2006/638/EC: Commission Decision of 6 September 2005 on the aid scheme implemented by Italy for certain undertakings for collective investment in transferable securities specialised in shares of small- and medium-capitalisation companies listed on regulated markets (notified under document number C(2005) 3302)   (Text with EEA relevance)
Date: 2005-09-06
Institutions: European Commission
Subjects: Italy, State aid, control of State aid, investment company, market capitalisation, securities, share, tax incentive

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 6 September 2005

on the aid scheme implemented by Italy for certain undertakings for collective investment in
transferable securities specialised in shares of small- and medium-capitalisation companies listed on
regulated markets

(notified under document number C(2005) 3302)

(Only the Italian text is authentic)

(Text with EEA relevance)

(2006/638/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(2)

Having regard to the Treaty establishing the European Commu-
nity, 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) On 2 October 2003 Decree Law No 269 of 30 September
2003 providing for urgent measures to promote develop-
ment and to correct the trend of public finances (‘Decree-
Law No 269/2003’), as subsequently converted into Law
No 326 of 24 November 2003, published in the Official
Gazette of the Italian Republic No 274 of 25 November
2003, entered into force on its publication in the Official
Gazette of the Italian Republic No 229 of 2 October 2003.
Article 12 of Decree-Law No 269/2003 provides that the
net operating result of certain undertakings for collective
investment in transferable securities specialised in shares of
small- and medium-capitalisation companies (‘small- and
mid-caps’) listed on a regulated market in the European
Union are subject to 5 % tax, instead of the standard 12,5 %
tax withheld by non-specialised investment vehicles.

By letter dated 22 October 2003 (D/56756), the Commis-
sion called on the Italian authorities to provide information
about the incentives in question and their entry into force
with a view to ascertaining whether they constituted aid
within the meaning of Article 87 of the Treaty. By the same
letter, it reminded Italy of its obligation to notify to the
Commission before they are implemented any measures
constituting aid pursuant to Article 88(3) of the Treaty.

(3)

letters of 11 November 2003 (A/37737)

and
By
26 November 2003 (A/38138),
the Italian authorities
provided the information requested. On 19 December 2003
its
(D/58192) the Commission again reminded Italy of
obligations under Article 88(3) of the Treaty and invited the
Italian authorities to inform those that might benefit from
the incentives of the consequences provided for by the
Treaty and by Article 14 of Council Regulation (EC)
No 659/1999 (2) if the incentives in question were found to
constitute aid unlawfully implemented without the prior
authorisation of the Commission.

(4)

the
By letter of 11 May 2004 (SG 2004 D/202046),
Commission informed Italy of its decision of 7 May 2004
to initiate the procedure laid down in Article 88(2) of the
Treaty in respect of the tax incentives granted by Italy by
way of the scheme in question.

(1) OJ C 225, 9.9.2004, p. 8.

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

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(5)

By letter of 14 July 2004 (A/35463), the Italian authorities
submitted their comments.

(6) On 9 September 2004 the Commission decision to initiate
the formal investigation procedure was published in the
Official
inviting interested
the European Union,
parties to submit their comments (3).

Journal of

collective investments, the tax in question is withheld each
year by collective investment undertakings on a taxable
base corresponding to the annual increase in the registered
daily value of their assets (net operating result), with a view
to taxing the potential capital gains realised by the investors
In this way, no
investing in such investment vehicles.
further tax is paid by the investors upon distribution of
income deriving from such investments.

(7) On 16 and 27 September 2004 two meetings took place
between the Commission's representatives and the Italian
tax authorities to examine certain aspects of the scheme.

(8)

(9)

By letter of 7 October 2004 (A/37679),
the Italian
Association of Asset Management Companies (‘Assoges-
tioni’) submitted its comments. By letter of 28 October
2004 (D/57696), the Commission forwarded the com-
ments to the Italian authorities. By letter of 6 December
2004 (A/39479), the Italian authorities responded to the
comments from Assogestioni.

By letter of 18 February 2005 (A/31490), Assogestioni
submitted further comments supplementing those sent on
7 October 2004. By letter of 24 February 2005 (D/51366),
the Commission forwarded them to the Italian authorities.
By letter of 4 April 2005 (A/32813), the Italian authorities
submitted their comments on those further comments by
Assogestioni.

Investment Funds
comments. Since

(10) By letter of 28 February 2005 (A/31724), the European
(FEFSI)
Federation of
submitted its
comments were
presented after the deadline set (see paragraph 6) and since
they were similar to those submitted by Assogestioni, they
were not forwarded to the Italian authorities or taken into
account in the present decision.

and Companies

its

II.

