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Introduction

In its ruling of 6 November 2018 in cases C‑622/16 P to C‑624/16 P, Scuola Elementare Maria Montessori v European Commission, the Court of Justice made it harder for Member States to escape from their recovery obligations.[1]

Montessori appealed against the judgment of the General Court in case T‑220/13, Scuola Elementare Maria Montessori v European Commission. That judgment was reviewed here on 11 October 2016 (http://stateaidhub.eu/blogs/stateaiduncovered/post/7255)

Montessori sought annulment of Commission decision 2013/284 which had found that an exemption from property tax also benefited buildings used by the church to provide a variety of courses some of which were economic in nature. The problem was that there was no account separation, so for purposes of recovery it was thought not possible to determine the proportion of those buildings that should have been subject to the tax.

Under the Italian law that applied at the time, buildings used by the church were not taxed because the activities of the church were “primarily non-commercial”. Consequently, no tax returns were submitted by the church administration and the Italian authorities did not appear to have other documents that could indicate the extent to which the buildings were used for economic activities. For this reason the Commission did not order recovery of the aid that was found to be incompatible with the internal market. After all, in the absence of any tax documents, the Commission considered that it was impossible for Italy to recover the aid.

The judgment of the Court of Justice of 6 November 2018 deals largely with two issues: the admissibility of the action brought by Montessori and the validity of the Commission’s reasoning not to instruct recovery. Although this article focuses primarily on the latter issue, it also examines briefly the question of admissibility because that depends on whether the party that brings the action is “directly and individually concerned”.

 

 

Who has standing to request annulment of a Commission decision?

The Court of Justice first recalled the relevant principles. “(42) The condition that a natural or legal person must be directly concerned by the decision against which the action is brought, laid down in the fourth paragraph of Article 263 TFEU, requires two cumulative criteria to be met, namely, first, the contested measure must directly affect the legal situation of the individual and, second, it must leave no discretion to its addressees who are entrusted with the task of implementing it, such implementation being purely automatic and resulting from the EU rules alone without the application of other intermediate rules”.

Rather notably, the Court went on to stress that “(43) as regards specifically the rules on State aid, it must be noted that their objective is to preserve competition […]. So, in that field, the fact that a Commission decision leaves intact all the effects of the national measures which the applicant, in a complaint addressed to that institution, claimed were not compatible with that objective and placed it in an unfavourable competitive position makes it possible to conclude that the decision directly affects its legal situation, in particular its right under the provisions on State aid of the FEU Treaty not to be subject to competition distorted by the national measures concerned”.

Then the Court of Justice applied the above principles to the case at hand. “(44) With respect to the first of the two criteria mentioned in paragraph 42 above, the General Court considered in substance, […], that it was satisfied because the services offered by […] Scuola Elementare Maria Montessori […] were similar to those offered by the beneficiaries of the national measures assessed in the decision at issue and, consequently, the former ‘might be in a competitive relationship’ with the latter.”

The Court of Justice disagreed with the view of the General Court and went on to expound a stricter standard. “(46) While it is not for the EU judicature, at the stage of the examination of admissibility, to rule definitively on the competitive relationships between an applicant and the beneficiaries of the national measures assessed in a decision of the Commission on State aid, such as the decision at issue […], a direct effect on such an applicant cannot be deduced from the mere potential existence of a competitive relationship, such as that found in the judgments under appeal.”

“(47) Given that the condition of direct concern requires the contested measure to produce effects directly on the applicant’s legal situation, the EU judicature must ascertain whether the applicant has adequately explained the reasons why the Commission’s decision is liable to place him in an unfavourable competitive position and thus to produce effects on his legal situation.”

“(48) It must nonetheless be recalled that, if the grounds of a decision of the General Court reveal an infringement of EU law but the operative part of the judgment can be seen to be well founded on other legal grounds, that infringement is not capable of leading to the annulment of that decision and a substitution of grounds must be made”.

The Court of Justice found that the rest of the judgment of the General Court on admissibility was free of legal errors and that, in fact, the General Court was right to focus on the strength of the competitive interaction between Montessori and the church schools. “(50) It may be seen from the applications brought by Mr Ferracci and Scuola Elementare Maria Montessori before the General Court that they submitted, with evidence in support and without being contradicted by the Commission on this point, that their establishments were situated in the immediate vicinity of ecclesiastical or religious entities carrying on similar activities to theirs which were thus active in the same market for services and the same geographical market. In so far as such entities were a priori eligible for the national measures assessed in the decision at issue, it must be considered that Mr Ferracci and Scuola Elementare Maria Montessori have adequately explained the reasons why the decision at issue was liable to place them in an unfavourable competitive position and, consequently, that that decision directly affected their legal situation, in particular their right not to be subject in that market to competition distorted by the measures in question.”

