In 2016 the European Commission found that a Spanish tax regime constituted illegal state aid. The tax regime allowed for the deduction of goodwill in the case of acquisitions of shares in foreign companies. Spain and several companies appealed the decision. Judgement of the General Court The Court annulled the decision of the Commission. Click here for unofficial English translation ...

While living in France, Israel Daniel Amram (IDA) devised an idea for the development of a unique and efficient computerized interface that would link insurance companies and physicians and facilitate financial accounting between medical service providers and patients. IDA registered the trademark “SEPHIRA” and formed a company in France under the name SAS SEPHIRA . IDA then moved to Israel and formed Sephira & Offek Ltd. Going forward the company in Israel would provid R&D services to SAS SEPHIRA in France. All of the taxable profits in Israel was labled as “R&D income” which is taxed at a lower rate in Israel. Later IDA’s rights in the trademark was sold to Sephira & Offek Ltd in return for €8.4m. Due to IDA’s status as a “new Immigrant” in Israel profits from the sale was tax exempt. Following the acquisition of the trademark, Sephira & Offek Ltd licensed the trademark to SAS SEPHIRA in return for royalty payments. In the books of Sephira & Offek Ltd, the trademark was labeled as “goodwill” and amortized. Following an audit the tax authorities determined that the sale of the trademark was an artificial transaction. Furthermore, they found that part of the profit labeled by Sephira & Offek Ltd as R&D income (subject to a lower taxation in Israel) should instead be labeled as ordinary income. On that basis an assessment was issued. Sephira & Offek Ltd and IDA disapproved of the assessment and took the case to Court. Judgement of the Court The court ruled in favor of the tax authorities. The trademark  transaction was artificial, as commercial reasons for the transaction (other than tax optimization) had been provided. The whole arrangement was considered non-legitimate tax planning. The court also agreed that part of the income classified by the company as R&D income (subject to reduced taxes) should instead be taxed as ordinary income. Click here for English translation Click here for other translation ...

The issue in these cases was tax provisions in Spain stipulating that, when a company in Spain acquires a share holding in a foreign company of at least 5%, goodwill resulting from that acquisition can be deducted for tax purposes through amortization (much like the US asset deal-regs). The Commission found these provisions to be in violation of EU State Aid rules. In 2014, the General Court annulled these Decisions, finding that the Commission had failed to establish the selective nature of the alleged aid measure. The General Court argued that for the selectivity condition to be satisfied, it is always necessary that a particular category of undertakings be identified that are exclusively favoured by the measure concerned and that can be distinguished by reason of specific properties common to them and characteristic of them. If that is not possible, then the measure is effectively open to all undertakings and thus not selective. The decision was then appealed by the Commission to the European Court of Justice. The European Court of Justice found that the General Court had erred in law by inferring a supplementary requirement from the case law. The Court explained that in the context of the “selectivity condition” what matters is whether the measure, irrespective of its form or the legislative means used, should have the effect of placing the recipient undertakings in a position that is more favourable than that of other undertakings, although all those undertakings are in a comparable factual and legal situation in the light of the objective pursued by the tax system concerned, cf. para 79. The fact that the number of potential beneficiaries is large and the criteria for the measure’s application are lax is not relevant – the measure is still selective. The Court of Justice then refered the case back to the General Court, for examination of the remaining three pleas of the alleged aid beneficiaries ...