value; minimum stock;
last-in-first-out).
This freedom of choice exists because it is not possible
to draft
the situations which
occur in practice and because the executive bodies are
not fully equipped to deal with them either. Taxation as
a single entity within the context of corporate tax is also
relevant here: companies can opt for it under certain
conditions. The rules governing the size of grants must
also be seen in this light: companies can determine the
size of grants themselves subject to the specified ceiling.

legislation covering all

(59)

(60)

The Dutch system also provides for the reserve to be
liberated at a nominal rate (lower than the normal rate),
subject to certain conditions. A reduced rate of 15 %
was applied to certain organisations which, following
changes in the law, no longer qualified as investment
companies and therefore had to be taxed on the reinvest-
ment reserve set up.

Lastly, when the group financing reserve is liberated
every five years at 10 %, whether or not this is necessary
for business-related reasons, the company in question
faces a number of disadvantages:
it can no longer
provide grants and it
is obliged to maintain the
substance. If it cannot or will not accept these disadvan-
tages the reserve must be liberated at the normal rate.

5.3. Articles 96 and 97 of the Treaty

(61) On the grounds set out above, the Dutch Government
takes the view that the gfa scheme does not constitute
aid within the meaning of Article 87 and that, if there is
a disparity between the legislation of the Member States
which distorts competition in the internal market,
it
should be possible to implement the Article 96 proce-
In so far as the Spaak report (14) distinguishes
dure.
between general and specific distortions, the gfa scheme
could perhaps be viewed as a general distortion rather
than a specific one. In the Dutch Government's opinion,
the discussions carried out within the framework of the
code of conduct for business taxation should be regarded
as consultation of the Member States within the meaning
of Article 96 EC.

(14) Report of the Heads of Delegation to the Foreign Ministers, Brussels

1956, pp. 60 and 61.

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(62)

In any event, the Dutch authorities take the view that
Article 87 of the Treaty refers solely to specific distor-
tions and that its scope cannot be extended to include
general measures.

5.4. The scheme is existing aid

(63)

(64)

(65)

(66)

If the gfa scheme is to be regarded as existing aid, the
Netherlands takes the view that it should be regarded as
existing aid within the meaning of Article 1(b)(v) of the
procedural regulation. The Dutch Government drew this
conclusion on the basis of
the
Belgian scheme for coordination centres and the discus-
sions on harmful tax competition.

the state of play of

It subsequently took the view that

In 1984 the Commission took the view that the Belgian
scheme for coordination centres (15) did not constitute
aid.
the scheme
became aid due to evolution of the common market
within the meaning of Article 1(b)(v) of the procedural
regulation. In the Dutch Government's view, there are
therefore good reasons for regarding the gfa scheme,
which has fundamental similarities to the Belgian coordi-
nation centres scheme, as existing aid. Both schemes are
targeted on companies operating internationally which
carry out highly mobile activities and are therefore extre-
mely tax sensitive.

this viewpoint

The Dutch authorities believe that
is
endorsed by the answers given by the Commission to
parliamentary questions on Belgian coordination centres
and in particular the answer given in 1990 to the
written question submitted by Mr Gijs de Vries (16),
which indicated that the Commission took the view that
the Belgian coordination centres scheme and similar
schemes in other Member States were not caught by the
State aid rules.

In the Dutch Government's view, the evolution of the
common market in question took place at the end of the
1990s. During those years the common market devel-
oped further as the third phase of economic and mone-
tary union was launched and the pace of globalisation
increased. Differences between the Member States' taxa-
tion systems, particularly in the area of business taxa-
tion, crystallised as a result. Internationally active compa-
nies increasingly sought to minimise tax costs. These
developments gave rise to various calls,
from the
Commission amongst others, for action to be taken at
European level on business taxation.

(15) 14th Report on Competition Policy (1984), p. 271.
(16) Written Question No 1735/90 (OJ C 63,11.3.1991, p. 37). See also
the questions submitted previously by Belgian MEPs Radoux No
2381/82 (OJ C 170, 26.6.1983, p. 9) and Van Rompuy No 1817/
83 (OJ C 148, 6.6.1984, p. 14).