The Court of Justice concluded that the action brought by Montessori satisfied the first of the two criteria quoted in paragraph 42 of the judgment. With respect to the second criterion, the Court found that the Commission decision “(54) produces legal effects purely automatically on the basis of the EU rules alone without the application of other intermediate rules.” Hence, Montessori proved it had legal standing.

 

 

The obligation of the Commission to order recovery of incompatible State aid

The Court of Justice first cited the relevant provisions in the procedural Regulation 659/1999 which since then has been replaced by Regulation 2015/1586.

“(76) It must be recalled that in accordance with the first sentence of Article 14(1) of Regulation No 659/1999, where negative decisions are taken in cases of unlawful aid, the Commission is to decide that the Member State concerned shall take all necessary measures to recover the aid from the beneficiary.”

“(77) It is settled case-law that the adoption of an order to recover unlawful aid is the logical and normal consequence of a finding that it is unlawful. The principal objective of such an order is to eliminate the distortion of competition caused by the competitive advantage conferred by the unlawful aid”.

“(78) However, in accordance with the second sentence of Article 14(1) of Regulation No 659/1999, the Commission shall not require the recovery of the aid if this would be contrary to a general principle of EU law.”

In other words, it is not up to the Commission to choose whether to order recovery of incompatible aid. It must demand that incompatible aid is recovered unless recovery would violate some other fundamental principle of EU law. Then the Court identified one such principle.

“(79) The principle that ‘no one is obliged to do the impossible’ is among the general principles of EU law”.

“(80) While it follows from settled case-law of the Court that the only defence that may be relied on by a Member State against an action for failure to fulfil obligations brought by the Commission on the basis of Article 108(2) TFEU is the absolute impossibility of implementing correctly the Commission’s decision to order recovery of the aid in question … that case-law relates, however, solely to the pleas that can be raised in defence by the Member State against an order for recovery made by the Commission, not to whether or not the absolute impossibility of recovering the aid may already be established at the stage of the formal investigation procedure.”

This means that a Member State cannot claim that it is absolutely impossible to recover incompatible aid unless it first tries to recover it or at least it tries to identify alternative methods for recovering it.

“(82) The Court has previously held that the Commission cannot, on pain of its being invalid, adopt an order for recovery which, from the moment of its adoption, is objectively and absolutely impossible to implement”.

“(84) Thus where, as in the present case, the Member State concerned already claims during the formal investigation procedure that recovery is absolutely impossible, the principle of sincere cooperation requires the Member State, at that stage, to submit to the Commission for assessment the reasons underlying that claim and requires the Commission to examine them scrupulously. Consequently, […], that principle does not require the Commission to attach an order for recovery to every decision declaring aid to be unlawful and incompatible with the internal market, but requires it to take into consideration the arguments put to it by the Member State concerned on the existence of absolute impossibility of recovery.”

“(90) It must be recalled that, in accordance with the Court’s settled case-law on actions for failure to fulfil obligations brought on the ground of infringement of a decision ordering the recovery of unlawful aid, a Member State which encounters unforeseen and unforeseeable difficulties or becomes aware of consequences overlooked by the Commission must submit those problems to the Commission for consideration, together with proposals for suitable amendments to the decision at issue. In such a case, the Member State and the Commission must, by virtue of the principle of sincere cooperation, work together in good faith with a view to overcoming difficulties while fully observing the provisions of the FEU Treaty, in particular those on aid”.

“(91) However, the condition of absolute impossibility of implementation is not satisfied where the defendant Member State does no more than inform the Commission of the internal difficulties of a legal, political or practical nature, attributable to the national authorities’ own acts or omissions, raised by implementation of the decision at issue, without taking real steps to recover the aid from the undertakings concerned and without suggesting to the Commission alternative methods of implementing the decision which would allow those difficulties to be overcome”.

“(92) A Member State which at that stage of the [initial review] procedure encounters difficulties in recovering the aid concerned must submit those difficulties to the Commission for consideration and cooperate in good faith with the Commission with a view to overcoming them, in particular by suggesting alternative methods allowing recovery, if only in part, of the aid. In all cases, the Commission is required to undertake a detailed examination of the difficulties pleaded and the suggested alternative methods of recovery. Only if the Commission finds, following such a detailed examination, that there are no alternative methods allowing even partial recovery of the unlawful aid in question may that recovery be considered to be objectively and absolutely impossible to carry out.”

