In a judgment of 8th September 2011 the European Court of Justice recognised the distinctive nature of co-operatives and their difference from other businesses – see Joined Cases C-78/08 to C-80/08 Ministero dell’Economia e delle Finanze v Paint Graphos Sarl
In this post I’ll give an outline of the case and the text of the relevant part of the judgment. In the next post I’ll discuss the implications of the case.
The case concerned the famous tax concessions available in Italy for co-operatives but dealt with them as they stood between 1984 and 1993. Those tax breaks included exemption from local income tax for agricultural and small-scale fishery co-ops and workers’ and producers’ co-ops; reductions in corporation tax for co-ops and an exemption for worker’s co-ops.
The benefits depended on co-ops having full mutuality with undistributable reserves locked in and impossible to distribute to members either during the co-op’s life or on its dissolution.
The disputes in the case involved allegations by the tax authorities that the conditions requiring mutuality had been breached by these particular co-ops so that no tax exemptions should be allowed.
The cases had been within the Italian national court system for up to 18 years. They reached the European Court of Justice by a reference from the highest Italian court, the Corte suprema di cassazione. The reference by the Italian court was under Article 234 of the EC Treaty on the question of whether the tax concessions for co-ops under Italian Law were compatible with EU Law or amounted to unlawful state aids from the Italian Government contrary to Articles 87 and 88 of the EC Treaty.
As article 234 EC provides, the European Court of Justice gave an opinion on EU Law to help the national court to decide the case.
The European Court’s decision focused on the 3 conditions that all have to be satisfied before a national tax break or other state measure amounts to a state aid:
- Is it financed by state resources?
- Does it affect trade between member states and distort competition?
- Is it “selective”?
Unsurprisingly, the court found that a tax break is financed by the state – see paragraphs 44 to 47.
The test about the effect on trade and distortion of competition is easy to pass. There is no need for the business in question to be involved in international trade and it is enough to show that the aid could affect trade and competition. It need not actually do so. So the court found that these tax breaks passed that test – see paragraphs 77 to 82.
That left the issue of “selectivity”. The court’s case law lays down that, in the case of a tax measure, it has to be compared with the country’s “normal” or “common” tax regime. This is done to decide whether the measure in question discriminates between economic operators who are actually in a comparable factual and legal situation given the objective of the national tax system. Here the use of net profit to assess corporation tax applied to the co-ops and to other firms but the co-ops had the benefit of exemptions not available to other firms because of their legal form. So the question was whether the co-ops were in “a comparable factual and legal situation” to the other firms.
The Court ruled that in principle they were not in a comparable situation and so the tax exemptions could be justified. This was because they operated for the mutual benefit of their members who are users, suppliers, or employees who benefit in proportion to their transactions with the co-op. In addition, the co-ops’ limited access to equity markets and the limited return offered on share and loan capital make it harder for them to raise capital. The lower profit margin that flows from those characteristics makes their position not comparable with that of commercial companies – ECJ judgment paras 55-61 (below).
However, societies which do not “truly pursue an objective based on mutuality” in accordance with the EU Commission Recommendation on the promotion of cooperative societies in Europe of 23rd February 2004 COM (2004) 18 final would be treated differently and might be regarded as being comparable to commercial companies so that any tax benefit could amount to a state aid – ECJ judgment para 62 (below).
Text of Relevant Paragraphs of the Judgment:
“55 Cooperative societies, the form taken by the legal entities at issue in the main proceedings, conform to particular operating principles which clearly distinguish them from other economic operators. Both the European Union legislature, in adopting Regulation No 1435/2003, and the Commission, in its Communication on the promotion of cooperative societies in Europe, have highlighted those particular characteristics.
56 As stated in particular at recital 8 in the preamble to Regulation No 1435/2003, those characteristics essentially find expression in the principle of the primacy of the individual, which is reflected in the specific rules on membership, resignation and expulsion. Moreover, recital 10 in the preamble to that regulation states that net assets and reserves should be distributed on winding-up to another cooperative entity pursuing similar general interest purposes.
57 Cooperative societies are not managed in the interests of outside investors. According to recitals 8 and 10 in the preamble to Regulation No 1435/2003 and section 1.1 of the Communication on the promotion of cooperative societies in Europe, control of cooperatives should be vested equally in members, as reflected in the ‘one man, one vote’ rule. Reserves and assets are therefore commonly held, non-distributable and must be dedicated to the common interests of members.
58 As regards the operation of cooperative societies, in the light of the primacy of the individual, their activities – as stated in particular at recital 10 in the preamble to Regulation No 1435/2003 and section 1.1 of the Communication on the promotion of cooperative societies in Europe – should be conducted for the mutual benefit of the members, who are at the same time users, customers or suppliers, so that each member benefits from the cooperative’s activities in accordance with his participation in the cooperative and his transactions with it.
59 Moreover, as stated at section 2.2.3 of that communication, cooperative societies have no or limited access to equity markets and are therefore dependent for their development on their own capital or credit financing. That is due to the fact that shares in cooperative societies are not listed on the stock exchange and, therefore, not widely available for purchase. Moreover, as is also made clear by recital 10 in the preamble to Regulation No 1435/2003, there is limited interest on loan and share capital, which makes investment in a cooperative society less advantageous.
60 As a consequence, the profit margin of this particular kind of company is considerably lower than that of capital companies, which are better able to adapt to market requirements.
61 In the light of those special characteristics peculiar to cooperative societies, it must therefore be held that producers’ and workers’ cooperative societies such as those at issue in the main proceedings cannot, in principle, be regarded as being in a comparable factual and legal situation to that of commercial companies – provided, however, that they act in the economic interest of their members and their relations with members are not purely commercial but personal and individual, the members being actively involved in the running of the business and entitled to equitable distribution of the results of economic performance.
62 Producers’ and workers’ cooperative societies with characteristics other than those normally associated with that type of society would not truly pursue an objective based on mutuality and would therefore have to be distinguished from the model described in the Commission’s Communication on the promotion of cooperative societies in Europe. “
© Ian Snaith 2012 This work is licensed under the Creative Commons Attribution-NonCommercial-Noderivs 2.0 England and Wales Licence. To view a copy of this licence visit http://creativecommons.org/licenses/by-nc-nd/2.0/uk/ or send a letter to Creative Commons, 559 Nathan Abbott Way, Stanford, California 94305, USA
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