Belgium: Taxing Games Of Chance: EU State Aid Law And The Member States' Power To Tax Games Of Chance

Taxing Games Of Chance: EU State Aid Law And The Member States' Power To Tax Games Of Chance

I. Introduction

The power to tax is one of the core state competences. Gambling Compliance's 2012 European Online Gambling Study demonstrates that most Member States of the European Union (EU) tax (online) games of chance. The same study also shows the vast differences between the EU Member States' tax regimes applicable to (online) games of chance.

The EU Member States' tax power is not unlimited. In particular, EU law imposes certain limits to the Member States' power to tax. European Court of Justice (ECJ) case law has reiterated many times that although direct taxation is a Member State competence, the Member States must none the less exercise that competence consistently with EU law. There is abundant case law demonstrating that the freedom to provide services (Article 56 Treaty on the Functioning of the European Union (TFEU)) or the freedom of establishment (Article 49 TFEU) limits the power of the EU Member States to tax. To give just one example, we can refer to the ECJ's judgment in case C-153/08, where it was held that Spain's fiscal legislation – according to which winnings from lotteries, games of chance and betting organised in Spain by certain public bodies and entities established in Spain and pursuing social or charitable non-profit-making activities were exempted from the law on income tax, while the same tax exemption did not apply to winnings from lotteries, games of chance and betting organised by bodies and entities established in another EU Member State and pursuing the same type of activities – violated the freedom to provide services. This will come as no surprise to anyone who is familiar with the EU case law on games of chance: also regulating games of chance is in the current state of affairs a Member State competence which has to be exercised within the limits of EU law, most notably the freedom to provide services and the freedom of establishment.

There are other EU law limits than the freedom to provide services and the freedom of establishment to the Member States tax competence. This article concerns one of those EU law limits, namely the prohibition to grant state aid (Article 107 TFEU).

II. EU State aid law: a very brief outline

The general prohibition of state aid is laid down in Article 107 (1) TFEU, which provides that "any aid granted by a Member State or through State resources in any form whatsoever, which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market". The ECJ has clarified that the notion of state aid requires that four conditions are fulfilled. Firstly, there must be an intervention by the State or through State resources. Secondly, the intervention must be liable to affect trade between Member States. Thirdly, it must confer an advantage on the recipient. Fourthly, it must distort or threaten to distort competition.

The general prohibition to grant state aid is not absolute. The European Commission ("Commission") has a wide discretion to declare state aid compatible with the EU internal market. However, state aid granted without the prior approval of the Commission is illegal. It follows that if a particular measure can be qualified as state aid, it must be notified to the Commission, which is exclusively competent to declare a state aid measure compatible with the internal market. The present article deals only with the concept of state aid, and examines more particularly if and when a gaming tax can be qualified as state aid.

III. EU State aid law and the gaming sector

While the application of EU State aid law to national gaming taxes is not new, it is an issue that has received relatively scant attention. It is noticeable that the Commission's important communication 'Towards a comprehensive European framework for online gambling' (COM (2012) 596 fin.) does not mention state aid law. On the other hand, the Commission's Staff Working Document accompanying the 2012 communication (SWD(2012) 345 fin.) contains a chapter 5.8 on the application of state aid law to the gambling sector. In this chapter the Commission mentions that two formal state aid investigations have been opened, one concerning Denmark and the other one concerning France.

Precedents

The Commission has received various complaints against EU Member States tax regulations imposing different tax measures applicable to online and off-line gambling services. Until today, the Commission has opened two formal investigations.

• The Danish Gaming Duties Act

In 2010 Denmark notified to the Commission its draft Gaming Duties Act, on the basis of which online providers of casino games and gaming machines would be subject to a flat tax of 20 % on the GGR, while the land-based casinos and gaming halls were subject to a tax which could rise up to 75%. The same Act was also the subject of two complaints filed with the Commission, the first one submitted by the Danish Amusement Machine Industry Association and the second one by a land-based casino operator. In its decision of 20 September 2011, the Commission argued that the lower tax rate applicable to online gambling services constitutes state aid for the providers of online gambling services. However, the Commission argued that this state aid measure was compatible with the internal market (Commission decision C(2011) 6499 (hereafter: "Danish state aid decision")). Two appeals have been lodged against the Danish state aid decision, submitted by Dansk Automat Brancheforening (pending case T-601/11) and by Royal Scandinavian Casino Århus (pending case T-615/11). In the latter case, Betfair Group plc and Betfair International Ltd have been admitted to intervene (Order of the President of the 7^th Chamber of the General Court of 21 September 2012).

• French levy on online horse-race betting

The second formal investigation concerns a French legislative proposal imposing a parafiscal levy on online horse-race betting in order to fund a public service mission to horse racing companies, notified to the Commission in April 2010. France has specified that the purpose of this levy is to fund a public service mission, namely to improve the equine species and the promotion of horse breeding, imposed on horse racing companies and the horse racing parent companies, to whom the revenues coming from the levy would be paid.

IV. The 'advantage' requirement

As explained above, state aid requires that 'an advantage' is conferred on the recipient. However, a gaming tax constitutes a charge for a gaming operator and not an advantage. How could a gaming tax then amount to state aid? It is well-established case law that the concept of state aid is broader than the concept of a subsidy and includes also all measures mitigating the charges which are normally included in the budget of an undertaking. The Commission considers a relief of charges that are normally borne from an undertaking's budget to be an advantage (Commission notice on the application of the State aid rules to measures relating to direct business taxation (OJ (1998) C 384/3), point 9).