(67) According to the Dutch Government, this resulted in the
code of conduct to prevent harmful tax competition,
which was agreed on 1 December 1997 as part of the
so-called tax package. The code of conduct expressly
acknowledges the link with the State aid rules in the EC
Treaty, and the Commission undertook to publish guide-
lines clarifying the application of the State aid rules to
measures relating to direct business taxation. This clarifi-
cation was provided by the Commission notice. The
code of conduct also indicates that
the Commission
intends to examine or re-examine existing tax arrange-
ments and proposed new legislation in the Member
States in the light of EC Treaty rules. The Dutch Govern-
ment believes that the Commission's plans, and in parti-
cular its intention to re-examine certain measures, was
partly inspired by the idea that re-examination of tax
measures was needed because the development of the
common market might result in a change of view.

5.5. Recovery

(68)

If, contrary to the view of the Dutch Government, the
gfa scheme were to be classified as aid and not as
existing aid, the Dutch Government believes that there
would be grounds for not
recovering the amounts
disbursed.

(69) Article 14 of the procedural regulation indicates that the
Commission does not require recovery of aid if this
would be contrary to a general principle of Community
law. In such cases recovery would be incompatible with
the general principle of
legitimate
expectations (17). The Dutch standpoint is based specifi-
cally on the conclusions of the Advocate General in Case
223/85 (18), which state that the Commission must act
with diligence in respect of non-notified aid as well.

the protection of

(70)

This principle that the Commission must act with dili-
gence is also laid down in Article 10 of the procedural
regulation.

(71)

In addition, as indicated above, the Commission sent a
request
for information to the Netherlands by letter
dated 5 March 1997 (19), to which the Dutch authorities
provided a detailed reply by letter dated 21 March 1997.
The Commission did not return to the matter until its
letter of 12 February 1999 (20), which contained no
reference to the correspondence of 1997 and did not

(17) This principle is recognised in Court of Justice case-law: judgment
of 14 May 1975, Case 74/74 CNTA v Commission [1975] ECR 533;
judgment of 25 January 1979, Case 98/78, Racke v Mainz [1979]
ECR 69.

(18) See footnote 10.
(19) Letter D/51112 dated 5 March 1997.
(20) Letter D/50716 dated 12 February 1999.

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raise any other questions. The Dutch Government
answered by letter dated 30 April 1999 (21). The Article
88(2) procedure was not
instituted until 11 July
2001 (22). The Netherlands takes the view that there are
no justifications in law for this delay of more than four
years, especially in view of the fact that the gfa scheme
was not amended in the intervening period. On that
basis the Netherlands considers that, in accordance with
the aforementioned case-law and the Commission's
previous decisions (23), an excessive delay in the adminis-
trative procedure constitutes grounds for not proceeding
with recovery.

(72)

The Netherlands also takes the view that the funda-
mental requirement of legal certainty has the effect of
preventing the Commission from indefinitely delaying
the exercise of its powers (24). Replying to the questions
raised by the Dutch Second Chamber (Parliament)
in
1997 as to whether the scheme was compatible with
Community law, the Dutch Government indicated that
the Commission had asked for information and that after
its questions had been answered nothing more had been
heard from it. In addition, the information in question
was made public. Not a single company had taken
advantage of the gfa scheme in spring 1997, because no
provisions had been issued. If the Commission had been
more diligent at
the time and made its objections
known, things would have turned out differently and the
damage to the companies in question could have been
avoided.

(73)

Lastly, in view of the fact that the gfa scheme forms part
of a interrelated package of measures to prevent the tax
base being eroded, the Dutch authorities believe that the
Commission is wrong in highlighting a single element of
the package. Even if the Commission could demonstrate
that, in some cases, an advantage had been bestowed on
in these circumstances and against
certain companies,
this background,
recovering the funds would be a
disproportionate measure.

6. OBSERVATIONS FROM THE NETHERLANDS ON THE

COMMENTS FROM INTERESTED PARTIES

(74)

In response to the comments submitted by interested
parties, the Dutch authorities point out that the large
number of answers reflects the importance of the issue
and that the opinions put forward support and reinforce
their own viewpoint. In addition, two aspects should be
considered.

