EU court says Spanish tax breaks may infringe EU state aid laws

LUXEMBOURG (Reuters) - Europe’s top court ruled on Wednesday that the European Commission may have been correct in finding tax breaks for Spanish companies on their foreign holdings were illegal.

The European Union flag and the Spanish flag are seen on the Department of Education building in Madrid, Spain, May 18, 2016. REUTERS/Juan Medina

In a case that may give clues as to how judges will deal with more complex tax cases involving Starbucks SBUX.O and Apple AAPL.O, the European Court of Justice (ECJ) said that the lower General Court had erred in annulling the Commission's decision in 2014.

The Court of Justice on Wednesday therefore referred the two cases in question, one involving Banco Santander SAN.MC, back to the General Court.

The European Commission, in two rulings in 2009 and 2011,said the scheme, which applied to Spanish companies holding a stake of at least 5 percent in a foreign company for at least a year, broke EU state aid rules, and ordered Spain to recover the money.

While the Spanish case is different in substance and facts from those involving Starbucks and Apple, the verdict shows the ECJ taking a wider view of what counts as state aid compared with the lower court.

The Spanish scheme allowed a company based in Spain to write down goodwill of a foreign shareholding and deduct this from its corporation tax. This did not apply to domestic shareholdings.

The European Commission had argued that the lower court was wrong to demand that it specify the category of companies that benefited unfairly from the tax breaks.

The ECJ agreed that the lower court had been wrong and that the only relevant criteria to establish whether the tax system was selective, and so unlawful state aid, was to establish if it favored certain companies over others.

The European Commission said it welcomed the judgment, saying its state aid decisions were reinstated and that it would now work with Spanish authorities to recover the aid granted.

The court’s verdict in the Spanish case on Wednesday could give insight into the ECJ’s stance on high-profile rulings by the European Commission against tax breaks for multinationals such as Starbucks and Apple, which have already been appealed to the General Court by the Dutch and Irish governments.

The Commission ordered Apple in August to pay Ireland a record 13 billion euros ($13.5 billion) in unpaid taxes, ruling the firm had received illegal state aid.

The Commission has also ruled that Starbucks, Fiat Chrysler FCHA.MI and 35 other companies benefited from illegal sweetheart deals with several EU countries.

Reporting By Philip Blenkinsop; editing by Robin Emmott