Victory for Spain and for the big multinationals. The General Court of the European Union (TGUE) yesterday approved the tax aid offered to companies that acquire foreign companies, a regime promoted by the former Minister of Finance Cristóbal Montoro in 2012, to promote the internationalization of Spanish companies. A measure that the European Commission had considered illegal.
The case dates back to the early 2000s, when the Popular Party government of José María Aznar decided to apply a tax regime that favored the internationalization of Spanish companies and that allowed the acquisition of foreign companies to be applied a tax deduction. Specifically, the financial goodwill (the difference between the cost of a company’s shares and the market value of its assets) generated in the direct acquisition of shares could be deducted as amortization in corporate tax of at least 5% in foreign companies that remained in the portfolio for at least one year.
In 2006, to questions from the European Parliament, the European Commission considered that the measure was not State aid. It was a time when important purchases of Spanish companies were endorsed, such as that of Telefónica from the British operator O2. However, three years later, after a complaint from a private operator, Brussels investigated the system applied, considered it an illegal tax regime and demanded Spain twice (the 2009 and 2011) to recover the aid, although it allowed that it could be applied in “certain cases” and conditions to protect legitimate expectations.
After the blow from Brussels, and with a new PP government, the then finance minister, Cristóbal Montoro, decided in 2012 to recover the regime, applying a new interpretation. Thus, the regime allowed companies to deduct from the corporate tax base the financial goodwill derived from the indirect acquisition of foreign companies. With this interpretation, Telefónica was able to acquire the Brazilian company Vivo. But the measure did not convince either, the European Commission declared it illegal in 2014 and asked Spain to recover the aid. Brussels then considered that these tax deductions were not compatible with “the rules of the European Union” to grant “a selective economic advantage”.
The decision was then appealed by several companies, including Telefónica itself, as well as Banco Santander, Ferrovial, Aigües de Barcelona and Abertis. The companies alleged that the European Commission erred when it called the new interpretation “new aid” and that it violated the principle of security and the protection of legitimate expectations.
Finally, the General Court of the EU has given the right to the companies, because it considers that the Commission “was not authorized to adopt the decision, because when it previously pronounced on the measure (in 2009 and 2011) it already included the acquisitions both direct and indirect”. According to the judgment of the TGUE, the Commission “could not revoke or withdraw the initial decisions” because “it has not been shown that they were based on incorrect information”.
These grants gave Spain the “subjective” right to apply the aid regime under certain conditions, and conferred on multinationals the right not to have to return certain illegal grants. “These are legal decisions that conferred on Spain, with certain conditions and due to the existence of legitimate trust, a subjective right to execute the aid scheme in question, which, despite this, had been declared incompatible” , says the judgment of the General Court.
In other words, Spain could apply this tax regime under certain conditions and cases, since the European Commission had allowed it, but, despite this, Brussels decided that all aid had to be returned without exception, and that is why European justice considers that he did not act correctly. The judgment of the TGUE can still be appealed to the Court of Justice of the European Union.
