IP/03/242
Brussels, 18 February 2003
Final negative State aid decisions on special tax schemes in Belgium, the Netherlands and Ireland
The European Commission yesterday decided that special tax breaks in Belgium, Ireland and the Netherlands constitute State aid. The fiscal measures concerned include the Co-ordination Centres scheme in Belgium, the International Financing Activities scheme in the Netherlands and the Foreign Income scheme in Ireland. In each case, the Commission has found that the scheme granted tax breaks that cannot be reconciled with the EU's rules on State aid.
"Yesterday's decisions on the co-ordination centres and international financing activities are economically the most significant amongst all the 15 measures we investigated since July 2001. The negative decisions taken by the Commission yesterday herald the definitive end of these tax-breaks. Yesterday's action is a key element in the fight against harmful tax competition, a fight launched in 1996 when I was Internal Market Commissioner", Commissioner Monti stated. (Further details on the other proceedings are set forth in IP/01/982
The three decisions constitutes a vital building block in repealing certain tax schemes deemed harmful by the Code of conduct on business taxation. This approach is coherent with the one already followed in the nine previous business taxation cases for which the Commission has closed its State aid investigations(1) without ordering the beneficiaries to pay back the tax advantages already granted because beneficiaries had legitimate reasons to believe that they were lawful. In this way, the Commission has ensured equal treatment of similar situations.
Commenting the recent progresses achieved by the Code of conduct group to tackle harmful tax competition, Competition Commissioner Mario Monti said: "I am a great supporter of the work of the Code of conduct group on the elimination of unfair tax competition. The Commission launched State aid proceedings in July 2001 just as the Code of conduct group started to make progress in its discussions. Without our State aid proceedings, some Member States may well have not negotiated this year's tax package.
Co-ordination Centres (Belgium)
The Belgian Co-ordination Centres regime dates back to 1984, when the Commission initially did not consider the scheme to constitute State aid. Subsequent to the Code of conduct initiative to tackle harmful tax competition, the Commission reviewed the system again and, on 11 July 2001, proposed that Belgium aligns its tax system with the State aid rules in order to avoid distorting competition and trade between Member States. After Belgium refused to do so in February 2002, the Commission launched formal proceedings IP/02/325
A Co-ordination Centre is an undertaking belonging to a multinational group providing services to other members of the group. Under a 10-year license granted by the tax authorities, the taxable revenues of a Co-ordination Centre are determined according to the so-called "cost-plus" method. The cost plus method is normally aimed at avoiding double taxation and limiting tax avoidance. In the cost plus method, the taxable profit is calculated as a percentage of the aggregated operating costs. Although this method of taxation does not constitute State aid per se, its practical application may well give rise to State aid. With respect to the Belgian scheme, the Commission has concluded that the Belgian authorities apply the cost-plus method in a way that gives raise to State aid. Firstly, Belgium systematically uses a default mark-up rate of 8% without verifying whether this rate reflects the economic reality of the services provided by the Co-ordination Centres. Secondly, the way in which the expenditure of the Centre is calculated excludes significant operating cost items of the Centre. Thirdly, the Belgian Co-ordination Centres enjoyed additional tax advantages such as a withholding exemption on income distributions and a real-estate property tax exemption. The benefits reduce the amount of taxable profits and thus grants an advantage not justified under the EU State aid rules.
Accordingly, the Commission has ordered Belgium to discontinue the scheme, closing it immediately to new entrants and phase it out with respect to existing beneficiaries not later than 31 December 2010. As most individual licenses will expire before that date, the regime will progressively loose its economic importance and will indeed have become of marginal significance by its expiry date in 2010. As the Commission had initially approved the scheme, the beneficiaries are not required to pay back any advantage they might have received in the past.
International Financing Activities (Netherlands)
The Dutch International Financing Activities regime dates back to 1996. Under this tax scheme, multinational companies active in more than four countries or two continents may place up to 80% of their foreign-source financial profits in a tax-free risk reserve for a period of 10 years. Under the scheme, the beneficiaries can further release the reserves formed without incurring taxation or at a reduced tax rate if the reserve funds are used for certain objectives encouraged by the scheme. The beneficiaries may also decide voluntarily to put an end to their reserve, by releasing the funds over five years at a reduced tax rate of 10% instead of the applicable corporate taxation rate of 34.5%.
The Commission decided that these tax advantages are not justified under EU State aid rules and had also been instituted without the mandatory prior notification. Accordingly, the Commission has ordered the Netherlands to close the scheme to new entrants immediately and to bring the tax advantages to a definitive end by 31 December 2010, at the latest. Thus, for example, a licence granted on 1 January 1997 will definitely expire on 31 December 2007, while no licence can be exploited beyond 2010. The Commission has also ascertained that the 70% of the licences have been granted in 1997 and 1998 and that the majority of the licences will therefore definitely expire by 2007/08. Given the similarities between this scheme and the Belgian Co-ordination Centres scheme, the Commission concluded that the beneficiaries had legitimate reasons to believe that the tax advantages did not fall foul of State aid rules. Accordingly, the beneficiaries are not required to pay back the aid granted under the Dutch measure, for the duration of the current tax arrangements in place.
Foreign income scheme (Ireland)
The regime consists of two measures. The first measure, dating back to 1988, exempts foreign dividends from taxation, where the dividends are used for investments that create or save jobs in Ireland. This measure has been abolished in 2001.The second measure, established in 1995, exempts the profits of foreign branches from Irish tax, where these profits are used for investments that create jobs in Ireland. This measure has been closed to new entrants in 2001. Although these schemes are also aimed at reducing international double taxation on foreign-source income, the Commission's investigation revealed that tax benefits were selective. While the Irish tax system does provide a tax credit to avoid the double taxation of foreign income, the two measures at issue provide additional tax savings when the tax rate abroad is lower than in Ireland. Such a selective advantage constitutes an incompatible State aid.
Currently, there are only three companies that might benefit from the scheme and only one of them ever used the licence to do so. Furthermore, with respect to the remaining tax arrangements currently in place, the Commission noted that the general corporate tax rate has progressively fallen in Ireland until its current level of 12.5%. As the foreign tax exceeds this rate, the companies that still have a valid exemption licence do not gain an additional tax saving anymore.
Finally, the Commission concluded that, given certain similarities between this scheme and the Belgian Co-ordination Centres scheme, the beneficiaries had legitimate reasons to believe that they did not fall foul of State aid rules. Accordingly, no reimbursement of the advantages that might have been received will be sought.
(1) These are, respectively : (1) the German « Coordination centres » scheme, (2) the Spanish « Biscaye Province Coordination centres » scheme, (3) the Luxembourgs Centres de coordination and (4) « Sociétés de financement » schemes, (5) the Finnish « Aland Islands Captive insurance » scheme, (6) the Frances « Centrales de trésorerie » scheme, (7) the Greek « Foreign companies offices » scheme, (8) Italys « Triestes financial and insurance services » scheme, and (9) Swedens « Foreign Insurance Companies » scheme.