One of the key issues for shipowners, aircraft owners or rail companies is to find the relevant financial resources to finance the acquisition of the assets used for their business operations at the cheapest price available. This has become even more problematic after the financial crisis suffered by the relevant players following the Lehman Brothers bankruptcy.

While secured lending was the most traditional way of raising finance, asset finance solutions through leasing and hire purchase agreements have been designed specifically to help businesses overcome the challenges of raising the necessary capital to purchase new assets. This provides a more targeted option than securing an overdraft or bank loan, and allows companies to spread their payments over a longer time frame to ease the cash-flow impact.

Some limited jurisdictions within the European Union offer tax benefits and tax allowances, which makes lease finance structures an even more interesting way of raising finance. In a context where the financed asset is a movable asset, and where companies are less reluctant to register their asset or incorporate the asset-owning company in the most economically advantageous jurisdiction, studying which jurisdiction offers an advantageous tax lease-based structure is of interest to many potential borrowers.

In a typical tax lease structure, the bank will incorporate a special purpose vehicle (the owner), which will acquire the asset to be financed. The owner will then lease the asset to the client of the bank, the company operating the asset (the lessee). The payment of the rentals due under the lease by the lessee will be used by the owner to pay all the sums due under the loan agreements it will enter into to finance the acquisition of the asset. Payment of rental under a finance lease may be distinguished from rental under an operating lease on the basis that, rather than paying exclusively for the use of the asset, the rental paid will be calculated so that, over the term of the lease, the lessee will reimburse the owner for its acquisition and financing costs for the asset. The specificity of the tax lease in comparison with a simple finance lease transaction is that the owner will pass on to the lessee, through the calculation of rentals and termination sums due under the lease by the lessee, all or part of the benefit to the owner of any capital allowances or any other tax benefits that it is able to claim in respect of its cost of acquiring the asset under the applicable tax laws.

Several Member States of the European Union have introduced such tax schemes in their legislation. For example, the French market has developed a tax lease structure that enables French banks to provide to their customers a cost saving of 5–10 per cent compared to a traditional loan-based financing. This type of financing does not rely on a structure provided as such by the French Tax Code, but is based on a combination of several features of French tax law, namely: (1) tax consolidation enabling the owner to transfer to its group any loss triggered by the owner for the group to pay less tax; (2) depreciation of the asset enabling the owner to benefit from an amortisation of the asset that will generate a tax-deductible loss during the first phase of the financing; (3) the advantageous tax treatment of the sale of the shares in the owner to the lessee, which is an indirect way for the lessee to become at some point the beneficial owner of the asset; and (4) in shipping finance transactions, the election of the advantageous tax tonnage scheme by the lessee once it acquires the shares in the owner.

In Italy, the 2008 Financial Act (Law No. 244 of 24 December 2007) also introduced a tax lease scheme to encourage certain financing transactions for the building of ships that require a crew of at least six persons.

The question arises as to whether such tax lease financing schemes could constitute indirect state aid providing some European jurisdictions with an unfair advantage in comparison with others, which would be prohibited by European state aid legislation.

While the Commission has no direct authority over national tax systems, it is indeed competent to investigate whether certain fiscal regimes, including in the form of tax rulings, constitute state aid under Article 107(1) of the Treaty on the Functioning of the European Union, and for this reason should be prohibited. This may be the case when a fiscal regime favours the recipient of the tax benefit with respect to its competitors and thus distorts competition on the market.

Two judgments of the European Court of Justice on 14 April 2016 and 28 July 2018 relating to the Spanish Tax Lease System (STLS) provide a useful indication in this respect.

By way of reminder, what can be referred to as the STLS saga began in May 2006 when the Commission started receiving complaints from several shipyards. Those complaints essentially argued that the STLS allowed maritime shipping companies to benefit from a 20–30 per cent price reduction when purchasing ships constructed by Spanish shipyards, to the detriment of the shipyards of other Member States.

The STLS is notably used in the context of ship purchasing where income tax discounts are granted to operators that invested in an economic interest grouping (EIG) for the purpose of acquiring newly built ships from a shipyard through leasing contracts with a view to later selling the ships to a shipping company; the latter benefiting in turn from a considerable price reduction for the ship purchasing. These tax discounts notably stem from the Spanish tax rules that enable an accelerated depreciation, over three to four years, of payments made under a leasing contract; and an early depreciation to be brought forward so that it starts before the asset becomes operational; that is, as soon as construction begins.