DESCRIPTION OF THE MEASURE

General framework

(11) Article 12 of Decree-Law No 269/2003 introduces tax
incentives for certain undertakings for collective investment
that are
in transferable securities (investment vehicles)
subject to Italian law. In particular it stipulates that, as of
the tax year in which certain conditions are met, the net
operating result of
for collective
investment in transferable securities that are specialised in
shares of small- and mid-caps listed on a regulated market
in the European Union (specialised investment vehicles) are
subject to a 5 % tax, instead of the standard 12,5 % rate of
tax. In general, under the Italian system of taxation of

those undertakings

(12) The scheme amends the tax treatment in Italy of capital
income accruing to various investment vehicles including
the open-ended investment funds governed by Council
Directive 85/611/EEC of 20 December 1985 on the
coordination of
regulations and administrative
provisions relating to undertakings for collective invest-
ment
the ‘historic
Luxembourg’
funds, open-ended investment companies
(SICAVs) and closed-end investment funds, as governed by
the laws regulating such investment vehicles. The relevant
legal provisions concerned most notably include:

in transferable securities (UCITS) (4),

laws,

a)

Articles 9 and 10b of Law No 77 of 23 March 1983
concerning the tax treatment of the net operating
result of open-ended investment funds;

b) Article 11a of Decree-Law No 512 of 30 September
1983 concerning the tax treatment of
the net
operating result of certain investment funds, including
the ‘historic Luxembourg funds’;

c)

d)

e)

f)

Article 11 of Law No 344 of 14 August 1993
concerning the tax treatment of the net operating
result of closed-end investment funds;

Article 14 of Decree Law No 84 of 25 January 1992
concerning the tax treatment of the net operating
result of SICAVs;

Articles 7 and 9 of Legislative Decree No 461 of
21 November 1997 concerning the tax treatment of
capital income and other income accruing to investors
resident in Italy;

Article 14 of Legislative Decree No 124 of 21 April
1993 concerning the tax treatment of capital income
accruing to pension funds.

(13) The investment vehicles in question undertake collective
investment in transferable securities including bonds, shares

(3) See footnote 1.

(4) OJ L 375, 31.12.1985, p. 3.

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and other securities of listed and non-listed companies in
the collective interest of third-party investors (participants).
They may take the form of a contractual investment fund
without legal personality (e.g. a unit trust) managed by a
distinct management company or of a corporate invest-
ment fund (e.g. a SICAV) (5) or a pension fund (6). The
investment vehicles taking the form of a unit trust can
either be ‘open-ended’ or ‘closed-end’ funds. (7)

(16) Small- and mid-caps within the meaning of Article 12 of
Decree-Law No 269/2003 are companies whose market
capitalisation does not exceed €800 million, as determined
on the basis of the market price of the company's shares on
the last trading day of each quarter of the calendar year (9).

(14) Article 12 of Decree-Law No 269/2003 provides that, as of
the tax year in which the scheme entered into force, the
specialised investment vehicles governed by the legislation
in question are to apply a 5 % tax, instead of the standard
12,5 %, on the net operating result accruing to them and
consisting in the annual
increase in the registered daily
value of their assets.

(17) The scheme is applicable as of the tax year in which the
investment vehicle's bylaws are amended (or adopted in
case of a new investment vehicle), introducing the express
requirement that the investment vehicle invest not less than
two thirds of its assets in shares of small- and mid-caps
listed on a regulated market in the European Union.

(15) Specialised investment vehicles within the meaning of

Article 12 of Decree-Law No 269/2003 are:

a)

b)

investment vehicles whose bylaws expressly specify
that at least two thirds of the value of the assets held
are to be invested in shares of small- and mid-caps
listed on a regulated market in the European Union;

investment vehicles that, one year after the starting
date of the fund or from the date on which new
bylaws were established, hold shares in small- and
mid-caps listed on a regulated market in the European
Union the value of which is equal to at least two thirds
of its assets, during the calendar year for more than
one sixth of the number of days of operation of the
investment vehicle (8)
the
aforementioned period, on the basis of information
taken from the Fund's relevant regular accounting
reports.

following the end of

(5) The main difference between SICAVs

(corporate funds) and
contractual investment funds is that, in the case of SICAVs, there
is no distinction between company capital and capital invested. The
participating shares in a SICAV are its capital.

(6) The tax rate applicable to the net operating result of pension funds is
not directly reduced by Article 12 of Decree-Law No 269/2003
because special tax rules apply to them. However, pension funds
investing in specialised investment vehicles benefit from a specific
tax credit which allows them to apply the specific 5 % rate to the
portion of
their revenues deriving from specialised investment
vehicles.

(7) The difference between open-ended and closed-end funds is that, for
the latter, the number of shares issued by the fund is fixed at the
outset for a certain number of years, the participants do not have the
right to request redemption of their shares at any time, and new
issues of shares are also restricted. Open-ended funds are not subject
to any of these restrictions (cf. Provvedimento del Governatore
27 agosto 2003 of the Bank of Italy amending the provisions on
UCITS in the previous Provvedimento of 20 September 1999 and
taking into account the changes to the provisions governing closed-
end funds introduced by Decree No 47 of 31 January 2003).
(8) This limit is set at two months in the case of closed-end funds.

