European briefing | Was France's tax treatment of EDF legitimate?

In Case C-124/10 P Commission v EDF (5 June 2012) the ECJ has upheld a controversial decision of the General Court ([2009] ECR II-4503) and in doing so also differed from the Opinion of Advocate General Mazák (20 October 2011).

The case concerned a long saga over the tax treatment of EDF, which was (at the time of the events in question) wholly owned by the French state. After years of argument about the proper accounting treatment for various assets and liabilities, EDF's balance sheet was 'restructured' in 1997. As part of this restructuring, the French state in effect waived tax which would otherwise have been due, adopting ?a law for that purpose. The essential question was whether this constituted state aid prohibited under article 87 EC (article 107 TFEU).

France's argument was that it was not, because it could be regarded not as aid given by the state qua state, but as tantamount to an investment. The argument was that if France had been a private investor, it would have restructured the balance sheet, tax would have become due, and (as a private investor) France would have made a capital contribution equal to the amount of that tax. The method in fact adopted was, of course, different: instead of receiving the tax and making a capital contribution, France waived the tax. But, it was said, the financial effect for EDF and for France was the same, and so no true aid was provided.

That argument succeeded before the General Court. On appeal, the commission and various other parties challenged it on a number of grounds. Although it is indeed a general principle that aid given by a state actor does not fall under article 87 if it was given by the state in the capacity of 'private investor', they said this test could not possibly be met. A private investor, they pointed out, could not conceivably have made an 'investment' which consisted of introducing a special tax rule giving the recipient a tax advantage. Nor, they suggested, could such a decision be regarded as equivalent to a capital contribution in substance, since it was a 'non-transparent' way of making such a contribution.

The Advocate General agreed: it was necessary to draw a clear line between acta iure imperii and acta iure gestionis. Tax rules are unequivocally acts of imperium. Legal certainty required that they be treated as such; if the state wishes to say that it has acted as a private investor, it must use those tools that are at the disposal of private investors, and not those that are uniquely at the state's disposal.

The ECJ disagreed. Although it accepted that the relevant test concerns the 'capacity' in which the state has acted, it thought that in assessing 'capacity' it was legitimate to look at substance, not form, focusing on the 'financial position' of the recipient of the alleged aid, rather than on the means by which that financial position was produced. If a private investor would have used private law means to put the recipient in a given financial position, the fact that the state has used public law means to do so does not prevent it from asserting that it has acted in the 'capacity' of a private investor, because article 87 was concerned with economic substance, not with form.

This seems questionable, for precisely the reasons the Advocate General gave. 'Capacity' is a legal metaphor, and like any metaphor its outer boundaries are elusive. It becomes ever more elusive as it is detached from the concrete facts of the case at hand. If anything is clear, it must be that a private investor would not '“ could not '“ decide to make an 'investment' which consisted of a special tax advantage. Once one starts asking not whether the private investor could or would have done that, but whether a private investor would have done 'something comparable' in its effects, analysis becomes difficult. Nor is there any reason why one should ask that question. If the state wishes to make a capital contribution, it could make a capital contribution. The choice of methods lies at its disposal, and, if it wishes to say that it is acting in a private capacity, it can and should use those legal means that are available to the private investor, and not a method that is quintessentially reserved for the state. Even such a rule will not be easy to apply, but it is far clearer than the terribly nebulous inquiry required by the ECJ's judgment, under which the commission has to ask not whether a notional private investor would have done this, but whether it would have done something sufficiently like this in its financial results.

The commission will now have to go away to ask, and answer, that difficult question. The result is not a foregone conclusion, since the ECJ did not decide that what France did was acceptable, only that it might be: that will depend on the facts (facts that date back 15 years).

Some might speculate that the decision has been affected by the current economic difficulties in the EU, which have perhaps given a new respectability to state aid. That probably reads too much into the decision. But it does seem clear that the decision will introduce a measure of legal uncertainty that many will think could and should have been avoided.