ECJ, Portugal v Commission: Illegal State Aid
The autonomous region of Azores is part of Portugal’s overseas territories where EC Law in principle applies, even though Art. 299 (2) EC Treaty permits taking into account factors like remoteness, insularity or dependence on a few products. As all these factors apply in the case of the Azores, jeopardizing the development of the local economy, the autonomous region at issues grants a reduction of 20% on Portuguese personal income tax and 30% on Portuguese corporate income tax, and this to all taxpayers established in its territory.
In its decision 2003/442/EC of the 11th of December 2002 the Commission analyzes these reductions. The reductions are considered as state aid in the sense of Art. 87 (1) EC Treaty, especially due to the selectivity of the measure. Taxpayers established in the Azores are taxed at a lower rate than taxpayers in other parts of Portugal. The state aid at issue could be compatible with EC Law if its established in view of promoting the development of economically disadvantaged regions (Art. 87 (3) EC Treaty).
The Commission accepts that the lower tax rate in the Azores could be justified, as long as those advantages are limited to companies contributing to the local development. This, however, is not the case for companies active in financial services or companies that deliver intra-group services. On these grounds, the Commission decided that the reductions of the Portuguese income taxes are illegal state aid when they apply to such companies.
Portugal, backed by the United Kingdom, argues that the Commission jumps to conclusions concerning the selectivity criterion. The context should be the autonomous region of Azores, where all companies are subject to the same regime, and not the whole of Portugal. Completely in line with the Opinion of Advocate-General Geelhoet of the 20th of October 2005, the ECJ states that only when an infra-State body is sufficiently autonomous in relation to the central government of a Member State, the legal framework appropriate to determine the selectivity of a tax measure might be limited to the geographical area concerned where the infra-State body, in particular on account of its status and powers, occupied a fundamental role in the definition of the political and economic environment in which the undertakings present on the territory within its competence operated. In the case of the Azores, the two aspects of the fiscal policy of the regional government, namely the decision to reduce the regional tax burden by exercising its power to reduce tax rates on revenue and the fulfillment of its task of correcting inequalities deriving from insularity, were inextricably linked and depended, from the financial point of view, on budgetary transfers managed by the central government. This implies, says the ECJ, that the correct context in which to see the measure at issue, is the complete territory of Portugal and the reduction in the Azores then constitutes a selective measure.
Finally the ECJ also confirms that companies that deliver financial or intra-group services do not sufficiently contribute to local development to enjoy the special regime of Art. 87 (3) EC Treaty. Therefore, the reduction, so far as it applies to these companies, amounts to illegal state aid.