If a tax authority decides that lower or no gaming taxes (i.e. respectively a tax reduction and a tax exemption) should be paid, such a tax measure may constitute an 'advantage'. The ECJ's jurisprudence contains numerous examples in which tax exemptions, tax reductions, the possibility to postpone tax normally due, etc. have been found to constitute an advantage within the meaning of Article 107 (1) TFEU. Provided that all other conditions of Article 107 (1) TFEU are fulfilled, such tax measures amount to state aid. The Commission has confirmed that an advantage can be provided "through a reduction on the firm's tax burden in various ways", such as: (i) a reduction in the tax base (such as special deductions, special or accelerated depreciation arrangements or the entering of reserves on the balance sheet), (ii) a total or partial reduction in the tax amount (such as exemption or a tax credit), (iii) deferment, cancellation or even special rescheduling of tax debt (Commission notice on the application of the State aid rules to measures relating to direct business taxation (OJ (1998) C 384/3), point 9). In sum, the advantage requirement has received a wide interpretation, as confirmed, for example, in the recent 3M Italia case, where it was held that state aid includes "a measure by which the public authorities grant certain undertakings favourable tax treatment which, although not involving the transfer of State resources, places those to whom it applies in a more favourable financial position than other taxpayers" (case C-417/10, point 38). This passage reveals that the advantage requirement also necessitates assessing whether the advantage granted favours certain undertaking. The requirement of a 'selective advantage' will be discussed in the following chapter.

V. The 'selective advantage' requirement

Article 107 (1) TFEU requires that state aid favours "certain undertakings or the production of certain goods", that is to say that state aid must be selective. The selectivity of a state measure is one of the constituent factors of the notion of state aid: non-selective measures cannot amount to state aid. This chapter deals with the question under which conditions gaming tax can be considered to grant a selective advantage. We will first comment on the requirement of a selective advantage (A) and thereafter analyze two cases of selectivity, namely material and geographical selectivity in relation to gaming taxes (B).

A. The requirement of a 'selective advantage'

It follows from the requirement that a state aid measure must be selective that advantages resulting from 'general measures' cannot be qualified as state aid. General tax measures, escaping state aid control, are measures that have been found to be non-selective. The test for establishing the selective nature of a tax measure is set out in some detail below.

Effects-based approach of EU state aid law

Qualifying a tax measure as state aid requires a careful analysis of the 'effects' of the tax measure at issue. In the Gibraltar tax case, the ECJ recalled that "Article [107] (1) [TFEU] does not distinguish between measures of State intervention by reference to their causes or their aims but defines them in relation to their effects, and thus independently of the techniques used" (joined cases C-106/09 P and C-107/09 P, point 87). The effect EU state aid control is intended to prevent is that undertakings are being placed, by means of State resources, in a more favourable position than that of its competitors (compare case C-124/10 P, point 90; case C-387/92, point 14).

The effects-based approach entails, firstly, that a (tax) measure cannot escape state aid control on the basis of the aims that measure is pursuing. Consider, for example, the hypothetical gaming tax aiming to protect consumers. The pursuit of such an aim cannot prevent the tax measure to be qualified as state aid. This does not mean that the objectives pursued by a tax objective are irrelevant for state aid law purposes. The aim of the tax measure can duly be taken into account when the compatibility of a state aid measure is examined under Article 107 (3) TFEU (case C-487/06 P, point 92).

Moreover, the effects-based approach means also the form of the tax measure is not decisive for its qualification as state aid or, on the contrary, to evade such a qualification. The EU Courts ruled that the notion of state aid covers "any aid granted through State resources – in any form whatsoever – which, in terms of its effects, distorts or threatens to distort competition" (case C-124/10 P, point 88). The excerpt from the Gibraltar case cited above underlines that state aid should be defined "independently of the techniques used" (joined cases C-106/09 P and C-107/09 P, point 87; see also the ECJ in the British aggregates case, case C-487/06 P, point 89).

The effects-based approach has an important impact on the selectivity test, explained below. The analysis of the regulatory design of a tax measure alone is not sufficient to draw any conclusions with regard to the selectivity of that measure. The material scope of application of a gaming tax measure may be defined narrowly (e.g. the tax is applicable only to fixed odds horse bets) or widely (e.g. the tax applies to all games of chance offered in a particular EU Member State): this circumstance alone is not sufficient to accept or reject the selectivity of the tax measure. A careful analysis of the effects of the gaming tax at issue will be required. In the same sense, if the material scope of application of a gaming tax is defined broadly and a particular category of gaming operators (or a particular category of games of chance) is exempted from paying that tax, no definitive findings regarding the selectivity of such a gaming tax measure can be based on the regulatory design of the tax regime.

In spite of the effect-based approach, it will be shown that that the selectivity test, which ultimately is aimed at identifying whether the tax measure under scrutiny "favour[s] certain undertakings or the production of certain goods", needs to have regard, at least to some extent, to the form and the aim(s) of the tax measure whose qualification as state aid is at stake.

General tax measures

Advantages resulting from a general measure applicable without distinction to all economic operators escape state aid control (see e.g. case joined cases C-106/09 P and C-107/09 P, points 73 and 79; C-417/10, point 38). According to the Commission, in order for a tax measure to be general it must be effectively and on an equal access basis open to all economic agents operating within a Member State, and the scope of the tax measure may not be de facto reduced through e.g. a State's discretionary power (Commission notice on the application of the State aid rules to measures relating to direct business taxation (OJ (1998) C 384/3), point 13).

