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Spanish tax lease system declared state aid

18 Oct 2013
In recent years, the European Commission has stepped up its activities on direct taxation by employing various mechanisms. One of the most notable, and potentially the most burdensome for taxpayers is that of state aid (article 107 et seq. of the Treaty on the Functioning of the European Union (TFEU) and implementing regulations). Several tax aid proceedings have been addressed against Spain in the last few years. In particular, 21 September 2011 saw the publication of the decision initiating a formal state aid procedure against Spain in relation to the so-called tax lease system for vessels. Following a complicated process, on 17 July 2013, the EU Commission adopted its final decision, in which it concluded that the Spanish tax lease system for financing the construction of vessels (the “STL”) constitutes aid that is unlawful and incompatible with the internal market. Taxand Spain investigates this ruling and the subsequent impact on companies operating within the sector.

In the Commission’s opinion, the STL combined accelerated (inherent in a lease) and early (before the vessel is brought into operation) depreciations with the tonnage system in a manner that gave rise to an advantage contrary to the TFEU. It should be noted here that the STL was already replaced by EU compliant regulations from 1 January 2013.

As described in the decision, the STL (actually, an aggregation of different existing tax rules) worked as follows:

  1. The financial lease company that has acquired the vessel leases it to an economic interest grouping (“EIG”), which benefits from the tax effects of the accelerated and early depreciation (the latter requiring the approval of the Spanish tax authorities).
  2. Subsequently, when the vessel has been practically depreciated, the EIG switches to being taxed under the tonnage system, which significantly reduces the taxation of the gain on the final transfer of the vessel to the shipping company operating it.

According to the Commission, inclusion in the tonnage system creates a situation in which the tax that is deferred through the accelerated and early depreciation is not recovered and levied according to the standard corporate income tax system. As a result, this combination constitutes an economic advantage that comes out of state resources.

This advantage would, moreover, apply exclusively (selectively and by administrative authorisation), to vessels under construction that are eligible for tonnage taxation and leased by EIGs. These vessels were, in the vast majority of cases, built in Spain by Spanish shipyards.

According to the decision, the beneficiaries of this aid scheme would be the EIGs and their investors, (who reported the tax losses generated by the EIGs in their tax returns) where the investors are entities with economic activity (ie companies). In any event, the Commission has considered as compatible with EU law, and therefore not subject to recovery, the part of the system that relates to the potential advantages received by shipping companies (up to the ceilings established in the EU Guidelines on State aid to maritime transport).

In the EU Commission's view, neither the shipping companies nor the shipyards are beneficiaries of the aid system. The Commission holds that if there are private agreements that cause the consequences of the recovery order to fall on the shipyards, those agreements would then be contrary to EU law (because they would thwart the useful effect of the rules on the recovery of state aid).

Finally, the Commission has taken the view that, in accordance with general EU legal principles, it is not appropriate to claim the incompatible aid granted before 30 April 2007, the date of publication of the decision on the French tax scheme for EIGs, in which the Commission declared that the tax system in force in France, and similar to the STL, constituted state aid. The Commission considers that, precisely because of the similarities existing between the French system and STL, and with the publication of that decision, a diligent economic operator should have doubted the lawfulness of the STL.

Your Taxand contacts for further queries are:
Rafael Calvo
T. +34 91 514 52 00

Salvador Pastoriza
T. +34 91 514 52 00

Taxand's Take

Beyond its evident media and economic impact in Spain, the truth is that the Commission’s decision is complex, and debatable from both procedural and substantive standpoints. Actions for annulment must be filed with the General Court of the European Union within 2 months and 10 days after the date of formal notification of the decision (in the case of the State) or of the publication of the decision in the Official Journal (in the case of private parties).

At the time of this writing, such publication in the Official Journal has yet to take place, so now is the time for the affected parties (namely, investors in the EIGs) to analyse the possibility of laying an action against the decision.

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