(18) The scheme amends the tax rules concerning all the various
Italian investment vehicles in Italy, whether
they are
administered/incorporated in Italy and subject there to the
special substitute tax levied on their net operating result
(investment vehicles subject to substitute tax in Italy) or
foreign vehicles
to tax in Italy on revenues
distributed to Italian subscribers. It amends with the same
effect the tax rules applicable to foreign investment vehicles
regulated by above-mentioned Council Directive 85/611/
EEC (harmonised foreign UCITS) (10) and the net operating
result of which is distributed to Italian investors or the
shares of which are held by Italian investment vehicles (11).

subject

(19)

In order to clarify the effects of the scheme and the way in
which it
indirectly extends the tax reduction to non-
specialised vehicles and to other participants, it is necessary
to examine separately the different tax rules applicable to
capital revenues accruing to investment vehicles and to
their participants, as amended by Article 12 of Decree-Law
No 269/2003. To this end, a distinction should be drawn
between ‘investment vehicles acting as financial intermediaries
the income of which is subject to substitute tax in Italy’ and
to substitute tax and acting as
‘investment vehicles
participants
investment vehicles’, since the same
investment vehicle may act both as a financial intermediary
(i.e. it invests in transferable securities) and as a participant

in other

subject

(9) A company can therefore be classified as a small- or mid-cap for one

or more quarters, depending on stock market fluctuations.

(10) The scheme does not directly affect taxation of foreign investment

vehicles falling outside the scope of Directive 85/611/EEC.

(11) To be more precise, while the foreign UCITS that distribute their net
operating result to individual Italian investors apply Italian with-
holding tax upon distribution, the portion of the net operating result
accruing to Italian investment vehicles from their participation in
foreign UCITS is eligible for relief from double taxation by means of
the exclusion of part of the net operating result deriving from such
foreign UCITS.

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it invests in other investment vehicles). A
investor (i.e.
separate section is devoted to the revenue accruing to other
investors exempt from the substitute tax applicable to other
investment vehicles.

exemption with regard to revenue deriving from specialised
investment vehicles (subject to the 5 % substitute tax). It
also reduces the effective tax on the revenue of non-
specialized investment vehicles participating in foreign
specialised investment vehicles not subject to substitute tax
in Italy at a rate of 5 % (13).

Taxation of revenue accruing to investment vehicles
acting as financial intermediaries subject to substitute
tax in Italy

Taxation of operating income accrued or distributed to
other participants in investment vehicles not subject
to the substitute tax

(20) Under the general system,

investment vehicles are not
subject to income tax. However, any operating revenue
accruing to investment vehicles is ordinarily subject to the
12,5 % substitute tax calculated on their net operating
result. As a general rule, this tax is in full discharge of tax
liability, replacing any further tax on revenues distributed
by investment vehicles.

(21) The net operating result is determined by deducting from
the fund's net assets at the end of
the year, plus the
substitute tax payable and any amounts distributed during
the year, the fund's net assets at the beginning of the year
and the revenue from participation in collective investment
undertakings subject to the substitute tax, as well as exempt
revenue and revenue subject to withholding tax (12).

(22) Article 12 of Decree-Law No 269/2003 amends the general
tax system in that it provides for the levying of a 5 %
substitute tax on the operating revenue of specialised
investment vehicles.

Taxation of revenue accruing to investment vehicles
to Italian substitute tax and acting as
subject

participants in other investment vehicles

(23) Any revenue distributed by an investment vehicle subject to
substitute tax in Italy to its participants (including other
investment vehicles) is not subject to further taxation under
the general system. The scheme in question maintains the

(12) Pursuant to Article 10b of Law No 77/1983, revenue from foreign
investment vehicles not governed by Council Directive 85/611/EEC
is included in the net operating result as it is not subject to
withholding tax.

(24) Revenue distributed by Italian and foreign investment
vehicles to Italian investors is not subject to further taxation
in Italy because it has already been taxed at the level of the
investment vehicle (withholding tax). However,
the
participating investor is a business undertaking acting as
such, the revenue received is included in its taxable income
subject to the 33 % rate of tax. Such beneficiary under-
takings qualify for a 15 % tax credit which offsets in full the
double taxation of the capital revenue received. The scheme
essentially confirms the tax credit, even when the revenue is
distributed by specialised investment vehicles (14).

if

(25) Revenue distributed by foreign investment vehicles to
Italian investors is subject to a 12,5 % withholding tax
pursuant to Article 18 of the Italian Income Tax Code

(13) As a general rule, only 40 % of the net operating result accruing to
an Italian investment vehicle from a foreign investment vehicle is
taxable in Italy. This means that the foreign income accruing to an
Italian investment vehicle is effectively taxed at 5 % (12,5 % of 40 %
corresponds to a tax rate of 5 %). By excluding from the net
operating result of an investment vehicle the entire amount of capital
revenue deriving from a specialised investment vehicle subject to the
reduced rate of 5 %, the scheme achieves the objective of ensuring
equal treatment between investments made in Italian specialised
investment vehicles and those made in foreign specialised investment
vehicles.

