April 23
Anjum Shabbir
Anjum Shabbir
19th March 2021
Competition & State Aid Data, Tech & IP Tax

Op-Ed: “Progressive Turnover Taxes and EU State aid law: Green light for digital services taxes?” by Saturnina Moreno González

On 16 March 2021, the Grand Chamber of the Court of Justice published its judgments in Commission v Poland  (C-562/19 P) and Commission v Hungary (C-596/19 P), finding that the Polish tax on the retail sector and the Hungarian advertisement tax, do not infringe EU State aid law. Both judgments dismiss the Commission’s appeals against the rulings of the General Court in Poland v Commission (T-836/16 and T-624/17) and Hungary v Commission (T-20/17) respectively.  In these judgments, the General Court annulled the Commission Decisions of 19 September 2016 and 30 June 2017 (Poland) and 4 November 2016 (Hungary), considering that the Commission made an error of legal characterisation in asserting that the taxes at issue conferred selective advantages to smaller undertakings over larger undertakings.

These judgments are of key significance for two reasons. Firstly, because they present a stricter interpretation of the criterion for selectivity applicable to tax measures, exhibiting a more sensitive approach to the fiscal autonomy of the Member States, and, correspondingly, limiting the power of the Commission to judge what constitutes State aid within the meaning of Article 107(1) TFEU. Secondly, because these judgments, together with the cases of Vodafone (C-75/18) and Tesco-Global (C-323/18), may eventually play an important role in dispelling doubts about the conformity with EU State aid law of controversial digital services taxes (commonly known as Google taxes) established by different Member States.

Without going into details of the particularities of the Polish and Hungarian taxes, the substantive issue in both cases is whether the use of progressive rates in sectoral taxes whose tax base is determined by turnover of undertakings generates different tax treatment depending on the size of an undertaking, arguably granting a selective advantage to smaller enterprises (with low turnover in the activity subject to taxation). In turn, these smaller undertakings would then be subject to lower tax rates than those applicable to larger enterprises taxed at higher rates.

To answer this question, it must be noted that the traditional method of analysis applied in the case law for a tax measure to be classified as ‘selective’ is the so-called derogation test, by which, the Commission must begin by identifying the ordinary or ‘normal’ tax system applicable in the Member State concerned, and thereafter demonstrate that the tax measure at issue is a derogation from that ordinary system, in so far as it differentiates between operators who, in the light of the objective pursued by that ordinary tax system, are in a comparable factual and legal situation (A-Brauerei, C-374/17, paragraph 36). Finally, if the concerned Member States shows that the tax advantage (in other words, the differentiation) is justified by the nature or general structure of the tax system of which it forms part, it cannot constitute a selective advantage.

However, since the Gibraltar case (C-106/09 P and C-107/09 P), the Court of Justice has recognised that the three-step analysis is not always sufficient, as, in some cases, it is necessary to examine whether the characteristics and boundaries of the system of reference have been designed in a consistent manner, or to the contrary, in a clear and arbitrary or biased way, to favour certain undertakings which are in a comparable situation with regard to the underlying logic of the tax system in question. In the formal investigation procedures into the Polish and Hungarian taxes, the Commission availed itself of the Gibraltar case law to note that some of the essential aspects of the taxes at issue (especially the application of progressive tax rates on a tax base linked to turnover) had been designed in an arbitrary or biased way so as to favour certain activities or the production of certain goods. In the Commission’s view, turnover taxes levy undertakings according to their size and not their profitability or ability to pay, and thus the introduction of a progressive tax rate is inconsistent. Thus, to determine the reference system under which to establish the existence of a selective advantage, the Commission considered that such a system of reference was laid down by the structure and key elements of the Polish and Hungarian taxes, except the progressive tax rates, which should be replaced by a single fixed rate as the only consistent option for a turnover tax.

However, the Court of Justice, coinciding with the General Court and Advocate General Kokott, finds that the progressive tax scale of the tax measures at issue should not be excluded for the reference system in the light of which the existence of a selective advantage has to be assessed. The Court of Justice extends to the field of State aid the judgments made in the cases of Vodafone and Tesco-Global as regards the fundamental freedoms of the internal market, where it held that, given the current state of harmonisation of EU tax law, the Member States are free to establish the system of taxation which they deem most appropriate, meaning that the application of progressive taxation falls within the discretion of each Member State. It thus follows that outside the spheres in which EU tax law has been harmonised, the determination of the characteristics constituting each tax falls within the discretion of the Member States in accordance with their fiscal autonomy, that discretion having, in any event, to be exercised in accordance with EU law.  Therefore, those characteristics constituting the tax (taxable event, basis for assessment and tax rate), in principle, define the reference system or normal tax regime under which to analyse the existence of a selective advantage.

