State Aid and Corporate Taxation: The fight against harmful tax competition

31 July 2003

Filip Ragolle













Within the context of its fight against harmful tax competition, the Commission recently took several negative state aid decisions concerning special corporate tax regimes. The Commission decisions concerned the following special tax regimes: the Belgian “Co‑ordination Centres” scheme[1], the French “Headquarters and Logistic Centres” scheme[2], the “International Financing Activities” scheme in the Netherlands[3] and the “Foreign Income” scheme in Ireland[4]. These tax regimes are aimed at attracting certain activities of multinational groups. In all of these cases, the Commission found that the tax regime granted tax breaks in breach of EU state aid rules.

The Belgian Co-ordination Centres[5] case and the French Headquarters and Logistic Centres case concerned the use of the so-called “cost plus” (flat rate) method of taxation. Under this method, the taxable income of the Centres is calculated as a percentage of their aggregated operating costs. This method does not per se amount to state aid. However, its practical application may give rise to state aid. In the Commission’s view, this was the case with both the Belgian and the French scheme.

The Commission decided that the Belgian Co-ordination Centres scheme constitutes state aid for three reasons: (1) Belgium systematically uses a default mark-up rate of 8% without verifying whether this rate reflects the economic reality of the services provided by the Co‑ordination Centres; (ii) The calculation of the expenditure of the Centre excludes significant operating cost items; and (iii) In addition, the Belgian Co-ordination Centres enjoyed several additional tax exemptions[6].

The French Headquarters and Logistic Centres Scheme also constitutes state aid. Under this tax regime, the taxable income is calculated by removing significant items of expenditure (subcontracting costs) from the tax base or by partially excluding the Headquarters and Logistic Centres from the application of the alternative-minimum-turnover-tax (Impôt Forfaitaire Annuel).

Under the Dutch International Financing Activities Scheme, multinational companies active in more than four countries or two continents may place up to 80% of their foreign-source financial profits in a tax-free risk reserve for a period of 10 years. Under the scheme, the beneficiaries can further release the reserves formed without incurring taxation or at a reduced tax rate if the reserve funds are used for certain objectives encouraged by the scheme. The beneficiaries may also voluntarily decide to put an end to their reserve, by releasing the funds over five years at a reduced tax rate of 10% instead of the applicable corporate taxation rate of 34.5%.

The Irish Foreign Income Scheme consists of two measures. The first measure exempts foreign dividends from taxation, where the dividends are used for investments that create or save jobs in Ireland. The second measure exempts the profits of foreign branches from Irish tax, where these profits are used for investments that create jobs in Ireland. Although these schemes are also aimed at reducing international double taxation on foreign-source income, the Commission's investigation revealed they lead to selective tax benefits. While the Irish tax system does provide a tax credit to avoid the double taxation of foreign income, the two measures at issue provide additional tax savings when the tax rate abroad is lower than in Ireland.

The above special tax regimes fulfil the four criteria for being classified as state aid: they constitute (1) economic advantages, which are (2) granted through state resources (3) to certain undertakings only and (4) they distort competition and intra-Community trade. The Commission therefore ordered the Member States concerned to discontinue the tax regimes immediately with respect to new entrants and to phase-out the schemes with regard to existing beneficiaries by 31 December 2010 at the latest.

The Commission did not order the Member States concerned to recover the tax benefits granted so far because these Member States and the beneficiaries had legitimate reasons to believe that the special tax regimes were lawful: in 1984, the Commission had considered that the Belgian Co-ordination Centres regime did not constitute state aid. The other schemes are very similar to the Belgian scheme. It was only in July 2001 that the Commission revised its position, in the light of its strategy to fight against harmful tax competition between the EU Member States.






[1] Commission Decision of 17 February 2003.

[2] Commission Decision of 16 May 2003.



[3] Commission Decision of 17 February 2003.



[4] Commission Decision of 17 February 2003.



[5] A co-ordination centre is an undertaking belonging to a multinational group whose sole purpose is to provide certain services (accounting, consultancy, etc.) to other members of the group.



[6] Following the negative Commission Decision of 17 February 2003, Belgium notified a revised scheme to the Commission. The revised scheme however maintained these tax exemptions, therefore the Commission therefore opened a formal investigation into this aspect of the revised scheme. With regard to the cost plus method provided for by the revised scheme, the Commission found that its practical application does not amount to State aid because, unlike the original scheme, the Centre’s taxable income is calculated on the basis of all its operating costs, to which an appropriate mark-up rate is applied. (See Commission Decision of 23 April 2003)