Tax Incentives as State Aid

Abstract

In the European Union, direct taxation is generally a matter of national law that falls within the exclusive competence of the Member States. While Member States are free to design their own tax systems as they see fit, they must comply with Union law, including the rules on State aid. In recent years, the Commission has embarked on an ambitious path of using the State aid rules to address Member States’ tax treatment of some of the world’s largest multinationals. In doing so, it has had to grapple with some of the most challenging questions in EU State aid law and its interface with national fiscal regimes, namely in relation to determining when a tax measure is ‘selective’ by favouring certain undertakings or the production of certain goods. The appropriateness and legitimacy of the use of State aid rules as a tool to achieve these goals aside, the Commission’s recent enforcement efforts have raised some important questions concerning the interpretation of the selectivity criterion under EU State aid law. This criterion will be tested before the EU courts in pending cases in the near future, and this could have far-reaching consequences for the reach of EU State aid law enforcement and, ultimately, the scope of Member States’ sovereignty in the field of taxation.