25 januari 2019 Dick van Sprundel
Comment in Highlights & Insights regarding the Spanish Tax Lease case
With effect from 1 January 2002, Spanish shipyards were able to build vessels at considerably lower prices, as investors received a tax-friendly treatment by using an early and accelerated depreciation in (successive) combination with the Spanish tonnage tax scheme. Subsequently, as a result of a fiscal transition to the Spanish tonnage regime, no recapture took place. In the market, this measure was known as Sistema Español de Arrendamiento Fiscal, the Spanish Tax Lease (hereinafter ‘STL’). Tax benefits were generated for investors in a fiscally transparent Spanish Economic Interest Grouping (hereinafter ‘EIG’) and some of the benefits were transferred to the shipping company involved in the construction, in the form of a discount on the price of the vessel. This discount could vary from 20% to 30% and applied to vessels built by Spanish shipyards.
The European Commission was of the view that State aid was given to the EIGs and their investors. At the request of Spain, the CJ annulled the decision of the General Court (hereinafter ‘GC’). The CJ ruled that the GC had erred in finding that the classification of a measure such as ‘State aid’ cannot depend on the legal status of the undertakings concerned or on the techniques used. According to the CJ, the tax measures in question may constitute State aid in favour of the EIGs. By not granting the EIGs the status of beneficiaries of these measures simply because they are fiscally transparent, the GC ruled against the settled case law of the CJ. In addition, the GC established an incorrect criterion as regards the selectivity condition. The CJ set aside the judgment of the GC and referred the case back to the GC.
This case concerns the (old version of the) STL for shipping companies that was applicable in Spain from 2002 up to 30 April 2007. It should be added that the STL was not submitted to the Commission for approval in advance.
In setting up the STL, an important organizational role was reserved for the supervisory bank. The bank set up the EIG and then sold the participating interests to investors. The investors were Spanish taxpayers who had a sufficient tax base. In general, they were not engaged in maritime activities. It was the leasing company, not the shipping company, that concluded the contract for the construction of the seagoing vessel with the Spanish shipyard. The EIG then leased the vessel for a period of three to five years. The EIG also undertook to buy the vessel at the end of the lease period (leasing option). When the vessel was completed, usually one to three years later, the EIG would lease it to the shipping company under a bareboat charter agreement. This would contractually stipulate that the shipping company was obliged to take over the vessel at the end of the lease (bareboat charter option).
The benefits of the STL were twofold, namely, first, early and accelerated depreciation of the vessel under the regular corporate tax system and, second, a tax exemption in respect of the profits from the sale of the vessel under the Spanish tonnage tax regime. The combination of the provisions for early and accelerated depreciation, enabled the EIG to fully depreciate the vessel within a period of three to five years. This early and accelerated depreciation resulted in a major tax loss for the EIG. As the EIG was transparent from a tax point of view, the losses were attributed to the ultimate Spanish investors. They were able to set off these losses directly against profits from other business operations.
Thanks to the accelerated depreciation, the book value of the vessel was lower than the market value. This created a deferred tax liability. When the new seagoing vessel was (nearly) depreciated in full, the EIG opted for application of the tonnage tax regime. This happened after full depreciation of the vessel, but before implementation of the bareboat charter option between the EIG and the shipping company. As a direct result thereof, the profits from the sale of the vessel fell under the tonnage tax regime.
The Spanish tonnage tax regime contains provisions to prevent extra gains or potential abuse with regard to old and second-hand vessels that opt for the tonnage regime. The Spanish law stipulates that, in the first year in which the tonnage tax regime is applied, or the year in which a second-hand seagoing vessel is bought, a reserve is created to the extent of the difference between the market value and the net book value. A seagoing vessel that became the property of the EIG through the lease option, however, was regarded as new on the basis of a specific provision under Spanish law. As a result, the schemes that were approved by the Commission and that served to prevent abuse did not apply and the profits were fully exempt.
Diagram 1: Structure of the Spanish Tax Lease Regime
The European Commission considered that the scheme constituted State aid for the EIGs and their investors (Commission Decision dated 17 July 2013, no. 2014/200 / EU), but this decision was overruled by the GC (Court of Justice dated 17 December 2015, nos. T-515/13 and T-719/13). The GC concluded that, because of their fiscal transparency, the EIGs did not themselves benefit from an economic advantage. In addition, the GC held that, in so far as the advantage was enjoyed by the investors, there was no selective advantage. Reason was, in brief, that the benefit was open to every taxpayer who invests in the construction of vessels. The arrangement, therefore, was not selective enough, as it were. The GC based its earlier judgments of 7 November 2014, nos. T-399/11 (Banco Santander) and T-219/10 (Autogrill España v Commission), against which, moreover, at the time of its judgment, an appeal had been brought to the CJ.