to prevent

tax of 5 %. However,

(14) Article 12 of Decree-Law No 269/2003 maintains the existing 15 %
tax credit with a view to ensuring that the 5 % reduced tax levied on
specialised investment vehicles is borne by the participating investor,
which would be the case if the credit had been limited to 5 %
(corresponding to the 5 % substitute tax paid by the investment
vehicle) instead of 15 %. In short, the 15 % tax credit makes it
possible to avoid higher taxation at the level of the investor, resulting
in an aggregate rate of
the
participating investors from unduly benefiting from the full 15 %
credit, while tax has been effectively paid at only 5 %, the scheme
states that the tax credit constitutes a limited tax credit as regards the
part not covered by the substitute tax on the accrued net operating
result, i.e. 9 %, which cannot be reimbursed or used to offset income
taxes due in tax years in which the revenue was taxed. To grant relief
against withholding tax, Italian tax law provides for a tax refund to
foreign (non-resident) investors participating in investment vehicles
subject to tax in Italy, which qualify for a tax refund equal to 15 % of
the amount distributed by the investment vehicles offsetting the tax
previously charged. The scheme limits the refund to 6 % for
distributions by specialised investment vehicles subject
to the
reduced substitute tax of 5 % under Article 12 of Decree-Law
No 269/2003.

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(TUIR). The scheme reduces the withholding tax to 5 % for
revenue distributed by specialised investment vehicles. This
provision ensures equal treatment of investors in foreign
and Italian investment vehicles.

European market. The Commission further observed that
the advantages in question are not proportionate to the
number of shares in small- and mid-caps owned by such
vehicles but are solely dependent on their status as
specialised vehicles.

(26) Revenue deriving from investment vehicles is included in
the net operating result of a pension fund participating in
such investment vehicles. It is subject to a substitute tax of
11 %. To eliminate double taxation of the income accruing
to pension funds, a tax credit equal to 15 % of such revenue
is imputed against
the substitute tax payable by such
pension funds. The scheme adapts the new reduced-
taxation arrangements for specialised investment vehicles
to the specific tax system for pension funds.

(27)

the substitute tax on
In parallel with the lowering of
specialised investment vehicles, the scheme reduces to 6 %
the tax credit for revenue deriving from Italian specialised
investment vehicles. Furthermore, Article 12 of Decree-Law
No 269/2003 provides that the portion of the assets of
pension funds generated by foreign specialised investment
vehicles is subject to a 5 % substitute tax, instead of the
standard 11 % (15).

(28)

(29)

III.

GROUNDS FOR INITIATING THE PROCEDURE

the
In its decision to initiate the formal procedure,
the
the measure met all
Commission considered that
criteria for classification as
specialised
state aid for
investment vehicles and for small- and mid-caps whose
shares are held by such specialised vehicles within the
meaning of Article 87(1) of the Treaty, while it did not raise
any doubts regarding the direct tax reduction granted to
investors in specialised investment vehicles because it
constitutes a general measure for all investors.

In raising doubts about the possible existence of aid for
specialised investment vehicles, the Commission held them
to be undertakings within the meaning of Article 87(1) of
the Treaty because they either have a corporate form and
constitute business entities per se or constitute separate
assets managed by undertakings that compete on invest-
ment markets. Secondly, the Commission observed that
specialised investment vehicles benefit either directly from a
tax rate reduction or indirectly from additional capital
investments by way of the tax reduction granted by the
scheme to their
investors where such vehicles invest
primarily in small- and mid-caps listed on a regulated

is

(15) The effective 5 % substitute tax on the income accruing to pension
funds
realised
from foreign specialised investment vehicles
because, under the specific tax provisions for pension funds, they
may deduct from their net operating result, taxed at 11 %, the
the revenue distributed by a foreign specialised
54,55 % of
investment vehicle, with the result that applying the reduced rate
of 11 % to 45,45 % corresponds to the imposition of a 5 % on total
revenue. On the other hand, the revenue accruing to pension funds
from Italian specialised investment vehicles is subject to an 11 %
substitute tax although it qualifies for a 6 % tax credit to offset the
tax already paid by such specialised investment vehicles.

(30) As regards small-caps the Commission stressed that the
measure provides an indirect advantage for those compan-
ies whose shares are held by specialised investment vehicles,
because it has the effect of increasing their liquidity by
providing them with easier access to capital. The advantage
is dependent on their status as small- and mid-caps listed
on a
regulated European market and not on the
performance; nor it is dependent on other conditions or
investments made by such companies.

IV.

COMMENTS FROM ITALY AND INTERESTED

PARTIES

(31)

In their comments, both Italy and Assogestioni claimed that
the investment vehicles in question cannot be viewed as
undertakings but simply as pools of assets managed by
separate undertakings. The latter are subject to ordinary
taxation on their profits and do not benefit from the tax
reduction provided for in Article 12 of Decree-Law No 269/
2003.

(32) Both Italy and Assogestioni

further observed that

the
scheme should be viewed as a general tax policy measure
directly benefiting the
investors and only indirectly
affecting small- and mid-caps and investment vehicles.
For the interested parties, the scheme is aimed at fostering
the market capitalisation of small- and mid-caps as opposed
to other companies listed in Europe and, as such, it would
fall outside the scope of state aid monitoring. Both Italy and
the interested parties argued that the measure does not
constitute aid for specialized investment vehicles or for
certain management companies. In this respect, the Italian
authorities stressed that the scheme is effectively open to all
undertakings that create separate funds aimed at investing
predominantly in small- and mid-caps listed on regulated
European markets and would therefore constitute a general
measure.

