State aid: Commission requests Portugal to repeal fiscal exemption on capital gains from privatisation and restructuring - Main contents

The European Commission has formally required Portugal to abolish Article 25 of the Portuguese Estatuto dos Benefícios Fiscais (EBF), the Portuguese Tax Relief Regulations, because the scheme violates the EC Treaty's ban on state aid liable to distort competition.

Under the regime, capital gains from privatisation and restructuring processes are tax exempt for public companies and companies controlled by them. The Commission's investigation concluded that in three out of the four cases where Article 25 has already been applied, the transactions would have anyway been exempted under the normal tax regime and therefore the aid need not be repaid. However, the aid granted to `Caixa Geral de Depósitos' (CGD) for the sale of its stake in a Brazilian bank has to be recovered by Portugal from the beneficiary.

EU Competition Commissioner Neelie Kroes said: "These tax advantages to selected companies distort competition in violation of the EU's state aid rules and have to be repealed".

Article 25 of the Portuguese Tax Relief Regulations

Article 25 of the Portuguese Estatuto dos Benefícios Fiscais (EBF) states that the corporation tax base for companies with exclusively public capital and for companies in a controlling relationship with them excludes capital gains from privatisation operations and from restructuring processes carried out following strategic guidelines laid down by the state in its capacity as a shareholder and recognised as such by order of the Minister for Finance.

Commission decision

Following a complaint, the Commission started an investigation and opened a formal procedure in October 2004. The Commission found that Article 25 of the Portuguese EBF confers a selective tax advantage to certain companies, which cannot be justified by the general logic of the Portuguese tax system and is therefore incompatible with the Single Market. Portugal has unlawfully implemented Article 25 and will have to both discontinue the scheme and recover aid already granted under the provision.

However, the investigation revealed that in three out of the four transactions which have been enacted under the scheme, the application of Article 25 EBF did ultimately not confer an advantage to the firms concerned, as the transactions would anyhow have been exempted under the normal Portuguese tax regime. Therefore only the aid granted in the context of the fourth transaction, relating to capital gains from the sale of CGD's stake in the Brazilian bank ITAU S.A., has to be recovered.