2006/940/EC: Commission Decision of 19 July 2006 on aid scheme C 3/2006 implemented by Luxembourg for 1929 holding companies and billionaire holding companies (notified under document number C(2006) 2956)   (Text with EEA relevance)
Date: 2006-07-19
Institutions: European Commission
Subjects: Luxembourg, State aid, control of State aid, holding company, tax exemption

21.12.2006

EN

Official Journal of the European Union

L 366/47

COMMISSION DECISION

of 19 July 2006

on aid scheme C 3/2006 implemented by Luxembourg for ‘1929’ holding companies and ‘billionaire’
holding companies

(notified under document number C(2006) 2956)

(Only the French text is authentic)

(Text with EEA relevance)

(2006/940/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

By letter of 20 July 2000 (A/36150), the Luxembourg
authorities provided the further information requested.

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 invited interested parties to submit their comments in
accordance with the above-mentioned provisions (1),

Whereas:

(4)

(5)

In 1997 the Council adopted a Code of Conduct
for
Business Taxation with a view to tackling harmful tax
competition (2). In accordance with the commitments made
under the Code,
in 1998 the Commission published a
notice on the application of state aid rules to measures
relating to direct business taxation (3) emphasising its
determination to apply those rules rigorously and to
respect
treatment. The present
proceeding is to be seen in the context of that notice.

the principle of equal

I.

PROCEDURE

By letter of 26 March 2001 (D/51279), the Commission
requested additional information, including the texts of the
laws establishing the tax schemes in favour of exempt 1929
and exempt billionaire holding
holding
companies. By letter of 11 May 2001 (A/33928),
the
Luxembourg
information
requested.

companies

authorities

provided

the

By letter of 11 February 2002 (D/50571), the Commission
informed the Luxembourg authorities of its preliminary
views about the possible aid nature of Luxembourg's tax
provisions, and invited them to submit their comments in
accordance with the cooperation procedure with respect to
existing aid schemes introduced by Article 17(2) of Council
Regulation (EC) No 659/1999 laying down detailed rules
for the application of Article 93 [now Article 88] of the EC
Treaty (4). Following a meeting with the Commission on
19 April 2002, the Luxembourg authorities provided the
requested comments by letter of 2 May 2002 (A/33288). A
second meeting took place between the Luxembourg
authorities and the Commission on 17 October 2002.

By letter of 12 February 1999 (D/50716), the Commission
requested Luxembourg to furnish it with preliminary
information on companies exempted from taxes under a
1929 Law. By letter of 26 March 1999 (A/32604), the
Luxembourg authorities provided a description of the 1929
scheme of exemption for holding companies (hereinafter
called ‘exempt 1929 holding companies’), as amended by
the Law of 29 December 1971 and the Law of 30 November
1978.

(6) With a view to finalising the preliminary examination of
the scheme in question pursuant to the procedure laid
down in Article 17(2) of Regulation (EC) No 659/1999, the
Commission requested Luxembourg by letter of 9 March
2004 (A/51743) to update the information concerning the
scheme by submitting all new proposed or approved
provisions relating to the tax treatment of exempt 1929
holding companies. By letter of 6 May 2004, Luxembourg
submitted the requested information to the Commission.

By letter of 5 July 2000 (D/53671),
the Commission
requested Luxembourg to provide further information on
exempt 1929 holding companies, including information on
the Law of 17 December 1938 on the arrangements
applicable to so-called billionaire holding companies
(hereinafter called ‘exempt billionaire holding companies’).

(1) OJ C 78, 31.3.2006, p. 2.
(2) OJ C 2, 6.1.1998, p. 1.
(3) OJ C 384, 10.12.1998, p. 3.

(7) On 15 September 2004, a third meeting took place
between the Luxembourg authorities and the Commission
during which the Commission was informed of certain
aspects of draft law No 5231 proposing certain amend-
ments to the Law of 31 July 1929 on the exempt 1929
holding companies tax scheme.

(4) OJ L 83, 27.3.1999, p. 1. Regulation amended by 2003 Act of

Accession.

(1)

(2)

(3)

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(8)

(9)

By letter of 4 May 2005 (D/53536), the Commission asked
to be provided with any information on the approval, on
19 April 2005, of draft law No 5231 so that it could
complete the preliminary assessment of the scheme in
question. By letters of 1 June 2005 (A/34536) and 23 June
2005 (A/35047), the Luxembourg authorities submitted
the requested information to the Commission.

By letter of 11 July 2005 (D/55311), the Commission
informed Luxembourg that it had come to the conclusion
as part of its preliminary assessment that the scheme in
question (as amended following the approval by the
Luxembourg Parliament on 19 April 2005 of draft law
No 5231, which had become the Law of 21 June 2005
amending Article 1 of the Law of 31 July 1929 on the
holding companies tax scheme) constituted aid incompa-
tible with the common market.

(10) On 25 July 2005, a fourth meeting took place between the
Luxembourg authorities and the Commission during which
the matter was examined in the light inter alia of the
amendments made to the scheme in question by the Law of
21 June 2005.

(11) By letter of 28 July 2005 (D/55780), the Commission
informed Luxembourg of its preliminary assessment that
the Law of 31 July 1929, as amended by the Law of 21 June
2005, was in the nature of aid incompatible with the
common market and invited Luxembourg to submit its
comments pursuant to Article 17(2) of Regulation (EC)
No 659/1999.

(c)

the Luxembourg authorities notify to the
that
Commission any proposed amendments
to the
exempt 1929 holding companies scheme, within the
scope of the preceding point (a), in accordance with
Article 2 of Regulation (EC) No 659/1999;

(d)

that the Luxembourg authorities issue, within 30 days
from the date of acceptance of
these appropriate
measures, a public statement on the introduction of
the necessary amendments in the tax legislation.

(14)

In the same letter,
the Commission also asked the
Luxembourg authorities to inform it in writing, within
one month of receipt of the proposal, whether Luxembourg
accepted, pursuant
to Article 19(1) of Regulation (EC)
No 659/1999, unconditionally and unequivocally the
appropriate measures in their entirety, and to indicate by
what date at the latest the scheme would be abolished. The
Commission indicated that it might otherwise initiate, in
accordance with Article 19(2) of
the said Regulation,
proceedings pursuant to Article 4(4).

(15) By letter of 9 December 2005 (A/40451), Luxembourg
informed the Commission that
the
appropriate measures proposed. In the light of Luxem-
bourg’s rejection and the Luxembourg authorities’ com-
ments
the Commission
decided to initiate the procedure laid down in Article 88
(2) of the Treaty.

in the aforementioned letter,

it did not accept

(12) By letters of 5 September 2005 (D/56729) and 19 Septem-
ber 2005 (D/57172), the Commission urged the Luxem-
bourg authorities to send the requested comments.

(16) By letters of 9 February 2006 (SG D/200621) and 28 March
2006 (SG D/201345), the Commission notified Luxem-
bourg of the decision to initiate the procedure laid down in
Article 88(2) of the Treaty together with a corrigendum to
that decision.

(13) Since no reply was received within the period prescribed,
the Commission, by letter of 25 November 2005 (5),
proposed to Luxembourg the
following appropriate
measures pursuant to Article 88(1) of the Treaty:

(17) The Commission’s decision (as corrected) was published in
the Official Journal of the European Union (6). In its decision,
the Commission called on interested parties to submit their
comments. In this context, the Commission received no
comments from interested third parties.

(a)

(b)

that the Luxembourg authorities close the exempt
1929 holding companies
to any new
applicants within 30 days from the date of acceptance
of these appropriate measures;

scheme

(18) Luxembourg submitted its comments by letter of 13 April

2006 (A/32917).

that the Luxembourg authorities take any legislative,
administrative or other measures necessary to repeal
the exempt 1929 holding companies scheme or to
eliminate from it any aid elements within the meaning
of Article 87(1) of the EC Treaty;

(19) On 6 July 2006, a further meeting took place between the
Luxembourg authorities and the Commission during which
the
information on the
financing activities of 1929 holding companies and on
those companies’ possible legitimate expectation in con-
tinuing to enjoy exemption during a transitional period.

former provided additional

(5) SG(2005) D/205866.

