European Court of Justice on legal certainty
Piet Holtrop, HOLTROP S.L.P. Transaction & Business Law.
In our article "A turn in Spanish Jurisprudence on retroactivity" we advocated a U-turn in Spanish jurisprudence on retroactivity, alleging incompatibility of such retroactivity with EU Law. We based our general opinion on a straight forward analysis of Spanish Jurisprudence, and on the COM documents which were part of the legislative process of Directive 28/2009/EC. We spoke with the European Commission about our findings, and were recommended to study the Plantanol case. Which of course we did.
Infographic
To grasp a better understanding of the structure of the Plantanol Case we made an infographic for you. We grouped the arguments of the Court of Justice of the European Union (CJEU) in group A, B, C, D and E. We numbered the individual elements of the argumentation 1 to 14. The CJEU arguments
are marked with a European Union flag and the arguments embraced by the Spanish Supreme Court (SSC) are marked with a Spanish Flag. A Spanish Flag combined with a no entry sign means that the Spanish Jurisprudence discussed in our aforementioned post has not mentioned such argument. The arguments of groups A and C stem from earlier jurisprudence of the CJEU, but the SSC may not have found it necessary to quote those, in the case of group D it is because these are introduced after the date of the SSC ruling. The CSS only quotes from group B and D, in what seems a cherry picking exercise to me. With its cherry picking the SSC gives an entire new dimension to the legal certainty doctrine of the CJEU.
If you click on the image a larger version will open in a new window.
Infographic Plantanol Case is licensed under a Creative Commons Reconocimiento-CompartirIgual 3.0 Unported License.
Unchanged Community framework
Argument number 9 and number 14 are particularly interesting: The Community rules have not been materially changed, the policy goal are still upright, and have even been increased. The Spanish national discretionary power has been exercised not to choose a different measure as allowed under the Directive, but merely to modify the economical conditions of the measure, especially protected in number 2 and 3 of group A above. The Spanish modification tends to eliminate the key driver of the measure, without changing the measure. The conditio sine qua non of the measure is a fixed return for a fixed period.
Fixed return for a fixed period, conditio sine qua non
The particular situations of the owner of PV installations have not been taken into account by L14/2010, quite to the contrary. The particular situation here is Project Finance. No Bank Due Diligence on PV projects in Spain has considered any regulatory risk for projects that complied with all legal requirements. RD661/2007 gave clear, precise and foreseeable rules with regard to the Feed in Tariff, in quantity and quality. In time and money. Nobody would have obtained Project Finance without such clear, precise and foreseeable rules with regard to this applicability of the Feed in Tariff. This applicability in qualitative and quantity terms a is not only an integral part of the functionality, but a condition sine qua non of its functionality, as said before. Without this guarantee a Feed in Tariff does not work. It is hence impossible to make adaptations to the application of these new rules, as argument 6 herein before requires.
Foreseeability
Argument 12 and 13 deal with the foreseeability of amendments. In the Plantanol Case a provision was made for intermediate adjustment of the measure, the aforementioned elements 12 and 13 discuss this. Such provision allowed for the economic operators to adjust, as discussed in group C, number 8. In Plantanol the adjustment was announced and therefore foreseeable to a certain extent. However, RD661/2007 did and does not envisage intermediate adjustments in its applicability. It expressly envisages only adjustment for future projects. The adjustments of L14/2010 have been unforeseen in the sense that neither they were envisaged in RD661/2007, nor could they reasonably be expected by anybody in the marketplace. L14/2010 came out of the blue, making use of a legislative emergency instrument, which in this particular subject matter was arbitrary and unjustified. Nobody foresaw the discretionary power of the Kingdom of Spain to encompass the elimination of the very "raison de être" of the Feed in Tariff. If the Spanish Government felt that it had this discretionary power, why didn't it cut the Feed in Tariff before the majority of the PV Installation were built? For the government it was perfectly foreseeable what the Feed in Tariff would cost (Installed Capacity x Time x Tariff).