(76)

Second, in view of the letter from the Commission dated
17 July 2000, the gfa scheme should be classified as
‘existing aid’ only in so far as the Commission takes the
view that it constitutes aid.

(77)

(78)

7. ASSESSMENT OF THE AID

The Commission confirms its view that the gfa scheme
constitutes aid within the meaning of Article 87(1) of
the Treaty. This is because it cannot accept the argu-
ments put forward by the Netherlands and the interested
parties for the following reasons.

The fact that the scheme was introduced with a view to
combating capital flight from the Netherlands does not
mean that its compatibility with the Treaty should be
assessed purely on the basis of Articles 96 and 97. Inves-
tigations into whether
fiscal or other measures are
compatible with the State aid rules focus on the conse-
quences of such measures rather than their objectives. In
so far as a measure meets all four criteria of Article
87(1) of the Treaty, it constitutes aid and the provisions
of Article 88 apply.
investigation
described below, the Commission has concluded that the
measure meets the four criteria.

Following

the

7.1. Advantage

(79)

First,
the measure must bestow an advantage that
reduces the charges normally borne by the company. As
indicated in point 9 of the notice, this advantage may
take the form of a reduction in the tax burden by
including reserves in the balance.

(80) With the risk reserve, which is tax-exempt, the tax pres-
sure can therefore be reduced immediately. This reduc-
tion may be significant (up to 80 % of taxable profits
from the group's financing activities). This substantial,
immediate reduction in tax favours, within the meaning
of Article 87(1), both those companies which benefit
directly from the scheme and the groups to which they
belong. This advantage results from the tax deferral on
the amounts included in the reserve; in some cases these
amounts are taxed at a lower rate or not at all.

(75)

First, the wide variety of companies which submitted
comments demonstrates that the gfa scheme is open to
all companies carrying out international financing activ-
ities, irrespective of the sector in which they operate.

(81)

(21) No 9596.
(22) Reference D/289741.
(23) See Decisions 92/329/EEC and 2001/168/ECSC.
(24) See Case 48/69, ICI v Commission [1972] ECR 619, paragraph 49.

Releases from the risk reserve are generally subject to
the standard corporate tax rate in the Netherlands, i.e.
35 %. However, this is not always the case. In certain
circumstances, funds released from the reserve may be
taxed at a rate of 10 %. Funds may be released from the
risk reserve for share purchases without being immedi-
ately subject to tax. Depending on the case in point, if

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the government takes the view that a particular risk is
involved, between 50 and 100 % of the purchase price
may be released from the reserve. On the other hand,
amounts included on the company's balance sheet are
diminished accordingly. This mechanism enables the
tax burden to be reduced immediately
company's
without the risk covered by the reserve actually arising
in practice. Admittedly, where acquired assets are liqui-
dated or sold, the loss in tax revenue will be less if the
value of assets entered to the balance sheet is reduced by
the amount released from the reserve with a view to
acquisition. However,
the said assets
remains an uncertain element, even completely hypothe-
tical in certain cases. No deadline has yet been fixed for
offsetting this advantage in terms of taxation.

liquidation of

(82)

The Commission cannot accept that the gfa scheme does
not bestow any advantage whatsoever in comparison
with other countries' schemes for international group
financing activities. The advantage must be assessed,
within the framework of
the State aid investigation,
purely at national level, in this instance with reference to
Dutch companies which are excluded from the gfa
scheme by virtue of the strict conditions which apply to
it. In this case, it is therefore not relevant whether the
gfa scheme is less attractive than other schemes applied
outside the Netherlands.

(83)

In conclusion, the Commission takes the view that the
establishment of the reserve bestows an advantage in the
form of an indefinite tax deferral. In addition, the fact
that lower tax rates apply for certain uses of the reserve
also comprises an advantage within the meaning of
Article 87(1) of the EC Treaty, both for the companies
concerned and the groups to which they belong.

result of the measure does not mean that the measure is
not financed from State resources. Whether a measure
constitutes aid must be assessed at a given time at the
level of individual companies with a view to determining
whether some companies receive more State aid or
contribute less to financing public goods and services.
Otherwise any type of aid would be justified in so far as
it enticed a company to set up in a given Member State,
enabled it
to increase its future taxable revenue or
prevented it from leaving the country.