(6) See footnote 1.

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II.

DESCRIPTION OF THE MEASURE

(20) The Organic Law of 31 July 1929 on the exempt holding
companies introduced a tax vehicle to encourage distribu-
tion of profits accumulated by operating companies in a
multinational group, while avoiding the multiple taxation
of the profits received by the beneficiary holding companies
In 1937,
and further distributed to their shareholders.
following amendments to the Law of 31 July 1929,
Luxembourg introduced an ancillary exempt status for
billionaire holding companies
formed by an initial
contribution of paid-up share capital of at least one billion
Luxembourg francs (LUF). Luxembourg further introduced
a participation exemption scheme whereby dividends,
royalties, capital gains and liquidation proceeds from the
sale of shares in participated companies are not taxable,
to certain conditions. Luxembourg accordingly
subject
nowadays possesses, in addition to a general participation
exemption scheme governed by ordinary law (e.g. Arti-
cle 166 of the Income Tax Act), transposing the Parent-
Subsidiary and Interest-Royalty Payments Directives (7), a
specific exemption scheme for exempt 1929 holding
companies and exempt billionaire holding companies.

taxes

are not

to any direct

(21) Under the Law of 31 July 1929, exempt 1929 holding
in
subject
companies
Luxembourg, such as, for example, corporate income tax
(impôt sur le revenu des collectivités), municipal business tax
(impôt commercial communal) (8) and net worth tax (taxe sur la
valeur nette) (9). They are, however, liable to taxes on capital,
such as real estate tax (impôt foncier) (10) and the annual
subscription tax (taxe d'abonnement) (11). Accordingly, divi-
interest, royalties and capital gains earned by an
dends,
exempt 1929 holding company are not
taxable in
royalties (12) and
Luxembourg. Payments of dividends,

(7) Council Directive 90/435/EEC of 23 July 1990 on the common
system of taxation applicable in the case of parent companies and
subsidiaries of different Member States (OJ L 225, 20.8.1990, p. 6),
as amended by Directive 2003/123/EC of 22 December 2003; and
Council Directive 2003/49/EC of 3 June 2003 on a common system
of
taxation applicable to interest and royalty payments made
between associated companies of different Member States (OJ L 157,
26. 6.2003, p. 49).

(8) Luxembourg resident companies and permanent establishments of
foreign companies are subject to corporate income tax levied at the
maximum rate of 22 % and to municipal business tax levied at a
variable rate depending on the municipality, but with an average of
7,5 %, on the taxable income corresponding to the gross income less
expenses excluding non-deductible expenses such as direct taxes,
hidden payments of dividends and directors' fees.

(9) Luxembourg imposes a net worth tax on resident companies and on
permanent establishments of foreign companies at a rate of 0,5 %
applied as at 1 January of each year to the net assets, these being the
difference between the assets estimated at their fair market value and
liabilities vis-à-vis third parties.

(11) Equal to 0,2 % of the paid-up share capital and share premiums

value.

(12) Luxembourg has abolished the tax on royalties as from 1 January

2004 (except in the case of payments abroad).

interest made by an exempt 1929 holding company are not
subject to any withholding taxes (13). Lastly, there is no
withholding tax on interest paid abroad by exempt 1929
holding companies as by any other Luxembourg company,
while
resident
received by non-exempt
companiess is always regarded as taxable income.

interest

the

(22)

Interest payments made by exempt 1929 holding compan-
ies (as by any other Luxembourg company) to individuals
— beneficial owners within the meaning of Council
Directive 2003/48/EC of 3 June 2003 on taxation of
savings income in the form of interest payments (14) —
who are resident in another Member State are subject to the
withholding tax provided for by the said Directive,
in
Luxembourg. There is a similar 10 % final withholding tax
introduced in
on interest paid to resident
Luxembourg as from 1 January 2006, to which interest
payments by an exempt 1929 holding are subject.

individuals,

(23) Exempt 1929 holding companies are normally excluded
from the bilateral double taxation and tax fraud prevention
conventions concluded by Luxembourg.

(24) As regards capital taxation, exempt 1929 holding compan-
ies are subject to a 1 % capital duty (droit d'apport) on cash
or asset contributions (15). In addition, they are subject to
an annual subscription tax (taxe d'abonnement) of 0,2 % of
the paid-up share capital and share premiums' value as set
on the date of closing of the preceding financial year (16).
Exempt 1929 holding companies may borrow funds from
their shareholders or from banks or other credit institutions
and they may issue bonds. With a view to avoiding non-
payment of subscription tax, thin capitalisation rules are
applied if the funding by means of debt as opposed to

(13) Dividends distributed by a non-exempt company are subject to
withholding tax at the rate of 20 % on the gross amount paid (25 %
if the withholding cost is borne by the payer), unless Directive 90/
435/EEC applies or qualifying participations within the meaning of
Article 147 of the Income Tax Act are involved. This withholding tax
may be reduced pursuant to treaty provisions. Interest is generally
not subject to any withholding taxes, unless qualified as hidden
dividends. Most types of royalties paid to non-resident beneficiaries
are subject to withholding tax levied at the rate of 10 % (11,11 % if
the withholding cost is borne by the payer). Luxembourg recently
adopted in its tax legislation the exemption provided for by Directive
2003/49/EC. This withholding tax maybe reduced or waived
pursuant to treaty provisions.

(14) OJ L 157, 26.6.2003, p. 1. Directive as last amended by Directive

2004/66/EC (OJ L 168, 1.5.2004, p. 35).

(15) Any contribution in cash or in kind to a Luxembourg company is

(16) Where dividends are distributed by an exempt 1929 holding
company in excess of 10 % of the paid-up capital existing on the date
of closing of the financial year during which the distribution was
made, the subscription tax due the following year is levied on a
deemed basis of 10 times the said dividends.

(10) A municipal
undertakings.

tax levied on the value of real estate owned by

subject to a 1 % capital duty.

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the fees
equity exceeds certain financial ratios. Finally,
(tantièmes) paid to resident or non-resident members of an
exempt 1929 holding company's board of directors,
managers or statutory auditors are subject
to a 20 %
withholding tax.

Conditions

(25) Exempt 1929 holding company status is available only to
companies (17) registered in Luxembourg, and not to one-
person businesses, contractual
joint ventures not in the
form of a company, or permanent establishments, branches
foreign companies. The amount of
or local offices of
subscribed capital of an exempt 1929 holding company
depends on the legal form adopted. A grand-ducal decree of
29 July 1977 requires an exempt 1929 holding company to
have a fully paid-up share capital of at least EUR 24 000.

(26) Companies established in Luxembourg can be registered as
exempt 1929 holding companies provided they engage only
in acquiring, holding and maximising the value of any
forms of participation in other Luxembourg or foreign
companies, including by providing loans, holding patents
and licensing copyright or know-how to the participated
companies. An exempt 1929 holding company is not
allowed to carry on any industrial activities on its own
account or to maintain a commercial establishment open to
the public. An exempt 1929 holding company extending its
activities beyond the above scope loses its status and is
treated as a fully taxable commercial company.

(f)

issuing bonds or deposit certificates (whether publicly
traded or privately issued);

(g)

(h)

(i)

acquiring and holding patents, exploiting them by
granting licences to its subsidiaries and receiving
royalties in consideration (licences may also be offered
to third parties, but there may be no trading therein);

holding trademarks and licences that are complemen-
tary to the holding of a patent and exploiting them by
receiving royalties from its subsidiaries is also allowed,
but only by way of ancillary activity;

holding equity interests
in simple partnerships,
provided the exempt 1929 holding company's share
least
of
EUR 1 240 000 and its financial liability is limited
to the capital contributed.

paid-up

capital

comes

the

to

at

(28) The prohibited activities include:

(a)

carrying on any industrial or commercial activity or
providing any kind of service;

(b)

running a commercial establishment open to the
public;

(27) The authorised activities of an exempt 1929 holding

company include, in particular:

(c)

owning land or buildings other than that used for its
own premises;

(a)

acquiring, holding, managing and selling equity
interests in any Luxembourg or foreign company
with limited liability;

(d)

carrying on the activities of agent, banker, or manager
on behalf of any company for consideration, unless
the other company is a subsidiary;

(b)

acquiring, holding, managing and selling Luxembourg
or foreign bonds, deposit certificates and debentures;

(e)

issuing short- or medium-term commercial paper;

(c)

acquiring, holding, managing and selling Luxembourg
or foreign companies' stocks;

(f)

granting loans, advances or guarantees in any form to
any entities other than its subsidiaries;

(d)

granting loans, advances or guarantees in any form to
companies in which it has a direct equity interest. In
order to safeguard such loans, a minimum 25 %
equity stake in such companies is required;

(g)

acquiring non-patentable intellectual property rights;

(h)

direct involvement in the affairs of its subsidiaries.