Regulatory Risk
The SSC argues that the Electricity Sector Law is the basis for the legal certainty in Spain, reasoning that the formula "reasonable return on investment, with reference to the price of money in the capital markets" is the only legal certainty for the economic operator. The following lack of clear, precise and foreseeable rules of such Law according to the SSC is a regulatory risk which is to be borne by the economic operators.
The Spanish legislative technique of implementing European Directives on two different national levels, between which the SSC subsequently creates a vacuum, in practice does not allow for clear, precise and foreseeable rules with regard to the Feed in Tariff for PV. In my understanding this implementation of EU Law does not comply with the very outset of the Plantanol Case, in group A herein above. The SSC should apply the doctrine of the CJEU entirely, and not only the elements of group B and D. If only the latter were to be applied by the cherry picking SSC, the CJEU doctrine would remain nothing but empty rhetoric. The CJEU should assist the SSC in a balanced interpretation of its legal certainty doctrine, giving detailed guidelines and thus leave no doubt with regard to the integrity of the argumentation scheme. The SSC jurisprudence was founded on cases on premiums, which are measures of a different, more volatile nature than Feed in Tariffs. In the cases to come before the SSC about L14/2010 the court will have to take into account the specific situation of the PV Feed in Tariff.
Other legal battles against L14/2010
The legal certainty argument is the most difficult one in the battery of arguments against L14/2010 as discussed on this blog. We discussed the most difficult one first. The non-discrimination issues raised by L14/2010, as discussed in various earlier posts on our blog, are more promising.
We will try to find some time to discuss the European Case Law on non-discrimination issues in one of our next posts.
In meantime we are still preparing litigation against L14/2010. If you own PV installations in Spain which may be affected by this legislation, please do not hesitate to contact us: This e-mail address is being protected from spambots. You need JavaScript enabled to view it.
The European Commission has brought the Kingdom of Spain before CJEU in corporate tax matter
Piet Holtrop, HOLTROP S.L.P. Transaction & Business Law.
The action was brought before the court on February 11 2011, and the issue at stake are valuation rules. According to the European Commission, Article 17(1) of Royal Legislative Decree 4/2004 of 5 March approving the consolidated text of the Law on Corporation Tax, the Kingdom of Spain has failed to comply with its obligations under Article 49 of the Treaty on the Functioning of the European Union and Article 31 of the Agreement on the European Economic Area.
The provision at issue introduces special treatment for unrealised capital gains on assets of companies that transfer their residence to another Member State of the European Union, cease their activity in Spain in order to continue it in another Member State or transfer their activities to another Member State. In those cases, Spain taxes the unrealised capital gains at the time of exit, so that the affected companies must settle a tax debt in respect of unrealised and hypothetical revenues which may never be realised. That regime amounts to an exception to the normal rule according to which tax is levied
on revenue actually obtained by the taxable person during the taxable period.
The Commission submits that that aspect of the Spanish legislation is incompatible with the TFEU and with the EEA Agreement, since it is a discriminatory measure, and in any event a disproportionate restriction on the freedom of establishment. The Spanish rule could discourage movements of companies or assets which would result in a better distribution of economic resources.
The Commission considers that companies must have the right to transfer their registered office or individual assets to another Member State without being subject to excessively complex and onerous procedures. According to the Commission, there is no justification for the immediate charging of taxes on unrealised capital gains when a Spanish company is transferred to another Member State or when a permanent establishment ceases activity in Spain or transfers its assets from Spain to another Member State, if that kind of taxation is not found in comparable national situations.
The case number is C-64/11. Keep you posted on this one.
A closer look at retroactivity in Spanish Law
Piet Holtrop, HOLTROP S.L.P. Transaction & Business Law.
