EU Court ruling on retailer tax in Poland | TAX Alert
The EU Court (the first instance of the ECJ) announced yesterday its verdict in a case concerning Poland’s retail tax, and so overruling the Commission’s decision which it had qualified as illegal state aid. The temporary suspension decision for this tax was also revoked (joined cases T-836/16 and T-624/17 Poland vs. EC).
The retail tax was devised as a turnover tax for retail stores and chains, targeted at taxing only larger (predominantly foreign) market players. Back in 2016, the European Commission prohibited its entry into force as illegal state aid, due to the fact that its progressive character would grant selective advantage to smaller retail outlets, which would not pay tax at all or pay it at a lower rate.
The Court ruled that the Commission insufficiently evidenced the selective advantage (which is the key test for illegal state aid) which the tax would grant to smaller taxpayers. This justification is however somewhat controversial.
Typically, the test for selectivity of state aid in taxes has three steps:
- Identification of a system of reference (i.e. the “normal” taxation system which should apply to all taxpayers),
- Identification of divergence from the system of reference by the measure in question,
- Check if the divergence from the system of reference is not justified by the general character or the structure of such a system.
Only after the above three criteria are satisfied, a tax measure may be declared as selective and (if other state aid criteria are met) consequently deemed (illegal) state aid.
The key issue in Poland’s case is the establishment of a system of reference for a progressive tax. The Court ruled that the EC was not right to automatically claim selectivity for a progressive tax, as progression should be treated as an element of the system of reference and only against this backdrop, the selectivity should be further assessed. This is particularly controversial, as under this assumption, a progressive tax with 0% rate at the lower end of the scale, if treated as a system of reference, even if out rightly discriminatory, could not be challenged as state aid at all. This ruling diverges therefore from the ECJ ruling in case C-106/09 P and C-107/09 P Gibraltar to which the EC referred in their decision.
It must be however underlined that the ruling does not state that progressive taxes are not state aid per se, or that the Polish retail tax is definitely not state aid, but rather emphasises the need for the Commission to put more effort into the verification of selectivity of such a measure as compared to the EC’s decision in Poland’s case. The Commission has now two months for appeal to the ECJ and we may expect that such an appeal will indeed be filed. We can therefore expect an interesting development in this case, which in our view is far from finished. It is therefore rather doubtful that Poland will decide to implement the tax in 2020 (theoretically being entitled to) if the Commissions files such an appeal. We will keep you posted on further developments in the case.