How do we know whether a State measure will be caught by EU State aid rules if it is unclear at the time of adoption whether the measure would grant a benefit or not? Should a different (or separate) analysis be carried out once we are able to assess the actual outcome of the State measure?

The Court of Justice of the EU grappled with these questions in a recent case concerning the Spanish football club FC Barcelona.

Impact

According to the CJEU, aid schemes must be assessed from a pre-aid perspective even if they are examined by the European Commission after they have been implemented. This approach is in line with the obligation to notify the aid to the EC before it is put into effect.

The CJEU ruled that a measure may amount to State aid and may have to be notified if it is “capable” of triggering an economic advantage. There is no need to take into account unforeseeable and random events that may offset this advantage but that cannot be quantified in advance.

Companies that may potentially benefit from such measures have daunting prospects. If the measure is not notified to the EC but turns out to confer an advantage, they face a recovery risk. But if the measure turns out to be disadvantageous, they cannot recoup their losses.

The case concerned an “aid scheme”, where the beneficiaries are defined in an abstract manner. However, in the future the principles set out in the judgment may also be applied to “individual aid”.

Background

In the late 1980s, many Spanish football clubs found themselves deep in debt following years of financial mismanagement. A new Sports Act was adopted in 1990 with measures aimed at remedying the situation. One of them was to require professional clubs to convert from non-profit, membership-based associations into sports limited liability companies (SLLCs). Clubs with proven “good corporate management” and positive financial balances were exempt from this obligation. The only football clubs that met these criteria were Athletic Club Bilbao, FC Barcelona, Club Atlético Osasuna, and Real Madrid CF. They all chose to continue to operate as non-profit entities.

The issue, from a State aid perspective, was the different legal regimes for SLLCs and the clubs that had the option of remaining as non-profits, including different fiscal rules.

Such differences may give rise to State aid under EU law if one group of companies enjoy an “advantage” compared to the relevant benchmark. In this case, the benchmark was corporate income tax in Spain, the rules of which applied in full to the SLLCs. The tax rate for non-profit entities was lower (25% instead of 30%). But not all of the differences worked to the advantage of the non-profits; they had fewer tax deductibles, for example.

Incompatible State aid

In 2016, the EC found that by limiting the right to the lower tax rate for non-profits to certain professional clubs, Spain had granted incompatible State aid. The EC ordered Spain to recover the difference between the corporate income tax these clubs had actually paid and the higher tax they would have paid as SLLCs.

FC Barcelona brought an action for annulment against the decision before the EU General Court.

The General Court upheld FC Barcelona’s appeal in 2019 arguing that the EC had failed to prove that the Spanish measure conferred an “advantage” on the alleged beneficiaries. The EC had not considered the extent to which the reduced tax deductibility of certain expenses was liable to offset the lower tax rate. The judgment mentions that at least Real Madrid had paid more tax with not-for-profit status than it would have as an SLLC.

The EC appealed to the CJEU. Its main argument was that the assessment of whether the Spanish measure conferred an advantage had to be based on the facts at the time it was adopted (before implementation). This is irrespective of the outcome in individual cases. And does not take into account “unfavourable elements caused by variable circumstances outside the regime”, like potential tax deductions.

The judgment of the CJEU

In March 2021, the CJEU upheld the EC’s appeal. It did not refer the case back to the General Court, but took advantage of its powers to finally settle the case by examining all pleas brought in first instance.

The CJEU emphasised that (i) the measure constituted a potential “aid scheme” (not ”individual aid”) and (ii) under State aid rules, the Member States and the EC itself must be able to assess whether a measure amounts to an “aid scheme” before it is implemented.

These findings were decisive to the outcome of the case. When assessing an aid scheme, the EC can focus on the common features of the scheme and give less relevance to the individual situation of each beneficiary. The fact that one of the (potential) beneficiaries might not have benefitted from the measure in the end becomes less relevant.

The CJEU did accept that it is necessary to take into account all relevant elements (favourable as well as unfavourable) of the national measure. However, since its nature as aid must be assessed at the time of notification and before it is put into effect, potentially disadvantageous features whose actual impact depends on “random and variable circumstances” should be disregarded.

In this case, the lower tax liability for non-profits was considered “capable” of conferring an advantage. According to the court, this was sufficient to classify the measure as an “aid scheme.” The EC was not required to examine the actual impact of the limited possibility of making tax deductions. Even if, in practice, this could mean that a club had to pay more tax as a non-profit than it would under the tax regime for SLLCs.

The fact that the EC adopted its decision 26 years after the Sports Act, when it was possible to observe the actual outcome for each club, was irrelevant. The nature of the measure as aid should still be assessed at the time the measure was adopted and before implementation. Allowing an assessment based on the actual effect of the scheme, after implementation and without prior notification, would favour Member States that fail to notify aid measures in advance.

The CJEU also underlined that the actual outcome is not irrelevant. The EC must look at the impact in individual cases during the recovery stage. A comparison could be drawn with the 2019 Starbucks ruling where a key question was whether a measure that appeared advantageous had in fact led to a lower tax liability.

At the stage of quantifying the amount of aid that each potential beneficiary must pay back to Spain, the non-profits that had actually paid more taxes than SLLCs (like Real Madrid) will not be affected by the EC’s recovery order.

What’s next?

The CJEU’s judgment breaks new ground, but also raises new questions.

The unfavourable elements of Spanish tax rules for non-profits were deemed dependent on “random and variable events” and were not capable of offsetting the benefit of the lower tax rate from a perspective prior to the scheme’s implementation. They were therefore irrelevant for the EC’s analysis. In other words, the impact of the favourable element (a lower tax rate) was considered more certain and foreseeable than the unfavourable.

But how should we deal with a measure if favourable and unfavourable impacts are equally unforeseeable from the outset? This is not clear from the CJEU's judgment. And if it is difficult to establish an “advantage” in advance, it may also be challenging to identify a particular category of beneficiaries. This would raise doubts about whether any advantage would be “selective”, which is another condition for the existence of State aid.

The extent to which the principles set out also apply to “individual aid” is also unclear. The actual outcome of individual measures may be just as difficult to foresee before they are put into effect, but they are subject to the same prior notification obligation as aid schemes.

FC Barcelona’s defeat in Luxembourg will not be the end of the story. The CJEU will likely have opportunities to revisit this ruling in the future and clarify the relevance of unforeseeable events to the State aid analysis.