7.3. Negative impact on competition and trade

between Member States

(85) According to Court of Justice case-law (25) and point 11
of the aforementioned notice, ‘the mere fact that the aid
strengthens the firm's position compared with that of
other firms which are competitors in intra-Community
trade is enough to allow the conclusion to be drawn that
intra-Community trade is affected’. This condition is met
because the recipients are companies belonging to multi-
national groups, most of which, if not all, are active on
the intra-Community market. The granting of special
advantages to these companies operating in at least four
countries or on two continents reinforces their financial
position.
In addition, the Commission notes that the
scheme has a negative impact on intra-Community trade
and competition given that, as the Netherlands and the
interested parties have stressed, it is open to all sectors
of economic activity,
including sectors where there is
intense intra-Community trade

7.4. Selectivity

7.2. Use of State resources

(86)

Lastly, the measure must be specific or selective in the
sense that it favours certain companies or certain goods.

(84)

Second, the advantage must be granted through State
resources. In this case, the Commission takes the view
the measure is granted through State resources
that
because the tax reduction awarded,
irrespective of
whether it takes the form of exemption or a lower rate,
leads to a reduction in State revenue. As the Netherlands
has stated in its capacity as an interested party, the
measure has not given rise to a loss of revenue for the
State but, on the contrary, has prevented companies
leaving the Netherlands and has helped to entice them
back or to set up there, which compensated for the loss
of revenue resulting from the reduction in the tax
burden. The Commission cannot share this assessment,
which is based on a cost-benefit analysis. The fact that a
reduction in revenue can be compensated for subse-
quently by an increase in the number of taxpayers as a

(87)

To start with, the fact that the scheme is not selective in
terms of companies' nationality, size or the sector in
which they operate, is not sufficient to demonstrate that
the gfa scheme is a general measure. Given that the gfa
scheme is solely targeted on the financing activities of
internationally active groups operating in at least four
countries or on two continents, it can be argued with
justification that the selectivity criterion has been met.
As indicated in point 20 of the notice, some tax benefits
are
intra-group
services). If such tax benefits favour certain companies
or goods, they may constitute aid. Not only does the gfa
scheme apply purely to intra-group financial transac-
tions, but on top of that only some of those transactions
are eligible.

restricted to certain functions

(i.e.

(25) Case 730/79 Philip Morris v Commission [1980] ECR 2671.

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(88)

supplementary

requirements. Only

Companies which may qualify for the scheme have to
meet
financing
operations which can be conducted independently from
the Netherlands are eligible, and financial activities for
Netherlands-based entities should be limited to 10 % of
total activities. These criteria confirm the expressed aim
of the Dutch authorities to reserve the scheme for inter-
nationally active groups whose financial centre is in the
Netherlands but which conduct
financing activities
chiefly focused on the group's entities abroad. As such,
the measure is selective, if only because it does not apply
to groups which are mainly based on Dutch territory or
to multinationals with operations in fewer than four
countries.
In addition, as the Dutch Government has
emphasised, the measure's purpose is to halt the flight of
multinationals' financing activities and to entice them
back to the Netherlands. Right from the outset, then, the
measure was
limited number of
companies.

targeted on a

(89) Nor can it be accepted that the measure is a general
measure on the basis that it is comparable with other
Dutch tax provisions concerning the establishment of
risk reserves and with the Italian scheme for the black
economy. Those two measures have different character-
istics to the gfa scheme. The Commission points out that
the Italian scheme is open to all companies, irrespective
of the activity in question and whether it is conducted
within a group or not, and irrespective of where it is
carried out, at national or international level.

