Update: The Spanish Tax Lease Scheme and The Return of State Aids
After a long investigation which began in 2006, the European Commission (“EC”) has announced that the Spanish tax scheme for the construction and acquisition of new vessels is incompatible in part with EU rules on state aid and that the aids granted between 2007 and 2011 should be refunded to the Spanish Treasury. The EC considers that the Spanish Ministry of Finance authorised transactions for the construction and the purchase of 273 vessels supported by unlawful state aids from 2002 to 2011.
According to the Guidelines on state aid for shipping, the Member States of the EU can help maritime shipping companies to remain competitive at international level, applying specific tax schemes which are limited by the competition rules of the Treaty of the European Union (“TEU”).
Beginning in the 1990s and with various changes throughout until 2011, the Spanish government enacted various pieces of legislation intended to make sure that the Spanish shipyards and shipping companies could compete with shipyards and shipping companies in other countries.
The efforts of the Spanish government focused on the construction of a tax system that would enable shipping companies to acquire vessels from Spanish shipyards at prices competitive with the prices offered by the shipbuilders in the Far East and in Turkey.
The so called Spanish Tax Lease (“STL”) was a combination of tax measures which provided two different tax benefits: an anticipated and accelerated depreciation of the vessel compared to the depreciation permitted by ordinary corporate rules, and a special Tonnage Tax which also entailed a tax exemption on the capital gain resulting from the sale of the vessel to the final buyer.
1. Anticipated and accelerated depreciation: this was based on a privileged regime in the Spanish Corporate Tax legislation, according to which companies could create a form of joint venture for tax purposes, incorporated under Spanish Law (“Economic Interest Group” or “EIG”) to invest in new vessels to be built by Spanish shipyards. The EIG was organised by a bank which offered shares to interested investors, even though the investors were not involved in shipping activities.
In the STL structure, the EIG was the initial beneficiary of the tax benefits. The accelerated depreciation (3-5 years) artificially increased depreciation costs in the first years of the project and led to a loss for the EIG. Since the EIG was tax transparent, the losses incurred by it were directly passed to its members, normally large Spanish taxpayers, reducing their tax base and consequently resulting in a tax saving for them.
Although the STL was organised by a bank in order to generate tax benefits for the members of the EIG, it transferred part of these benefits to the shipping companies in the form of a significant discount in the final price of the vessel.
With certain variations, essentially the process of the STL was as follows:
• A shipbuilding contract was entered into between the shipyard and the shipping company. The yard would then contact a bank in order to organize the STL structure and the EIG.
• The shipping company would accept to buy the vessel, not from the shipyard but from the EIG. The bank would then sign a replacement shipbuilding contract with the shipyard through a leasing company which, in turn, would lease the vessel and sell her to the EIG.
• Once the construction of the vessel was complete (3- 4 years), the shipping company and the EIG would enter into a bareboat charter including the Buyers’ option to purchase the vessel at the end of the charter period.
2. Tonnage Tax System and exemption of the capital gain:
When the cost of the vessel was fully depreciated (even before the construction had been concluded), the vessel changed from the normal Corporate Tax System to the Tonnage Tax System, resulting from the aggregate tonnage of the fleet operated by the company. Thus the EIG accumulated benefits from the STL because the capital gain under the accelerated depreciation was now under the Tonnage Tax and exempted from corporate tax until the execution of the Buyer’s option of purchase under the bareboat charter. In practice, the EIG achieved exemptions of the capital resulting from the hire under the bareboat charter and the sale of the vessel to the shipping company.
The benefits of the STL passed from the EIG to the final buyer of the vessel by way of a significant price reduction (20-30%).
European Commission’s investigation
Since 2006 the European Commission has been investigating the STL following the complaints filed by some shipbuilding associations within the EU and some individual shipyards that this scheme could possibly distort competition within the EU internal market.
The Spanish government alleged that the STL was aligned with the Guidelines on state aid for shipping and with similar tax schemes implemented in France and in The Netherlands. On 29 June 2011 the European Commission made public its decision C (2011) 4494 that the STL constitutes an unlawful form of state aid pursuant to Article 107 (1) TEU. The European Commission considered that rebates of 20-30% off the gross price of vessels might introduce severe distortion of the competition between shipping companies and that the tax scheme was used by beneficiaries which were not shipping companies, such as banks, investors, intermediaries etc.
New Spanish Tax Lease Scheme
In 2011 the Spanish government implemented a new Spanish Tax Lease scheme with a similar structure to the STL but limiting the accumulation of tax benefits by the EIG. According to this new scheme, the EIG would benefit from the accelerated depreciation of the vessel but not from the combined benefits of the Tonnage Tax System. In 2012 the EC confirmed that such new scheme is compliant with EU competition rules.
Recovery of the Tax Benefits
After considering the allegations filed by the Spanish government, in July 2013 the EC confirmed its initial conclusions and requested that the tax benefits for the construction of vessels granted by Spain from 2007 to 2011 should be returned by the companies which obtained them, excluding the shipping companies and the shipyards. The EC has also announced that the decision about when, how and in what amount the aid will be refunded is a matter for the Spanish government.
The parties involved in the shipping sector estimate the amount of the tax benefits during the relevant period amount to approximately two billion euro. Some of the questions arising now are: a) who has to return the benefits since the scheme was used principally by the arranging banks’ investors and b) how will the Spanish government calculate and claim them?