Santander Win in EU Court Case May Hinder Probes Into Tax

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Banco Santander SA’s court victory in a case over Spanish tax breaks may hamper the European Union’s probes into unfair fiscal deals for multinational firms, lawyers said.

Today’s ruling at the EU General Court, on special treatment for companies that take a stake in overseas firms, follows the revelation of hundreds of fiscal deals with companies in Luxembourg, which sparked calls for tougher EU action to combat corporate tax dodging.

It “takes some wind out of the European Commission’s sails,” Javier Ruiz Calzado, a lawyer at Latham & Watkins LLP in Brussels, said. The ruling “doesn’t mean the commission is going to surrender because the political pressure, particularly these days, is huge. But it’s going to be more difficult to navigate for them.”

The Spanish case is part of an EU campaign across the 28-nation bloc targeting tax breaks that may have given companies unfair advantages. Tax avoidance leaped to the top of the EU’s agenda yesterday after a group of investigative journalists published almost 28,000 documents cataloging how companies such as PepsiCo Inc., Ikea Group and FedEx Corp. lowered their tax bill via deals with Luxembourg.

Apple to Amazon

Before the Luxembourg leaks, the EU was already reviewing the nation’s agreements with Amazon.com Inc. and Fiat Finance & Trade. Pacts between Ireland and Apple Inc. and Starbucks Corp. with the Netherlands are also under scrutiny.

Regulators have said they would soon publish details of their Starbucks investigation, adding to information they already announced on the Apple and Amazon probes.

Ireland’s Finance Minister Michael Noonan said the EU’s probe into his country’s arrangements with Apple is likely to be dropped.

“My legal advice is that the Irish authorities will win the case quite easily and that there isn’t a strong case,” he told reporters after a meeting of ministers in Brussels.

In today’s ruling, the EU court in Luxembourg said the bloc’s competition regulators “failed to establish that the Spanish regime was selective” by giving special treatment to certain companies. The Spanish system “does not exclude, a priori, any category of undertaking from taking advantage of it.”

The judges gave “a reminder that there are limits” in assessing whether a tax measure is selective and thus potentially illegal under EU state subsidy rules, said Jose Luis Buendia, a lawyer at Garrigues, who represented Santander.

‘More Work’

The commission will need to do “a lot more work” and prove that companies in comparable situations were disadvantaged to make their case against Apple, Starbucks and Amazon, Ruiz Calzado said.

The timing of the Luxembourg leaks came days after new European Commission President Jean-Claude Juncker took office. Juncker was the country’s prime minister for almost 19 years.

The Brussels-based commission first began its probe into Spain in 2007 after complaints. Before the EU investigation, Spanish companies had been on a buying spree, with Telefonica purchasing U.K. mobile-phone operator O2 Plc and Iberdrola SA buying Scottish Power Plc.

The court today rejected arguments by the EU’s executive branch that the Spanish measures are selective. The Spanish system in question “is not aimed at any particular category of undertakings or the production of goods, but a category of economic transactions,” said the court.

Recoup Aid

Spain was ordered in 2009 and 2011 by the EU to abolish the tax break and recoup parts of the aid. The court annulled those decisions today.

“We take note of the General Court’s judgment, and we will carefully assess the judgment and its implications,” commission spokesman Ricardo Cardoso said.

Santander declined to comment on today’s court ruling and a spokesman for Spain’s budget ministry wasn’t immediately available to comment.

In a related case, the Brussels-based commission last month ordered Spain to recover money from companies that benefited from related rules that encouraged acquisitions in foreign holding companies. It said the Spanish measures unfairly rewarded companies for buying stakes in foreign competitors.

“This decision remains valid as commission decisions are effective unless they are annulled by EU courts,” Cardoso said.