European Court allows different tax rates for land-based and online operators
On 26 September, the General Court of the European Union handed down two judgments dismissing the appeals of Dansk Automat Brancheforening ("DAB") and Royal Scandanavian Casino Århus against a European Commission decision of 20 September 2011. The result is approval of the Danish law on gaming duties with different rates, depending on the type of gaming. Although the lower rates for online gambling constitute state aid, the positive effect of the liberalisation of the market outweighs the distortion of competition.
In 2010, Denmark decided to reform its legislation on gaming and betting services and subsequently notified the European Commission of it legislative proposal. The Law on Gaming Duties ("Gaming Law") became law on 25 June 2010. The European Commission received two complaints about the Gaming Law, from DAB and Royal Scandanavian Casino Århus, which prompted the European Commission to carry out an in -depth investigation into the Gaming Law. The entry into force of the Gaming Law was suspended pending the decision of the European Commission.
Pursuant to the Gaming Law, holders of a licence to operate gaming:
- on slot machines in amusement arcades and restaurants, must pay a tax of 41% of gross gaming revenues (this is subject to an additional tax of 30% on gross gaming revenues exceeding certain thresholds);
- in land-based casinos, must pay tax of 45% of gross gaming revenues (this is subject to an additional tax of 30% of gross gaming revenues exceeding certain thresholds); and
- in an online casino, must pay tax of 20% of gross gaming revenues.
Original Decision of the European Commission
In September 2011, the European Commission decided that although the lower rate of tax for online gaming constituted state aid as conferring a tax advantage on online gaming businesses, the differentiation was permissible because the Gaming Law was in accordance with EU state aid rules. This was because the European Commission found that:
- the Gaming Law would liberalise the market and allow Danish and foreign online gaming operators to provide their services to Danish residents;
- the Gaming Law met the proportionality requirement as the tax rate applicable to online gaming operators was not lower than necessary to ensure the objectives of the Gaming Law would be met; and
- setting the tax rate for online gaming at the same or similar level as the rate for land-based gaming operators would have led to a situation where the operators would not have responded to the possibility of legally providing online gaming services on the Danish market.
In its decision, the European Commission observed that Member States (including the UK) who had already liberalised their gambling markets tended to apply a lower duty for the online provision of services compared to the land-based casinos. It also noted that other Member States, that were in the process of liberalising their gambling markets, also intended to provide for different tax rates (e.g. Spain, Greece and Germany).
The Gaming Law subsequently came into force on 1 January 2012.
Actions before the General Court
The European Commission's decision was addressed to the Kingdom of Denmark. Royal Scandinavian Casino Århus and DAB appealed against the European Commission’s decision. In the judgments handed down on 26 September 2014, the General Court dismissed both appeals, holding that the applicants lacked legal standing (locus standi) to bring the proceedings.
Dansk Automat Brancheforening Decision
DAB is a trade association representing slot machine operators. The slot machine operators receive gross gaming revenues from the slot machines and then pay the taxes due on such revenues to the State. They then pay part of the revenue to the establishments where the machines are installed. DAB challenged the decision of the European Commission.
In order to have locus standi to challenge the decision, the applicants had to show in accordance with the fourth paragraph of Article 263 TFEU, and following the Court of Justice decision in Telefónica v Commission (C- 274/12 P) that the decision of the European Commission was (i) of direct and individual concern to it or (ii) of direct concern to it and is a regulatory act which does not entail implementing measures.
(i) Was the decision of the European Commission of direct and individual concern to DAB?
The General Court held that the European Commission's decision was not of direct and individual concern to DAB. However, DAB argued that the condition was still satisfied as most of its members had legal standing because their competitive position was substantially affected by the Gaming Law and therefore that the action was admissible.
However, the General Court held that DAB had not demonstrated that the consequences of Gaming Law affected, its members in their objective capacity as operators of slot machines in Denmark any differently from any other economic operator in the same situation. Further DAB had not demonstrated with sufficient evidence the extent of the potential impact of the Gaming Law on the economic situation of its members. The lower profits could have been as a result of the recession. DAB and its members were therefore not individually concerned by the Gaming Law.
(ii) Was the decision of the European Commission of direct concern to DAB and a regulatory act which does not entail implementing measures?
Where a regulatory act (such as a decision of the European Commission) directly affects the legal situation of a person without requiring implementing measures, that person could be denied effective judicial protection if he does not have a direct legal remedy before the European courts for the purposes of challenging the regulatory act.
In this case, the actual consequences of the European Commission's decision only materialised when the Gaming Law came into force on 1 January 2012 (i.e. several months after the decision of the European Commission). Accordingly, it was possible for DAB and its members to challenge the Gaming Law in the national courts in Denmark (who could request a preliminary ruling from the European Court of Justice if necessary). Therefore - irrespective of the question whether the European Commission's decision constituted a regulatory act - DAB did not have the necessary legal standing to bring the proceedings.
It was therefore held that DAB's action was inadmissible as it lacked the necessary legal standing to bring the proceedings.
Royal Scandanavian Casino Århus Decision
Royal Scandanavian Casino Århus is a one of seven major land-based casinos in Denmark. As above, it pays tax on gross gaming revenues to the State. It claimed that the Gaming Law would weaken its competitive position, particularly because of structural changes in the market.
For similar reasons to the DAB's case, it was held that Royal Scandanavian Casino Århus was not individually concerned by the decision of the European Commission and the arguments relating to the European Commission's decision constituting a regulatory act entailing implementing measures were dismissed. It was therefore held that Royal Scandanavian Casino Århus' action was inadmissible as it lacked the necessary legal standing to bring the proceedings.
Consequences for taxation of online gambling in European jurisdictions
The decisions of the General Court seemingly rubber-stamp Member States liberalising their gambling markets by applying a lower duty for online gaming services compared to land-based gaming services. Member States, such as Spain, may therefore proceed to implement different tax rates in their legislation.
Online gambling companies based in the EU must also be prepared for the VAT changes, changing the place of supply to the establishment of the player, to bring the rules into line with non-EU established businesses.