21 September 2022, the General Court of the European Union held that the European Commission was correct to conclude that the Madeira Free Trade Zone (MFTZ) State aid scheme had not been implemented in line with approved conditions. It therefore dismissed the appeal brought by Portugal against the Commission’s decision.
In Portuguese Republic v European Commission Case T-95/21 R, the MFTZ State aid scheme, which provided corporate income tax reductions and other tax benefits for companies established in the Autonomous Region of Madeira (RAM), was initially approved by the European Commission (EC) in 1987 as compatible regional aid. It was subject to several subsequent amendments.
The version, known as the MFTZ Regime III, covered the period 1 January 2007 to 31 December 2014. The Commission approvals explicitly linked the amount of aid granted to jobs created and maintained in the RAM, while the tax benefits applied to income derived from activities actually carried out in the RAM.
Following concerns triggered during its standard monitoring of the implementation of State aid decisions, the Commission opened an in-depth investigation into Regime III on 6 July 2019. It concluded on 4 December 2020 that the scheme had not been implemented in line with approved conditions and was in breach of EU State aid rules., Portugal was required to recover aid granted in respect of 311 companies out of the 1,700 covered by Regime III, which totalled some €1 billion (€833 million plus interest).
The Portuguese government appealed. It claimed that Regime III did not constitute ‘State aid’ under EU law, did not affect trade and distort competition trade between EU Member States, and was not ‘selective’. It further claimed that the Commission had failed to demonstrate that Regime III should be classified as ‘existing aid’ and was in breach of the principles of legal certainty and the protection of legitimate expectations.
The General Court dismissed Portugal’s claim that the scheme under dispute did not constitute ‘State aid’ under EU law because the Commission only had to examine whether that aid was likely to affect trade and distort competition. In the Court’s view, granting tax benefits to companies operating in the MFTZ could in principle distort competition. The selectivity criteria were also met because the disputed regime did represent a derogation from the reference framework of ordinary or ‘normal’ taxation and its objective.
The General Court also dismissed Portugal’s claim that Regime III should have been classified as ‘existing aid’ because the Free Zone was created before Portugal’s EU accession and any subsequent amendments were minor and only made to comply with successive versions of the Commission’s guidelines on regional State aid. It noted that, under EU State aid law, any change to an existing scheme that exceeded purely formal or administrative amendments qualified as ‘new aid’. Regime III had introduced substantial changes by amending constituent elements of the initial scheme – activities in scope, additional criteria and updated thresholds – sufficient to represent ‘new aid’ for the purpose of EU law.
The Court further dismissed Portugal’s claim of breach of the principles of legal certainty and the protection of legitimate expectations. It noted that recovery was the logical consequence of finding that a State aid measure was unlawful and that the Commission was generally required to order the recovery of the aid. Nor could Member States justify a failure to comply with EU law obligations on the grounds of administrative or practical difficulties when implementing the recovery Decision. The fact that the recovery of unlawful State Aid could lead to bankruptcy of the beneficiaries could not affect the compulsory nature of the recovery.
Portugal can appeal the decision to the Court of Justice of the European Union (CJEU). Prior to the General Court’s decision, the Portuguese tax authority, on behalf of the Commission, had begun the process of notifying the beneficiaries affected. The beneficiaries can also challenge the Decision by appealing before the CJEU.