“(93) In the present case, […] the Commission confined itself, in the first part of the decision at issue, to deducing the absolute impossibility of recovering the unlawful aid in question solely from the fact that it was not possible to obtain the necessary information for recovery of the aid from the Italian land registry and tax databases, while omitting to consider the possible existence of alternative methods allowing recovery, if only in part, of the aid.”

The Court of Justice faulted the General Court because it upheld “(94) the [Commission] decision on this point”.

Then the Court of Justice apportioned responsibility to Italian authorities for failing to keep appropriate records. “(95) The circumstance that the information needed for recovery of the unlawful aid in question could not be obtained from the Italian land registry and tax databases must be regarded as caused by internal difficulties attributable to the national authorities’ own acts or omissions. According to the settled case-law of the Court […], such internal difficulties do not suffice for it to be concluded that there is absolute impossibility of recovery.”

This is an important legal statement because it makes it very difficult for Member States to escape from their obligation to recover incompatible aid by simply not keeping records of what they do.

“(96) Recovery of unlawful aid may be considered to be objectively and absolutely impossible only if the Commission finds, following a detailed examination, that two cumulative conditions are satisfied, namely that the difficulties relied on by the Member State concerned are real and that there are no alternative methods of recovery. As noted in paragraph 93 above, the General Court upheld the first part of the decision at issue despite the fact that the Commission had omitted to carry out, in that decision, a detailed examination of whether the second of those conditions was met.”

“(97) The error of law which thus vitiates the General Court’s judgment […] overlaps with that also committed by the General Court by rejecting […] Montessori’s argument that the Commission should have examined the existence of alternative methods enabling recovery, if only in part, of the aid in question, on the ground that Scuola Elementare Maria Montessori had not been able to demonstrate their existence.”

Accordingly, the burden of proof rests on the Commission to examine alternative methods for recovery. “(98) In so far as Article 14(1) of Regulation No 659/1999 requires the Commission, as a general rule, to adopt an order to recover unlawful aid and allows it to refrain from doing so only exceptionally, it was for the Commission to show in the decision at issue that the conditions for it to decline to adopt such an order were satisfied, not for Scuola Elementare Maria Montessori to prove before the General Court that there existed alternative methods enabling recovery, if only in part, of the aid in question. In those circumstances, the General Court could not confine itself to observing that Scuola Elementare Maria Montessori had not succeeded before it in showing that such alternative methods existed.”

On the basis of the above analysis, the Court of Justice proceeded, without referring the case back to the General Court, to annul the part of the Commission decision that did not order recovery of the incompatible State aid.

 

 

Non-economic activities

In the same judgment the Court of Justice also made a number of interesting observations about the non-economic activities of church schools.

The Court recalled that Article 107(1) TFEU applies to undertakings, that undertakings are entities that carry out economic activities and that “(104) any activity consisting in offering services on a given market, that is, services normally provided for remuneration, is an economic activity. The essential characteristic of remuneration lies in the fact that it is consideration for the service in question”.

While the meaning of “remuneration” is fairly clear [it is a payment in exchange for something], “consideration” is a rather mysterious term. It means that the payment corresponds, in the eyes of the seller and buyer, to the value of what is provided or what is transacted.

“(105) As regards educational activities, the Court has held that courses provided by educational establishments financed essentially by private funds that do not come from the provider itself constitute services, since the aim of such establishments is to offer a service for remuneration”.

“(106) In the present case, the General Court found […] that the exemption from (a tax) applied only to educational activities provided free of charge or against payment of a token amount covering only part of the actual cost of the service, with that part not being related to the cost.”

“(109) Since the General Court found in its interpretation of national law that the exemption from (a tax) applies only to educational activities provided free of charge or against payment of a token amount not related to the cost of the service, it was able to reject, without committing an error of law, Scuola Elementare Maria Montessori’s complaint that the exemption applied to educational services provided for remuneration.”

The lesson to be deduced is that an undertaking does not offer its services for free or for a fee that does not cover its costs. Unfortunately, EU courts have not set a threshold above which fees are no longer “token” or, as cited in other cases, “notional” or “symbolic”. (The Advocate General in his opinion noted that the fees did not cover the “essential” part of the educational activities. But there was no further explanation whether essential meant, for example, more than half.)

 

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[1] The full text of the judgment can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=207331&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=318906.

 

Photo by Robert Collins on Unsplash



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