Article 238a HA IIIb CGI states that investments in certain sectors, including the pleasure boat sector, are eligible for the deduction provided for in paragraph I of the Article only subject to the prior approval of the budget minister. Such approval ‘may be granted after seeking the opinion of the minister for the overseas departments and territories provided that the investment is of economic interest for the department in which it is made, that it is in keeping with regional planning and environmental policy and that it guarantees protection for investors and third parties.’

The CGI states that natural persons are taxed on their income. The tax is charged on the taxpayer’s net income, i.e. the total net income from various categories of income. Net income in the various categories generally consists of property, capital assets, salaries, etc. owned or received by taxpayers, and profits from the lucrative activities in which they engage, minus the losses recorded in a year in an income category.

However, in relation to the category of ‘industrial and commercial profits’, Article 156(1a) CGI states that the deduction is not allowed for ‘losses attributable, directly or indirectly, to activities for industrial and commercial profit where such activities do not involve the continuous, direct and personal participation of one of the members of the tax unit in the performance of the acts entailed in the activity. Such is the case, for example, where management of the activity is entrusted in law or in fact to a person who does not belong to the tax unit by virtue of a mandate, a contract of employment or other such agreement.’

Nevertheless, Article 238a HA IIIc CGI states that Article 156(1a) does not apply to losses resulting from the deduction of the investments referred to in paragraph I of the said Article 238a HA and from their operation where such investments are made after 1 January 1996 and have the prior approval of the minister responsible for the budget in accordance with Article 238a HA IIIb.

The Bank and CIL set up a joint-ownership vehicle (within the meaning of Law 67-5 of 3 January 1967 on the status of ships and other seagoing vessels, as amended), the ‘copropriétée du navire Le Levant’, with its head office in Nantes. According to its articles of association, the joint-ownership vehicle was set up for the purposes of ‘financing, purchasing, fitting out and operating the luxury cruise vessel Le Levant’. The joint-ownership was divided into 740 co-ownership shares, or ‘quirats’, of which CIL acquired two and the Bank the remaining 738.

CIL was appointed manager of the joint-ownership vehicle and, in return for payment, would oversee the construction of the vessel and its operation after delivery.

The Bank sold its 738 shares to investors subject to income tax who wished to benefit from tax advantages under the Loi Pons. For this purpose, each investor set up an undertaking of which they were the sole shareholder whose corporate purpose was to acquire the shares and operate the vessel as joint owners (‘joint-ownership companies’). These companies had the status of one-person limited liability undertakings (EURLs).

An EURL in which the sole shareholder is a natural person is fiscally transparent. The shareholder therefore includes the company profits of the EURL in his income tax return (under industrial and commercial profits). He may also, if necessary, write off the company’s losses against his other income, provided it is the same type of income. However, under Article 156(1a) CGI, he may not as a rule write off losses from activities for industrial and commercial profit unless such activities involve the personal participation of one of the members of the tax unit in the performance of the acts necessary to the activity.

• a capital investment by the shareholder of FRF 50 000 (about EUR 7 700),

• a loan from the Bank at a fixed rate of 8 % over a period of seven years from 31 December 1996. The amount was FRF 554 683 (about EUR 85 300) for a set of two shares,

• the share of CIL’s deposit of guarantee set up with each joint-ownership company as security for its sound management of the joint ownership. This guarantee was for a sum of FRF 40 000 000 (about EUR 6 150 000), or FRF 108 108 (about EUR 16 600) per set of two shares, at an interest rate of 8 % per annum, with the interest capitalised annually from 31 December 1996. The principal and capitalised interest on the guarantee would be repayable as of 31 December 2003.

After all the Bank’s shares had been transferred, the joint-ownership vehicle consisted of the joint-ownership companies and the CIL (as holder of two shares).

• the operating results of the joint-ownership vehicle, forecast as a loss,

• the annual repayments and financial costs of the bank loan granted by the Bank to acquire the shares, and

• the companies’ operating expenses.