(33) Furthermore, according to those comments, the scheme
would not affect competition because any European small-
or mid-caps could benefit from the easier access to capital.

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Moreover, it would not constitute aid to such companies
because investment vehicles or their management compan-
ies would take their investment decisions with a view to
maximizing profits.

vehicles prompts investors to buy shares in such vehicles,
thereby providing additional liquidity and extra income in
terms of entry and management fees.

(34) Assogestioni provided detailed information on the func-
tioning of the scheme during its first period of operation
(2004). By the end of 2004 three specialised investment
vehicles were operational: two that had existed previously
and had amended their bylaws so that
they invested
primarily in shares of small- and mid-caps listed on
regulated European markets, and one newly established
fund. Assogestioni indicated that the tax cost of the scheme
in 2004 was minimal. On the basis of the data presented by
Assogestioni, the Commission calculated that the shortfall
in tax revenues in 2004 amounted to some €1,1 million,
account being taken of the necessary adjustments to offset
the carry-forward of the virtual tax credits relating to tax
incurred in previous years. Italy and the interested parties
consider that these figures show that the scheme had an
insignificant effect on intra-Community competition and
trade, also bearing in mind that small- and mid-caps and
investment vehicles established abroad may benefit from
the indirect effects of the tax reduction in question.

V.

ASSESSMENT OF THE MEASURE

State aid within the meaning of Article 87(1)
of the Treaty

(35) Having considered the comments submitted by the Italian
authorities and the interested parties,
the Commission
maintains its position that the tax reduction for investors
constitutes state aid not only for specialised vehicles
investing in shares of small- and mid-caps listed on
regulated European markets but also for small- and mid-
caps whose shares are held by such vehicles because it
cumulatively meets all the criteria laid down in Article 87
(1) of the Treaty.

Selective advantage for specialised investment vehicles

(36) The Commission firstly confirms the view expressed in its
letter opening the formal investigation procedure that, in
some cases, investment vehicles are undertakings within the
meaning of Article 87 of the Treaty and may accordingly
benefit from the tax reduction provided for in Article 12 of
Decree-Law No 269/2003. In particular, it considers that,
even if specialised investment vehicles do not benefit
directly from the tax reduction granted to their investors,
they nonetheless receive an indirect economic benefit in so
far as the tax reduction on investments in specialised

(37) Pursuant to the Commission Communication on state aid
and risk capital (16), in some cases where a state measure
provides for the creation of a fund or other investment
vehicle it is necessary to consider whether the fund or
vehicle can be considered to be an enterprise benefiting
from state aid. In the case at hand, the Commission takes
note of the comment by the Italian authorities to the effect
that the specialised investment vehicles benefiting from the
reduced tax pursuant to Article 12 of Decree-Law No 269/
2003 are simply pools of assets and so cannot be regarded
as undertakings within the meaning of Article 87 of the
Treaty.
such
investment vehicles take corporate form and may therefore
benefit individually from advantages although taxation of
them is separate from taxation of the assets they manage. It
further points out that other investment vehicles without
legal personality are managed by undertakings which
compete with other operators managing savings and that
those undertakings may accordingly benefit from advan-
tages.

It notes, however,

in some cases

that

(38) The Commission considers that specialised investment
vehicles perform an economic activity and constitute
undertakings within the meaning of Article 87(1). This is
confirmed by the case law of the Court in the VAT field. In
particular, the Court recently held (17) that transactions
carried out by SICAVs and consisting in the collective
investment in transferable securities constitute an economic
activity carried out by taxable persons within the meaning
of Article 4(2) of the Sixth VAT Directive (18). According to
the case law (19), it is evident from the preamble to the First
Directive (20) that VAT harmonisation aims to eliminate
factors which may distort conditions of competition and
therefore to secure neutrality in competition. Given that the
state aid rules and the VAT harmonisation directives share
the same purpose, the Commission considers it appropriate
to refer to the case law concerning the latter, which
confirms that the investment vehicles in question, whether
or not they have corporate form, perform an economic
activity and therefore constitute undertakings within the
meaning of Article 87(1).

(39) The Commission accordingly considers that a tax advantage
provided to investors investing in specialized investment
vehicles favours the vehicles themselves as undertakings
the undertakings
when they have corporate form or

(16) OJ C 235, 21.8.2001, p. 3, paragraph IV.1.
(17) Case C-8/03 BBL, paragraphs 42 and 43.
(18) Sixth Council Directive 77/388/EEC of 17 May 1977 on the
harmonisation of the laws of the Member States relating to turnover
taxes — Common system of value added tax: uniform basis of
assessment (OJ L 145, 13.6.1977, p. 1).

(19) Case 89/81 Hong-Kong Trade Development Council [1982] ECR 1277,
paragraph 6.V. See also Case C-317/94 Elida Gibbs [1996] ECR I-
5339, paragraph 20.

(20) First Council Directive 67/227/EEC of 11 April 1967 on the
harmonisation of legislation of Member States concerning turnover
taxes (OJ 71, 14.4.1967, p. 1301; English Special Edition, Series I,
Chapter 1967, p. 14).

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managing such vehicles when they have contractual form.
In particular, the increased demand for shares of specialized
investment vehicles leads to an increase in the management
and entry fees charged by the vehicles or by the
undertakings managing them.

