The EDF judgment of the CJEU in case C-124/10 P: towards a public investor test in EU State aid law?

On the 5th of June 2012, the Court of Justice of the EU (hereafter ‘CJEU’) delivered an important judgment in the field of European State aid law on the very notion of State aid and the application of the private investor test to situations where a priori a private investor could not adopt the same behaviour as the State. To put things in context, it will be recalled that the private investor test is normally used in order to determine whether a public company has been granted an advantage within the meaning of Article 107 TFUE, by comparing the behaviour of the State with that of a private investor operating in normal market conditions. It was settled case-law (see notably the case-law quoted by the Court at point 79 of its judgment) however that, when the State acts as a public authority (by using its fiscal prerogatives for example), this test cannot be applied as there is no private investor to which the State can be compared to.

For the first time with this EDF judgment, the CJEU attempts to set criteria in order to distinguish between the State acting as shareholder and the State exercising public power.

The facts of the case are quite simple, although their presentation itself may already lead to a certain bias as to its outcome andunderstanding: EDF, a formerly public-owned company governed under French law, was to be progressively privatised in order to comply with Directive 96/92/EC concerning common rules for the internal market in electricity. In that perspective, a management contract signed between the French State and EDF provided for the normalisation of EDF’s accounts and of its financial relationship with the State. In this process, some grantor rights (representing a debt that EDF owed to the French State, for the use without consideration of its infrastructure) were allocated directly to the capital injections item without flowing through the profit and losses account. This apparent ‘purely accountancy operation’ had in fact fiscal consequences as, to the opinion of the Directorate-General for Taxation of the French Ministry of Economic Affairs, Finance and Industry, those grantor rights represented an unowed debt which was unjustifiably exempted from tax by being incorporated into the capital. The tax advantage thus obtained was estimated at 888,89 million EUR.

This operation was however described by EDF and the French authorities as a ‘shortcut’ for a longer and equivalent transaction which would have entailed, firstly, assigning to capital a net amount after corporation tax, secondly, requesting to EDF to pay a corporation tax in an amount equal to the variation in net worth; and thirdly, making an additional capital injection in an amount equal to the tax paid.

The Commission, however, took the view that the grantor rights should have been taxed at the same time and at a same rate as the other accounting provisions created free of tax. Furthermore, the Commission dismissed the French authorities’ claim that the restructuring of EDF’s accounts in 1997 could be regarded as a capital injection of an amount equivalent to the partial tax exemption. In the view of the Commission, the private investor test can only be applied in the context of the pursuit of an economic activity, not in the context of the exercise of regulatory powers. In its decision, the Commission stated that

“A public authority cannot use as an argument any economic benefits it could derive as the owner of an enterprise in order to justify aid granted in a discretionary manner by virtue of the prerogatives it enjoys as the tax authority in relation to the same enterprise. While a Member State may act as a shareholder in addition to exercising it powers as a public authority, it must not combine its role as a State wielding public power with that of a shareholder. Allowing Member States to use their prerogatives as public authorities for the benefit of their investments in enterprises operating in markets that are open to competition would render the Community rules in State aid completely ineffective. Furthermore, while in accordance with Article [345 TFEU] the Treaty is neutral as regards the system of capital ownership, the facts remains that public enterprises must be subject to the same rules as private enterprises. Public and private enterprises would no longer be granted equal treatment if the State were to use the prerogatives of public power for the benefit of the enterprises in which it is a shareholder.” (points 96-97 of the contested Commission decision)

The approach followed by the Commission, according to which the private investor test could not be applied to the conversion into capital of a tax claim, since a private investor could never hold a tax claim against an undertaking, was rejected by the General Court in first instance. According to the General Court, the purpose of the private investor test is to establish whether, despite the fact that the State has at its disposal means which are not available to the private investor, the private investor would, in the same circumstances, have taken a comparable investment decision. Thus, neither the nature of the claim, nor the fact that a private investor cannot hold a tax claim, was of any relevance for the General Court. This statement could not be reconciled with the Commission’s view as expressed in the decision. The Commission therefore decided to bring an appeal before the Court on this important question of principle.

