The decision follows another overturned State aid ruling in February 2019 involving alleged preferential corporate tax treatment to 4 Spanish football clubs which included Real Madrid as well as Barcelona, Osasuna and Athletic Bilbao.
In reaching its decision, the General Court noted that the European Commission had failed to carry out a complete analysis of all factors relevant to the transaction and its context and, therefore, had not proven to the requisite standard that the measure conferred an advantage on Real Madrid before finding that it had comprised unlawful State aid.
In November 1996, Madrid City Council and Real Madrid entered into an agreement concerning a complex series of land swaps under which Real Madrid was due to receive a particular plot of land (plot B-32) valued at €595,194 according to Council estimations at the time. Following the agreement, all land swaps were implemented, except for plot B-32 as it was not possible under the legal planning regime in force at the time.
In 2011, the parties acknowledged the inability of the Council to legally effect the transfer of plot-32 and reached a settlement agreement. It was agreed that the Council would compensate Real Madrid for the transfer not taking place by an amount corresponding to the value of plot-32 in 2011 (which had increased since the agreement from €595,194 to €22.7m) in the form of alternative plots transferred to the club.
2016 Decision - Market Economy Operator Principle
Following a complaint alleging State aid in favour of Real Madrid arising as a result of the 2011 settlement, the case was considered by the Commission in 2016.
In reaching its decision, the Commission considered the Market Economy Operator Principle ('MEOP'), a test to compare the actions of public bodies with that of private operators in the same circumstances. An economic transaction carried out by a public body does not constitute State aid provided it can be demonstrated to have been carried out in line with normal market conditions. Accordingly, the State aid rules are not triggered if it can be shown that a market operator in the same or similar circumstances and operating in the normal market conditions may have entered into the transaction upon the same terms. The rationale is that there is no advantage attributable to intervention by the state if it is merely acting as any private operator would, as the recipient could theoretically have concluded the same deal regardless of the source of the funding.
The Commission held that a market economy operator in a similar situation to Madrid City Council would not have signed the 2011 settlement agreement without first taking legal advice to establish the full legal liability for the impossibility of transferring plot B-32 as had been agreed in 1996.
In addition, the Commission found that the amount of compensation far exceeded the maximum extent of its legal liability arising from its failure to transfer plot B-32, which the Commission valued at €4.2m. Therefore, it was decided that the City Council of Madrid had overcompensated the club by €18.4m, which meant that Real Madrid had been given an unjustified advantage over other clubs and was required to pay back the €18.4m plus interest. Real Madrid lodged an appeal against this decision in November 2016.
2019 Appeal Decision - failure to establish an advantage
At the hearing on 5 September 2018, Real Madrid presented their appeal on the following three grounds:
- that the Commission had incorrectly applied the MEOP test;
- that the Commission had made an error in assessing the value of advantage; and
- that the Commission had failed to establish an advantage.
On 22 May 2019, the General Court handed down its judgment. While it rejected the first two grounds of appeal, concluding that the Commission was correct in its assessment, the General Court noted the Commission's failure to value the alternative plots of lands transferred to Real Madrid in place of plot B-32 under the settlement agreement and, thus, failure to establish an advantage.
By merely examining the value of plot B-32, the Commission did not take into consideration all of the other aspects of the transaction at issue and its context, in order to look at the deal concluded "in the round". Therefore, it could not have carried out a complete analysis of all of the relevant factors for the purposes of evaluating the amount of aid and also whether there was, in fact, an advantage resulting from the measure in light of all relevant (compensating) factors.
Therefore, as all aspects of the transaction and context had not been taken into account, the European Commission had not proven to the requisite standard that the measure conferred an advantage on Real Madrid.
Accordingly, the Commission's decision was annulled. The reversed verdict means the €18.4 million, plus over €2 million in interest, will be returned to the club.
The appeal decision highlights the importance of considering all aspects of a transaction, including the wider context, when assessing the presence of State aid. Furthermore, it serves as a pertinent reminder of the potential serious consequences of State aid rulings, the importance of careful consideration of State aid at the outset of a transaction and that State aid decisions are capable of challenge.
DWF Law LLP has a breadth of expertise in State aid law matters. We are able to draw upon a team of leading experts, in our UK, Brussels and other international offices, who have extensive experience in this area, including working within the UK Government on high profile funding matters, defending projects from recovery and designing projects to meet the rules.