On 23 September 2020, the General Court of the European Union issued a judgment holding that the Spanish tax system applicable to certain finance lease agreements entered into by shipyards, the 'Spanish Tax Lease System', constitutes an unlawful State aid scheme.

Under the system, shipping companies were allowed to benefit from a 20-30% price reduction when purchasing ships constructed in Spanish Shipyards. This was achieved through the use of an Economic Interest Grouping (EIG) that takes a lease on a ship from a leasing company as soon as the construction of such ship begins and at the same time, leases the ship to a shipping company under a bareboat charter. At the end of the leasing contract, the EIG would buy the ship and sell it to the shipping company with a rebate.

With such an arrangement, an EIG could benefit from an early and accelerated depreciation on the leased ship under Spanish law resulting in tax losses that could be used by the EIG investors given the transparent nature of an EIG. Then, before the ship is sold, the EIG opts for the tonnage tax regime, under which capital gains from the sale of the ship are not subject to tax and, as such, no tax is paid on the sale to the shipping company even though the tax basis of the ship has been eroded due to the early and accelerated depreciation.

The judgment reverses an earlier judgment of the General Court finding that the lease system was not unlawful State aid, which had resulted in the annulment of a European Commission decision on the matter. With the latest judgment, the Commission decision is upheld, and the unlawful State aid must be recovered.

The main text of the General Court's press release on the judgment is as follows:

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The Spanish tax system applicable to certain finance lease agreements entered into by shipyards constitutes an aid scheme

The unlawful State aid granted under that system must be recovered from the beneficiaries

In 2006, the European Commission received a number of complaints concerning the application of 'the Spanish Tax Lease System' ('the STL system') to certain finance lease agreements in so far as it allowed shipping companies to benefit from a 20-30% price reduction when purchasing ships constructed by Spanish shipyards. According to the Commission, the objective of the STL system was to grant tax advantages to economic interest groupings ('EIGs') and the investors participating in them, which then passed on part of those benefits to the shipping companies that bought a new ship.

In a decision adopted in July 2013, the Commission found that the STL system constituted State aid in the form of a selective tax advantage that was partially incompatible with the internal market. In so far as the aid scheme had been implemented since 1 January 2002 in breach of the notification obligation, the Commission ordered the national authorities to recover the aid from the investors, that is to say, the members of the EIGs.

In September 2013, Spain, Lico Leasing, SA and Pequeños y Medianos Astilleros Sociedad de Reconversión, SA ('the applicants') brought actions for annulment of the Commission's decision. In its judgment of 17 December 2015, Spain and Others v Commission (T-515/13 and T-719/13), the General Court of the European Union held that the benefit obtained by the investors of the EIGs was not selective and that the statement of reasons relating to the criteria of distortion of competition and effect on trade was inadequate. Consequently, the Commission's decision was annulled without it being necessary to rule on the other pleas in law and arguments put forward by the applicants. By its judgment of 25 July 2018, the Court of Justice, hearing an appeal brought by the Commission, set aside the judgment in Commission v Spain and Others. (C-128/16 P), judgment of the General Court. The Court of Justice held that the General Court, in its analysis of the selective nature of the tax measures, misapplied the provisions of the Treaty relating to State aid and that, contrary to the findings of the General Court, the Commission's decision was not vitiated by a failure to state reasons. Noting that the General Court had not ruled on all the pleas in law raised before it, the Court of Justice found that the state of the proceedings did not enable it to give final judgment and, accordingly, referred the case back to the General Court.

By its renvoi judgment of 23 September 2020, Spain and Others v Commission (T-515/13 RENV and T-719/13 RENV), the General Court dismissed the actions brought by the applicants.

The General Court assessed, first, the classification of the tax measures as State aid. In that context, it ascertained, first of all, whether the Commission was entitled to conclude that the benefits granted under the STL system, taken as a whole, were selective in nature. Following a review of the case-law on selectivity stemming from the discretionary power of the national authorities when exercising their competences in respect of taxation, the General Court observed that the benefit of the tax regime at issue was granted by the tax authorities in the context of a system of prior authorisation on the basis of vague criteria requiring an interpretation exercise for which no provision was made. Thus, the tax authorities could set the start date for depreciation on the basis of circumstances defined in terms that gave that authority considerable scope for discretion. The General Court took the view that the existence of those discretionary aspects was such as to favour the beneficiaries over other taxpayers in a comparable factual and legal situation. More specifically, other EIGs might not have benefited from accelerated depreciation under the same conditions. Furthermore, in order to dispel the argument that authorisation had in practice been granted to all EIGs active in the sector in question, the General Court stressed that, in view of the de jure discretionary nature of the legislation, it did not matter whether or not their application was de facto discretionary. The General Court therefore concluded that, since one of the measures enabling benefit from the STL system as a whole was selective, namely the authorisation of accelerated depreciation, the Commission had not erred in considering that the system as a whole was selective. Next, the General Court pointed out that the market of the purchase and sale of maritime vessels was open to trade between Member States and that a price reduction of 20-30% on the price of a ship threatened to distort competition on that market on which the EIGs were active. Thus, the conditions relating to the risk of distortion of competition and the effect on trade between Member States were satisfied. Consequently, the General Court rejected the plea alleging disregard of the classification of a measure as State aid.

The General Court examined, second, the recovery of the unlawful aid and rejected the pleas raised by the applicants in that regard. Inter alia, it rejected the allegation of infringement of the principle of legitimate expectations. The applicants had failed to establish that they had obtained precise, unconditional and consistent assurances from the Commission that the regime at issue did not constitute 'State aid'. Furthermore, the General Court found that the Commission had duly taken into account the requirement of legal certainty in its decision, which had led it to limit in time the recovery of the unlawful aid. The recovery of the aid was limited to that granted following publication of the decision relating to the French tax EIGs, which had put an end to a situation of legal uncertainty arising from the Brittany Ferries decision. In that regard, the General Court finds that the Commission did not err in finding that the publication of that decision had brought to an end all legal uncertainty since, in that decision, a regime comparable to the STL system had been classified as State aid. Moreover, the General Court pointed out that that finding was not called into question by subsequent circumstances, such as the Commission's alleged inaction with regard to the regime at issue.

Lastly, the General Court also rejected the plea alleging infringement of the principles applicable to recovery. The applicants criticised the Commission's decision in so far as it ordered the recovery of all aid from the investors (the members of the EIGs) even though part of the tax benefits had been transferred to the shipping companies. The Commission had decided that the shipping companies were not beneficiaries of the aid and therefore the recovery order was directed solely and entirely at the investors, who were the sole beneficiaries of all the aid on account of the tax transparency of the EIGs. The General Court held that the Commission had not erred in ordering recovery of all the aid from the investors, even though the investors had passed part of the benefit to other operators, since the latter were not regarded as beneficiaries of the aid. It was the investors who actually benefited from the aid, since the applicable legislation did not require them to pass part of the aid to third parties.