IP/08/433

Brussels, 12 March 2008

State aid: Commission requests Italy to recover €123 million of unlawful fiscal aid from nine privatised banks

The European Commission has closed its in-depth investigation under EC Treaty state aid rules into the provision of Italy’s 2004 Finance Law that allowed former public-owned banks to release hidden capital gains matured during their privatisation by paying a nominal tax of 9% instead of the ordinary company tax of 37.25%. The investigation, opened in May 2007 (see IP/07/737), found that this tax scheme favoured a select group of Italian banks without objective justification under the tax system for company reorganisations in Italy. To redress the distortion of competition caused by the aid unlawfully granted, the Italian Government must recover the aid from its beneficiaries. On the basis of the circumstances of the case the Commission has limited the recovery to the difference between the tax actually paid and the tax the beneficiary banks would have had to pay, had they applied a general tax revaluation scheme provided for by the same Finance Law of 2004. The aid to recover is estimated to a total of €123 million among the nine beneficiaries.

Competition Commissioner Neelie Kroes said: "When Member States set favourable tax rules for a select number of undertakings, they must be careful not to alter the level playing field between competitors. Illegal aid given to privatised banks must be recovered and returned to taxpayers."

Under Law 218/1990 on the privatization of the Italian banking system, a major reorganization 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) provided that hidden gains resulting from these privatizations, that had remained frozen as capital reserves, could be released by paying a 9% substitute tax on such gains, in lieu of the ordinary company tax of 37.25%. This provided the banks concerned with an economic advantage, in particular by increasing their attractiveness and their economic value both for investors and corporate acquirers. Law 350/2003 also authorized the payment of the substitute tax in three instalments (50% in 2004, 25% in 2005 and 25% in 2006), without interest.

The Commission found that nine banking groups realigned the value of their assets to the underlying gains realized following the banking reorganisations, pursuant to the scheme. The global capital gains recognised amounted to more than €2 billion. The corresponding difference between the tax ordinarily payable and the tax actually paid, amounts to over €586 million.

The Commission concluded that the said difference provided an advantage in favour of these banks, which constitutes incompatible state aid. The Commission found that the tax scheme is not justified by the principles on tax neutrality relating to company reorganizations. Moreover, none of the exceptions invoked by Italy to gain state aid approval were applicable, as the tax scheme in review was evidently not aimed at promoting new business reorganizations but solely at favouring a select number of banks resulting from prior reorganizations.

Italy did not notify the scheme to the Commission before its implementation and the aid unlawfully granted must therefore be recovered from its beneficiaries. Based on the comments received from interested parties, the Commission decided, however, that the recovery order should be limited to the difference between the tax effectively paid and the tax the beneficiary banks would have paid had they applied a general tax revaluation scheme provided for by Article 2(25) of the same Finance Law of 2004. The Commission therefore demands to recover an estimated amount of €123 million from the nine beneficiaries.

The non-confidential version of the decision will be made available under the case number C 15/2007 in the State aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State aid Weekly e-News.