It is worth emphasizing that the application of a general tax regime can result in different tax burdens for different operators. Differences in tax burdens are therefore not sufficient to demonstrate the selective nature of the advantage (joined cases C-106/09 P and C-107/09 P, point 103). Furthermore, in the Gibraltar tax case the ECJ has made clear that the requirement to make a profit and the capping of taxation of profits are "per se general measures applicable without distinction to all economic operators" and are therefore not liable to confer selective advantages (joined cases C-106/09 P and C-107/09 P, point 80). These requirements do not grant a selective advantage to unprofitable operators or very profitable operators: they "are merely the consequence of the random event that the undertaking in question is unprofitable or very profitable during the period of assessment" (idem, point 83).

Finally, even though an analysis of the legal provisions of a particular tax justify its qualification as a general tax measure, it is still possible that the application of the general tax measure favours certain undertakings or certain products and is therefore selective. This can be the case where the administration called upon to apply the general rule has a discretion when applying the tax measure (see e.g. case T-36/99, point 129).

Selectivity test

In order to determine whether particular measures, including tax measures, are selective, it is required to assess "whether, under a particular statutory scheme, a State measure is such as to favour certain undertakings or the production of certain goods [...] in comparison with other undertakings which are in a legal and factual situation that is comparable in the light of the objective pursued by the measure in question" (case C-143/99, point 41). However, the selective nature of a state measure can be "justified by the nature or general scheme of the system of which it is part" (case C-143/99, point 42) and will therefore not satisfy the condition of selectivity.

It follows that a gaming tax will be selective, and therefore fulfill one of the requirements to be qualified as state aid, if it favours certain undertakings or the production of certain goods which are, in light of the objective pursued by the tax measure, legally and factually comparable, unless the selective advantage granted by the gaming tax is justified by the nature or general scheme of the tax system of which it is part.

Applying the selectivity test to tax measures

The issue of the material selectivity has risen in several recent cases. It is remarkable that on three occasions the judgment of the Court of First Instance (now the General Court) has been set aside by the ECJ.¹ Legal scholars therefore emphasize the legal uncertainty surrounding the application of the selectivity test. In line with the effects-based approach explained above it can be argued that the assessment of the selective nature of a tax measure does not necessarily have to follow a pre-determined and firm formal framework. Nevertheless, in general, the determination of the selective nature of a tax measure involves the following steps: determining a tax reference framework (step 1), assessing whether the tax measure at issue derogates from the reference framework (step 2) and assessing whether the tax measure is justified by the nature or the general logic of the system of which it is part (step 3).

Step 1: determining the tax reference framework

No tax measure can be considered to be selective without a 'tax reference framework'. In the case of tax measures, the determination of the reference framework is particularly important, since, as the ECJ has underlined, the very existence of an advantage can only be established when compared with 'normal' taxation. The identification and examination of the "common or 'normal' regime applicable in the Member State concerned" (case T-210/02 RENV, point 49) is the first step to qualify a tax measure as selective. The 'normal' tax rate is "the rate in force on the geographical area constituting the reference framework" (case C-88/03, point 56).

The tax reference framework can consist of the corporation tax system (see e.g. joined cases C-78/08 to C-80/08) or of a specific or sectoral tax system (see e.g. case T-210/02 RENV; case C-169/08). It is noteworthy that in case T-210/02 RENV, the General Court also identified the "'normal' taxation principle" underlying the tax reference framework, which was, in that case, "the principle of the taxation of the commercial exploitation in the United Kingdom of a material that is taxable as an 'aggregate'" (points 53 and 55). In the Gibraltar tax case the ECJ has ruled that "the tax regime at issue" can also serve as the tax reference framework (joined cases C-106/09 P and C-107/09 P, point 95), in which case the tax reference framework and the tax measure being examined coincide.

It is important to note that the determination of a 'common' or 'normal' tax regime in a particular Member State does not require comparing the tax regimes applicable in other EU Member States. Gambling Compliance's European Online Gambling Study (2012) has shown that there are substantial differences between tax regimes applicable to games of chance in the EU. The tax differences between Member States are not relevant for determining the normal tax regime for state aid law purposes.

Step 2: assessing whether the tax measure at issue differentiates between comparable operators or products

In relation to the tax reference framework determined in step 1, it must be "assess[ed] and determine[d] whether any advantage granted by the tax measure at issue may be selective by demonstrating that the measure derogates from that common regime [i.e. the tax reference framework] inasmuch as it differentiates between economic operators who, in the light of the objective assigned to the tax system of the Member State concerned, are in a comparable factual and legal situation" (case T-210/02 RENV, point 49).

The use of the word 'derogate' does not imply, as the ECJ recently explained in the Gibraltar tax case, that "the classification of a tax system as 'selective' [is] conditional upon that system being designed in such a way that undertakings which might enjoy a selective advantage are, in general, liable to the same tax burden as other undertakings but benefit from derogating provisions, so that the selective advantage may be identified as being the difference between the normal tax burden and that borne by those former undertakings" (joined cases C-106/09 P and C-107/09 P, point 91). This interpretation of the selectivity criterion, which centres around the regulatory technique used of the tax measure, is at odds with the aforementioned effects-based approach in EU state aid law.

The demonstration of the derogatory character of the tax measure under scrutiny involves three sub-steps, explained hereunder.

