EU state aid law is still relatively recent law within the Union. As part of competition law, it plays an important role for state subsidies that disrupt the balance of the internal market. At the same time, particular attention must be paid to companies that aid may have to be recovered if it has been unlawfully paid out. This must be checked well in advance and it is equally important to keep an eye on competitors who may benefit more from certain subsidies or even perceive them at all.

At the beginning, it is necessary to identify the purpose of European Union State aid law. Article 107 of the TFEU is considered fundamental. This is the basis for protecting competition between undertakings operating in the internal market from distortions. Thus, State aid law is to be understood as part of competition law, which is intended to provide a level playing field within the EU for resident companies.

Now Article 107(1) TFEU states that State aid of any kind whatsoever granted by the beneficiary:

certain undertakings distort or threaten to distort competition in so far as they affect trade between Member States. However, there are certain exceptions, which are referred to in Article 107(2) and (3) TFEU.

In addition, the notification procedure in particular is a special element of State aid control, which is governed by Article 108 TFEU. It states that existing aid under Article 108(1) TFEU is applicable in the Member State as long as the Commission does not contest it. The Commission monitors this throughout. On the other hand, newly introduced aid must be notified by the Commission in accordance with Article 108(3) TFEU before it is applied.

Important observations are required to understand the scope of Article 108 TFEU. A Member State may grant the aid only after a final decision has been taken by the Commission. Therefore, any aid is initially subject to a standstill ban. As a result, there is first a preventive ban on new aid with permission reservation.

First of all, a distinction must be made between the formal and material legality of aid. It is important to divide it into different scenarios. If the aid is compatible with the internal market, it must be divided into measures without, in accordance with paragraph 2, and with, in accordance with paragraph 3 of Article 108 TFEU. If the aid is subject to a notification procedure under Article 108 TFEU and has been implemented by the Commission, it may benefit from Union law. On the other hand, aid which is incompatible with the internal market and therefore constitutes a selective measure which distorts or threatens to distort the internal market is directly contrary to Union law.

The standstill obligation pursuant to the third sentence of Article 108(3) TFEU is different from the prohibition on State aid pursuant to Article 107(1) TFEU directly applicable law in the Member States. This prohibition states that non-notified aid may not be granted. Otherwise, a competitor of the beneficiary entrepreneur has the right to bring a so-called negative competitor action.

If the Commission issues a negative decision, i.e. a ban on the aid, the aid already granted must be recovered with interest. In accordance with the principle of procedural autonomy, recovery must be implemented in accordance with national procedural law. Here it is important to observe the effectiveness principle. It is particularly important to emphasise that there is no legitimate expectations, in particular before the notification procedure is concluded. The action for annulment under Article 263 TFEU shall provide for legal protection against the Commission’s shelling. The action for annulment shall be brought by the General Court of the European Union (CFI) in accordance with Article 256(1) TFEU. In addition, the ECJ is considered an appeal body.

The Member State concerned is only entitled to bring an action under Article 263(2) TFEU. Indeed, taxpayers who have benefited from the aid are only entitled to action under the other conditions of Article 263(4) TFEU. In other words, if individual aid or other aid has already had a tax-reducing effect.

Now, Article 107(1) TFEU provides for a broad concept of aid, since aid of any kind is taken into account. This covers not only direct subsidies, but also relief subsidies. These are present when a tax burden borne by a company in principle is reduced. Some examples are given below. This includes legal tax benefits for companies such as tax exemptions, tax rate reductions, increased depreciation or the waiver of withholding tax. Otherwise, individual measures in tax enforcement and administrative practice are meant, i.e. a tax waiver, a tax deferral, the communication between tax administrations and taxpayers in transfer prices by APAs.

In addition, the State aid controls of Member State tax benefits have been considerably intensified in recent years. On the basis of Article 109 TFEU, a de minimis Regulation was adopted which exempts aid up to EUR 200,000 from control. However, these do not play a major role in tax law either.

Now, for a legally correct review of aid, a strict examination scheme must be followed. The main focus here is on the examination of the granting of a selective advantage to beneficiary companies, which will be examined in detail below.