(e)

holding gold or commercial paper linked to the value
of gold;

(17) These are the public limited company (société anonyme), the private
limited company (société à responsabilité limitée), the limited partner-
ship with a share capital (société en commandite par actions), and the
cooperative company (société coopérative).

(29) Exempt 1929 holding companies are subject to supervision
by the Luxembourg Land Registration and Estates Depart-
ment (Administration de l'Enregistrement et des Domaines),
which is entitled to inspect their books, but only as far as is
necessary to confirm whether
the holding companies’
activities are within the limits laid down by the 1929
legislation.

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Exempt billionaire holding companies

(30) There is among exempt 1929 holding companies a specific
form of holding company, namely the exempt billionaire
holding company. This may be formed either by contribut-
ing shares in foreign companies or by increasing the paid-
up share capital and reserves to at least EUR 24 million
(LUF 1 billion). Exempt billionaire holding companies may
opt
for a tax regime whereby the subscription tax is
replaced by a so-called income tax. Pursuant to the grand-
ducal decree of 1937 on exempt billionaire holding
companies, this income tax is levied on interest paid to
bond and security holders, dividends paid to shareholders,
and fees paid to directors, auditors and liquidators of such a
company.

(31) Where the aggregate amount of interest paid to bond or
security holders for the financial year concerned is more
than EUR 2,4 million, the tax is calculated according to a
specific schedule including 3 % of the interest paid, 1,8 % of
the dividends, fees and remunerations up to an aggregate
distribution amount of EUR 1,2 million, and 0,1 % of any
dividends, fees and remunerations in excess thereof. Where
the aggregate amount of interest paid to bond or security
holders for the financial year is less than EUR 2,4 million,
the tax is calculated according to a different schedule
including 3 % of the interest paid, 3 % of the dividends, fees
and remunerations up to an amount equal to the difference
between EUR 2,4 million and the aggregate amount of
interest paid, 1,8 % of
the surplus dividends up to
EUR 1,2 million, and 0,1 % of any dividends, fees and
remunerations in excess thereof. As a result, exempt
billionaire holding companies are not subject
to the
ordinary thin capitalisation rules applicable for subscription
tax purposes, and no withholding tax is applied on fees and
remunerations paid.

(32) The authorised activities of an exempt billionaire holding

company include:

(a)

(b)

providing financial assistance to any company over
which it exercises, either directly or indirectly, effective
control;

providing financial assistance to any company in
which companies it controls hold a participation of at
least 25 % and with which continuous economic
relations are maintained;

(c)

providing financial assistance to subsidiaries effec-
tively controlled by companies in which it holds a
25 % participation.

Exempt financial holding companies

(33) The tax exempt status described above has been extended
financial

under certain conditions to so-called exempt

holding companies — a subcategory of exempt 1929
holding companies. These are responsible for financing the
activities of the subsidiaries or affiliates of a group of
companies. In this connection, companies are considered to
be members of
common
denomination which constitutes the symbol of reciprocal
dependence or if the companies of the same group hold a
substantial participation (of at least 25 %) in their share
capital
relations
between them.

and maintain continuous

a group if

economic

they use

a

(34) Similarly to exempt billionaire holding companies, exempt
financial holding companies may carry on a greater range
of activities than exempt 1929 holding companies with
respect to intra-group financing. Whereas exempt 1929
holding companies may only finance companies in which
they hold a direct participation, exempt financial holding
companies may grant loans to any member companies
within their group. More particularly,
the authorised
activities of exempt financial holding companies include:

(a)

financing other group members by granting loans to
companies in which no direct participation is held in
addition to directly participated companies;

(b)

issuing bonds the proceeds of which are used to
finance the activities of any other group members;

(c)

performing invoice discounting activities as factor
within the group;

(d)

receiving cash deposits from companies within the
group in order
to other
companies.

to provide advances

Amendments to the exempt 1929 holding companies
scheme

(35) On 6 November 2003,

the Luxembourg Government
presented to Parliament draft law No 5231 amending the
Law of 31 July 1929 on the exempt 1929 holding
companies scheme. At its sitting of 19 April 2003, the
Luxembourg Parliament approved the above-mentioned
draft subject to certain amendments. The new law was
promulgated on 21 June 2005 and published in the Official
Journal of the Grand Duchy of Luxembourg on 22 June
2005. The Law of 21 June 2005 entered into force on
1 July 2005.

(36) Under the Law, holding companies receiving 5 % or more
of
the total dividends distributed in the year by non-
resident companies which are not subject to an income tax
comparable to Luxembourg's income tax lose their exempt
1929 holding company status and become ordinarily
taxable companies. The parliamentary documents accom-
panying the draft law explain that, for an income tax to be

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considered comparable to Luxembourg income tax, it needs
to be levied at a rate of at least 11 % (corresponding to 50 %
of Luxembourg corporation tax) and that the basis of
calculation of this foreign income tax has to be similar to
the one applicable in Luxembourg.

intermediaries,

including traditional banks and
financial
consultancy firms. Trade seemed to be affected because the
conferred by the
advantages
exempt 1929 holding
companies
scheme benefited only holding companies
exercising certain essentially cross-border financial func-
tions.

(37)

It is apparent from the commentaries to the Law that these
amendments were adopted in order to reconcile the 1929
holding companies tax scheme with the recommendations
presented to the Luxembourg authorities on 3 June 2003
by the Council as part of the review under the Code of
Conduct for business taxation. In this respect, the new Law
introduced a transitional regime safeguarding the existing
advantages for companies enjoying exempt 1929 holding
company or billionaire holding company status, from the
date of its entry into force until 1 January 2011.

III.

REASONS FOR THE INITIATION OF THE FORMAL

INVESTIGATION PROCEDURE

(38)

In its decision of 9 February 2006, the Commission found
in substance that the exempt 1929 holding companies
scheme constituted aid within the meaning of Article 87(1)
of the Treaty. In the Commission’s opinion, the scheme
conferred exclusively on the holding companies in question
several economic advantages consisting in exceptional
exemptions from corporation, withholding, net worth
and real estate taxes. The above advantages translated into
reduced tax liabilities towards the Luxembourg Treasury in
favour of the holding companies and the economic groups
to which they belonged.

(39) These advantages appeared to the Commission to involve
the use of state resources in the form of foregone tax
revenue for the Luxembourg Treasury. The scheme seemed
to be selective in that it was reserved for holding companies
carrying on only certain types of business activity, including
financial, managerial, licensing and treasury functions. The
scheme was also deemed to be restricted to intra-group
activities as the beneficiaries had to operate within a group
in order to benefit from it. It was thus not open to all
undertakings but only to those operating within a group
structure, with the creation of a holding company in
Luxembourg exclusively devoted to carrying on certain
activities such as financing, managing holdings, coordinat-
ing and granting licences and patents.

(41) None of the derogations provided for in Article 87(2) and
(3) of the Treaty seemed to be applicable, as the measure in
question constituted an operating aid not linked to the
execution of specific projects and it seemed merely to
reduce the beneficiaries’
current expenditure without
contributing to the achievement of any Community
objectives.

(42) The Commission also concluded that what was involved
here was an existing aid measure within the meaning of
Article 1(b)(i) of Regulation (EC) No 659/1999. The
amendments introduced by the 2005 law amending the
exempt 1929 holding companies scheme did not appear to
alter the existing nature of the aid in question as they left
the advantages conferred by the scheme unchanged, while
temporarily limiting the circle of beneficiaries to those not
receiving certain dividends subject
to reduced taxation
outside Luxembourg.

