First grounds of appeal: the existence of a principle of correspondence in the reference framework
First, the CJEU recalled its settled case-law, highlighting its decision in the joined cases C‑885/19 P and C‑898/19 P, on the elements based on which a national measure would be classified as unlawful State aid. The Court continued by noting that, in cases involving tax measures, the determination of the reference framework is of particular importance since the existence of an economic advantage may be established only when compared with ‘normal’ taxation.
The CJEU further noted that, in the context of determining the reference system, the EC interpreted the Luxembourg law based on the assumption that a correspondence principle could be inferred from the applicable national law, so that a tax exemption is only to be granted if the distributed profits have previously been taxed at the level of the subsidiaries. In this context, the Court recalled its settled case-law under which, in the absence of harmonization in EU law, each Member State has exclusive competence in the field of direct taxation to determine at their own discretion the characteristics of their domestic tax system. Additionally, the principle of legality of taxation, which is a general principle of EU law, requires that tax obligations and the related substantive features are clearly established by law. This includes ensuring that the taxpayer can anticipate and compute the tax liability, as well as determine the time at which this tax becomes payable.
Based on the above, the CJEU concluded that, when determining the reference system, the EC should in principle be required to accept the interpretation of provisions of national law given by the Member State during an exchange of arguments, provided that that interpretation is compatible with the wording of those provisions. In the CJEU’s view, the EC may depart from that interpretation only if it is able to establish, on the basis of reliable and consistent evidence that has been the subject of that exchange of arguments, that another interpretation prevails in the case-law or the administrative practice of that Member State.
In respect to the EC’s first line of reasoning, the Court noted that, when determining the reference system, the EC must also take into account exemptions that are considered relevant by the national tax authorities of the Member State concerned. This requirement applies as long as such provisions do not manifestly discriminate between companies and do not, in themselves, confer a selective advantage. The CJEU therefore concluded that the EC is not allowed to establish a derogation from a reference framework solely by finding that a measure deviates from a general objective of taxing all resident companies, without taking into account the provisions of national law specifying the manner in which that objective is to be implemented.
The Court then noted, in the context of the EC’s second line of reasoning, that the interpretation given by Luxembourg to the rules at hand is that they do not include an explicit requirement that the exemption of income from participations for a parent company is conditioned on the taxation of distributed profit at its subsidiary’s level. Moreover, in the Court’s view, none of the evidence presented by the EC invalidated Luxembourg’s interpretation. Additionally, the Court determined that Luxembourg’s interpretation aligns with the wording of the rules at hand.
As a result, the CJEU concluded that the EC and the General Court based their selectivity analysis on an incorrect reference framework. Based on settled case-law, an error made in determining the reference system vitiates the entire selectivity analysis. Consequently, the Court upheld the plaintiffs first grounds of appeal.
Second grounds of appeal: derogation from the reference framework by not applying the abuse of law provision
The CJEU then turned to the plaintiffs’ plea that the General Court erred in finding that the Commission could disregard the national administrative practice in Luxembourg in the context of the EC’s conclusion that the Luxembourg’s tax rulings disregarded the general anti-abuse rules (GAAR) provided by the national tax law. The CJEU upheld the AG’s views that GAARs, due to their general nature, could apply across an extensive range of contexts and situations.
Therefore, in the Court’s view, when analyzing the existence of a selective advantage, the EC should have considered whether the tax ruling under dispute deviated from the national case-law or administrative practice of the Luxembourg tax authorities relating to applying the domestic GAAR. If this were not the case, in the CJEU’s view, the Commission would overstep its authority by defining the correct application of local anti-abuse rules, infringing upon Member States’ fiscal autonomy.
In light of the above, the CJEU concluded that the General Court erred in law when it held that the EC was not required to take into account the administrative practice of the Luxembourg tax authorities when applying the domestic GAAR, on the ground that such provision did not give rise to any difficulties of interpretation. Consequently, the CJEU also upheld the plaintiffs’ second grounds of appeal.
CJEU’s findings on the actions for annulment
Whilst looking at the please for annulment brough forward by the plaintiffs, the Court recalled the various errors performed by the EC in its assessment of the reference framework defining the normal tax system, including inter alia the findings above. Moreover, the Court stated that by not accepting this interpretation and defining the reference framework solely based on the general objective, the Commission disregarded the fiscal autonomy and competence of the Member State. The Court acknowledged that the determination of the basis of assessment, the taxable event, and any exemptions to which the tax is subject are the exclusive competences of the Member State in the matter of direct taxation.
In light of the above, the CJEU held that the various errors vitiated the whole of the selectivity analysis. As a result, the CJEU decided to set aside the General Court’s ruling and to annul the EC’s Decision.