The cash requirements were to be covered by the investors who formally undertook to reinvest each year the tax savings made as a result of deducting the vessel’s operating losses in the joint ownership in the form of capital increases by the respective joint-ownership companies (other than in the last operating year, when the investors had the right to retain the tax savings). The reinvestment of the tax savings would be the sole source of financing for the joint-ownership companies during the operating phase.

The joint-ownership companies promised to sell the shares to the Bank (and the Bank promised to buy them) for a total price of FRF 124 861 905 (about EUR 19 million) at the end of the vessel’s operating phase. This price (the ‘base price’) could however vary according to a predefined formula on the basis of the actual rates applied in the top income tax bracket for the years 1997-2003. The base price would be reduced by the joint-ownership companies’ liabilities on the date of transfer (consisting essentially of the CIL’s deposit of guarantee plus capitalised interest). The net price was estimated at FRF 56 494 213 (about EUR 8,7 million), or FRF 153 101 (about EUR 23 500) per set of two shares. The transfer was expected to take place by 29 February 2004 at the latest.

For their part, the Bank and CIL made a mutually binding promise according to which CIL would acquire all the Bank’s shares at a price corresponding to the price paid by the Bank. This transfer, which would make the CIL the legal owner of Le Levant, would take place not later than 29 February 2004.

The provisions of the Loi Pons applied to the contested financial package are a derogation from the general tax legislation and, because they allow a larger than usual deduction, confer an advantage on the taxpayers to which they relate. By conferring that advantage, France is foregoing tax revenues and its resources are consequently diminished. The aid is thus granted through State resources.

The instrument conferring that advantage is the budget minister’s approval decision of 23 November 1996. Pursuant to the approval, the benefit of Article 238a HA IIIb and c CGI is granted to the ‘joint-ownership of the vessel Le Levant’.

However, the earnings of the joint-ownership vehicle are liable to tax in the hands of the joint-ownership companies that form it and it is to these companies that the possibility of deducting the amount for the purchase of the shares (granted on the basis of Article 238a HA I CGI) relates.

The derogation from Article 156(1a) CGI granted on the basis of Article 238a HA IIIc CGI benefits the investors in whose hands the earnings of the joint-ownership companies are subject to tax (income tax) by virtue of the fiscal transparency of the joint-ownership companies. The advantages conferred by the approval thus have an immediate financial impact on the investors in the form of tax savings, made possible by the deductions applied under the Loi Pons derogation scheme.

It should however be noted that the tax savings are not simply left at the investors’ disposal but pre-assigned under the terms of the financing package endorsed by the French authorities under the approval decision. The investors are in fact obliged, under the terms of the investment to which they have subscribed, to reinvest practically all the tax savings in the joint ownership in the form of capital increases by their respective joint-ownership companies in order to cover the costs of financing the purchase of Le Levant and the losses arising from its operation (see recital 27).

In order to identify the beneficiaries, a detailed examination is required of the circumstances governing the purchase and operation of Le Levant.

Clearly the purpose of the package was to allow CIP to purchase a vessel which it would own and the role of the investors recruited from the Bank’s clients was merely to finance the purchase.

In the case of Le Levant, the tax benefits of the investors (the immediate beneficiaries) were transferred to CIL by a different mechanism. In the ‘Renaissance’ case the investors leased the vessels to the operator whereas, in the present case, CIL formally disposes of the vessel only in its capacity as manager of the joint-ownership vehicle, the formal operator of the vessel in its own right. There is therefore in principle no tenancy relationship that would allow the benefit to be retroceded through a reduction in the rent.

In practice the benefit is transferred to CIL as follows:

The cost of acquiring the vessel and its operating losses are reflected in losses in the shareholding EURLs. Thanks to the tax benefits allowed under the Loi Pons, the investors may deduct these losses from their other revenue liable for income tax, thereby obtaining a tax saving which represents the concretisation of their tax benefit and which consists, as such, of State resources within the meaning of Community law. However, rather than keep these tax savings, the investors undertook to use most of them for calls for funds to cover the losses of the EURLs.

