The European Commission's recent state aid crusade against so-called sweet deals in the form of tax rulings may have unwelcome consequences never contemplated by the Commission.

When the six founding members of the European Union drafted the 1957 Treaty of Rome, they established "state aid" rules as a means to subject member state subsidies to the Commission's control. What they had in mind was, in simple terms, that national governments would be tempted to favor their "national champions", which could lead to a "subsidy race" and ultimately distort competition within the common market. Hence the need to have an independent arbitrator.

Initially, the notion of state aid was quite easy to grasp conceptually, but over the years more and more forms of state measures were found to involve state aid. From the one-off cash grant to the mere announcement of a government guarantee, everything short of a smile can today amount to a "selective financial advantage".

"Selectivity" is indeed the key issue here. A "general measure" is never state aid, but any advantage that is not truly "general" will be "selective", even where this is not prima facie obvious. If one particular company receives a financial advantage paid out of state resources, it is deemed selective. The same is true where a particular sector is favored. The "selectivity" can be hidden; a measure can de facto favor a particular company or sector.

What was designed to ensure a competitive level playing field for companies throughout the single market has turned into a much wider political scheme. It is not the first time that the Commission uses its powers under the competition chapter of the EU Treaty to "discipline" member states unwilling to progress with harmonization of laws. It was in 1998 that the Commission adopted its first notice on "fiscal state aid",1 in which it announced its intention to use the state aid stick in the field of non-harmonized direct business taxation. Its most problematic feature was the stated view that the simple existence of administrative discretion can indicate selectivity whenever the administrative exercise of the discretion power "goes beyond the simple management of tax revenue by reference to objective criteria". According to the 1998 Notice, if "in daily practice tax rules need to be interpreted, they cannot leave room for a discretionary treatment of undertakings. Every decision of the administration that departs from the general tax rules to the benefit of individual undertakings in principle leads to a presumption of State aid and must be analysed in detail. As far as administrative rulings merely contain an interpretation of general rules, they do not give rise to a presumption of aid. However, the opacity of the decisions taken by the authorities and the room for manoeuvre which they sometimes enjoy support the presumption that such is at any rate their effect in some instances. This does not make Member States any less able to provide their taxpayers with legal certainty and predictability on the application of general tax rules."2 In short, in the Commission's view any tax ruling that does more than simply interpreting the general tax system bears the potential of being state aid.

One may wonder why the Commission did not start its crusade against tax rulings in 1998. Could it possibly ignore their existence? Is it just politically more compelling at a time when EU member states struggle with their budget and thirst for money? One of the dangers is that the state aid procedure is primarily a "bilateral" procedure between the Commission and the member state government. The state aid beneficiary only has a third-party status. Moreover, once the Commission concludes that the state aid granted under the umbrella of a tax ruling is "incompatible with the common market" (which it likely will), the member state that has granted it then has to recover it for up to 10 years back. Legitimate expectations are irrelevant.

The number of rulings published by Luxleaks is quite significant, and more information may become available over time in relation to other member states. Of course the Commission can only process a limited number of cases per year, but does that help? Competitors of state aid beneficiaries may apply to national courts and ask for conservatory measures (including the temporary recovery of state aid) pending the Commission's decision on its compatibility. It is difficult to imagine the endemic consequences of a massive tide of court proceedings that not even the Commission may have pondered.

Maybe the political actors would be advised to find a legal and/or political solution to the problem before this gets out of hand. The policy makers in the Commission's ivory tower may have rushed ahead on initiatives that may be difficult to get under control. Fingers crossed.