(43)

investigation procedure,

In initiating the formal
the
Commission called on the Luxembourg authorities to
furnish any information that might be relevant for purposes
of assessing the effects of the scheme in question, notably in
the financial services sector. It also invited Luxembourg and
interested third parties to submit their comments on the
possible existence of a legitimate expectation on the part of
beneficiaries
justify the adoption of
transitional measures should it ask that the scheme in
question be abolished.

such as might

IV.

COMMENTS FROM THE LUXEMBOURG

AUTHORITIES AND THIRD PARTIES

Journal of

(44) No interested third party formally submitted comments
the Commission’s decision of
following publication of
9 February 2006 in the Official
the European
Union (18). Several representatives of exempt 1929 holding
companies contacted the Commission informally, however,
asking to be informed inter alia of the legal consequences
for
investigation procedure
initiated by the Commission under Article 88(2) of the
Treaty and of the legality of the tax exemptions they had
received.

individuals of

the formal

(40)

In its decision to initiate the formal investigation procedure,
the Commission took the view that this advantage distorted
competition and affected trade between Member States in
that
the financial and management activities typically
carried on by exempt 1929 holding companies generally
took place in international markets where competition was
intense. In this respect, competition seemed to be distorted
because the exempt 1929 holding companies were treated
more favourably than independent service providers and

(45) The Luxembourg authorities sent their comments by letter
dated 13 April 2006. They disagreed with the finding that
the 1929 holding companies exemption scheme constituted
aid within the meaning of Article 87(1) of the Treaty and

(18) See footnote 1.

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L 366/53

did not comment on the scheme's compatibility with the
common market.

(46)

In its letter of 13 April 2006 Luxembourg also refused to
furnish any relevant information for purposes of assessing
the measure in question and its effects on competition and
trade in, among others, the areas of financial services, intra-
intellectual
group activities and the management of
property rights. No information was forthcoming on
investments managed by exempt 1929 holding companies,
nor was a list provided of exempt holding companies. The
Luxembourg authorities claimed it was impossible to draw
up such a list because exempt 1929 holding companies
were not subject to administrative authorisation.

(47) Lastly, on the issue of

the existence of a legitimate
expectation on the part of beneficiaries of the exemption
scheme justifying the adoption of transitional measures in
the event of a negative final decision, the Luxembourg
authorities observed that the abolition of the exempt 1929
holding companies scheme would have such an impact on
Luxembourg's tax system that the expectations of operators
acting under the scheme would have to be protected. The
latter could not expect a legal status to be done away with
overnight.

(48)

in their

In substance,
letter of 13 April 2006 the
Luxembourg authorities dispute the finding that the tax
scheme in question constitutes aid.

(49) First of all,

applicable

they state that

standard taxation regime

the exempt 1929 holding
companies scheme confers no advantages compared with
the
to holding
companies, being designed merely to avoid a multiplication
the tax burden linked to the profits distributed by
of
operating companies. Without the exemption scheme in
question, exempt 1929 holding companies would in effect
be penalised from a tax point of view, the profits of an
operating company being taxed once as profits of that
company, a second time when they were distributed as
participation income of the holding company and, lastly —
in the event of a subsequent distribution — as dividends of
the holding company’s shareholders.

(50) Secondly, according to the Luxembourg authorities, the
exempt 1929 holding companies scheme is not selective
and therefore does not distort competition or affect trade
between Member States. All companies in a comparable
factual and legal situation, involving inter alia the acquisition
of equity interests and the management, financing and
value maximisation of shareholdings in controlled compan-
ies, can potentially benefit from the scheme.

competition and trade within the Community because the
beneficiary holding companies are exclusively passive
recipients of income and are not in situations comparable
to those of other operators acting as independent service
providers. At all events, the Commission has not,
it is
claimed, shown that the scheme in question has the effect
of strengthening the position of exempt 1929 holding
companies compared with that of other types of holding
company.

V.

ASSESSMENT OF THE SCHEME

(52) Article 87(1) of the Treaty provides that ‘any aid granted by
a Member State or through State resources in any form
whatsoever which distorts or threatens to distort competi-
tion by favouring certain undertakings or the production of
certain goods shall, in so far as it affects trade between
Member States, be incompatible with the common market.’

Aid nature of the scheme

(53) The Commission has carefully examined the exempt 1929
holding companies scheme in the light of the comments
submitted by the Luxembourg authorities. The numerous
objections raised are not such as to cause the Commission
to alter its preliminary assessment that the tax advantages
granted by the scheme to such companies constitute aid
within the meaning of Article 87(1) of the Treaty.

(1)

(54) The classification of a national measure as state aid
presupposes that the following cumulative conditions are
met:
that
the measure confers an advantage;
(2)
(3) the
advantage is conferred through state resources;
advantage is selective; and (4) the measure distorts or
threatens to distort competition and is capable of affecting
trade between Member States (19).

(55)

In the present case, the Commission considers in substance
that the 1929 Law grants tax advantages which are not
confined to elimination of
the
income received by other holding companies in Luxem-
bourg, i.e. those which are in principle taxable but which
receive allowances related to taxes already paid either in
Luxembourg or abroad.

the double taxation of

(56) The Commission considers, in this context, that the scheme
affords several extraordinary tax advantages and that these
advantages favour certain undertakings carrying on a
limited number of activities in Luxembourg generally
falling within the financial
the
scheme is selective in character. In view of the seriousness
of the objections raised by Luxembourg, the Commission
considers it necessary to give the precise reasons for finding
that the scheme in question, as described above, meets all
the conditions mentioned in paragraph 53.

sphere. Consequently,

(51) Lastly, the exempt 1929 holding companies scheme is not,
so the Luxembourg authorities say, capable of distorting

(19) See, for example, judgment of the Court of Justice of the European
Communities in Case C-222/04 Ministero dell’Economia e delle Finanze
v Cassa di Risparmio di Firenze, not yet reported, paragraph 129.

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Existence of an advantage

(57)

In its comments of 13 April 2006, Luxembourg stated that
the exempt 1929 holding companies taxation scheme
constituted a general tax scheme applicable to companies
exclusively earning passive income already taxed at the time
of generation, irrespective of their size, area of activity or
legal form. It also stated that the scheme was justified by the
overall structure of the Luxembourg tax system, which was
aimed at avoiding double taxation, and that fully taxable
companies could avail themselves of other, comparable
forms of relief against double taxation. In particular,
in
Luxembourg’s view, the scheme afforded no advantages for
two main reasons.

(58) Firstly, the Luxembourg company taxation system provided
for a number of
schemes alternatively applicable to
comparable situations and accessible to all operators
without discrimination. As
Justice had
acknowledged in Banks, such a system could not therefore
involve any advantages within the meaning of Article 87(1)
of the Treaty (20). In that judgment, the Court had held that
there was no aid where different
taxation formulas,
involving potential advantages in the light of the choices
actually made by economic operators, were accessible to all
operators without discrimination.

the Court of

In their view, however,

(59) Secondly, according to the Luxembourg authorities, the
evaluation of the tax burden to which exempt 1929 holding
companies were subject should take into account all the
factors, both advantageous and disadvantageous, of the
scheme.
the Commission had
manifestly not followed that approach. In this connection,
the Luxembourg authorities claim to have provided, in their
three examples of holding
letter of 13 April 2006,
companies that had been placed at a disadvantage by the
application of the scheme in question compared with taxed
holding companies.

(60) The Commission cannot share the Luxembourg authorities’
conclusions. Contrary to what those authorities maintain,
the scheme in question is characterised by several tax
exemptions, notably from income tax, municipal business
tax and net worth tax. These exemptions derogate from the
rule of the taxation of the companies concerned. Moreover,
they are intended not just to avoid the multiple taxation of
income but to relieve from the payment of some taxes
certain economic activities coming under
the Law of
31 July 1929 carried on by exempt holding companies.

to the tax exemptions established and concerns several
personal taxes from which exemption is granted (22). As
regards direct taxes, in particular income tax, municipal
business tax and net worth tax (wealth tax), the exemption
enjoyed by 1929 holding companies is total.