First sub-step: determining the objective of the tax measure

In order to determine whether different situations are comparable the objective of the tax measure in question must be identified. In case T-210/02 RENV, the General Court explained that "the elements which characterise different situations, and hence their comparability, must in particular be determined and assessed in the light of the subject-matter and purpose of the act which makes the distinction in question, as well as the principles and objectives of the field to which that act relates" (point 68). Recent cases have identified and taken into account various objectives, such as for example "the protection of the environment" (case T-210/02 RENV; see also case C-169/08), the objective "to introduce a general system of taxation for all companies established in Gibraltar" (joined cases C-106/09 P and C-107/09 P, point 101), "the taxation of company profits" (joined cases C-78/08 to C-80/08), "ensuring compliance with the principle that judgment must be given within a reasonable time" (case C-169/08, point 42).

It should be emphasized that the identification of the objective, in this first sub-step, only serves the purpose of providing an analytical framework to establish the group of comparable economic operators (in sub-step 2). Since the concept of state aid is defined in relation to its effects and not to its objectives (see e.g. case C-487/06 P, point 85; see also above), the objective identified can in any case not impede the qualification of the tax measure as state aid.

The title of the first sub-step used in this article states that the objective of the tax measure must be determined. However, a close reading of the case law shows that in some cases the objective of the tax measure is determined and in other cases the objective of the tax reference framework. Contrast, for example, case C-279/08 P, where the ECJ held that "it is for the Commission to prove that [the measure in question] creates differences between undertakings which, with regard to the objective of the measure in question, are in a comparable factual and legal situation" (point 62), with the joined cases C‑78/08 to C‑80/08, where the ECJ indicated that it must be "assess[ed] and determine[d] whether any advantage granted by the tax measure at issue may be selective by demonstrating that the measure derogates from that common regime [i.e. the tax reference framework mentioned in step 1] inasmuch as it differentiates between economic operators who, in light of the objective assigned to the tax system of the Member State concerned, are in a comparable factual and legal situation" (joined cases C-78/08 to C-80/08, point 49). The tax measure at issue and the tax reference framework usually do not coincide and it is not excluded that both pursue different objectives: in such a case, it is unclear which objective should be taken into account.

The identification of the objective is of paramount importance to the outcome of the second and third sub-steps. Since the group of comparable economic operators must be determined in light of the objective of the tax measure under scrutiny, the broader the objective identified the larger the group of economic operators that will be found to be in a comparable situation (sub-step 2). Since it will be more likely to find a differential treatment in a large group of comparable economic operators, the identification of the objective in the first sub-step will ultimately also heavily influence the outcome of the third sub-step. The Gibraltar tax case (joined cases C-106/09 P and C-107/09 P) may serve as an example: since the ECJ identified a very broad objective (namely the introduction of a general system of taxation for all companies established in Gibraltar), it could – implicitly – consider that offshore companies were comparable with the companies having payrolls and business premises in Gibraltar (sub-step 2) and conclude that the differential treatment of both groups of companies was selective (sub-step 3).

Most cases in which an objective has been explicitly identified seem to identify only one objective: the introduction of a general system of taxation for all companies established in Gibraltar (joined cases C-106/09 P and C-107/09 P, point 101), the taxation of company profits (joined cases C-78/08 to C-80/08), environmental protection (case T-210/02 RENV). However, a particular tax measure can pursue several objectives. All taxes arguably serve the objective to raise revenues and financial means for government budgets. In addition, taxes may also pursue other objectives than the objective to generate financial means for the state, such as for example environmental (e.g. in the British aggregates case) or social objectives. It can be assumed that in the cases where a non-revenue generating objective has been identified, the EU Courts reasoned that the non-revenue generating (or regulatory) objective pursued by the tax measure at issue took precedence over the revenue generating objective: the tax measure was used as a means to achieve a non-revenue generating or regulatory objective. This raises the question how a tax measure should be assessed when it is pursuing both a revenue generating and a non-revenue generating objective, with both objectives carrying the same weight. The answer to this question cannot be directly inferred from case law. However, gaming taxes might exactly bring up this question: a national gaming tax will raise state resources, but the tax legislator can pursue, at the same time and to the same extent, other objectives, such as for example the steering of the demand for games of chance from the illegal market to a regulated market. An example can be found in the Danish state aid decision, where the Danish authorities argued that it was "the result of a balancing exercise aiming to ensure, on the one hand, that the law is upheld, while on the other hand, maximising the tax revenue and maintaining consumption of gambling at a moderate level" (Danish state aid decision, point 38).

Second sub-step: determining the group of economic operators in a comparable factual and legal situation

Once the objective of the tax measure has been established, it must be assessed which economic operators are in a comparable factual and legal situation, in light of that objective.

The British aggregates case can serve as an example of a case where the taxed and untaxed products (the tax at hand in that case was a specific tax regime applicable to the 'aggregates sector') have been found to be in a comparable situation. In this case, the General Court found that the untaxed aggregates were equally, if not more, harmful to the environment than the taxed aggregates (case T-210/02 RENV, point 73) and, considering the environmental objective of the aggregates tax, that the taxed and untaxed aggregates were comparable. In joined cases C-78/08 to C-80/08, on the contrary, no comparability was found, in light of corporation tax regime's objective to tax company profits, between genuine cooperative societies and commercial companies (points 55-61).

It is worth emphasizing that the EU courts have also used a competition or substitutability test as a proxy. The clearest example can be found in the British aggregates case, where the General Court found that "there is at least a potential link in terms of competition or of substitutability between the various aggregates as regards their use or commercial exploitation" (case T-210/02 RENV, point 72).

Third sub-step: examining whether the tax regime differentiates between the economic operators who are in a comparable factual and legal situation

Once it has been established which economic operators or goods are in a comparable factual and legal situation, it must be examined whether the tax measure at issue differentiates between those operators or goods. If this question is answered in the positive, the tax measure will give rise to a selective advantage (unless, as will be shown in step 3, the selective nature of the tax measure can be justified). In case the question receives a negative answer, there is no tax differentiation and, consequently, no selective advantage: the tax measure will therefore not amount to state aid.

