State aid29/11/06 / cata_european-union-news

In this case, Italian republic had challenged the Commission’s Decision No. 2002/581/ES of 11 December 2001 on the regime of state aids introduced in Italy in favor of banks.

The ECJ clarified several points, among others, with regard to procedure and definition of state aid in its judgment of 15 December 2005 (“Judgment C-66/02”).

Certain legislative measures were introduced in Italy during the 1990s with the aim of reversing the existing pattern of specialization and regionalization of the Italian banking sector at that time and to prepare for further privatization of the sector. Following a parliamentary question, the Commission requested information from Italian authorities on 24 March 1999 on some of the measures taken and later adopted a Decision concluding the measures constituted state aid and were incompatible with common market rules. The Commission ordered Italy to remove the illegal measures and to recover the aid granted, including applicable interest.

The case discusses a number of legal issues, two of which are discussed here.

A. Procedural rules on pleas at the ECJ

During the procedure Italy raised several arguments in its rejoinder, notably that (a) there had been a violation of the right of defense, (b) the Commission had not taken into account that some of the beneficiaries of the measures were not undertakings pursuant to Art. 87 par. 1 of the ECT and (c) the Commission did not consider whether the prohibited measures might affect trade between the Member States only partially. The Commission submitted that such arguments constituted new pleas prohibited under Article 21 of the ECJ Statute and under Article 38 and 42 (2) of the rules of procedure of the Court of Justice[3].

The ECJ reminded that it is prohibited under applicable rules to introduce new pleas during the proceedings unless such pleas are based on new matters of law or fact. The ECJ rejected argument (a) as a new plea and therefore inadmissible.

However the ECJ established a distinction in reviewing argument (c) and considered it as admissible. The ECJ explained that Italy had contested in its application that trade between Member States was affected. Hence argument (c), although only introduced in Italy’s reply, came “in support of the motion for annulment of the attacked decision contained in the application. The argument was not modifying the motion nor complementing it” and could therefore not be considered a “new plea”.

The ECJ also considered argument (b) as admissible on the grounds that it did not constitute a “new plea” but amplified an existing plea[4]. The ECJ recalled that “a plea which may be regarded as amplifying a plea made previously, whether directly or by implication in the original application, must be considered admissible” (paragraphs 86 and 108).[5]

It is interesting to note that in the case of argument (c), the ECJ raises on its own initiative the application of Article 42 (2) of rules of procedure – which the ECJ interprets as allowing amplification as defined. The Commission had apparently only referred to Article 21 of the Statute and Article 38 of the rules of procedure (see paragraph 104) in its plea. The ECJ, having concluded that argument (c) came in support of the motion contained in the original application for annulment, went on to state the argument “is in reality an amplification”, thus clarifying that there is no substantive difference between arguments in “support” under Article 38 and arguments in “amplification” under Article 42 (2) of the rules of procedure.

B. Definition of state aid

Italy’s plea that the Commission was in breach of Article 87 (1) of the ECT included six separate arguments, two of which are of particular interest.

1. Qualification of tax provisions as a state aid measure

Italy had argued in particular that the measures did not constitute state aid as there was no transfer of state resources or foregoing of state resources. The scope of state aid is wider than that of subvention. This means that a tax exemption, although it does not involve the transfer of state resource, has the same nature and identical effects and places beneficiaries in a situation more favorable than other taxpayers.[6] Consequently, the ECJ further held that measures granting to certain undertakings a reduction of taxation or a payment deferral of the tax normally due are considered to be state aid.

2. Affectation of trade between the Member States

A second argument raised by Italy is that the measures only partially affected trade between the Member States. This reasoning was then developed to argue that, under the proportionality principle, the aid should only be recovered in part.

The ECJ first referred to the settled case law on the application of Article 87 (1) of the ECT which establishes that the criterion for affection of trade is limited to the demonstration that a given measure is liable to affect trade (and distorts or threatens to distort competition)[7].

The ECJ then rejected the distinction made by Italy between “partial” and “full” effect on trade between the Member States as being excluded by definition from the notion of affectation or possible affection of trade (paragraph 112). The ECJ went on to refute the applicability of the principle of proportionality to the objectives of the ECT with regard to state aid, in particular to the suppression of illegal aid through recovery[8].

The ECJ also considered as irrelevant to the notion of affectation (or potential affectation) of trade whether the concerned undertaking participates itself in trade between the Member States or whether the measure is available in Italy to the branches of banks from other Member States.

Notes

[2] Quotes of the Judgment in the present note are a free translation from the French language version.

[3] “No new plea in law may be introduced in the course of proceedings unless it is based on matters of law or of fact which come to light in the course of the procedure” – First paragraph of Article 42 (2) of the rules of procedure of the Court of Justice.

[4] Paragraph 88 of the Judgment states: “the claim contained in the rejoinder following which the measures also advantage beneficiaries which are not undertakings constitutes an amplification of the plea initially developed [breach of Article 81 (1) EC]. It targets one of the cumulative conditions to which is subject the application of Article 87, paragraph 1, EC. The corresponding argument is implicitly contained in the plea raised”.

[5] See C-306/81, Verros v Parliament, paragraph 9 and C-301/87, Netherlands v Council, paragraph 169.

[6] See C-387/92, Banco exterior de Espana, paragraph 14.

[7] See also C-372/97, Italy v Commission, paragraph 44.

[8] See also C-372/97, Italy v Commission, paragraph 103.