(90)

In addition, it should be noted that the aforementioned
benefits, which may significantly reduce the tax burden,
apply to only a very limited number of companies, i.e.
87. Clearly, this number is particularly small in compar-
ison with the total number of companies subject to
corporate tax (26). Furthermore, even if it were to be
accepted that this number should be compared against
the total number of multinationals in the Netherlands,
the following needs to be established. Only a minority of
these groups can meet the requirements set out in the
gfa scheme, irrespective of the nature or importance of
the risks incurred as a result of
international
activities.

their

J u sti fi c a ti on by t h e nat ur e or a i ms of
syste m

th e

(92)

(93)

(94)

of the system. Given that the present case concerns the
establishment of a reserve for the risks associated with
certain activities, the Dutch authorities have put forward
the following arguments.

international transactions entail specific risks in
First,
comparison with national
transactions for which the
political or commercial risks are less important or can
be forecast more easily. In addition, as the Dutch autho-
rities have stated, additions to the risk reserve must be
proportionate to actual risks.

Referring to the arguments put forward as part of the
the Commission recognises that amounts
procedure,
included in the risk reserve may cover very real risks, as
is demonstrated by the notification given to it by various
interested parties to the effect that they had released
amounts from the reserve after certain risks had actually
arisen in practice. However, the fact that the reserve can
be justified, albeit in certain cases, from the accounting
and financial perspective, does not mean that limiting it
to certain categories is also justified.

The Commission cannot endorse the argument that the
sole purpose of the minimum four countries/two conti-
nents requirement is to provide objective criteria which
can be used to assess whether the basic requirements are
met. Although it is logical to set certain limits or thresh-
olds in a tax structure to ensure that it works properly,
this should not result in excessive demands being made
which are not proportionate to the desired aims. Objec-
tively speaking, groups which are active in only three
countries or on one continent are no less exposed to the
risks associated with international
financing activities.
On the other hand, there seems to be no doubt that the
number of companies which do not meet the gfa sche-
me's criteria far exceeds the number of those which do.
In that sense, and in the light of the Court of First
Instance's recent Alava judgment (27),
it has not been
proven that the measure is justified by the nature or
aims of the Dutch tax system. Thus measures to combat
erosion of the tax base or improve the lack of competi-
tiveness which group financing activities in the Nether-
lands suffered from before 1997 do not justify the award
of State aid to a limited number of companies. This prin-
ciple was established in the Court of Justice judgment in
Case 173/73 (28).

(91) As indicated in point 23 of the notice,

‘the differential
nature of some measures does not necessarily mean that
they must be considered to be State aid.’ Measures which
resemble State aid can be justified by the nature or aims

(95) As indicated above, the scheme's express aim was to
encourage large multinationals to transfer their financing
activities back to the Netherlands. This is an economic
aim and is not inherent in a taxation system.

(26) According to report No 2/2002 of the European Observatory for
the total number of companies in the Netherlands is

SMEs,
555 000.

(27) Judgment of 23 October 2002, Case T-346/99 [2002], p. II-4259,

paragraphs 58-63.

(28) Case 173/73 Italy v Commission [1974] ECR 709, paragraphs 22-

33.

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(96)

(97)

(98)

In addition, even if it has been proven, in the light of the
comments submitted by the Netherlands and other inter-
ested parties,
that additions to the risk reserve were
genuinely intended to cover risks, it has not been shown
that the limit of 80 % of net profits from international
financing activities and 80 % of profits from all the reci-
pient's activities were proportionate in all cases to the
actual risks incurred. Additions to the reserve can be
made as soon as a risk has been shown to exist;
however, it is not necessary to demonstrate the impor-
tance of the risk, the only restriction being that no more
than 80 % of profits from international financing activ-
ities can be added to the reserve.

Since the purpose of the risk reserve is to cover the risks
associated with international financing activities, releases
from the risk reserve with temporary tax exemption for
the purpose of acquisitions in the Netherlands or abroad
are not in keeping with the logic which underpins the
establishment of risk reserves in general, but tally far
more closely with the logic of an aid scheme for
company takeovers. This is because the reduction in the
tax burden in cases of company takeovers is compen-
sated for only if the companies in question are sold on
or wound up. Whether tax is levied in such circum-
stances does not depend on whether the risk covered
actually arises but on a decision by the company caught
by the gfa scheme.

Lastly,
irrespective of the limits provided for in this
scheme, the Commission basically takes the view that
the tax treatment of intergroup financial transactions
should not differ from the arrangements for financial
transactions between non-associated companies. Since
the main justification put forward in the procedure is
the disadvantage suffered by these activities in the Neth-
erlands in comparison with some other tax systems, the
Commission takes the view that it is external to the logic
of the Dutch tax system but tends to reflect economic
policy objectives.