The Court in its judgment did not follow the Commission’s approach, often described as being too formalistic, despite the Advocate General’s forceful opinion. It is clear however from a close reading of the judgment that the Court did not fully endorse the General Court’s approach either, and that it has been keen to put strict conditions and safeguards in order to ensure that the private investor test is not completely deprived of its substance in such situations where the State intervenes in its double capacity of economic actor and public authority.

The Court indeed starts by recalling its case-law according to which “in order to assess whether the same measure would have been adopted in normal market conditions by a private investor in a situation as close as possible to that of the State, only the benefits and obligations linked to the situation of the State as shareholder – to the exclusion of those linked to its situation as a public authority – are to be taken into account.” (point 79 of the judgment) Therefore, “the roles of the State as shareholder of an undertaking, on the one hand, and of the State acting as a public authority, on the other, must be distinguished (…).” (point 80 of the judgment)

Thus, for the Court, “the applicability of the private investor test ultimately depends, therefore, on the Member State concerned having conferred, in its capacity as shareholder and not in its capacity as public authority, an economic advantage on an undertaking belonging to it.” (point 81)

The question remaining is how to determine whether the State acted in its capacity shareholder or as public authority, who bears the burden of proof of showing this, and when such determination should be made. It would be too easy for example for a Member State to argue during an administrative procedure, or even during litigation before the Court, that its intention had in fact always been to act as a private investor, in its capacity of a private shareholder, if the means used were those of a public authority (tax exemption for example) and there was no trace of such an intention at the time.

The Court therefore stated that

“if a Member State relies on that test during the administrative procedure, it must, where there is doubt, establish unequivocally and on the basis of objective and verifiable evidence that the measure implemented falls to be ascribed to the State acting as shareholder.” (point 82, emphasis added) “That evidence must show clearly that, before or at the same time as conferring the economic advantage (…), the Member State concerned took the decision to make an investment, by means of the measure actually implemented, in the public undertaking.” (point 83, emphasis added) “In that regard, it may be necessary to produce evidence showing that the decision is based on economic evaluations comparable to those which, in the circumstances, a rational private investor in a situation as close as possible to that of the Member State would have had carried out, before making the investment, in order to determine its future profitability. By contrast, for the purposes of showing that, before or at the same time as conferring the advantage, the Member State took that decision as a shareholder, it is not enough to rely on economic evaluations made after the advantage was conferred, on a retrospective finding that the investment made by the Member State concerned was actually profitable, or on subsequent justifications of the course of action actually chosen (…).” (points 84-85)

However, if the Member State has been able to provide the Commission with the requisite evidence, “it is for the Commission to carry out a global assessment, taking into account – in addition to the evidence provided by that Member State – all other relevant evidence enabling it to determine whether the Member State took the measure in question in its capacity as shareholder or as a public authority. In particular, (…) the nature and subject-matter of that measure are relevant in that regard, as is its context, the objective pursued and the rules to which the measure is subject.” (point 86) The burden of proof thus appears to be shifted to the Commission once the Member State concerned has adduced the evidence as described at points 82-85 (this shift is also apparent from the wording of point 103 of the judgment). It remains to be seen, however, how much evidence should be provided before the Commission really has to carry out such a global assessment, and in which cases the Commission will still be able to reject the applicability of the private investor test. Timing will probably also be a decisive factor in that respect in the future (see also point 104 of the judgment: “it cannot refuse to examine the information unless the evidence produced has been established after the adoption of the decision to make the investment in question”).