When particular operators or products are found to be in a comparable situation, the fact that certain operators or products are exempted from the tax at issue will lead to a tax differentiation and, therefore, to tax selectivity (case T-210/02 RENV, point 75). However, a different tax burden for comparable operators does not necessarily justify the conclusion that the tax measure is selective. The ECJ has recognized that the application of a general gaming tax measure can lead to different tax burdens. In the Gibraltar tax case, the ECJ has explained that the effects of tax measures, applicable without distinction to all economic operators, which are merely the consequence of 'random events' are not selective advantages (joined cases C-106/09 P and C-107/09 P, points 83 and 103).

Step 3: assessing whether the tax measure under scrutiny is justified by the nature of general logic of the system of which it is a part

Even when a tax measure is found to be selective (under step 2), the tax measure can escape qualification as state aid if its selective nature is justified by the nature or structure of the tax system of which it is part. Such a justification supposes that the Member State concerned shows "that that measure results directly from the basic or guiding principles of its tax system" (joined cases C-78/08 to C-80/08, point 69). This assessment requires to distinguish "on the one hand, the objectives attributed to a particular tax regime and which are extrinsic to it and, on the other, the mechanisms inherent in the tax system itself which are necessary for the achievement of such objectives, since, as basic or guiding principles of the tax system in question, those objectives and mechanisms could support such justification, which it is for the Member State to demonstrate" (case T-210/02 RENV, point 84).

In its notice on the application of the State aid rules to measures relating to direct business taxation (OJ (1998) C 384/3), the Commission states that selective tax measures do not constitute state aid when it concerns "measures whose economic rationale makes them necessary to the functioning and effectiveness of the tax system" (point 23). In addition, the Commission indicates as possible justification grounds the redistributive purpose of the tax, profitability or the need to take into account specific accounting requirements. The ECJ has cited as potential justification grounds the purpose of redistribution and the criterion of ability to pay (case C-88/03, point 82). Objectives unrelated or external to the tax measure, such as environmental, social or regional development objectives, cannot be taken into account to justify its selective nature.

There are only few cases where the EU Courts concluded that the selective nature of a tax measure was justified. An example can be found in case C-353/95 P (Tiercé Ladbroke SA), where the ECJ had to consider whether French tax legislation applicable to bets on horse races constituted state aid because bets on French races were treated differently from bets on Belgian races. The ECJ considered that "the application of Belgian rates to bets placed in France is justified for reasons relating to the logic of the totalizator betting system" (point 35). The ECJ described the logic of the totalizator betting system in the following words: "In totalizator betting the stakes constitute a common pool which, after various levies, is distributed amongst the winners equally, whatever the origin of the bets. The share of the stakes paid out to the winners thus cannot vary according to the State in which the bets were placed. The proper functioning of such a system can therefore be ensured only if the rate at which any levies which may be imposed on the bets laid on a horse-race is that of the State in which the race is run" (point 34).

B. Cases of selectivity: material and geographical selectivity of gaming taxes

When does a gaming tax, for the purposes of applying Article 107 (1) TFEU, favour certain undertakings or the production of certain goods? Under point 1, the issue of 'material selectivity' of gaming taxes is considered, by summarizing and commenting on the Commission's Danish state aid decision, using the analytical framework set out above (under A, 'the requirement of a selective advantage'). In point 2, we will deal with the separate matter whether regional gaming taxes can or should be considered to be selective ('geographical selectivity').

1. Material selectivity of gaming taxes

A gaming tax is materially selective if it favours "certain undertakings or the production of certain goods" within the meaning of Article 107 (1) TFEU. The issue of material selectivity has been considered in the Commission's Danish state aid decision, currently under appeal before the General Court. Also other jurisdictions may have to address the potential material selectivity of their gaming tax regimes. A prime and very recent example are the Netherlands, where the draft Act for remote gambling, accompanied by an explanatory memorandum ("Memorie van Toelichting"), has been published on May 22, 2013. The Dutch draft Act contains the proposal to levy a tax of 20% on the GGR for legal remote gambling activities. The tax rate applicable to land-based gambling activities is 29%. The explanatory memorandum spells out that the Dutch government considers such an online tax regime appropriate to attain the objectives pursued, which are to generate a reasonable revenue of gaming taxes and, at the same time, a steering of the demand from the illegal market to a regulated one ('canalisation') (p. 35 of the explanatory memorandum). Also the Belgian legislator has introduced different tax rates for offering online and land-based gambling.

The question of materially selective gaming taxes does not only come to the surface in relation to differences between the tax regimes applicable to online and land-based gambling activities, but also in relation to tax differences applicable to different categories of land-based (or online) games of chance. Consider, for example, the various tax rates applicable to land-based games of chance in the Flemish region (one of the three federated entities in Belgium): a tax of 15% on the gross amount of the sums involved for all bets on horse-races, dog races and sporting events; different tax rates apply to casino games (5,3% for baccarat, 3% for roulette, 33% for all other casino games for gaming proceeds up to 865,000 euro and 44% for the gaming proceeds exceeding 865,000 euro) and to gaming machines (going from 20% to 50%); permitted lotteries are exempted.

In the Danish state aid decision, the Commission concluded that the Danish tax regime at issue – on the basis of which the tax rate applicable to online games of chance was lower than the one applicable to land-based games of chance – was materially selective and, since the other conditions for applying Article 107 (1) TFEU were equally satisfied, constituted state aid. The part of the Danish state aid decision in which the material selectivity of the tax regime at issue was assessed will be analyzed and commented upon below.

