Portuguese Republic v Commission of the European Communities.
Date: 2006-09-06
52. Article 87(1) EC prohibits State aid ‘favouring certain undertakings or the production of certain goods’, that is to say, selective aid (Case C-66/02 Italy  v Commission  [2005] ECR I-10901, paragraph 94). However, according to settled case-law, the concept of State aid does not refer to State measures which differentiate between undertakings and which are, therefore, prima facie  selective where that differentiation arises from the nature or the overall structure of the system of charges of which they are part (see, to that effect, Case 173/73 Italy  v Commission , paragraph 33, and Case C-148/04 Unicredito Italiano  [2005] ECR I-11137, paragraph 51).
53. Accordingly, it is appropriate to examine, first, whether the measures reducing the tax rates in question are selective in nature and, if necessary, to examine whether, as the Portuguese Government submits, those measures are justified by the nature and overall structure of the Portuguese tax system.
54. As regards the assessment of the condition of selectivity, which is a constituent factor in the concept of State aid, it is clear from settled case-law that Article 87(1) EC requires assessment of whether, under a particular statutory scheme, a State measure is such as to ‘favour certain undertakings or the production of certain goods’ in comparison with other undertakings which are in a legal and factual situation that is comparable in the light of the objective pursued by the measure in question (see, to that effect, Case C-143/99 Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke  [2001] ECR I-8365, paragraph 41, Case C-308/01 GIL Insurance and Others  [2004] ECR I-4777, paragraph 68, and Case C-172/03 Heiser  [2005] ECR I-1627, paragraph 40).
55. Such an analysis is also required in respect of a measure adopted not by the national legislature but by an infra-State authority, since a measure adopted by a regional authority and not the central power is likely to constitute aid if the conditions laid down by Article 87(1) EC are satisfied (see, Case 248/84 Germany  v Commission  [1987] ECR 4013, paragraph 17).
56. It is clear from the foregoing that in order to determine whether the measure at issue is selective it is appropriate to examine whether, within the context of a particular legal system, that measure constitutes an advantage for certain undertakings in comparison with others which are in a comparable legal and factual situation. The determination of the reference framework has a particular importance in the case of tax measures, since the very existence of an advantage may be established only when compared with ‘normal’ taxation. The ‘normal’ tax rate is the rate in force in the geographical area constituting the reference framework.
57. In that connection, the reference framework need not necessarily be defined within the limits of the Member State concerned, so that a measure conferring an advantage in only one part of the national territory is not selective on that ground alone for the purposes of Article 87(1) EC.
58. It is possible that an infra-State body enjoys a legal and factual status which makes it sufficiently autonomous in relation to the central government of a Member State, with the result that, by the measures it adopts, it is that body and not the central government which plays a fundamental role in the definition of the political and economic environment in which undertakings operate. In such a case it is the area in which the infra-State body responsible for the measure exercises its powers, and not the country as a whole, that constitutes the relevant context for the assessment of whether a measure adopted by such a body favours certain undertakings in comparison with others in a comparable legal and factual situation, having regard to the objective pursued by the measure or the legal system concerned.
60. It is true, as the Court has already ruled, that the fact that an aid programme has been adopted by a regional authority does not prevent the application of Article 87(1) EC if the relevant conditions are satisfied (see, to that effect, Case 248/84 Germany  v Commission , paragraph 17). Furthermore, as the Commission stated, in paragraph 26 of the grounds of the contested decision, the text of the Treaty itself, which in Article 87(3)(a) and (c) classifies measures intended to ‘favour certain undertakings or the production of certain goods’ as State aid which may be declared compatible, indicates that benefits whose scope is limited to part of the territory of the State subject to the rules on aid may constitute selective benefits. However, it cannot be inferred from that that a measure is selective, for the purposes of Article 87(1) EC, on the sole ground that it is applicable only in a limited geographical area of a Member State.
61. Furthermore, it cannot be inferred from the judgment in Case C-156/98 Germany  v Commission  [2000] ECR I-6857 that a measure the benefit of which is reserved for undertakings situated in certain regions is selective for that reason alone. In paragraph 23 of that judgment the Court held that the fact that a tax concession favoured certain undertakings situated in the new Länder or West Berlin prevented its being a general measure of tax or economic policy. However, the tax concession concerned had been adopted by the national legislature and was applicable to only some of the undertakings in a number of regions in Germany, namely those employing a maximum of 250 employees and whose head office and management were situated in the new Länder or West Berlin, by way of derogation from the national system which is otherwise homogeneous.
65. In the third situation described, a regional or local authority adopts, in the exercise of sufficiently autonomous powers in relation to the central power, a tax rate lower than the national rate and which is applicable only to undertakings present in the territory within its competence.
