On 4 March 2021, the Court of Justice of the EU confirmed the legality of the Commission's decision to qualify the tax regime of four Spanish professional football clubs as incompatible State aid. This regime allowed certain Spanish professional football clubs to be exempted from transforming into public limited sports companies.

The Spanish tax regime applicable to certain professional football clubs

Following the adoption in 1990 of Law 10/1990 on sport, Spanish professional sports clubs were obliged to transform into public limited sports companies, except for those clubs that had achieved a positive result in the financial years preceding the adoption of this law. Several professional La Liga clubs, namely Fútbol Club Barcelona (hereinafter "FCB"), Club Atlético Osasuna de Pamplona, Athletic Club de Bilbao and Real Madrid Club de Fútbol, taking advantage of this exception, chose to maintain their legal form as non-profit legal entities. Under that specific tax regime, these clubs benefited from a specific rate of taxation on their income, which remained, until 2016, lower than the rate applicable to public limited sports companies.

The European Commission's position

In 2009, the Commission was informed by citizens about a possible preferential tax treatment in favour of certain Spanish football clubs. On 18 December 2013, the Commission notified Spain of its decision to open an in-depth investigation into the tax measures in question.

On 4 July 2016, the Commission found that the rules, which conferred a corporate tax advantage on the four clubs concerned, constituted an unlawful aid scheme that was incompatible with EU State aid rules. As this scheme had existed for more than 10 years and was therefore an existing scheme, the Commission ordered Spain to put an end to this exceptional scheme and, taking into account the limitation period for State aid to the period 1990-2000, to order the recovery of the incompatible aid as from the tax year 2000.

The annulment of the European Commission's decision by the General Court of the EU

On 26 February 2019, the General Court annulled the Commission's decision on the grounds that the Commission had not sufficiently established the existence of an economic advantage conferred on the beneficiaries of the measure in question. According to the General Court, the Commission had not sufficiently analysed whether the advantage resulting from the reduced rate at issue benefiting entities operating as non-profit legal persons could be offset by the less favourable rate of deduction for reinvestment of windfall profits for these entities compared with that applicable to entities operating as sports public limited companies.

The ruling of the Court of Justice of the EU

In its judgment of 4 March 2021, the Court of Justice of the EU, seized by the Commission, annulled the judgment of the General Court. The Commission's main argument, based on the infringement of Article 107(1) TFEU, concerned, on the one hand, the concept of "advantage likely to constitute State aid" and, on the other hand, the obligations incumbent upon it in the context of the examination of the existence of aid, in particular from the point of view of the existence of an advantage.

Firstly, the Court of Justice of the EU ruled that the disputed measure did not constitute "individual aid" but an "aid scheme", which consists of any provision on the basis of which, without the need for further implementing measures, aid may be granted individually to undertakings, defined in a general and abstract manner, and any provision on the basis of which aid not linked to a specific project may be granted to one or more undertakings for an indefinite period and/or for an indefinite amount.

Therefore, with regard to "aid schemes", the examination of the existence of aid relates exclusively to the scheme itself and not to aid subsequently granted on the basis of that scheme. The examination of the advantage must therefore be carried out at the time of the adoption of the aid scheme, and not at the time of the subsequent granting of aid to the four football clubs.

Second, the Court of Justice of the EU found that the error of law committed by the General Court undermines the conclusions which it drew from it concerning the extent of the Commission's obligations to prove the existence of an advantage.

In this respect, the General Court had held that the Commission should have taken into account, when examining the existence of an advantage, not only the advantage deriving from the reduced rate of taxation, but also other components of the tax system at issue, which it considered indissociable, such as the possibilities of deduction, insofar as their limitation could counterbalance the abovementioned advantage.

According to the Court of Justice of the EU, when assessing the "advantage" condition, the European Commission must indeed carry out an overall assessment of an aid scheme and take into account all the components of a national scheme (both favourable and unfavourable for the beneficiaries).

However, where the tax scheme applies on an annual or periodic basis, the Commission only has to demonstrate that the aid scheme, taken as a whole, and taking into account its own characteristics, is such as to favour its beneficiaries at the time of its adoption. Consequently, potentially unfavourable characteristics the real impact of which depends on "random and variable circumstances" may be ignored. Conversely, the Court of Justice of the EU recalls that it is only at the stage of the possible recovery of individual aid granted on the basis of the aid scheme that the Commission must verify the individual situation of each beneficiary, since such recovery requires the exact amount of the aid actually received during each tax year to be determined.

In the present case, the Court of Justice of the EU held that the aid scheme provided, from the time of its adoption, an advantage to certain clubs eligible for the scheme, of which FCB was one - namely the possibility of continuing to operate, by way of derogation, as a non-profit-making entity, to benefit from a reduced rate of taxation compared with that applicable to clubs operating as public limited sports companies. Consequently, the Commission was not required to examine the real impact of the tax deduction and to determine whether it counterbalanced the advantage granted by the reduced tax rate. The Court of Justice of the EU has therefore, on this point, upheld the contested judgment of the General Court.

Needless to say, sport, having rapidly become an economic sector in its own right, has seen its public funding soar in recent years. It is in this context that the European Commission, anxious to preserve a level playing field, has started to look more closely at State aid granted to professional sports clubs, and in particular Spanish football clubs. In this respect, several decisions have been taken against several Spanish clubs (see in this respect our article of 25 June 2018 concerning the suspension of a Commission State aid decision in favour of Elche CF).

It should be stressed that this distinction between individual aid and aid schemes is fundamental with regard to the level of proof to be provided by the Commission, as revealed in this case, but also with regard to the application of the statute of limitations on State aid, which is set at 10 years from the granting of the aid - in the case of individual aid - or from the entry into force of the scheme - irrespective of the date of the aid granted under that scheme.

It is also worth recalling in this respect that this issue is not new in the field of taxation. For example, the European Commission's decision on the Belgian tax rulings scheme was annulled in 2019 by the General Court of the EU because it did not constitute a scheme but individual aid. In the wake of this ruling, the Commission opened 39 formal investigation procedures against all multinational companies that benefited from the tax rulings challenged in its original procedure. At the same time, the Commission appealed against this judgment to the Court of Justice of the EU. The case is still pending, but the Advocate General shares the European Commission's position in its opinion filed on 3 December 2020.

These cases clearly show the difficulty for both the European courts and the Commission in dealing with taxation in the field of State aid while legal certainty is essential for undertakings in order to assess their legal risks.