(62)

In view of the above, the Commission acknowledges that,
as far as real estate tax is concerned, exempt 1929 holding
companies are subject thereto in accordance with the Law
of 1 December 1936 and that, contrary to what it stated in
its decision of 9 February 2006, the said holding companies
do not enjoy any advantages in this respect.

(63) As regards the exemption from income tax and municipal
business tax, the scope of the exemption granted to 1929
holding companies in respect of the income from share-
holdings (dividends and capital gains) goes far beyond the
exemption of shareholdings granted in respect of dividends
and capital gains earned by non-exempt holding companies
In
with a view to preventing their double taxation.
particular, exempt 1929 holding companies are exempted
therefrom, irrespective of whether or not they satisfy the
conditions for benefiting from the common exemption
arrangements aimed at avoiding double taxation (23). Unlike
they therefore benefit automatically
taxable companies,
from these
the
Commission considers that
the exemption in question
gives exempt 1929 holding companies an advantage by
mitigating the charges which are normally included in their
budgets (24).

circumstances,

exemptions.

In these

(64) Still on the subject of income tax and municipal business
tax, the Commission would add that interest and royalties
received by exempt 1929 holding companies are totally
exempted therefrom, in contrast to the ordinary taxation
applicable to other Luxembourg holding companies. Such
exemption cannot be justified by the wish to prevent the
double taxation of the income in question inasmuch as the
related charges are deducted upstream by those bearing
them. The exemption of this income under the Law of
31 July 1929 is therefore in the nature of an exception and
contradicts the principle that interest and royalty payments
are subject, at least once, to income tax. In view of the
exceptional nature of
the Commission
accordingly considers that exempt 1929 holding companies
also benefit in this case from a mitigation of the charges
which are normally included in their budgets.

this exemption,

(61) While it is true that the 1929 exemption scheme from
which exempt holding companies benefit does not cover all
the taxes to which Luxembourg companies are normally
subject (21), the present proceeding is nevertheless limited

(65) As

regards withholding taxes on distributed income,
dividends and royalties made by exempt 1929 holding
companies, the Commission notes that the said holding
companies are not subject to the withholding tax normally
applied by Luxembourg to payments made to non-resident

(20) Judgment in Case C-390/98 H.J. Banks & Co. Ltd v The Coal Authority
and Secretary of State for Trade and Industry [2001] ECR I-6117,
paragraphs 49 and 50.

(21) Exempt 1929 holding companies are thus not exempted from
payment of indirect taxes such as capital duty, registration duty and
VAT.

(22) For the purposes of this proceeding, for example, impersonal taxes,
based on the nature of the transactions carried out, are not relevant.
(23) Paragraphs 46-54 of the Commission's decision of 9 February 2006.
(24) See, for example, the judgment of the Court of Justice in Case C-387/
92 Banco Exterior de España [1994] ECR I-887, paragraph 14.

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recipients, including — in the case of billionaire holding
companies — the withholding tax imposed on directors'
fees. It accordingly considers that exempt 1929 holding
companies also benefit in this case from a mitigation of the
charges which are normally included in their budgets.

Luxembourg ignores situations in which exemption is not
ordinarily granted, despite the fact
that, as previously
observed,
it is only in such situations that the scheme
enables beneficiaries under it to retain a specific advantage
compared with the ordinary scheme.

(66) Even supposing that

this withholding tax exemption
benefits directly the income recipients, and only indirectly
exempt 1929 holding companies, the Commission con-
siders that it nonetheless has the effect of relieving the latter
of charges normally borne by distributing companies
taxable in Luxembourg. This assessment is borne out by
the fact that, where a withholding is applied, the rate of tax
is higher if its cost is borne by the distributor and that the
latter is under no legal obligation, in such a case, to pass on
the tax to the recipient of the income. Furthermore, exempt
1929 holding companies receive an indirect advantage in
terms of easier access to risk/debt capital due to the higher
return to investors resulting from the exemption.

(67) Finally, exempt 1929 holding companies are not subject to
the net worth tax applicable to companies taxable in
Luxembourg. Even supposing that this exemption has an
economically limited scope, it nonetheless relieves exempt
1929 holding companies of a charge normally borne by
companies in Luxembourg.

(68)

It follows from all the foregoing that, in the Commission’s
view, the advantages in question constitute exceptional
measures which are capable of favouring certain under-
takings compared with other undertakings which are, in the
light of the objective pursued by the said scheme — namely
the prevention of multiple taxation — in a comparable
factual and legal situation. The Commission considers in
this context that the reference made by the Luxembourg
authorities to the judgment in Banks is irrelevant. In that
case, of the various possible formulas for applying certain
taxes, none appeared a priori more advantageous. In the
present case, however, an exemption is, in principle, more
advantageous than the taxation of income. The Commis-
sion concludes from this
that exempt 1929 holding
companies benefit actually and not potentially from a
mitigation of the charges which are normally included in
their budgets.

(70) The Commission considers,

it

that

therefore,

is not
necessary to take into account all applicable direct and
indirect taxes in order to determine whether there exists an
tax advantage granted to exempt 1929 holding
actual
companies, the existence of that advantage being already
sufficiently proven. The Commission would point out,
moreover, that such an analysis would be impossible to
carry out in view of the indeterminate number of possible
situations.

(71)

In conclusion, the Commission considers that the scheme
in question constitutes an advantage conferred on exempt
1929 holding companies.

Selectivity

(72) The specific nature of a state measure, namely its selective
application, constitutes one of the necessary elements of
the concept of state aid within the meaning of Article 87(1)
of the Treaty. In that regard, it is necessary to determine
whether or not
the tax scheme in question entails
advantages accruing exclusively to certain undertakings or
certain sectors of activity (25). In the present case, according
to the Luxembourg authorities, the exempt 1929 holding
companies scheme is not selective because all undertakings
in comparable situations, i.e. those carrying on exclusively
the activities of managing and maximising the value of
participations held in controlled companies
and of
receiving income derived from those activities, can benefit
from it.

(73) The Commission shares the view of

should be

the Luxembourg
authorities that the selectivity of a measure such as the tax
exemption for holding activities must be assessed in the
light of comparable situations (26). It considers, however,
that what
taken into consideration for
comparison purposes here are companies receiving income
comparable to that of exempt 1929 holding companies. It
would observe though that, among Luxembourg compan-
ies, only the
exempt 1929 holding companies are
completely exempted from tax on all the income they
receive, irrespective of any tax already borne upstream on
their
in which they hold a
participation.

income by companies

(69) The three examples given by the Luxembourg authorities in
their letter of 13 April 2006 are not of such a character as
to call into question the conclusion that the scheme at issue
confers advantages derogating from ordinary tax law which
are not justified by the nature of the Luxembourg tax
system. First of all, they concern situations which are not
representative of the actual use made of the exempt 1929
holding companies scheme. Secondly, they concern only
situations in which the ordinary scheme already grants total
exemption from income taxes. On the other hand,

(74)

In these circumstances, the Commission can only conclude
that such an exemption scheme is selective since it favours
carrying on exclusively certain
certain undertakings

(25) See the judgment of the Court of Justice in Case C-241/94 France v
Commission [1996] ECR I-4551, paragraph 24, and in Case C-200/97
Ecotrade [1998] ECR I-7907, paragraphs 40 and 41. See also the
judgment of the Court of First Instance in Case T-55/99 CETM v
Commission [2000] ECR II-3207, paragraph 39.

(26) See in this connection the judgment of the Court of Justice in Case
C-143/99 Adria-Wien Pipeline v Finanzlandesdirektion für Kärnten
[2001] ECR I-8365, paragraph 41.

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activities among the various undertakings and activities
which are subject to the risk of multiple taxation.

(75) This assessment is borne out, moreover, by the fact that,
the Law of
according to the Luxembourg authorities,
31 July 1929 is designed to prevent an excessive extension
of this favourable regime to companies other than exempt
1929 holding companies so as to prevent it from placing an
undue burden on the state budget. The Commission would
point out in this connection that a justification based on the
nature or overall structure of the tax system must reflect the
consistency of a specific tax measure with the internal logic
of the tax system in general (27). Such cannot be the case
here, however, inasmuch as Luxembourg has not justified,
the
by reference to the nature or overall structure of
national tax scheme, the exceptional arrangement from
which exempt 1929 holding companies alone benefit.