Recently the Spanish renewable energy sector was shaken by a salvo of legislative changes which together may profoundly affect its return on investment. The photovoltaic energy sector has been punished most severely by this development. In the early days of last December we published an article on RD1565/2010, and in the first days of this January month we published an article on RDL14/2010. You can check out these posts for a closer analysis of the content of the aforementioned legislative changes. in this post we will analyse the retroactive effect of these measures, and the legality of such retroactive effect under Spanish Law.
Amendments proposed to RDL14/2010, the sequel
Piet Holtrop, HOLTROP S.L.P. Transaction & Business Law.
After the failed intent of last march 10th, when an amendment to derogate the "Photovoltaic Clauses" of RDL14/2010, we will now see a sequel to this quest.
Coming 5-7 July a commission of the Spanish Senate shall vote on approval of an amendment proposal to be sent to the Senate. On the 12-13 July the Senate shall then vote on such amendments, and if approved, on 19-20 July the Spanish Congress shall vote.
What's the content?
The content is controversial in the Sector, because it furthers discrimination and is only a partial band aid. It does not take away the structural flaws of RDL14/2010, and in general would rather be a further legal argument in the battle against RDL14/2010.
The content is, basically:
For installations of <100Kw the cap of 2011 remains unaffected, but the cap of 2012 is increased with 310 Hours, whereas the cap for 2013 is increased with 430 Hours. This provides the small sized segment of the market with some air. This way these installations may at least be able to afford legal defense.
As of 2014, for all installations the reference value for their production will be the maximum average of the years 2009 and 2010. The very imprecise radiation map is substituted for two arbitrary reference years. Although still not objective this would be an improvement.
The official credit line which is offered to installations affected by RDL14/2010 is to allow a period of two years in which only the interest on the capital would be due, thus furhter buffering the effect of RDL14/2010 financially.
UPDATE 06-07-2011: The Spanish Government vetoed the amendments yesterday and therefore RDL14/2010 will stay as it was. Spain is now facing an avalanche of litigation against RDL14/2010. The first cases have already been taking into consideration by the Audiencia Nacional, our Firm will be presenting claims for a growing group of investors. Some of the installations of our clients are affected already by the liquidation of July 2011, we will initiate litigation for those installations within little more than two months from now.
The European Commission has brought the Kingdom of Spain before CJEU in corporate tax matter
Piet Holtrop, HOLTROP S.L.P. Transaction & Business Law.
The action was brought before the court on February 11 2011, and the issue at stake are valuation rules. According to the European Commission, Article 17(1) of Royal Legislative Decree 4/2004 of 5 March approving the consolidated text of the Law on Corporation Tax, the Kingdom of Spain has failed to comply with its obligations under Article 49 of the Treaty on the Functioning of the European Union and Article 31 of the Agreement on the European Economic Area.
The provision at issue introduces special treatment for unrealised capital gains on assets of companies that transfer their residence to another Member State of the European Union, cease their activity in Spain in order to continue it in another Member State or transfer their activities to another Member State. In those cases, Spain taxes the unrealised capital gains at the time of exit, so that the affected companies must settle a tax debt in respect of unrealised and hypothetical revenues which may never be realised. That regime amounts to an exception to the normal rule according to which tax is levied
on revenue actually obtained by the taxable person during the taxable period.
The Commission submits that that aspect of the Spanish legislation is incompatible with the TFEU and with the EEA Agreement, since it is a discriminatory measure, and in any event a disproportionate restriction on the freedom of establishment. The Spanish rule could discourage movements of companies or assets which would result in a better distribution of economic resources.
The Commission considers that companies must have the right to transfer their registered office or individual assets to another Member State without being subject to excessively complex and onerous procedures. According to the Commission, there is no justification for the immediate charging of taxes on unrealised capital gains when a Spanish company is transferred to another Member State or when a permanent establishment ceases activity in Spain or transfers its assets from Spain to another Member State, if that kind of taxation is not found in comparable national situations.
The case number is C-64/11. Keep you posted on this one.
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