State aid

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 Italyin favor of banks.

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

Certain legislative measures were introduced in Italy during the 1990s withthe aim of reversing the existing pattern of specialization and regionalizationof the Italian banking sector at that time and to prepare for furtherprivatization of the sector. Following a parliamentary question, the Commissionrequested information from Italian authorities on 24 March 1999 on some of themeasures taken and later adopted a Decision concluding the measures constitutedstate aid and were incompatible with common market rules. The Commission orderedItaly to remove the illegal measures and to recover the aid granted, includingapplicable interest.

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

A. Procedural rules on pleas at the ECJ

During the procedure Italy raised several arguments in its rejoinder, notablythat (a) there had been a violation of the right of defense, (b) the Commissionhad not taken into account that some of the beneficiaries of the measures werenot undertakings pursuant to Art. 87 par. 1 of the ECT and (c) the Commissiondid not consider whether the prohibited measures might affect trade between theMember States only partially. The Commission submitted that such argumentsconstituted new pleas prohibited under Article 21 of the ECJ Statute and underArticle 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 introducenew pleas during the proceedings unless such pleas are based on new matters oflaw or fact. The ECJ rejected argument (a) as a new plea and thereforeinadmissible.

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

The ECJ also considered argument (b) as admissible on the grounds that it didnot constitute a “new plea” but amplified an existing plea[4]. The ECJ recalled that “a plea which may beregarded as amplifying a plea made previously, whether directly or byimplication 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 onits own initiative the application of Article 42 (2) of rules of procedure –which the ECJ interprets as allowing amplification as defined. The Commissionhad apparently only referred to Article 21 of the Statute and Article 38 of therules of procedure (see paragraph 104) in its plea. The ECJ, having concludedthat argument (c) came in support of the motion contained in the originalapplication for annulment, went on to state the argument “is in reality anamplification”, thus clarifying that there is no substantive difference betweenarguments in “support” under Article 38 and arguments in “amplification” underArticle 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 ECTincluded 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 aidas there was no transfer of state resources or foregoing of state resources. Thescope of state aid is wider than that of subvention. This means that a taxexemption, although it does not involve the transfer of state resource, has thesame nature and identical effects and places beneficiaries in a situation morefavorable than other taxpayers.[6]Consequently, the ECJ further held that measures granting to certainundertakings a reduction of taxation or a payment deferral of the tax normallydue 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 partiallyaffected trade between the Member States. This reasoning was then developed toargue that, under the proportionality principle, the aid should only berecovered in part.

The ECJ first referred to the settled case law on the application of Article87 (1) of the ECT which establishes that the criterion for affection of trade islimited to the demonstration that a given measure is liable to affect trade (anddistorts 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 definitionfrom the notion of affectation or possible affection of trade (paragraph 112).The ECJ went on to refute the applicability of the principle of proportionalityto the objectives of the ECT with regard to state aid, in particular to thesuppression of illegal aid through recovery[8].

The ECJ also considered as irrelevant to the notion of affectation (orpotential affectation) of trade whether the concerned undertaking participatesitself in trade between the Member States or whether the measure is available inItaly 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.