(76) The Commission would point out, moreover,

that

the
benefit of the exemption under the Law of 31 July 1929 is
subject to fulfilment of several conditions linked essentially
to the existence of a registration system monitored by the
authorities and to compliance with certain legal require-
ments relating to minimum net worth and to the actual,
exclusive pursuit of certain strictly defined activities. In the
Commission’s view, the existence of these stringent criteria
enhances the selective nature of the scheme in question.

maximisation of participations. Moreover, in addition to
equity participations, exempt 1929 holding companies may
hold public or private bonds, whether or not quoted on the
regulated markets, and whether or not issued by the public
sector. Exempt 1929 holding companies may also hold only
bonds, independently of or in conjunction with participa-
tion management activities. It is thus possible for financial
holding companies to broaden the circle of potential
financing beneficiaries and in so doing to grant loans to all
companies forming part of the group and hence to all
companies sharing a common name which are at least
25 %-held by a common parent company.

(79) Furthermore,

certain activities

are presumed to be
equivalent to the acquisition of a participation, even if no
shares are held by the exempt 1929 holding company in
question. A holding company may thus hold patents and,
although it may not exploit or negotiate them, it may grant
exploitation licences to other companies either outside or
within the group to which it belongs and hence collect a
royalty without losing the benefit of exemption.

(77) The Commission would note in this respect that exempt
1929 holding companies must limit their activities to the
acquisition of participations, in whatever form, in other
undertakings and to the management and value maximisa-
tion of those participations. The summary definition of the
value maximisation of participations given in the Law of
31 July 1929 has been clarified by the Land Registration
and Estates Department, which has interpreted it broadly as
including several economic activities, directly or indirectly
linked to the value maximisation of participations, taking
the form notably of financing activities. Holding companies
are thus authorised to grant long- or short-term advances
and loans to companies in which they directly hold a
participation (28).

(80) The activities which exempt 1929 holding companies are
authorised to carry on also include the provision of advice
on management and investment by investment funds. The
purpose of this activity is to provide advice to collective
investment undertakings on the management of
the
portfolio entrusted to them. It is normally carried on by
consultancy firms which are in principle taxable under
ordinary tax law. However, where certain specific condi-
tions are met, it is possible for a consultancy firm to opt for
1929 holding company status (29).

(78) Under the Law of 31 July 1929, collateralisation in favour
of creditors of companies in which exempt 1929 holding
companies hold a participation and collateralisation of their
capital increases also come under the concept of the value

(81)

(27) See the judgment of the Court of Justice in Case C-409/00 Spain v
Commission [2003] ECR I-1487, paragraph 52, the judgment of the
Court of First Instance in Joined Cases T-92/00 and T-103/00
Diputación Foral de Álava and Others v Commission [2002] ECR II-
1385, paragraph 60 and the case law cited.

(28) The granting of

loans comes under the concept of

the value
maximisation of participations and is compatible with pure holding
company status, but it must be an activity ancillary to the holding of
a participation. The ancillary nature of the activity is not assessed by
reference to the amount of the loan or to the purchase price or value
of a participation. The authorities require, rather, that the exempt
1929 holding company should hold a substantial participation in the
company being financed. A participation is deemed to be substantial
where it amounts to 25 % of the capital of the company being
financed. In the case of quoted companies, however, a lower level of
shareholding does not rule out the granting of credit if a substantial
part of the securities are available (floating) on the market. It should
be noted that any financing must be terminated before or at the
same time as the participation is disposed of.

It follows from the above that the activities which a 1929
holding company may carry on are strictly limited by the
Law of 31 July 1929, the pursuit of other activities being
sanctioned by the withdrawal of tax-exempt status. The
Commission considers that these restrictions confirm the
selective nature of the exemption scheme for exempt 1929
holding companies. Moreover, as the Commission men-
tioned in its decision of 9 February 2006, it suffices to
point out that several economic sectors cannot benefit from
the advantages offered by the scheme. Thus, undertakings
carrying on activities other than those authorised concern-
ing participation value maximisation and activities falling

(29) To qualify for 1929 holding company status, a consultancy firm
must satisfy a series of requirements laid down by the tax authorities
in Treasury Ministry Decision No 12.061 of 17 October 1968. In
particular, it must have as its object the supervision and advising of a
single open-ended or closed-ended investment company and it must
invest at least 5 % of its capital in the company receiving its advice,
with a minimum of EUR 50 000, the remainder being investable in
other transferable securities of outside companies. The consultancy
firm must have a company capital of at least EUR 76 000.

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within several sectors, such as manufacturing, agriculture
and commerce, are excluded from the benefit of
the
scheme.

Distortion of competition and effect on trade between
Member States

(82) The Commission considers that no objective explanation
can justify such a tax treatment specifically reserved for
exempt 1929 holding companies, seeking as it does, by thus
limiting its application to certain undertakings, to place
them at an advantage compared with their competitors.

(83) The fact that the scheme in question is accessible only to
Luxembourg undertakings carrying on a limited number of
activities strengthens this assessment. In order to benefit
from the exemption scheme in question, any undertaking
wishing to maximise the value of its investments must set
up a separate entity in Luxembourg for the purpose of
carrying on exclusively the activities authorised by the 1929
legislation. The establishment of such a structure therefore
entails investments on top of
the normal costs of an
investment activity. Only undertakings with a group
structure and significant financial resources (30) of sufficient
amount to establish in Luxembourg a structure devoted to
the activities of managing and financing participations are
able to benefit from the scheme. Such undertakings include,
for example, exempt billionaire holding companies.

State resources

(84) With regard to the state origin of the advantages resulting
from the application of the scheme in question, it should be
pointed out that the concept of aid is more general than
that of subsidy because it embraces not only positive
benefits, such as subsidies themselves, but also measures
which, in various forms, mitigate the charges which are
normally included in the budget of an undertaking and
which, therefore, without being subsidies in the strict sense
of the word, are similar in character and have the same
effect (31). It follows that a scheme, such as the one at issue
here, by which the public authorities grant
to certain
undertakings exemption from the tax normally due, which,
although not involving a transfer of state resources, places
beneficiaries in a more favourable financial situation than
other taxpayers constitutes state aid within the meaning of
Article 87(1) of
In the present case,
therefore, although the exemptions resulting from the
application of the exempt 1929 holding companies scheme
do not constitute transfers of state resources, it cannot be
denied that they lead to a loss of tax revenue and hence
constitute state financing.

the Treaty (32).

(30) See the judgment of the Court of First Instance in Joined Cases T-92/
00 and T-103/00, cited above in footnote 27, paragraphs 38-40.
(31) See inter alia the judgments of the Court of Justice in Cases C-143/99
Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke [2001]
ECR I-8365, paragraph 38; C-501/00 Spain v Commission [2004]
ECR I-6717, paragraph 90 and the case law cited; Case C-66/02 Italy
v Commission, not yet reported, paragraph 77; and Case C-222/04,
referred to above in footnote 19, paragraph 131, and the case law
cited.

(32) See, for example, the judgment of the Court of Justice in Case C-387/
92 Banco Exterior de España [1994] ECR I-887, paragraph 14.

(85) According to Luxembourg,

the exempt 1929 holding
companies scheme is not capable of distorting competition
and trade within the Community because the beneficiary
holding companies are exclusively passive recipients of
income and are not in situations comparable to those of
other operators acting as independent service providers.
Nor, according to Luxembourg, has the Commission proved
that the scheme has the effect of strengthening the position
of exempt 1929 holding companies compared with that of
other holding companies.

Justice of

the Court of

(86) The Commission would point out that, under the settled
case law of
the European
Communities, for a measure to distort competition it is
sufficient that the recipient of the aid competes with other
undertakings on markets open to competition (33) and that
intra-Community trade when state
a measure affects
financial aid strengthens the position of an undertaking
compared with other undertakings competing in intra-
Community trade (34).