In the normal process of capitalisation, an investor would make sure of capitalising on his investment (in this case, the vessel) by securing a return on the investment that would cover his purchasing costs and include an adequate profit margin. In the case of the leasing package in ‘Club Med’ and ‘Renaissance’, this outcome is achieved through the rent paid by the buyer (although the rent is beneficial to the buyer as part of the tax benefit is retroceded to him in the form of a below market-price rent).

In a normal situation, these costs (e.g. payment of the rent or covering all the losses) would be borne by CIL and not by the investor. In the disputed package, these costs are allocated to the EURLs and, by means of the calls for funds, absorbed into the tax savings which are State resources within the meaning of Article 87(1) of the Treaty. CIL is likewise relieved of the expenses it would normally have had to bear for the operation of the vessel. For all the above reasons, the Commission finds that the investors’ benefit is transferred to CIL. It should nevertheless be said that not all the tax benefit is transferred to CIL. Under the terms of the package, the investors keep the tax savings relating to 2003, the last year of operation.

Regardless of this technical difference in the package, the results are no different to those produced by the package in the ‘Renaissance’ case. In fact, as in ‘Renaissance’, CIL enjoys the actual benefit of Le Levant as soon as it is delivered, thus anticipating its formal ownership of the vessel, which will take effect only on completion of the package. Just as in ‘Renaissance’, the vessel is made available to CIL without its having to bear the real cost as no financial contribution is required of it. The costs that CIL should normally have borne for the operation of the vessel are thus reduced, which represents an advantage to CIL.

The fact that the investors are able to put the vessel at CIL’s disposal free of charge is due to the tax benefits granted to them under the Loi Pons which enable them, through their EURLs, to deduct from their taxable income both the purchase price of the vessel and the losses of their EURLs, which include the annual capital and interest on the loan granted by the Bank for the purchase of the shares. The deductible profits of the EURL also include their respective shares of Le Levant’s operating profits within the limits guaranteed by CIL.

The package and the coverage by the investors of the costs of financing and, in part at least, of operating Le Levant by means of the compulsory calls for funds for the EURLs are intended to ensure that CIL benefits from the advantages granted under the Loi Pons. This mechanism for transferring aid was one of the conditions laid down in the application for approval and was, as such, endorsed by the French authorities. This transfer of resources from the investors to the joint-ownership vehicle helps to subsidise the operation of Le Levant by the CIL. Without this mechanism, the operation of the vessel by the CIL would not be economically viable.

For the investors, the return from the package is produced at the end of the financing operation through the purchase of their shares and the fact that they can keep the tax savings relating to 2003, the last year of the period of operation (which is not negated by a compulsory call for funds).

The State resources (consisting of the investors’ tax savings) are thus split between CIL, to whom practically all the aid is retroceded, and the investors. The part of the benefit retroceded to CIL consists of the total of the calls for funds to which the investors responded for the EURLs.

CIL’s comment that the Commission has not proved that the aid would allow Le Levant to be operated under more favourable conditions than those available to other operators cannot therefore be accepted.

As regards the price for the sale of Le Levant to CIL in January 2004, according to the Commission’s information, it did not appear to include a concessionary element in favour of CIL. According to CIL, the selling price was estimated by an independent maritime broker as higher than the vessel’s market value. The Commission has no reason to question the validity of this information.

Case law thus demonstrates that the classification as an undertaking must be based not just on the legal forms but on an assessment of the economic realities of a specific case. CIL and the investors’ status as an undertaking must therefore be established by an assessment of business relationships in the package in order to determine how the economic activity that consists of operating Le Levant as a cruise vessel is actually conducted.

In the case at hand, the Commission notes that under the terms of the joint ownership articles of association, each investor exercises rights over the vessel through his shares and that these rights may only be exercised jointly (each share also gives entitlement to a proportional part of the operating revenue). The investors exercise their rights at the general meeting of joint owners where each shareholder has voting rights proportional to his share in the joint-ownership. In this sense, the investors’ situation is comparable to that of shareholders or members.

