European court rules Spanish foreign holding tax scheme was illegal aid

By Jesús Aguado and Emma Pinedo

MADRID (Reuters) - The European Court of Justice ruled on Wednesday that a Spanish scheme granting tax breaks to companies investing in foreign businesses constituted illegal state aid.

In a statement, the court said it dismissed appeals brought against rulings by the General Court "upholding the classification of the Spanish tax rules on the amortisation of financial goodwill as state aid incompatible with the internal market."

Spain introduced a law in 2001 that allowed goodwill to be deducted from taxes in the form of amortisation for holdings in foreign companies of at least 5% if held for one year.

The European Commission determined in decisions in 2009 and 2011 that this amounted to illegal state aid, prompting a legal challenge from Spanish companies which had benefited from the tax breaks, including the country's largest bank Santander.

Santander declined to comment on the Wednesday ruling.

The General Court of the European Union initially upheld the companies' challenge, but later overturned its decision after the European Court of Justice ordered it to reconsider its verdict.

The Court of Justice said then that tax measures could still be considered selective even if they applied to all Spanish companies as they granted an advantage to companies who held foreign shareholdings.

Dismissing the appeals on Wednesday, the EU's top court said "the appellants had failed to establish, more specifically, that undertakings acquiring shareholdings in non-resident companies are in a different factual and legal situation to that of undertakings acquiring shareholdings in Spain."

(Reporting by Jesús Aguado and Emma Pinedo; additional reporting John Chalmers; editing by Inti Landauro and Jason Neely)