Is this the end of tax exemptions for ports in Europe?

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In January 2020, the Commission published its decision to open an in-depth investigation into the tax exemption granted to port authorities in Italy following that State’s refusal to adopt the appropriate measures suggested by the Commission.

Furthermore, in December 2019, the Commission made public its decision welcoming Spain’s unconditional acceptance to abolish the tax exemption granted to its ports.

In January 2019, the Commission had invited Italy and Spain to adopt the necessary measures to abolish the corporate tax exemption granted to port authorities.

These procedures followed investigations initiated by the European Commission in 2013 concerning the functioning of ports and the taxation system applicable to that sector in the Member States. These surveys have revealed that most Member States subject the economic activities of their ports to the normal corporate tax regime, with the exception of certain Member States.

In the wake of these studies, the European Commission ordered in 2016 the Netherlands and in 2017 Belgium and France, to adapt their taxation system applicable to port authorities. For more information on this, we refer you to our previous article. The General Court of the EU dismissed all the actions for annulment brought against these decisions.

The Commission therefore had free rein to continue its procedures against Italy and Spain.

In October 2019, Spain informed the Commission of its unconditional acceptance of the appropriate measures suggested by the Commission. The Commission decision stating this acceptance was made public in January 2020.

However, in March 2019, Italy informed the Commission that it rejected the proposal to amend its port taxation scheme. Consequently, in November 2019, the Commission decided to open a formal investigation procedure to assess whether the existing aid complies with EU state aid rules and, if not, to impose appropriate measures on Italy.

This decision was published on 10 January 2020 in the Official Journal of the EU. The Commission has invited all interested third parties, such as Italian ports or their competitors, to submit their comments within one month of this publication.

The decision describes the tax measure in question, the arguments presented by the Commission and the Commission's doubts as to the compatibility of the tax exemption with the Treaty on the Functioning of the EU.

Thus, in the context of the preliminary investigation, Italy presented several arguments to justify maintaining the exemption from corporation tax granted to port authorities. Italy first argued that Italian ports are "far from competing, even potentially, on European markets" but suffer from "ruthless competition" from North African ports. Secondly, Italy pointed out that, according to its interpretation of the Consolidated Italian Tax Act, only undertakings carrying out economic activities are subject to this tax. However, Italy considers that port authorities belong to the public administration and do not constitute undertakings as such, since they only carry out activities of a non-economic nature, such as maritime traffic control and security surveillance, which are public authority tasks.

In its decision, the Commission recalls that, according to European case law, an undertaking is an entity engaged in an economic activity, regardless of the legal status of the entity, the way in which it is financed or the fact that it is public. The Commission does not question the legality of the Italian Consolidated Tax Act, but contests Italy's interpretation of the provisions governing corporate taxation and considers that port authorities also carry out economic activities, which essentially consist in the commercial exploitation of port infrastructure (such as the leasing of port land).

Therefore, in the Commission's view, the exemption from corporate tax granted to Italian port authorities for their economic activities gives them a financial advantage, granted by the State through State resources, which may distort competition and affect trade between Member States. Indeed, ports are involved in trade within the Union, which means that they are inevitably in competition with each other.

At this stage, the Commission therefore considers that the tax exemption granted to Italian port authorities constitutes state aid that appears to be incompatible with European law. In this investigation, the Commission only focusses on the economic activities of ports. Non-economic activities (such as customs, police, anti-pollution surveillance, etc.) in ports may remain subject to a special tax regime.

Tax exemption schemes for port authorities (Spanish and Italian) were put in place prior to 1958, when the Treaty of Rome was signed. These measures therefore constitute existing aid so that the Commission can only order the abolition of these tax systems for the future (and cannot require the reimbursement of aid received in the past). 

The Italian authorities have already had the opportunity to respond to the Commission's position.

Interested third parties are invited to submit their comments to the Commission by 10 February 2020. These comments will be sent to Italy, which will be given the opportunity to react.

Finally, it is important to note that it is still possible for States to grant investment aid to sea ports and inland ports as, since May 2017, the General Block Exemption Regulation allows Member States to grant such aid up to €150 million per project in sea ports and up to €50 million per project in inland ports. No prior notification to the Commission is required, thanks to the simplification of the rules on public investment in ports, subject to compliance with the conditions laid down in the Regulation. Any aid projects in excess of these amounts must be formally authorized by the European Commission.