• CIL is responsible for the fitting-out, maintenance, operation and technical and commercial management of the vessel,

• CIL manages the hotel and catering services and organises ports of call and sightseeing visits. CIL is responsible for managing port and pilotage charges etc. More generally, it operates the vessel on the best economic terms and ‘is authorised to conclude all charter contracts and, more generally, to negotiate all commercial transactions’ (Article 3.1 of the management mandate). The joint-ownership has therefore given CIL a completely free hand in the core business in question — namely the provision of cruises on board Le Levant,

• ‘the manager has full powers with respect to third parties to manage the joint-ownership’s property and business and can carry out all tasks relating to administration, including laying-up of the vessel, but not disposition of the property’ (Article 6 of the management mandate). The joint-ownership therefore gives CIL virtually full autonomy as, on its own initiative and without consulting the investors, CIL can even have the vessel laid-up — i.e. terminate its operation,

• according to Article 6 of the management mandate, the manager ‘shall undertake the following measures on behalf of the joint-ownership vehicle: staff recruitment and management, shipboard working arrangements […]. The full powers thus conferred on the manager mean that he can undertake management tasks with a maximum degree of flexibility’.

The investors’ lack of involvement in operations is not the result of a commercial choice which they could freely go back on — rather it is determined by the actual structure of the package. Under the terms of their investment contracts, each joint-ownership company is headed by two joint managers who are actually Bank executives. All the practical aspects of setting up and running the joint-ownership companies are undertaken by these managers or people presented by the Bank. At the joint-ownership’s general meeting (where, in theory the investors could exercise their rights over the vessel and its operation), the joint-ownership companies are represented not by their members but by their managers. The investor cannot appoint other managers or even take over management of his EURL, without sacrificing the Bank’s undertaking to acquire the shares, which is the guarantee of the return on his investment. As for the choice of manager of the joint-ownership and the terms of its mandate, CIL was appointed in the joint ownership’s articles of association (drawn up by the Bank and CIP) and in practice cannot be revoked except in cases of serious misconduct or wilful wrong. The Commission therefore concludes that the package does not include any way of allowing the joint-ownership to be effectively involved in the operation of Le Levant as a cruise ship, i.e. in the actual business itself, which is carried on exclusively by CIL. In short, it can be concluded that the investors signed a membership contract whose terms they could not freely determine.

It is also important to note that in the relationship between an owner-operator and his manager, the economic risk inherent in operating the vessel is usually borne by the owner as the manager is paid for his services and is not concerned by the operating results. In the case of Le Levant, however, as the investors are guaranteed a return by the promoters of the project, they do not run any real risks in respect of the Le Levant’s operating results. It is really CIL which incurs the risks and, even though it has only two shares out of the 740 shares of the joint ownership, it has agreed to assume full responsibility for any losses which exceeded the operating estimates for the period 1996-2003. The Commission concludes that this distribution of risks, which is unusual in a normal relationship between operator and manager, demonstrates that CIL bears sole responsibility for commercial activity.

This organisation faithfully reflects the purpose of the package, whereby CIL must acquire a vessel and the investors intervene only in its financing and not in its operation. The only reason why the investors, via their companies, are the official owners of the vessels is because of the fiscal engineering of the package. It does not mean actual participation in its commercial operation.

The investors’ activity is limited to an equity holding aimed at making a return, with no real participation in Le Levant’s operation. CIL, which in formal terms is just the manager, has the guarantee that on conclusion of the package, it will obtain sole ownership of the vessel at a price calculated according to a pre-determined method. Pending this legal formalisation of its rights over the vessel, it can decide freely (unlike the investors) how it is operated. CIL therefore acts as the real owner of the vessel as regards everything to do with the Le Levant’s commercial operation.

