Brussels orders Spain to recover tax breaks granted to shipbuilding sector

The European Commission on Wednesday ordered Spain to recover tax benefits granted to financial intermediaries in the construction of ships in the period 2007-2011 after deeming the arrangement to be in breach of European Union competition rules.

The ruling is less onerous than it might have been on the sector, given that EC vice president and competition commissioner, Spaniard Joaquín Almunia, at one point spoke of Spain having to recover such illegal aid from 2005.

The starting point of 2007 coincides with a previous EC ruling in April of that year against a so-called French tax lease scheme that was similar to the one currently in place in Spain. That system saw financial intermediaries finance the building of vessels for maritime transport companies by leasing the ship while it is being built in exchange for tax breaks.

Almunia made it clear that the tax would only be recovered from the financial intermediaries and not from the shipbuilders themselves or the maritime transport firms that placed orders for their construction. Almunia also noted that a tax scheme was approved by the Commission in November 2012, of which the shipbuilding industry in Spain can avail itself.

Almunia had come under pressure from the Spanish government from June 2011 when it launched an investigation into the Spanish tax-lease scheme in response to a complaint by shipbuilders in other EU countries. Brussels’ probe also sparked protests by shipbuilding workers.

Spain can appeal the Commission’s decision with the European courts of justice.

The EU commissioner said it would be up to the Spanish government to determine the amounts to be recovered. According to sources in the Spanish sector, the amount of tax relief granted up to 2011 amounts to some 2.8 billion euros. Other sources said that Almunia’s ruling that such aid be returned only from 2007 would reduce that figure by some 20 percent.

Despite the concessions made by Almunia, the Spanish shipbuilding sector remained unhappy with the commissioner’s ruling. “The maritime sector considers the new proposal of the European Commission on the Spanish tax lease scheme absolutely insufficient,” Pymar, the association that groups together small- and medium-sized shipbuilders, said in a statement.

The association said that the end result of the ruling would be the disappearance of shipyards in Spain, which employ about 87,000 workers.

In a parallel development, the Commission said it had opened an investigation to determine whether tax breaks granted by Spain to local companies in the acquisition of overseas firms is in breach of EU rules on state aid. Spanish companies buying non-EU firms can write off the amortization of goodwill (the difference between the acquisition price of such a company and its book value) against their tax obligations.

The Commission had previously ordered Spain to abolish previous corporate tax arrangements of a similar nature and the current probe is focusing on an amended version approved by the government in March 2012 that also included indirect acquisitions.