66. In the latter situation, the legal framework appropriate to determine the selectivity of a tax measure may be limited to the geographical area concerned where the infra-State body, in particular on account of its status and powers, occupies a fundamental role in the definition of the political and economic environment in which the undertakings present on the territory within its competence operate.
67. As the Advocate General pointed out in paragraph 54 of his Opinion, in order that a decision taken in such circumstances can be regarded as having been adopted in the exercise of sufficiently autonomous powers, that decision must, first of all, have been taken by a regional or local authority which has, from a constitutional point of view, a political and administrative status separate from that of the central government. Next, it must have been adopted without the central government being able to directly intervene as regards its content. Finally, the financial consequences of a reduction of the national tax rate for undertakings in the region must not be offset by aid or subsidies from other regions or central government.
68. It follows that political and fiscal independence of central government which is sufficient as regards the application of Community rules on State aid presupposes, as the United Kingdom Government submitted, that the infra-State body not only has powers in the territory within its competence to adopt measures reducing the tax rate, regardless of any considerations related to the conduct of the central State, but that in addition it assumes the political and financial consequences of such a measure.
80. In accordance with the case-law cited in paragraph 52 of this judgment, it is therefore appropriate to examine whether the tax measures at issue may be justified by the nature or overall structure of the Portuguese tax system, a matter which it is for the Member State concerned to demonstrate.
81. A measure which creates an exception to the application of the general tax system may be justified by the nature and overall structure of the tax system if the Member State concerned can show that that measure results directly from the basic or guiding principles of its tax system. In that connection, a distinction must be made between, on the one hand, the objectives attributed to a particular tax scheme which are extrinsic to it and, on the other, the mechanisms inherent in the tax system itself which are necessary for the achievement of such objectives.
82. Measures such as those at issue, which apply to all economic operators without any distinction as to their financial circumstances, cannot be regarded as ensuring that for the purpose of redistribution the criterion of ability to pay is observed. Although it is true that the disadvantages related to the insularity of the Azores might, in principle, be suffered by all economic operators regardless of their financial circumstances, the mere fact that the regional tax system is conceived in such a way as to ensure the correction of such inequalities does not allow the conclusion to be drawn that every tax advantage granted by the authorities of the autonomous region concerned is justified by the nature and overall structure of the national tax system. The fact of acting on the basis of a regional development or social cohesion policy is not sufficient in itself to justify a measure adopted within the framework of that policy.
88. According to settled case-law, the statement of reasons required by Article 253 EC must be appropriate to the act at issue and must disclose in a clear and unequivocal fashion the reasoning followed by the institution which adopted the measure in question in such a way as to enable the persons concerned to ascertain the reasons for the measure and to enable the Court to carry out its review. It is not necessary for the reasoning to go into all the relevant facts and points of law, since the question whether the statement of reasons meets the requirements of Article 253 EC must be assessed with regard not only to its wording but also to its context and to all the legal rules governing the matter in question (see, inter alia, Case C-56/93 Belgium  v Commission [1996] ECR I-723, paragraph 86, Case C-278/95 P Siemens  v Commission  [1997] ECR I-2507, paragraph 17, and Case C-501/00 Spain  v Commission  [2004] ECR I-6717, paragraph 73).
89. Applied to the classification of a measure as aid, that principle requires a statement of the reasons for which the Commission considers that the measure concerned falls within the scope of Article 87(1) EC. In that connection, even in cases where it is clear from the circumstances under which it was granted that the aid is liable to affect trade between Member States or to distort or threaten to distort competition, the Commission must at least set out those circumstances in the statement of reasons for its decision (Case 57/86 Greece v Commission [1988] ECR 2855, paragraph 15, Joined Cases C-329/93, C-62/95 and C-63/95 Germany  v Commission [1996] ECR I-5151, paragraph 52, and Case C-156/98 Germany  v Commission , paragraph 98).
91. As regards the assessment by the Commission of the effects of the aid on intra-Community trade, it must be held that the contested decision, in paragraph 24 of its grounds, and as indicated in paragraph 19 of this judgment, logically deduced from the characteristics of the system in question and from the general scope of the reduced rates of tax that the result of that system, since those reductions apply to all economic sectors in the Azores, is that at least some of the undertakings concerned carry on economic activities involving such trade and, therefore, trade between Member States is likely to be affected.
99. As a preliminary point, it must be recalled that, for the purposes of Article 87(3) EC, the Commission enjoys a wide margin of discretion, the exercise of which involves assessments of an economic and social nature which must be made within a Community context. The Court, in reviewing whether that freedom was lawfully exercised, cannot substitute its own assessment for that of the competent authority but must restrict itself to examining whether the authority’s assessment is vitiated by a manifest error or misuse of powers (see, in particular, Case C-310/99 Italy  v Commission , paragraph 45, Case C-456/00 France  v Commission  [2002] ECR I-11949, paragraph 41, and Case C-66/02 Italy  v Commission , paragraph 135).