(40) The argument whereby the scheme is not selective in so far
as it does not favour specific investment vehicles and
managing undertakings with respect to their size, nation-
ality, place of registration or composition is irrelevant in so
far as what matters is the fact that the scheme provides for a
tax reduction that
is extraordinary and limited to the
investment vehicles specialised in shares of listed small- and
mid-caps and their managing undertakings. According to
settled case law (21), the fact that aid is not aimed at one or
more specific recipients defined in advance but is subject to
a series of objective criteria cannot suffice to call
into
question the selective nature of a state measure. The
Commission also considers that the fact that the advantage
conferred by the scheme on investment undertakings
managing specialised investment vehicles is only indirect
cannot rule out the existence of state aid in so far as,
according to the settled case law of the Court (22), direct tax
advantages granted to investors who are not undertakings
constitute indirect aid for the undertakings invested in.

(41) The Commission accordingly concludes that the measure
confers the specific indirect advantage mentioned above on
specialised investment vehicles and their management
companies, to the detriment of other undertakings offering
alternative forms of investment.

the capitalisation of small- and mid-caps in Europe and
would fall outside the scope of the state aid rules cannot be
accepted either. The Commission takes the view that the tax
advantage conferred does not offset any substantial
disparity in tax treatment between collective investments
in listed small- and mid-caps, on the one hand, and
collective investments in other companies and individual
investments in non-listed companies, on the other. Nor can
the scheme be justified by its own specific objective because
it provides solely for
tax reductions in the case of
specialised collective investments in shares of small- and
mid-caps listed on regulated markets and, as such, it is not
targeted at or proportionate to the aim of promoting the
capitalisation of such companies but instead is conditional
on the investments being made through specialised
investment vehicles.

State resources

(44) The Commission would point out that the advantages in
question are granted by the State or through state resources.
Noting that Italy did not present any objections in this
respect, it confirms the appraisal made in the decision to
initiate the formal procedure according to which the
advantage is attributable to the State as it consists in the
forgoing of tax revenues by the Italian Treasury.

Selective advantage for small- and mid-caps whose
shares are held by specialised investment vehicles

(45)

(42) The Commission also confirms the view expressed in its
letter opening the formal investigation procedure that the
effect of the scheme in question is to favour small- and mid-
caps whose shares are held by specialised investment
vehicles benefiting from the tax reduction provided for in
Article 12 of Decree-Law No 269/2003. In particular, it
considers that the scheme confers an indirect selective
advantage on small- and mid-caps whose shares are held by
specialised investment vehicles consisting in the increased
demand for their shares and in increased liquidity. The
argument that there would be no advantage for small- and
mid-caps because funds and investors seek to maximize
profits cannot be accepted since more favourable tax
treatment enhances the attractiveness of such an invest-
ment, with increased liquidity for small- and mid-caps even
in absence of any active behaviour by them aimed at
benefiting from such an advantage.

(43) The argument according to which the scheme would
constitute a general tax policy measure aimed at favouring

(21) Case T-55/99 CETM v Commission [2000] ECR II-3207, paragraph 40,
and Joined Cases T-92/00 and T-103/00 Territorio Histórico de Álava
and Others v Commission [2002] ECR II-1385, paragraph 58.

(22) Case C-156/98 Germany

v Commission [2000] ECR I-6857,
paragraphs 24 to 28, and Case T-93/02 Confédération nationale du
Crédit mutuel v Commission, judgment of 18 January 2005, not yet
reported, paragraph 95.

Effect on competition

for a measure to distort competition it

In view of the effects of the measure, the Commission
confirms the appraisal made in the decision initiating the
formal procedure that the measure may distort competition
between undertakings and affect trade between Member
States because the beneficiary companies can operate in
international markets and pursue commercial and other
economic activities
in markets where competition is
intense. In accordance with the settled case law of the
Court (23),
is
sufficient that the recipient of the aid competes with other
undertakings on markets open to competition. In particu-
lar,
in
the vehicles undertaking collective investment
transferable securities and specialised in shares of small-
and mid-caps compete with other financial undertakings
and operate in an open market characterised by substantial
intra-Community trade. As to the small- and mid-caps
whose shares are held by the specialised investment vehicles
described in Article 12 of Decree-Law No 269/2003, at
least some of
them are active in sectors where trade
between Member States takes place.

(46) The Commission considers that neither the limited tax
expenditure on this scheme in 2004 (€1,1 million) nor the
small number of specialised vehicles operating during that
same year (three), as compared with the large number of
listed small- and mid-caps whose shares have been held, can

(23) Case T-214/95 Het Vlaamse Gewest v Commission [1998] ECR II-717.

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affect the conclusion that the measure constitutes aid firstly
because, according to the settled case law of the Court (24),
even a small amount of aid affects competition and
secondly because it is not ruled out by Italy that the scheme
in question may have a far more important economic
impact in the future. It must further be noted that the
limited impact of the measure may also be explained by the
fact that the Commission promptly initiated an investiga-
tion and opened the formal investigation procedure into the
measure, and this may have influenced the behaviour of the
operators. Lastly, although the number of eligible small-
and mid-caps listed on regulated European markets is
relatively large compared with the size of the tax reduction
the information presented by Italy does not
in 2004,
the benefits accruing to any individual
indicate that
beneficiary fall within the limit for de minimis aid.