The CJ has now ruled on the judgment of the GC. In the first place, the CJ considered that they were the EIGs to which the tax measures in question were applied and that those EIGs can indeed be regarded as direct beneficiaries of the benefits arising therefrom. The fact that these benefits are then passed on to the investors does not change that. Second, the CJ found that the GC applied an incorrect criterion as regards the selectivity condition. Not only had this condition been erroneously not (partly) examined at the level of the EIGs (see above), but moreover, in its judgment of 21 December 2016, no. C-20/15 P and C-21 / 15 P (Commission v World Duty Free Group and others), ruled that the reasoning of the GC in the above-mentioned cases – Banco Santander and Autogrill España – was based on an incorrect application of the selectivity condition. This removes the ground for the GC judgment and the GC must re-examine selectivity. In particular, in the light of the judgment in the Commission v World Duty Free Group, the outcome in this case is not surprising.
For the sake of completeness, I note that the Spanish regulation has been amended with effect from 1 January 2013. In essence, the structure has not changed. The changes mainly relate to formal and implementation aspects of the structure. Before the legislative change of 27 December 2012, for instance, the application of early and accelerated depreciation required permission from the Ministry of Finance. In effect, the Ministry decided who and with effect from what date early depreciation could be taken. From what I understand, foreign parties would not qualify. In addition, it emerged that, in practice, early and accelerated depreciation was available only for seagoing vessels that had been purchased by an EIG. The legislative changes aimed to expand the scope of taxpayers that can invoke early and accelerated depreciation. This means the scheme is now also available in respect of trains, airplanes and other assets not manufactured in a series. It does not matter whether or not the asset is manufactured in Spain or abroad and the early and accelerated depreciation applies automatically. The only formal requirement is that the taxpayer must notify the Ministry of Finance in advance by way of an application. The Spanish law was amended in several areas and now stipulates that every lessee can start depreciating the moment construction of an asset commences, if the following conditions are cumulatively met: (i) the construction must concern tangible fixed assets that are covered by a financial lease agreement, the lease instalments of which are paid mostly before construction is completed; (ii) the construction period must last at least 12 months; and (iii) the assets must not be manufactured in a series, which means the assets are subject to a unique design and construction requirements.
In addition, the requirements that stipulate that the assets covered by a financial agreement have to be leased to a third party that is not affiliated with the EIG and are used for its business activities have been abolished. Furthermore, it is no longer a requirement for the ultimate participants in the EIG to remain committed until the end of the tax period in which the lease agreement ends.
Finally, the formal requirements with regard to early and accelerated depreciation of certain assets have been withdrawn. Another thing that has been deleted, is the provision that seagoing vessels, when purchased as a result of exercising a bareboat option, do not qualify as used when opting for the tonnage tax regime. As a result, the thus created deferred taxation is included as a debt, which is made up within a certain period. In that scenario, there is no permanent advantage.
This new scheme – Spanish Tax Lease 2 (hereinafter ‘STL2’) – was approved by the Commission (Commission Decision of 20 November 2012, No C (2012) 8252 DEF) and this decision was upheld by the CJ (CJ 14 April 2016, C-100/15 P Netherlands Maritime Technology Association)). Nevertheless, I have written in my article ‘The Eighty Years’ War, the Spanish Tax Lease System and other Netherlands/Spanish Sea and Field Battles’ which was published in European Taxation issue 7, July 2015, that it may appear that STL2 offers a de facto selective advantage. There are several arguments that have not been discussed in detail in previous rulings, particularly with regard to selectivity. Apart from the final outcome, business owners can use the STL2 without any worries. They may rely on the fact that STL2 was approved by the European Commission (see European Commission decision of 8 May 2001 in C-31/98, Brittany Ferries).
Hopefully, the upcoming ruling that will be issued by the GC – due to the case back referral – will provide more insights and guidance to State aid and in particular its selectivity criteria. This would be welcomed by the practice and among the academic world.