7.5. Classification of the scheme as unlawful aid

(99)

Both the Dutch authorities and the interested third
the gfa scheme should be
parties have argued that
regarded as existing aid because of its similarity to the
Belgian coordination centres scheme, which could not
be regarded as aid according to the 1984 Commission
ruling. A number of elements need to be identified in
that connection.

It has been established in the present case that the Dutch
scheme was not notified to the Commission prior to
implementation, and that
the information which the
Dutch authorities provided to the Commission at the
latter's request in March 1997 cannot be regarded as
informing the Commission within the meaning of
Article 88(3) of the Treaty.

(101) Second, as regards the Belgian coordination centres
scheme quoted by the Dutch authorities and the inter-
ested parties, it should be noted that although a decision
was issued in 1984 indicating that the scheme should
not be regarded as aid,
it goes without saying that it
concerned the Belgian scheme alone and was solely
addressed to Belgium. Moreover, although the two
schemes do have some features in common, the fact that
they are not identical cannot be denied in view of the
techniques used and the form in which the benefits were
granted.

(102) Lastly,

the gfa scheme cannot be considered to be
existing aid within the meaning of Article 1(b)(v) of the
procedural regulation because all the elements of State
aid were present from the time when the measure was
introduced. Nor had it been demonstrated that
the
common market has evolved. Because even if the third
phase of economic and monetary union had already
been launched, and increasing globalisation was already
a reality, these notable events nevertheless formed part
of ongoing processes which had started long before the
gfa scheme was approved. The third phase of monetary
union is the culmination of attempts to coordinate
exchange-rate policy which began in the 1970s. For its
part, globalisation can be traced back to the multilateral
nature of the GATT Agreement (30) immediately after the
war. As far as the aforementioned Commission notice is
concerned, as the Court of First Instance observed in the
Alava judgment (31), it is substantially based on the case-
law of
Justice and the Court of First
Instance and merely elucidates the application to tax
measures of Articles 87 and 88 of the Treaty. Even
assuming that the Commission's decision-making prac-
tice has changed, as underlined by the Court of First
Instance in its Gibraltar
the answer to
whether a measure constitutes existing aid or new aid
cannot depend on a subjective assessment by the
Commission but must be answered independently of its
previous administrative practice.

the Court of

judgment (32),

7.6. Investigation into compatibility

(100) First,

it should be noted that the concept of an aid
measure is an objective criterion and that the Commis-
sion does not have any discretionary power as far as it is
concerned. The Court (29) has also ruled that
the
Commission does not have any margin for manoeuvre
when asked whether a measure constitutes existing aid.

(29) Case C-295/97 Piaggio [1999] ECR I-3735, paragraphs 44 et seq.

(103) Given that the relevant tax scheme constitutes aid within
the meaning of Article 87(1) of the EC Treaty, whether
it is compatible must be examined in the light of the
derogations referred to in Article 87(2) and (3).

(30) General Agreement on Tariffs and Trade.
(31) Paragraphs 83 and 84.
(32) Joined cases T-195/01 and T-207/01 [2002] ECR II-2309, para-

graph 121.

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(104) The derogations set out in Article 87(2) EC of the Treaty
concerning aid with a social character, granted to indivi-
dual consumers, aid to make good the damage caused
by natural disasters or exceptional occurrences and aid
granted to the economy of certain areas of the Federal
Republic of Germany do not apply in the present
instance.

eligible costs or restrictions on aid intensity. In addition,
the post-investment tax cut is immediate and the final
amount cannot be calculated in advance; as such, the
measure may include elements of operating aid which,
as stated above,
the derogation
is not eligible for
enshrined in Article 87(3)(c).

(105) The derogation in Article 87(3)(a) authorising aid to
promote the economic development of areas where the
standard of living is abnormally low or where there is
serious underemployment does not apply in this case
because no part of the Netherlands is caught by the
Article in question. The same is true of the derogation in
Article 87(3)(c) authorising aid to facilitate the develop-
ment of certain economic areas because the scheme in
question applies outside the regions eligible for this
derogation.