(87) The Commission considers that exempt 1929 holding
companies are active in the financial sector, where they
perform specific activities such as providing loans to other
group members,
issuing bonds, performing invoice dis-
counting and managing cash deposits on behalf of both
directly and indirectly controlled companies and other
companies in a group to which an exempt 1929 holding
company belongs, or providing advice on the management
of investment funds. As indicated above, exempt financial
and exempt billionaire holding
holding
companies enjoy increased operational
flexibility under
the 1929 legislation in the pursuit of such financing
activities. Exempt 1929 holding companies are also active
in purchasing, managing and licensing patents on behalf of
directly and indirectly owned subsidiaries, or for other
companies in the group.

companies

(88)

In accordance with the process of deregulation which has
characterised the Community market in financial services,
competition in this sector
is based primarily on the
elimination of any institutional restrictions to the pursuit of
financing activities
in the common market and on
transparency and equality of conditions in the pursuit of
such activities where they are comparable. Competition is
distorted, however, by the scheme in question inasmuch as
exempt 1929 holding companies enjoy complete exemp-
in
tion from the direct
Luxembourg to the income from such activities, despite

taxes normally applicable

(33) Judgment of the Court of First Instance in Case T-214/95 Het

Vlaamse Gewest v Commission [1998] ECR II-717.

(34) Judgment in Case 730/79 Philip Morris v Commission [1980] ECR

2671, paragraph 11.

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the fact that those activities are taxable where they are
carried on by independent service providers or service
providers who do not take the specific form of an exempt
1929 holding company.

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

(89) Moreover, in view of the fact that the legal form of exempt
1929 holding company is frequently chosen by groups
having an international dimension or whose activities cover
various sectors, including the trading sector, trade between
Member States is affected because of the tax advantages
awarded to trading multinationals availing themselves of
the services of exempt 1929 holding companies. Further-
more, exempt 1929 holding companies provide intra-group
services and can, within certain limits, take part in the
industrial
activities of participated
companies — which, as the Court of Justice confirmed in
its recent judgment in Fondazione Cassa di Risparmio di
Firenze (35), constitutes a fully fledged economic activity. For
all these reasons, and because of the commercial activities
carried on by the groups to which exempt 1929 holding
companies belong, the effect on trade and the distortion of
competition are also present at the level of those groups.

and commercial

(90) These conclusions are strengthened by the finding of the
considerable impact which the tax exemptions in question
have on the choice of Luxembourg as a preferred financial
centre. In this connection, the Commission considers it
appropriate to refer to articles that have appeared in the
press (36), according to which the Luxembourg financial
system is founded on the holding companies tax exemption
scheme. This is evidence that financial multinationals use
the structure of holding companies, including exempt 1929
holding companies, in Luxembourg to minimise their tax
burden. According to these press articles, there are getting
on for 15 000 exempt 1929 holding companies registered
in Luxembourg.

(91) Despite the lack of data from the Luxembourg authorities
making it possible to establish the aggregate turnover
achieved by exempt 1929 holding companies, the Commis-
sion considers there can be no denying how important the
scheme is to the financial sector in Luxembourg or how
substantial are the resulting distortions of competition and
trade.

Compatibility

(94) The same goes for the exception provided 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. Likewise, the scheme cannot be
considered a project of common European interest or a
remedy to a serious disturbance in the economy of
Luxembourg, as provided for by Article 87(3)(b) of the
Treaty. Nor does it have as its object the promotion of
culture and heritage conservation as provided for by
Article 87(3)(d) of the Treaty.

(95) As regards lastly Article 87(3)(c) of

the Treaty, which
permits 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, the Commission
would point out that the tax advantages granted to exempt
1929 holding companies are not linked to investment, job
creation or specific projects. They simply consist
in a
mitigation of the charges which should normally be borne
by the companies concerned in the course of their business
and must therefore be considered to be operating aid. In
line with established Commission practice, such aid cannot
be considered compatible with the common market if it
does not facilitate the development of certain activities or of
certain economic areas and if it is not limited in time,
degressive or proportionate to what is necessary to remedy
specific economic handicaps.

(96) The Commission would observe that the mere fact that the
tax advantages in question are exclusively reserved for
companies registered in Luxembourg as exempt 1929
holding companies seems to contravene the freedom of
establishment of business entities established in Luxem-
bourg as well as being formed in other Member States (37).

(92) The Commission considers that the state aid granted to
exempt 1929 holding companies cannot be considered
compatible with the common market. The Luxembourg
authorities have advanced no arguments to show that any
of the exceptions provided for in Article 87(2) and (3) of
the Treaty are applicable in this case.

(35) Case C-222/04, cited above in footnote 19, not yet reported,

paragraph 112.

(36) See the interview with Carlo Thelen, a member of the Luxembourg
Chamber of Commerce, published in the International Herald Tribune
on 9 February 2006.

(97) The Commission would point out in this connection that
only companies established in company form in Luxem-
bourg can benefit from the advantages afforded by the
Luxembourg tax scheme to exempt 1929 holding compan-
ies and that this cannot be justified by the nature of the
that a foreign undertaking
scheme.
carrying on activities comparable to those of an exempt
1929 holding company,
including through a permanent
establishment, an agency or a branch of a foreign company

It would appear

(37) Judgment of the Court of Justice in Case C-307/97 Saint-Gobain

[1999] ECR I-6161.

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within the meaning of Article 43 of the Treaty, cannot
benefit from the advantages afforded by the exempt 1929
holding companies scheme. Against this background, the
Commission cannot accept the Luxembourg authorities'
commitment not to oppose the extension of exemption
status under the Law of 31 July 1929 to include permanent
establishments in Luxembourg of foreign companies which
satisfy the conditions laid down in that Law. Article 87(1) of
the Treaty makes no distinction according to the causes or
aims of state aid, but defines it in terms of its effects (38).
The Commission therefore confirms its preliminary assess-
ment that the scheme in question places, first and foremost,
foreign undertakings operating in Luxembourg which do
not
take the form of a Luxembourg company at a
disadvantage compared with holding companies which do
take the form of a Luxembourg company. This discrimin-
ation may therefore constitute a barrier to the freedom of
establishment of foreign companies in Luxembourg con-
trary to the Treaty and hence incompatible with the
common market.

the Treaty. State aid,

(98) The Commission would also point out in this connection
that the procedure provided for in Article 88 of the Treaty
must never produce a result which is contrary to other
specific provisions of
certain
conditions of which contravene other provisions of the
Treaty, cannot therefore be declared by the Commission to
be compatible with the common market (39). In the present
case, as already indicated, it would appear that the scheme
in question would not benefit a foreign company operating
in Luxembourg through a secondary establishment taking
the form of a permanent establishment, an agency or a
branch, within the meaning of Article 43 of the Treaty,
taxable in Luxembourg. If a Member State grants, even
indirectly, a tax advantage to undertakings having their
registered office in its territory, while refusing to allow
registered office in another
undertakings having their
Member State to benefit from that advantage, then the
difference in treatment between these two categories of
beneficiary is in principle prohibited by the Treaty, provided
that there is no objective difference in situation between
them.

(99)

In the light of all the above considerations, the Commission
considers that the scheme in question cannot be considered
compatible with the common market.

scheme still affords all the tax advantages in question, and
this despite the fact that the circle of beneficiaries under the
scheme is restricted to holding companies receiving less
than 5 % of their dividends from foreign companies subject
to less than 11 % corporation tax and to holding companies
receiving dividends from foreign companies subject to at
least 11 % corporation tax or from Luxembourg compan-
ies. The Commission concludes from this that the exempt
1929 holding companies scheme, as amended by the Law
of 21 June 2005, constitutes state aid within the meaning
the
of Article 87(1) of
exceptions provided for in Article 87(2) or (3) of the Treaty
applies.

the Treaty and that none of

(101) The Commission notes that the exemption granted by the
1929 legislation has not been fundamentally modified since
the Treaty entered into force. It considers, therefore, that the
scheme in question constitutes existing aid within the
meaning of point (b)(i) of Article 1 of Regulation (EC)
No 659/1999. The amendments to the exempt 1929
holding companies scheme provided for by the Law of
21 June 2005 do not, in its view, introduce any new aid
elements and do not increase the number of beneficiaries;
the measure accordingly retains its nature as existing aid.