First of all, the beneficiary of enterprises must be examined, which must always be independent economic activities. In addition, a selective tax advantage must be granted. It would then have to be examined whether they constitute State aid and State resources. The question of state resources can usually be answered in the affirmative. This aid can only be granted by reducing tax revenue. In addition, however, it must be assigned to the Member State and not, for example, to the European Union. The fact that this affects trade between Member States has so far mostly been assumed implicitly, as well as the presentation of a distortive effect on competition.

First of all, however, it is necessary to check whether the aid in question favours only certain selective undertakings. In this context, it is necessary to examine whether a selective measure exists under tax law in three steps.

2.2.1 Identification of the reference system

First of all, the normal tax burden must be determined within the same tax type. Fiscal and governance policy principles in the respective Member States play the most important role. In this respect, the Member States are in principle free to design their tax system. General tax competition, such as low corporate tax rates for companies, is not affected by State aid rules. However, there may be considerable difficulties in determining the reference system. This is because it is important to understand the exact intention of the legislator, since otherwise possible tax benefits are already considered a violation, and they are generally desired by the legislator.

The Commission and the General Court are convinced that a link only to the direct regulatory context of the provision, which demonstrates a close understanding. In the case of §8c(1a) KStG in question, §8c(1a) KStG was therefore considered to be the normal case, so that the principle of taking account of losses was already a justifiable selective advantage in favour of companies in need of restructuring. In contrast, there is the ECJ’s broad understanding that the general tax system is crucial. Therefore, the loss carry-forward and the separation principle of the references are in the KStG. Of which § 8c (1) KStG deviates for reasons of prevention of abuse. Thus, §8c Ia KStG re-establishes the normal case as a re-exception due to lack of risk of abuse in restructuring cases.

This example is intended to illustrate that this analysis is by no means simple and must be re-examined with the intentions of each Member State.

In addition, the second step is to examine whether the tax credit deviates from the reference system and thus differentiates between undertakings which are in a comparable factual and legal situation in the light of the objective pursued by the scheme in question. The relevant benchmark must therefore be determined on the basis of the basic assessments of the tax system to which the tax credit in question belongs.

It is important to consider both legal and actual selectivity. Legal selectivity exists if the tax concession is already legally granted only to individual companies. Actual selectivity exists when a tax concession is formally open to all undertakings but in fact concerns only individual undertakings. In addition, regional selectivity is also prohibited in principle under Article 107(3)(a) and (3)(c) TFEU. However, if regional authorities enjoy tax autonomy within their territory, no aid should be granted in the absence of a normal national burden. This is the case in Germany with the municipal GewSt lift rates and different GrESt rates of the federal states. If there is a derogation, the scheme is a priori selective. This means that such a regulation can be adopted without prior experience.

2.2.3. Justification of the derogation

The existence of a selective advantage can be rebutted if the tax measure is justified by the nature or general purposes of the system. This is the case in particular if the tax concession is a logical development of basic or guiding principles of the relevant tax system.

In addition, according to the case-law of the ECJ, a derogation may also be justified in order to ensure effective tax enforcement, avoid tax evasion or avoidance and avoid double taxation. Any tax benefits must comply with the principle of proportionality. It should also be noted that the Commission is required to provide evidence for the derogation from the reference system and for comparability, while Member States are required to bear the burden of proof for a

have any justification.

Since 2013, the Commission has used tax ruling procedures to review advance rulings and binding commitments made by Member State tax administrations in accordance with the State aid rules. This includes transfer pricing commitments, i.e. APAs. In this respect, state aid law has become another tool in the fight against harmful tax competition and aggressive tax planning. Nevertheless, transfer pricing in particular presents a considerable problem in determining the normal tax burden.

Where the Commission considers that a reference system is the arm’s length principle derived directly from Article 107(1) TFEU. This is based on the non-binding transfer pricing guidelines of the OECD.

Nevertheless, there is a problem with this, because the frame of reference is no longer determined on the basis of the Member State tax system, but on the basis of a hypothetical ideal system. This is possible in principle, but there must still be a favourable treatment of the undertaking or undertakings concerned.

State aid law controls competition within the European Union and secures the internal market from unfair advantages for companies by states. This promotes competition and must be strictly controlled and subjected to a high level of protection.