(47) The Commission has therefore come to the conclusion that
the scheme alters (by way of the tax treatment accorded to
investors) the competitive position of certain undertakings
pursuing economic activities and, in so far as the latter
operate on markets open to international competition,
affects competition.

Lawfulness of the scheme

(48) Since the Italian authorities implemented the scheme
without first notifying the Commission, they did not fulfil
the obligation incumbent on them under Article 88(3) of
the Treaty. In so far as it constitutes state aid within the
meaning of Article 87(1) of the Treaty and was put into
effect without prior approval from the Commission, the
measure ranks as unlawful aid.

Compatibility

(49) As the measure constitutes state aid within the meaning of
its compatibility with the
Article 87(1) of
common market must be assessed in the light of
the
derogations provided for in Article 87(2) and (3) of the
Treaty.

the Treaty,

(50) The Italian authorities have not explicitly challenged the
Commission's assessment set out in its letter of 11 May
2004 instituting the formal investigation, namely that none
of the derogations provided for in Article 87(2) and (3) of
to which state aid may be
the Treaty and pursuant
considered compatible with the common market
is
applicable in the present case, and the Commission has
not become aware of any other elements that invalidate this
conclusion.

(51) The advantages in question are either unrelated to any
expenses or linked to expenses ineligible for aid under
existing Community guidelines or block exemptions.

(52) The derogations in Article 87(2) of

the Treaty, which
concern aid having a social character that is granted to
individual 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 this case.

(53) Nor does the derogation in Article 87(3)(a) of the Treaty,
which 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
underemployment, because the measure in question applies
to Italian territory as a whole and not only to assisted
regions in Italy within the meaning of Article 87(3)(a).
Lastly, the scheme does not seem to contribute in any way
to the development of the said regions.

(54)

In the same way, the regime cannot be considered to be aid
to promote the execution of an important project of
common European interest or
to remedy a serious
disturbance in the economy of Italy, as provided for in
Article 87(3)(b) of the Treaty. Nor does it have as its object
the promotion of culture and heritage conservation, as
provided for in Article 87(3)(d) of the Treaty.

(55) Lastly, the measures in question must be examined in the
light of Article 87(3)(c) of the Treaty, which stipulates that
aid to facilitate the development of certain economic
activities or of certain economic areas, where such aid does
not adversely affect trading conditions to an extent contrary
to the common interest is admissible. The tax advantages
granted by the measure are not related or proportionate to
specific investments, to job creation or to specific projects
which would facilitate the development of certain economic
activities or certain areas within the meaning of Article 87
(3)(c) of the Treaty. They cannot be declared compatible
with the common market in accordance with the criteria
laid down in the Commission Communication on state aid
and risk capital (25) because the investments benefiting
from them are targeted at companies listed on a regulated
European market and the Italian authorities have not shown
that those companies do not enjoy proper access to equity
finance and face higher costs than other companies when it
comes to raising capital. The Commission would finally
point out that, as stated by the Court with respect to
another aid measure favouring specific investments,
‘there
the scheme from being applied to
was nothing to prevent
undertakings in difficulties or operating in sensitive industries for
which specific State aid rules have been laid down’ (26).
It

(25) OJ C 235, 21.8.2001, p. 3.
(26) Case C-156/98 Germany v Commission [2000] ECR I-6857,

(24) Case C-142/87 Belgium v Commission [1990] ECR I-959.

paragraph 69.

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concludes that the advantages granted under the scheme
reduce charges that should normally be borne by the
beneficiaries in the course of their economic activities and
must therefore be considered as operating aid, which, in
accordance with practice and case law, is incompatible with
the common market.

VI.

CONCLUSIONS

(56) The Commission concludes that the tax reliefs granted
under this measure constitute a scheme of operating aid not
the derogations from the general
covered by any of
prohibition of such aid and that the measure is therefore
incompatible with the common market. It also finds that
Italy has unlawfully implemented the measure.

(57) Where state aid is found to have been granted unlawfully
and to be incompatible with the common market, the
natural consequence is that the aid should be recovered in
order to restore as far as possible the competitive position
that existed before the aid was granted.

(58) This decision concerns the scheme in question as such and
must be immediately implemented, including recovery of
the aid granted under the scheme pursuant to Article 14 of
Procedural Regulation No 659/1999 (27).

(59) To this end, the Commission finds it necessary to ask Italy
first to remove immediately the aid, which consists in the
different tax treatment of their net operating result,
in
respect of
the revenue accruing to investment vehicles
specialised in shares of small- and mid-caps listed on
regulated European markets by informing all those required
by the relevant national rules of Article 12 of Decree-Law
No 269/2003 to apply the tax incentives in question about
the direct applicability of this Commission decision.