Step 1: establishing a tax reference framework

In the Danish state aid decision, the Commission used as tax reference framework "the taxation system for Danish gambling activities", i.e. the tax system applicable to "all gambling activities provided or arranged in Denmark" (point 83 of the Danish state aid decision). In addition, the Commission noted that the Gaming Duties Act "aims at regulating the payment of duties of all gambling activities provided or arranged in Denmark, be it online or through land-based activities" (idem). By doing so, the Commission seems to have identified, in a similar way as the General Court in case T-210/02 RENV, a 'normal taxation principle'. The 'normal taxation principle' singled out in the Danish state aid decision is the provision of gambling activities in Denmark, be it online or through land-based activities.

Step 2: assessing whether the tax measure at issue derogates from the reference framework

Sub-step 1: objective(s) pursued by the Danish tax measure

It was highlighted above that the case law is unclear on the question whether the objective of the tax measure at issue or the objective of the tax reference framework must be considered in order to determine the group of comparable operators. The Danish state aid decision explains that the comparability must be examined "in the light of the objective pursued by the scheme in question" (point 81 of the Danish state aid decision). This statement does not elucidate whether the objective of the tax measure at issue or the objective of the tax reference framework should be examined.

Moreover, when the Commission examines the 'departure of the general tax system' (points 84-94 of the Danish state aid decision) no objective is explicitly identified. Only when the 'system of reference' (i.e. the tax reference framework) is defined, the Commission highlights that the Danish Gaming Duties Act "aims at regulating the payment of duties of all gambling activities provided or arranged in Denmark, be it online or through land-based activities" (point 83 of the Danish state aid decision). The objective that seems to be taken into account by the Commission is therefore the objective pursued by the tax reference framework.

It appears from the Danish state aid decision that Denmark has put forward several arguments regarding the objectives of both the differential tax treatment and the Danish Gaming Duties Act. It should be underlined that the Danish Gaming Duties Act, which contains the differential tax treatment between land-based and online casino operators, is part of a set of legislative acts aiming to liberalise the gambling sector in Denmark, which includes the Danish Gaming Act.

The "overall objective" of the Danish Gaming Act (not the Danish Gaming Duties Act) is fourfold: (i) to keep the consumption of gambling at a moderate level; (ii) to protect young persons and other vulnerable persons against exploitation or against developing addiction to gambling; (iii) to protect gamblers by ensuring that gambling is supplied in a reasonable, reliable and transparent manner; and (iv) to ensure public order and prevent gaming being used for criminal purposes (point 8 of the Danish state aid decision).

With regard to the objectives of the Gaming Duties Act (the tax reference framework), Denmark made the following comments:

• the objectives pursued "are those listed in the Gaming Act" (point 69 of the Danish state aid decision; see also point 34). This argument means, in fact, that the Gaming Duties Act and the Gaming Act pursue the same four regulatory objectives.
• the "general purpose of the new Act would remain unchanged, that is to generate income on gambling, as any similar system for collecting revenue to finance the public budget" (point 69 of the Danish state aid decision).
• its aim is not to attract foreign gambling providers (point 69 of the Danish state aid decision) or to preserve the international competitiveness of the Danish gaming industry (point 34 of the Danish state aid decision).

With regard to the differential tax treatment itself, the Danish authorities made the following claims:

• "a uniform tax level for online and land-based gambling activities would undermine the policy objectives pursued in this field by the legislator" (point 35 of the Danish state aid decision; see also point 40). In other words, like the Gaming Duties Act itself, the differential tax treatment is a means to further the four policy objectives pursued by the Gaming Act.
• it is "the result of a balancing exercise aiming to ensure, on the one hand, that the law is upheld, while on the other hand, maximising the tax revenue and maintaining consumption of gambling at a moderate level" (point 38 of the Danish state aid decision).
• the tax system on remote gambling "is designed in such a way so as to ensure that the highest revenue would be collected" and "the lower tax rate for online gambling would reflect the need for balancing the four objectives set out in the notified Act [i.e., the Gaming Duties Act] with the need to maximise tax revenues" (point 71 of the Danish state aid decision).

It follows that Denmark invoked several objectives for the tax measure under scrutiny: one of these objectives is a revenue-generating objective (maximising the tax revenue), while the other ones are regulatory or non-revenue generating objectives, which are, in essence, the four regulatory objectives of the Danish Gaming Act.

When the Commission examined the comparability of land-based and online casino operators, the multiple aims invoked by the Danish authorities were not taken into account. The Commission merely noted that the Danish Gaming Duties Act "aims at regulating the payment of duties of all gambling activities provided or arranged in Denmark, be it online or through land-based activities" (point 83). No mention was made, at this stage of the decision, of the other (regulatory) objectives put forward by Denmark.

Sub-step 2: determining which economic operators are in a comparable factual and legal situation, in light of the pursued objective

It was argued that the Commission, in sub-step 1, identified only one objective of the tax scheme in question, namely the payment of duties of all gambling activities provided or arranged in Denmark, be it online or through land-based activities. In a second sub-step, the Commission had to assess whether land-based and online casino operators are comparable operators, in light of that objective. Since taxing the activities of both categories of operators enables to contribute to the objective "to generate income on gambling, as any similar system for collecting revenue to finance the public budget" (see point 69 of the Danish state aid decision), it should have been relatively straightforward for the Commission to find that both land-based and online casino operators are in a comparable situation.