(102) The Luxembourg authorities have argued that the Commis-
sion approved the amendments introduced by the Law of
21 June 2005 within the Council's Code of Conduct Group
devoted to scrutinising harmful tax measures in the light of
the Code of Conduct for Business Taxation (40) and that, as
a result, the exempt 1929 holding companies scheme is in
conformity with the Treaty.
the
Commission would point out firstly that Article 87 does
not exclude from its scope tax measures of any description.
Secondly, neither the Law of 31 July 1929 nor any of its
including those introduced by the Law of
amendments,
21 June 2005, were notified to the Commission in
accordance with Article 88(3) of the Treaty. Consequently,
the Commission has not had occasion to decide on the
compatibility of the scheme in question with the state aid
rules.

In response to this,

VI.

CONCLUSIONS

(100) The Commission finds that the tax scheme applicable to
exempt 1929 holding companies constitutes state aid
within the meaning of Article 87(1) of the Treaty and that
none of the exceptions provided for in Article 87(2) or (3)
of the Treaty applies. It also finds that,
in spite of the
amendments to the exempt 1929 holding companies
scheme introduced by the Law of 21 June 2005, the

(38) Judgment of the Court of Justice in Case C-159/01 Netherlands v
Commission, not yet reported, paragraph 51 and the case law cited.
(39) Judgment of the Court of Justice in Case C-156/98 Germany v

Commission [2000] ECR I-6857.

(103) No conclusions can therefore be drawn from the fact that
the Commission took part in the proceedings of the Code
of Conduct Group, the aim of which was to examine the
harmful character of the tax measures in question. Suffice it
to say that the procedure for examining tax schemes from a
state aid point of view is legally independent of the work of
the Code of Conduct Group. Moreover, the scope of the
the exempt 1929 holding companies
examination of
scheme by the Code of Conduct Group was narrower than
that of the present examination inasmuch as the Group
focused solely on the exemption of dividends received by
such companies.

(40) See footnote 2.

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(104) It follows from this that the Group's examination cannot
prevent the Commission from carrying out the present
assessment or call into question the Commission's finding
that the exempt 1929 holding companies scheme governed
by the Law of 31 July 1929, as amended by the Law of
21 June 2005, constitutes state aid incompatible with the
common market within the meaning of Article 87(1) of the
Treaty.

(105) The Commission considers that it is necessary to put an
end to the granting of the various advantages conferred by
the tax exemption scheme applicable to exempt 1929
holding companies either by abolishing them or by
modifying them so as to make them compatible with the
common market. As from the date of notification of this
Decision, the advantages conferred by the scheme or its
constituent parts may no longer be granted to new
beneficiary companies registered in the form of exempt
1929 holding companies. To that end, the Luxembourg
authorities will amend their legislation by 31 December
2006 at the latest.

(106) With regard to existing exempt 1929 holding companies
which currently enjoy tax exemption under the scheme
described in this Decision, the Commission acknowledges
that the existing aid nature of the scheme prevents any aid
this Decision from being
granted before the date of
recovered.

(107) The Commission takes note of the fact that interested third
parties did not submit any comments or other information
relevant to determining whether there is, on the part of
beneficiaries of
the scheme in question, a legitimate
expectation such as might justify the adoption of individual
transitional measures before the aid scheme is abolished. It
has examined the information submitted by the Luxem-
bourg authorities on 1929 holding companies' financing
activities and the other arguments presented by those
authorities concerning the legitimate expectations of
current beneficiaries. The thrust of these is that the said
beneficiaries should be allowed to continue enjoying the
scheme's effects during a transitional period before it is
abolished altogether.

(108) In this respect the Commission would point out firstly that,
in the light of the judgment of the Court of Justice of
22 June 2006 (41), neither Luxembourg nor the benefici-
aries under the scheme can claim a legitimate expectation
in the maintenance of the exempt 1929 holding companies
scheme during the transitional period laid down by the
Council (in the context of the work of the Code of Conduct
Group) for dismantling those parts of the scheme that are
deemed to be harmful. The state aid regime based on
Articles 87-89 of the Treaty which is the subject matter of
this proceeding is distinct from the Council's activities as
part of the above-mentioned work.

(109) The Commission would point out secondly that, although
a

exempt 1929 holding companies

scheme

the

is

(41) Joined Cases C-182/03 and C-217/03 Kingdom of Belgium and Forum
187 asbl v Commission, not yet reported, paragraphs 150-154.

permanent scheme, beneficiaries cannot in principle claim
a legitimate expectation in its continued existence beyond
the tax year to which the exemption applies. In particular,
the scheme is not conditional on the carrying out of
specific investments by beneficiaries, but is instead limited
to exempting the income received by exempt 1929 holding
companies during the tax period concerned.

it may have given beneficiaries

(110) Admittedly, however, the exempt 1929 holding companies
scheme is still governed by the Law of 31 July 1929, which
has not been significantly modified since it was promul-
gated. Although such longevity (76 years) is no guarantee of
the scheme's permanence or of its compliance with the
state aid rules,
the
impression that a tax scheme closely bound up with their
activities would not be terminated all of a sudden and that
they could reasonably expect those activities to continue.
The business of 1929 holding companies consists, more-
over, in the provision of medium- and long-term financing.
This business is distinct from that of short-term financial
trading and cannot be carried on outside of a lasting stable
environment.

(111) It is true that existing 1929 financial holding companies
have invested heavily in the multinational groups to which
they belong. This investment is aimed among other things
at setting up and developing those multinational groups'
infrastructure so as to coordinate and promote the growth
of their business activities. Any questioning of their status
would therefore lead to difficult and complex reorganisa-
tion operations which would take some time to complete.

(112) Similarly, medium- and long-term commitments have been
entered into towards staff and outside service providers so
as to enable holding companies to perform the activities
related to the international groups to which they belong.
According to the Luxembourg authorities, there are almost
13 000 exempt 1929 holding companies currently active in
Luxembourg; these contribute to the country's attractive-
ness as an international
the active
population of which consists in any case of no more than
110 000 workers. The Commission must
therefore be
mindful of
the relatively serious consequences that a
decision to immediately abolish the exempt 1929 holding
companies
scheme might have for employment and
economic growth in Luxembourg.

financial centre,

(113) In view of

the above,

the Commission considers

it
reasonable to grant a transitional period to exempt holding
this Decision. This
companies existing on the date of
transitional period will end on 31 December 2010.
However, those companies which continue to benefit from
the exemption scheme until 31 December 2010 will not be
able to form the subject matter of any total or partial
transfer for consideration of their capital throughout the
duration of this transitional arrangement, the reason being

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that, in view of their nature as holding companies, when
their parts are disposed of they can no longer have any
legitimate expectation of continuation of the tax exemption
scheme. In the case of income exemption on and after
1 January 2011, application of the exempt 1929 holding
companies scheme will therefore be unlawful and may give
rise to recovery of any advantage granted.

HAS ADOPTED THIS DECISION:

In the case of exempt 1929 holding companies benefiting under
the scheme referred to in Article 1 on the date of this Decision,
the scheme's effects may be prolonged until 31 December 2010
at the latest. However, those companies which continue to
benefit under
the scheme referred to in Article 1 until
31 December 2010 may not form the subject matter of any
total or partial
their capital
throughout the duration of this transitional exemption arrange-
ment.

for consideration of

transfer

Article 1

Article 3

The tax scheme currently in force in Luxembourg in favour of
holding companies exempted on the basis of the Law of 31 July
1929 (hereinafter called ‘exempt 1929 holding companies’) is a
state aid scheme incompatible with the common market.

Within two months of notification of this Decision, Luxembourg
shall inform the Commission of the measures it has taken to
comply with it.

Article 4

Article 2

This Decision is addressed to the Grand Duchy of Luxembourg.

Luxembourg shall abolish the aid scheme referred to in Article 1
or amend it to make it compatible with the common market by
31 December 2006 at the latest.

As from the date of notification of this Decision, the advantages
of the scheme or of its component parts may no longer be
conferred on new beneficiaries.

Done at Brussels, 19 July 2006.

For the Commission
Neelie KROES
Member of the Commission