(60) Secondly, Italy must recover the aid from the investment
vehicles or from the undertakings managing contractual
investment vehicles that are at the same time the first
beneficiaries of the aid and the persons required by tax
legislation to pay to the State the substitute tax on their net
operating result. The aid to be recovered corresponds to the
difference between the standard substitute tax and the
reduced tax resulting from the tax incentives in question.
This decision is without prejudice to the possibility for the
investment vehicles or for the undertakings that manage
them to claim a corresponding amount
from their
investors, if such a possibility exists under national law.
The obligation to recover the aid does not, however, rule
out the possibility that all or part of the aid granted to
individual beneficiaries may be compatible under Article 2
of Commission Regulation (EC) No 69/2001 on the

application of Articles 87 and 88 of the EC Treaty to de
minimis aid (28).

(61) The Commission calls on Italy to provide the information
requested by replying to the questionnaire attached in
Annex 1 to this decision, compiling a list of the financial
intermediaries and the other parties concerned by the
recovery of the tax incentive in question and indicating
clearly the measures planned and already taken to obtain
immediate and effective recovery of the unlawful state aid.
It also calls on Italy to submit within two months of the
adoption of this decision all documents showing that the
proceedings for recovering the unlawful aid have been
initiated (such as circulars, recovery orders, etc.).

(62)

Interest has to be paid on the amounts to be recovered. It
will be calculated on the basis of Commission Regulation
(EC) No 794/2004 of 21 April 2004 implementing Council
Regulation (EC) No 659/1999 laying down detailed rules
for the application of Article 93 of the EC Treaty (29),

HAS ADOPTED THIS DECISION:

Article 1

The state aid in the form of tax incentives for undertakings for
collective investment
in transferable securities specialised in
shares of small- and medium-capitalisation companies listed on a
regulated European market provided for by Article 12 of Decree-
Law No 269/2003, unlawfully put into effect by Italy in breach
of Article 88(3) of the EC Treaty,
is incompatible with the
common market.

Article 2

The Italian Republic shall withdraw the aid scheme referred to in
Article 1 with effect from two months following the date of
notification of the present decision.

Article 3

inform all

the Italian Republic shall

1. Within two months of the date of notification of the present
decision,
the financial
intermediaries, including the undertakings for collective invest-
ment in transferable securities specialised in shares of small- and
medium-capitalisation companies and all
the other parties
concerned by the application of the state aid scheme referred
to in Article 1, of the Commission decision deeming the scheme
to be incompatible with the common market.

2. The Italian Republic shall take the necessary measures to
recover the aid referred to in Article 1 and unlawfully made
available to its beneficiaries from the corporate investment

(27) See footnote 2.

(28) OJ L 10, 13.1.2001, p. 30.
(29) OJ L 140, 30.4.2004, p. 1.

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vehicles or, as the case may be, from the undertakings managing
the contractual
investment vehicles, without prejudice to any
subsequent recourse under national law.

Within two months of the date of notification of the present
decision, the Italian Republic shall inform the Commission of the
identity of
the amount of aid granted
individually and the methods by which such amounts were
determined.

the beneficiaries,

3. Recovery shall be effected without delay and in accordance
with the procedures of national law provided that they allow the
immediate and effective execution of the decision.

4. The aid to be recovered shall include interest from the date
on which it was at the disposal of the beneficiaries until the date
of its recovery.

Interest shall be calculated in accordance with the provisions laid
down in Chapter V of Commission Regulation (EC) No 794/
2004.

Article 4

the date of notification of

The Italian Republic shall inform the Commission, within two
months of
the
measures taken and planned to comply with it. It shall provide
this information using the questionnaire attached in Annex 1 of
this decision.
It shall submit within the same period all
documents showing that the recovery proceedings have been
initiated against the beneficiaries of the unlawful aid.

this decision, of

Article 5

This decision is addressed to the Italian Republic.

Done at Brussels, 6 September 2005.

For the Commission

Neelie KROES

Member of the Commission

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Information regarding the implementation of the Commission decision on aid scheme C 19/2004 — Italy: Direct
tax incentives for undertakings for collective investment in transferable securities specialised in shares of small-
and medium-capitalisation companies listed on regulated markets

ANNEX

1.

Total number of beneficiaries and total amount of aid to be recovered

1.1.

Please explain in detail how the amount of the tax incentives to be recovered from individual beneficiaries will be
calculated:

— principal

— interest

1.2. What is the total amount of unlawful aid granted under this scheme that is to be recovered (gross grant equivalent; at

… prices)?

1.3. What is the total number of beneficiaries from whom the tax incentives unlawfully granted under this scheme are to

be recovered:

2. Measures already taken and planned to recover the aid

2.1. Please describe in detail what measures have already been taken and what measures are planned to ensure immediate
and effective recovery of the tax incentives. Please also indicate where relevant the legal basis for the measures taken/
planned.

2.2. By what date will the recovery be completed?

3.

Information by individual beneficiary

Please provide details for each subject from whom the tax incentives unlawfully granted under the scheme are to be
recovered in the table overleaf.

Identity of the subject

Amount of the incentive
unlawfully granted (*)

Currency: …

Amounts reimbursed (o)
Currency: …

(*) Amount put at the disposal of the beneficiary (in gross grant equivalent; at … prices).
(o) Gross amounts reimbursed (including interest).