Brussels, 31st May 2007
State aid: Commission opens formal investigation into Italy's tax incentive to recognise hidden gains of privatised banks
The European Commission has opened under EC Treaty state aid rules a formal investigation into the provision of Italy’s 2004 Finance Law that allows former state-owned banks to release hidden capital gained during their corporate restructuring in the 1990s by paying a nominal tax of 9% in lieu of the ordinary company tax of 37.25%. The amount of gains recognised totals over €2 billion among the nine banks which decided to use the system. The difference between the tax ordinarily payable and the tax actually paid amounts to over €586 million. The Commission is concerned that the release of the gains may unduly affect the ongoing consolidation process of bank conglomerates in the EU, without contributing to economic development to any significant extent. The investigation will allow interested parties to comment on the measures under scrutiny. It does not prejudge the Commission’s final decision.
The Commission’s probe
Following a detailed fact-finding phase, the Commission calculated that the difference between the ordinary company tax and the tax actually paid by the banks under scrutiny amounted to over €586 million. This could have a detrimental effect on competition in the current context of financial services markets undergoing consolidation in Europe.
The scheme has enabled certain Italian banks to eliminate their tax liabilities resulting from hidden capital gains at a tax cost much lower than the ordinary company tax. This may give them an economic advantage, in particular by increasing their attractiveness and their economic value both for investors and corporate acquirers.
The Commission believes such an advantage might constitute state aid to certain banks to recognise their hidden capital gains and that such aid might be incompatible with the Single Market. The opening of the formal investigation procedure will enable the Commission to deepen its assessment of the measure and to determine the appropriate amount of tax advantage with regard to its contribution to common EU objectives.
Italy did not notify the scheme to the Commission before its implementation. Should the investigation find that the scheme constitutes incompatible state aid, Italy would have to recover the aid illegally granted. By means of this investigation, the Commission also invites comments as to whether a potential recovery order could be limited to the difference between the advantage received and the tax the beneficiary banks would have paid had they applied a general tax revaluation scheme provided for by the same Finance Law of 2004.
The tax scheme
Under Law 218/1990 on the privatisation of the Italian banking system, a major reorganisation of formerly state-owned banks took place in Italy in the 1990s. Article 2(26) of Law 350/2003 (Italy’s Finance Law for 2004) provides that hidden gains resulting from these privatisations, that had remained frozen as capital reserves, could be released provided that the 9% substitute tax on such gains was paid, in lieu of the ordinary company tax of 37.25%. Law 350/2003 also authorised the payment of the substitute tax in three instalments (50% in 2004, 25% in 2005 and 25% in 2006), without interest.
According to the information provided by Italy, several banking groups realigned the value of their assets to the underlying gains realised following the banking restructuring, pursuant to the scheme. The global capital gains recognised amounted to more than € 2 billion.