(106) The tax scheme on the risk reserve does not fall within
the category of projects of common European interest
which qualify for the derogation enshrined in Article
87(3)(b) either, nor is it designed to promote culture and
heritage conservation, so it does not qualify for the dero-
gation in Article 87(3)(d).

(107) Lastly, it needs to be investigated whether the scheme is
eligible for the derogation enshrined in Article 87(3)(c)
whereby aid to facilitate the development of certain
economic activities is authorised on condition that it
does not adversely affect trading conditions to an extent
contrary to the common interest.

job creation or

(108) The tax benefits associated with the establishment of the
risk reserve and its voluntary release are not linked to
investments,
specific projects. They
merely entail a reduction in overheads and may there-
fore be regarded as operating aid. The Commission
therefore takes the view that they adversely affect trading
conditions to an extent contrary to the common interest
and that as such they do not qualify for the derogation
set out in Article 87(3)(c).

the Commission finds that

(109) With regard to the aid granted when the reserve is
released with a view to acquiring companies in the Neth-
the
erlands and abroad,
measures should normally be limited to the assisted
areas or SMEs, and to investments which qualify for aid,
investments (33), and that aid intensity
namely initial
should reflect the level authorised by the Commission.
The Commission finds, however,
the present
measure does not include any provisions on the afore-
large companies,
the exclusion of
mentioned areas,

that

(110) Given that the scheme does not qualify for any of the
derogations in Article 87 of the EC Treaty, it is incompa-
tible with the common market.

7.7. Legitimate expectation

(111) Article 14(1) of Regulation (EC) No 659/1999 states:
‘The Commission shall not require recovery of the aid if
this would be contrary to a general principle of Commu-
nity law.’ Pursuant to Court of Justice case-law and the
Commission's previous decisions, a recovery decision
constitutes an infringement of a general principle of
Community law in so far as the Commission creates, by
its actions, a legitimate expectation on the part of the
recipient that the aid was granted in accordance with
Community law.

In the Van den Bergh and Jurgens case (34) the Court
stated: ‘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 the protection of
legitimate expectation. On the other hand, if a prudent
and discriminating trader could have foreseen the adop-
tion of a Community measure likely to affect his inter-
ests, he cannot plead that principle if the measure is
adopted.’

In the present case the Commission notes that, although
the Belgian and Dutch schemes are not completely iden-
tical, the gfa scheme nevertheless has similarities with
the scheme introduced in Belgium by Royal Decree No
187 of 30 December 1982 dealing with the tax treat-
the measures
ment of coordination centres. Both of
concern intra-group activities and a significant number
of beneficiaries of the gfa scheme had previously made
use of the Belgian scheme.
In its decision of 2 May
1984, the Commission ruled that the Belgian scheme
was not aid within the meaning of Article 92(1) EC of
the Treaty. Even if this decision was not published, it
should be noted, as the Dutch authorities and interested
parties have stressed, that
it was stated in the 14th
Competition Report and in an answer to a parliamentary
question (35) that the Commission had not lodged any
objections to the scheme in question.

(33) For the definition of initial investments, see point 4.4 of the Guide-

lines on national regional aid (OJ C 74,10.3.1998, p. 9).

(34) Case 265/85 Van den Bergh en Jurgens v Commission [1987] ECR

1155, paragraph 44.

(35) See footnote 16.

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(112)

In this context, the Commission points out that its deci-
sion on the Belgian scheme was adopted before the gfa
scheme entered into force. It also notes that all benefici-
aries of the gfa scheme were recognised as such before
the Commission decided to institute the formal investi-
gation procedure. The Commission therefore accepts the
arguments put forward by the Dutch authorities and
interested parties to the effect that the beneficiaries had
a legitimate expectation and will refrain from ordering
recovery of the aid.

(116) First, the Commission takes note of the context in which
the procedure was initiated. It complements the activities
launched by the Member States under the code of
conduct with a view to combating harmful tax competi-
tion. The progress made by the Member States towards
the final objective of bringing harmful tax competition
to an end should also be taken into account. As such,
the distortion of competition entailed by maintaining the
scheme until 2010 should be offset against the progress
achieved at Community level in realising the objective of
combating harmful tax competition.