Hence, accelerated and early depreciation increases the costs of the EIG and creates losses for it, which the investors can deduct from their tax bases.

Following the opening of a state aid investigation into the STLS in June 2011 – and perhaps sensing the risk that STLS breaches state aid law – the Kingdom of Spain notified the Commission that it had introduced new legislation on early depreciation. This new legislation introduced amendments clarifying, in particular, that early depreciation was not being subject to prior authorisation and was available for all types of assets.

Before even adopting any position on the former regime, the Commission declared this amended new regime compatible with state aid rules on 20 November 2012 (the Decision).

Key to the Commission's assessment was that this new early depreciation regime did not entail advantages accruing exclusively to certain undertakings or to certain sectors of activity. As a reminder, tax measures can amount to state aid if they are selective (i.e., provided that the criteria applying to the derogatory tax burden must 'be such as to characterise the recipient undertakings, by virtue of properties which are specific to them, as a privileged category, thus permitting such a regime to be described as favouring 'certain' undertakings or the production of 'certain' goods').2

However, the Commission found that the acquisition of assets financed through financial leasing contracts is generally accessible to companies of all sectors and sizes. In addition, leasing contracts and early depreciation can be used with respect to assets built in (originating from) Member States other than Spain. The General Court confirmed this analysis on the following grounds: the measure applied to all undertakings that are subject to income tax in Spain; any kind of asset acquired by any kind of company active in any sector of the economy can be the subject of a leasing contract; and if the measure required certain conditions, as regards the asset being custom-built and as regards the construction period and pre-financing, these are justified because they offset the fact that a lessee has to bear the financial cost of a significant part of the asset before it actually becomes operational.

This assessment was confirmed on 14 April 2016 by the European Court of Justice.

On 25 July 2018, the European Court of Justice subsequently found by contrast that the former STLS scheme did constitute state aid.3 Interestingly, the General Court had previously concluded otherwise on two grounds. The first was that, because the EIGs are tax transparent, only the investors could be regarded as beneficiaries of the advantages arising from the tax measures at issue and it was therefore by reference to the investors alone that the condition relating to selectivity had to be examined. The second was, in this respect, that the advantages granted to investors were not selective because the advantages arising from the STLS are available to any undertaking

The European Court of Justice overturned both findings. It found that the former STLS could also constitute state aid in favour of the EIGs, as those perform an 'economic activity' (the acquisition of vessels through leasing contracts) and, in this context, apply to the tax authority for the benefit of early depreciation of leased assets, which they are granted in the first place. The fact that they pass on all benefits to investors is irrelevant for the classification of a measure as 'state aid'. The General Court therefore erred in law in failing to examine whether the former STLS conferred on the tax authority a discretionary power such as to favour, de jure or de facto, the activities carried on by the EIGs involved in the STLS. In relation to investors, the European Court of Justice found that the mere fact that the advantages arising from the STLS are available to any undertaking does not mean they cannot be selective. According to established case law, with regard to a national measure conferring a tax advantage of general application, the condition relating to selectivity is satisfied where the Commission is able to demonstrate that that measure is a derogation from the ordinary or 'normal' tax system applicable in the Member State concerned, thereby introducing, through its actual effects, differences in the treatment of operators, although the operators who qualify for the tax advantage and those who do not are, in the light of the objective pursued by that Member State's tax system, in a comparable factual and legal situation. The General Court therefore failed to assess whether the Commission had established that the tax measures, by their practical effects, introduced differentiated treatment between operators in a comparable factual and legal situation. The European Court of Justice referred the case back to the General Court on those points and the General Court's judgment is pending.

The two judgments indicate that the compatibility of tax lease schemes in the European Union will greatly depend on whether they are selective or not in their application. The fact that the advantages they create are in principle available to any operator is irrelevant in that respect.


1 Christine Ezcutari is a partner and Yann Anselin is a senior associate at Norton Rose Fulbright LLP.

2 Judgment in Netherlands Maritime Technology Association v. Commission, T-140/13, ECLI:EU:T:2014:1029, Paragraph 99.

3 Judgment in Commission v. Spain and Others, ECLI:EU:C:2018:591.