Moreover, the Court of Justice notes ‘EU law thus does not preclude progressive taxation from being based on turnover, including where such taxation is not intended to offset the negative effects likely to be caused by the activity being taxed’, as, contrary to the views of the Commission, ‘the amount of turnover constitutes, in general, a criterion of differentiation that is neutral and a relevant indicator of the taxable person’s ability to pay, as stated in the Vodafone and Tesco-Global cases. ‘It does not follow from any rule or principle of EU law, including in the field of State aid, that progressive rates may apply only to taxes on profits. Moreover, like turnover, profit in itself is merely a relative indicator of ability to pay. The fact that it may constitute, as the Commission contends, a more relevant or more precise indicator than turnover is irrelevant in matters of State aid, since EU law on that matter seeks only to remove the selective advantages from which certain undertakings might benefit to the detriment of others which are placed in a comparable situation. The same is true of the possibility of economic double taxation, linked to the combined taxation on turnover and taxation of profits’ (C-562/19 P, paragraph 41; C-596/19 P, paragraph 47).

In light of the above, the Court of Justice considers that the essential elements constituting the tax, which include progressive tax rates, constitute, in principle, the reference system or the ‘normal’ tax regime for the purposes of analysing the condition of selectivity. Although, in the Gibraltar case, the Court noted that it cannot be excluded that the characteristics constituting a certain tax regime may, in certain cases, form a manifestly discriminatory element, in the present case, the Commission has not established that the progressivity of the rates adopted by the Polish and Hungarian legislature (in the exercise of their discretion, in the context of its fiscal autonomy), was designed in a manifestly discriminatory manner, with the aim of circumventing the requirements of EU law on State aid.

As noted at the beginning of this commentary, from the perspective of EU State aid law and, in particular the interpretation (in a more, or less, expansive manner) of the selectivity criterion with regard to tax measures, the Court of Justice’s rulings are of great significance. They are more respectful of the fiscal autonomy of the Member States, which, in parallel, entails the introduction of limits on the Commission’s powers, impeding the use of a hypothetical or ideal reference framework, created by the Commission itself, to replace that established by the Member State concerned, in the light of which to assess the existence of a selective advantage. In addition, the Court of Justice acknowledges that a model of progressive turnover taxation that is designed to be applied to a tax levied on undertakings solely on the basis of their volume of activity does not in itself constitute the existence of a selective advantage. In other words, the Commission cannot validly infer the existence of a selective advantage merely from the progressive nature of a tax, unless it can prove that such progressivity is incompatible with the objective of the tax at issue and can demonstrate with concrete and conclusive facts that there exists factual or legal discrimination against a certain group of undertakings. In short, these judgments serve as a corrective to the Commission, while clearly pointing the way forward in proving that a given tax conceals indirect discrimination, demanding greater evidentiary requirements.

On the other hand, the judgments in Commission v Poland and Commission v Hungary may help clarify concerns about the compatibility with EU State aid law of the domestic digital services taxes implemented by some Member States. Notwithstanding the differences between them, they are, broadly speaking, taxes that are levied, through two quantitative thresholds and a fixed proportional rate, on the volume of turnover of undertakings that provide some digital services, generating a certain progressivity in the taxation. This could be construed as a selective tax advantage for smaller enterprises (which are not subject to taxation as their turnover does not reach the required amount), thus placing them in a more favourable position than their larger competitors (non-resident entities, in many cases), which are obliged to pay tax by reference to their turnover.

In principle, the Commission seems unlikely to initiate procedures of investigation into the digital taxes implemented by the Member States given that it has proposed a similar tax at European level (COM (2018) 148). Nonetheless, we cannot exclude the possibility, at a national level, of judicial proceedings on the compliance with EU law of such taxes. This could then result in references from national courts for rulings from the Court of Justice.

If this were the case, the case law under analysis provides arguments in favour of the compatibility of these digital services taxes with EU State aid law. However, the question will not be fully clarified until a pronouncement is issued that expressly declares it. In this respect, the comparability analysis will be especially important to determine whether the economic operators affected by a different tax treatment are in a comparable legal and factual situation in the light of the objectives pursued by such taxes. Thus, the key to the question of establishing the compatibility of these digital taxes with EU State aid rules lies in ensuring that their configuration entails no discrimination. To this end, it must be determined that the criteria for the liability for taxation are objective and consistent with the aims of such taxes, according to European case-law.

In any case, the future of national digital services taxes remains uncertain given its conflicting relationship with international treaties for the avoidance of double taxation and with international trade and investment law. In the European context, the uncertainty about the future of these national taxes is exacerbated by the Commission’s proposal of a European digital services tax to fund the EU’s recovery plan from the COVID-19 pandemic. Logically, if the Commission’s proposal for a common system of a digital services tax is approved, the problem of its compatibility with EU State aid law will no longer be relevant as it will not be a measure taken by the Member States.


Saturnina Moreno González is a Full Professor of Finance and Tax Law at the University of Castilla-La Mancha (Spain).


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