However, the Commission's analysis of the comparability of online and land-based casino operators is not centered around the revenue generating objective that has been identified. Instead, the Commission seems to have undertaken a very broad and general analysis of the comparability of online and land-based casino operators. The Commission found that "online and land-based casinos should be perceived as being legally and factually in a comparable situation" (point 94 of the Danish state aid decision) on the basis of the following reasons:

• the games offered by land-based and online gaming operators are equivalent. The Commission noted, in particular, that games offered by both online and land-based operators – including roulette, baccarat, punto banco, black jack, poker and gaming on gaming machines – form part of the same activity of gambling, regardless of their online or land-based settings (point 88 of the Danish state aid decision).
• from a technical point of view, online and land-based casinos appear to be comparable with regard to their technological platforms, formats and parameters (point 88 of the Danish state aid decision).
• online gambling is another distribution channel of similar type of gaming activities (point 89 of the Danish state aid decision).

Denmark had also put forward the argument that online and land-based gambling constitute two different types of activities that are legally and factually not comparable because of the socio-economic profiles of consumers, addiction risks and market evolution. The Commission has rejected these arguments because the studies Denmark relied upon contained contradictory findings. The Commission concluded that "online and land-based casinos should be perceived as being legally and factually in a comparable situation" (point 94 of the Danish state aid decision) and added that "[a]s both online and land-based gambling raise these risks, the notified measure addresses both online and land-based gambling" (idem).

These statements indicate that the Commission has made a general appraisal of the comparability of online and land-based casinos. The Commission's conclusion is based on an analysis of the games of chance offered by both types of casinos: the games of chance are 'equivalent', they 'form part of the same activity of gambling, regardless of their online or land-based settings', and they are 'comparable with regard to their technological platforms, formats and parameters'. The Commission also had regard to other criteria, such as the socio-economic profiles of consumers, addiction risks, or market evolution, but did not accept them. Such a general assessment was arguably unnecessary: as explained above, the question should not have been whether 'online and land-based casinos are comparable', but whether 'online and land-based casinos are comparable in the light of the revenue-generating objective identified.

A final remark is that the Commission has scrutinized, in essence, whether online and land-based casinos offer competitive or substitutable products. The test of comparability applied has been, in fact, one of substitutability or competitiveness. It was highlighted earlier that case law, most notably case T-210/02 RENV, has applied a substitutability or competitiveness test as a proxy for the comparability test.

Sub-step 3: examining whether the tax measure at issue differentiates between the comparable situations

Since the Commission reasoned that online and land-based gambling are comparable, the Commission could logically conclude that "a differential treatment in favour of online gambling operators, to the detriment of land-based casinos" was prima facie selective (point 94 of the Danish state aid decision).

Step 3: assessing whether the measure under scrutiny is justified by the nature of general logic of the system of which it is part

It appears that Denmark invoked two grounds to justify the prima facie selective nature of its gaming tax regime. The first ground is that the differentiated tax regime is "the only way to ensure efficiency of [the Danish] tax regime": according to the Danish authorities, a higher online tax rate would discourage online gambling operators from applying for a Danish license, while a lower tax rate for all gambling operators (both online as off-line) would be contrary to the overall objective of keeping gambling at a reasonable level (point 96 of the Danish state aid decision). As a second justification ground, Denmark argued that the financial capacity of the online gambling operators is lower than the one of the land-based casino operators (point 97 of the Danish state aid decision).

The Commission dismissed both arguments, since the Danish authorities did not submit sufficient evidence for their arguments. In addition, the Commission observed, concerning the first argument, that the objective of attracting foreign online gambling service providers in Denmark and complying with the Danish rules is "a public policy objective which is external to the logic of that tax system" (point 99 of the Danish state aid decision). As an additional reply to the second Danish argument, the Commission remarked that Denmark did not demonstrate that "the financial capacity to pay is a principle embedded in [the Danish] system of direct business taxation" (point 100 of the Danish state aid decision).

Conclusion of the Danish state aid decision concerning the presence of state aid

The Commission concluded that the Danish gaming tax regime was selective. Since the other conditions to apply Article 107 (1) TFEU were equally satisfied, the Commission has qualified that the measure of a lower tax rate for online gambling constitutes state aid for the providers of online gambling services established in Denmark (point 102 of the Danish state aid decision). However, the Commission considered subsequently that the tax regime was nevertheless compatible with the internal market (points 103-143of the Danish state aid decision).

2. Geographical selectivity: regional gaming taxes

Taxes cannot only be materially selective, but also geographically selective. 'Geographical selective' gaming taxes refer to all gaming taxes not set by the central government but by infra-state bodies, such as regions, districts, provinces. Examples of such regional gaming taxes can be found in several EU Member States. In Belgium, the Flemish, Walloon and Brussels Regions (i.e. federated entities) have the legislative power to set the tax rate applicable to online games of chance independently; in each of these regions the tax rate is currently set at 11% of the actual gross margin realized upon the betting or gambling activity. In Spain, it has recently been reported that the Madrid region is considering to reduce the tax rate for land-based casinos from 45% to 10%.

As discussed above, in order to analyze the selective nature of a gaming tax regime, it will be necessary to define a tax reference framework (see 'step 1' above). The 'normal' tax rate is "the rate in force on the geographical area constituting the reference framework" (case C-88/03, point 56). Regional tax regimes, including regional gaming taxes, raise the question whether they are, by their very nature, selective for the purposes of Article 107 TFEU and can, therefore, amount to state aid.