The Court then carefully rejects the argument of the Commission according to which the applicability of the private investor test could be ruled out in the present case simply because the means employed by the French State were fiscal in nature by recalling that, under Article 107(1) TFEU, any aid granted through State resources – in any form whatsoever – which, in terms of its effects, distorts or threatens to distort competition is incompatible with the common market in so far as it affects trade between Member States. The test embodied in Article 107(1) is thus effects-based and does not depend on the means used, the intention underlying Article 107(1) being to prevent the recipient undertaking from being placed in a more favourable position than that of its competitors (interestingly, the Commission had used this argument precisely in order to show the inaccuracy of the intentions-based approach developed by the General Court in its judgment!). “However, follows the Court, the financial situation of the recipient public undertaking depends not on the means used to place it at an advantage, however that may have been effected, but on the amount that the undertaking ultimately receives. Consequently, when considering whether the private investor test was applicable, the General Court did not err in law by focusing its analysis, not on the fiscal nature of the means employed by the French State, but on the improvement – with a view to the opening up of the electricity market – in EDF’s financial situation and on the effects of the measure in question on competition. Accordingly, it follows from all of the foregoing that, in view of the objectives underlying Article [107(1) TFEU] and the private investor test, an economic advantage must – even where it has been granted through fiscal means – be assessed inter alia in the light of the private investor test, if, on conclusion of the global assessment that may be required, it appears that, notwithstanding the fact that the means used were instruments of State power, the Member State concerned conferred that advantage in its capacity as shareholder of the undertaking belonging to it.” (points 91-92)

This notwithstanding, the judgment breaks new ground in the area of State aid law: in the future, whatever the means used by the State in order to support a public company, the Commission will not be able to exclude automatically the applicability of the private investor test, but will have to go through a ‘global assessment’ on the basis of the evidence submitted by the Member State in order to determine whether the State acted in its capacity of economic actor or shareholder, or in its capacity of public authority. The difficulty is that in practice, these interests are often mixed, and the State may easily pretend it is pursuing a purely economic goal when it has other goals in the back of its mind (elections approaching for example). Whereas the method proposed by the Commission, accused of being too formalistic, was aimed at ensuring strict equality between public and private companies, one may wonder whether this will still be the case with the solution proposed by the Court, even with all the safeguards surrounding it. The solution advocated by the Commission might probably have sounded too rigid and disconnected from economic reality (what was the real advantage that EDF would have lost if the French State had decided to go trough the ‘long route’ as suggested by the Commission?) but the solution proposed by the Court will certainly not make administrators’ life easier in Brussels, and might come at the expense of legal certainty and of ensuring a real level-playing field between private and public companies in the EU.


    • Sébastien Thomas

      Thank you. Interesting article too, but I am a bit sceptical to broadly applicable economic tests such as the MEIP, especially in a field such as State aid where the State often pursues other objectives (equity, solidarity, public access to common goods, etc) which are not prohibited under the Treaty but subject to the appraisal of the Commission. This is the case in particular as regards SGEI, where the application of a strict private investor test would lead to the mere abolition of most public services in Europe! Sometimes, the State intervenes precisely because the market fails to deliver certain outcomes, so it would be quite absurd to apply an MEIP test to these kinds of interventions in my opinion.

      • Hans Vedder

        Dear All,

        Indeed an interesting post on a very important judgment. @Sebastien: why are sceptical about the Commission’s competence to rule on the compatibility of such measures with the internal market. An overly broad construction of an MEIP-exception would take potentially distortive measures outside the scope of the Commission’s supervisory powers. I’d actually prefer the Commission coming with a well-reasoned and published decision that is subject to judicial review over some MS fixing something together with an (aspiring) national champion… This will certainly help to separate the chaff of protectionism from the wheat of true market failures.

        • Sébastien Thomas

          Thank you Prof. Vedder,
          actually I share your opinion, the problem with a too broad application of the MEIP test is that it has as a consequence, once the test can be applied and is allegedly fulfilled, that the measures falls OUTSIDE the scope of Article 107 TFEU and therefore outside Commission’s competence to assess it (if a measure is not a State aid, the Commission cannot pronounce itself on its compatibility with the internal market…). This is I think one of the problematic aspects of this judgment and of a too broad application of the MEIP.

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