8. THE NEED FOR A TRANSITIONAL PERIOD

(113) By letter dated 3 October 2002 the Netherlands
in view of legitimate
informed the Commission that,
expectation and the safeguarding of acquired rights,
it
should enable companies currently using the gfa scheme
to benefit from this scheme until the end of the period
for which they were recognised as beneficiaries. In the
Commission's view, two issues need to be examined in
this connection. First, what needs to be done with the
reserves already created under the gfa scheme, and
second, whether companies can still use the scheme to
constitute new reserves after the final decision.

(114) First,

risks,

the potential

it should be noted that the beneficiaries of the
scheme can invoke the principle of legitimate expecta-
tion when constituting these reserves. The amounts
placed in these reserves are regarded as intended to
cover
the risks associated with financing activities.
it
Leaving aside the nature of
emerged that the decisions to place funds in the reserves
were the result of trade-offs and formed part of the
beneficiaries' long-term strategy. The Commission finds
that although the advantages of using the reserve can be
spread over time, they are induced by the establishment
of the reserve. It can therefore be posited that the advan-
tages associated with the actual amounts in the reserves
are safeguarded in principle on the basis of legitimate
expectation. As such, in the case in point there is no
basis for requiring the amounts in the risk reserve to be
subject immediately to corporate tax at the normal rate.
The amounts placed in these reserves can therefore be
used under existing Dutch law and qualify for the bene-
fits for which it provides.

(115) With regard to the establishment of new reserves, the
Commission takes the view in principle that after a final
decision in which a scheme is classified as unlawful aid,
companies may no longer invoke the principles of legiti-
mate expectation or legal certainty.
It goes without
saying that the principle of legitimate expectation cannot
be invoked after a reasonable period, which should
provide the Member State and the companies concerned
to the new situation.
with sufficient
However,
the following
factors should be taken into account in this particular
case.

time to adapt
the Commission feels

that

the number of beneficiaries of

(117) Second, as the Netherlands stated in its letter of 3
the
October 2002,
scheme is to diminish gradually in the run-up to 2010.
In December 2002 the Dutch authorities announced that
no new applications would be accepted. As a result the
number of beneficiaries will gradually diminish and it is
the
probable that most of
remaining life of the scheme to liquidate the reserves,
given that the Netherlands has undertaken not to extend
the scheme beyond 2010. In view of the fact that a date
has been set for the scheme's termination, the Commis-
focus
sion takes the view that
mainly on using existing reserves rather than consti-
tuting new reserves.

them will make use of

the beneficiaries will

(118)

In view of these exceptional circumstances, the Commis-
sion considers that the companies benefiting from the
gfa scheme when this procedure was initiated can
continue to constitute new reserves or to continue to
use existing reserves in accordance with the gfa scheme's
implementing provisions while the current provisions
remain in force and until 31 December 2010 at the
latest.

9. CONCLUSION

(119) The Commission finds that the Kingdom of the Nether-
lands has unlawfully implemented the aid in breach of
Article 88(3) of the Treaty. It regards the gfa scheme as
incompatible with the common market. However,
in
view of the beneficiaries' legitimate expectation and the
exceptional circumstances described above, there are no
grounds for proceeding with recovery of the aid and the
scheme can be maintained until 31 December 2010,

HAS ADOPTED THIS DECISION:

Article 1

The aid scheme implemented by the Netherlands pursuant to
Article 15b of the 1969 Corporate Tax Act and put into effect
by the Law of 13 December 1996 is incompatible with the
common market.

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Article 2

Article 4

The Netherlands shall
terminate the scheme referred to in
Article 1. The companies covered by this scheme as at 11 July
2001 may continue to benefit from it until the end of the 10-
year period granted to them by the Dutch tax authorities. In
any event, implementation of the scheme shall be terminated
by 31 December 2010 at the latest.

Article 3

The Netherlands shall
inform the Commission, within two
months of the date of notification of this Decision, of the
measures taken to comply with it.

This Decision is addressed to the Kingdom of the Netherlands.

Done at Brussels, 17 February 2003.

For the Commission

Mario MONTI

Member of the Commission