Tax reference framework for regional gaming taxes

The ECJ has clarified, for the first time in case C-88/03, that a reference framework must "not necessarily be defined within the limits of the Member State concerned, so that a measure conferring an advantage in only one part of the national territory is not selective on that ground alone for the purposes of [Article 107 (1) TFEU]" (Case C-88/03, point 57). EU state aid law recognizes that the reference framework does not necessarily have to correspond to the whole territory, but that the territory of the infra-state body can be the relevant reference framework:

Lower tax rates in a limited geographical area: three situations

The ECJ has indicated, also in case C-88/03, that there are three different situations in which measures can establish, in a limited geographical area, tax rates lower than the nationally applicable rates.

In the first situation, the central government unilaterally decides that the applicable national tax rate should be reduced within a defined geographic area. In this case, the tax reference framework should be the national tax regime. It follows that if the central government of a particular Member State decides to lower the tax rate for games of chance for all gaming operators established in a particular part of its territory, the tax measure will undoubtedly be selective for the purposes of Article 107 TFEU.

A second situation "corresponds to a model for distribution of tax competences in which all the local authorities at the same level (regions, districts or others) have the autonomous power to decide, within the limit of the powers conferred on them, the tax rate applicable in the territory within their competence". According to the ECJ, a measure taken by such a local authority is not selective "because it is impossible to determine a normal tax rate capable of constituting the reference framework".

Belgium can serve as an example of the second situation. The Flemish, Walloon and Brussels Region set independently the tax rate applicable to online games of chance. There is no 'national' tax rate applicable to online games of chance. The regional online gaming tax rates can therefore not be benchmarked against a national tax rate and, as a consequence, they are not – regionally – selective. It should be underlined that the fact that the regional tax measures are not regionally selective does not prevent them to be materially selective within the sense explained above.

A third situation concerns the situation where "a regional or local authority adopts, in the exercise of sufficiently autonomous powers in relation to the central power, a tax rate lower than the national rate and which is applicable only to undertakings present in the territory within its competence" (case C-88/03, point 65). In this case, the tax reference framework must not necessarily coincide with the national territory, but may be limited to the geographical area of the regional or local authority.

But when does a regional or local authority have "sufficiently autonomous powers" in relation to the central power? The ECJ has laid down a threefold autonomy test to assess such an autonomy: only when the regional or local authority is institutionally, procedurally and economically autonomous, the tax reference framework may be limited to the geographical area of the regional or local authority:

• Institutional autonomy: the regional or local authority must have, from a constitutional point of view, a political and administrative status separate from that of the central government.
• Procedural autonomy: the tax measure of the regional or local authority must have been adopted without the central government being able to intervene directly as regards its content.
• Economic autonomy: the financial consequences of a reduction of the national tax rate for undertakings in the region must not be offset by aid or subsidies from other regions or central government.

If one of the three autonomy conditions is not met, the regional or local authority must be deemed not to have been vested with sufficiently autonomous powers vis-à-vis the central government. As a consequence, the tax reference framework to assess whether the regional or local (gaming) tax is selective will be the Member State as a whole, and not the territory where the regional or local authority exercises its powers. The three autonomy conditions, which were initially laid down in case C-88/03, have received further clarification in subsequent cases, namely joined cases C-482/06 to C-434/06 (the 'Rioja cases') and joined cases T-211/04 and T-215/04 ('Gibraltar tax case')

Conclusion

The present article tries to clarify under which conditions a gaming tax can constitute state aid within the meaning of Article 107 (1) TFEU. While the notion of state aid requires that four conditions are satisfied, the main legal issue is the selectivity of the tax measure. Only a gaming tax favouring certain undertakings or the production of certain goods constitutes state aid. General gaming taxes escape state aid control. Therefore, in order to qualify a gaming tax as state aid, the selective nature of the gaming tax, both from a material and a geographical point of view, must be assessed.

When a gaming tax constitutes state aid, the Member State concerned is under an obligation to notify this tax to the Commission, who is exclusively competent to declare state aid compatible with the EU internal market. State aid granted without the Commission's prior approval is illegal.

A Member State may not have notified its gaming tax because, for example, it is convinced that its gaming tax is not selective but a general tax measure escaping state aid control, or because it reasoned that its selective gaming tax results directly from the basic or guiding principles of its tax system and is therefore justified. However, the Member State's judgment might be erroneous. This article has attempted to demonstrate that the assessment of a selective nature of a gaming tax can be a complicated exercise, especially considering the legal uncertainties surrounding the selectivity test. If a Member State has wrongly appraised the selectivity of its gaming tax regime, it is granting state aid and puts in particular the beneficiaries in an awkward situation. Procedurally, abeneficiary of a favourable gaming tax regime cannot interrogate the Commission whether it is benefiting of a gaming tax that qualifies as state aid. At the same time, the ECJ has clarified that "undertakings to which aid has been granted may not, in principle, entertain a legitimate expectation that the aid is lawful unless it has been granted in compliance with the procedure laid down in [Article 107 TFEU]. A diligent businessman should normally be able to determine whether that procedure has been followed" (case C-24/95, point 25).

Reprinted with permission from Gambling Compliance Ltd, original article available following this link.

Footnote

^{1 See the 'British aggregates case': judgment of the Court of First Instance in case T-210/02, set aside by the ECJ in case C-487/06 P and redecided by the General Court in case T-210/02 RENV; the 'Dutch NOx scheme case': judgment of the Court of First Instance in case T-233/04, set aside by the ECJ in case C-279/08 P; the 'Gibraltar tax case': judgment of the General Court in joined cases T-211/04 and T-215/04, set aside by the ECJ in joined cases C-106/09 P and C-107/09 P.}

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