In terms of Le Levant’s operation, only CIL can be classified as an undertaking under Article 87(1) of the Treaty. As the investors are not undertakings in this sense, the advantages that they have obtained through State resources under the Le Levant financing package do no constitute State aid.

As regards the status of the shipyard, the Commission finds that the comments from interested parties provide no proof of an advantage financed through State resources to the benefit of the shipyard. The formal investigation procedure has therefore not found any evidence that the shipyard was the beneficiary of the aid.

The Commission considers that the selective nature of the measure in question has been sufficiently demonstrated by the fact that it results from applying the selective scheme of the Loi Pons and that it is not therefore necessary to comment on the nature of the discretion given to the French authorities in granting the approval provided for under Article 238a HA IIIb of the CGI, a point which the Commission raised merely for the sake of completeness.

The French authorities and CIL stated that Le Levant was operated out of Saint-Pierre-et-Miquelon, therefore on a very limited market where no other cruise company was present. CIL also invoked Le Levant’s small capacity and the fact that it was mainly targeted at North American customers. For these reasons, the French authorities and CIL dispute that the advantage granted to CIL could have caused distortion of competition and affected trade between Member States.

The Commission considers that it is not relevant to consider cruises from Saint-Pierre-et-Miquelon as a separate market. A consumer who is planning to go on a cruise in that region would probably also be prepared to consider cruises to other destinations or from other ports and his choice would be determined by a range of factors, including price, which could be affected by the measure in question. Cruises therefore form part of a bigger market and since the tax benefits in question release CIL from costs that it would normally have had to bear to finance its economic activities, the aid could cause a distortion of competition on this market.

The measure in question may therefore distort competition and affect trade between Member States.

The Commission considers that the aid includes all the tax savings passed on by the investors to their joint-ownership companies in the form of the capital increases that they were committed to as part of their involvement in the Le Levant financing package.

The French authorities claimed that they are unable to provide figures for the tax savings without conducting a separate examination of the tax situation of each of the investors.

The Commission’s Decision of 27 January 1993 not to raise any State aid objections as regards the Loi Pons clearly stated that ‘the application of the aid in question is subject to the rules and guidelines laid down by Community law in relation to (…) certain industrial sectors …’. Consequently that Decision does not cover the aid in question since it comes under the scope of Directive 90/684/EEC.

The Commission accordingly confirms that the compatibility of the aid with the common market should be assessed in the light of Directive 90/684/EEC.

Under the terms of Article 4(7) of Directive 90/684/EEC, aid related to shipbuilding and ship conversion granted as development assistance to a developing country may be deemed compatible with the common market if it complies with the terms laid down for that purpose by OECD Working Party No 6 in its Agreement concerning the interpretation of Articles 6 to 8 of the Understanding on Export Credits for Ships or with any later addendum or corrigendum to the said Agreement (hereinafter OECD criteria).

• vessels must not be operated under a flag of convenience,

• in the event that the aid cannot be classified as public development aid for the purposes of the OECD, the donor must confirm that the aid is part of an intergovernmental agreement,

• the donor must give appropriate assurances that the real owner is resident in the recipient country and that the recipient company is not a non-operational subsidiary of a foreign company (eligible recipient countries include not only developing countries classified as such by the OECD but also all overseas countries and territories associated with the European Union, including the French overseas territories),

• the recipient must give undertakings not to sell the ship without governmental approval.

Also, the aid granted must include a concessionary element of 25 % at least.

• Le Levant is operated under the French flag. The requirement that it not be operated under a flag of convenience is thus met,

• Saint-Pierre-et-Miquelon is on the list of countries eligible for development aid annexed to Commission letter SG(89)D/311 to Member States,

• the Commission notes that under the terms of the package, CIL is intended to become the sole owner of the vessel and that, during the intervening period, it operates the vessel in its commercial business as a de facto owner. For the purposes of the residence condition for the owner, the Commission finds that CIL should be considered the real owner of Le Levant41. CIL has its head office in Wallis-et-Futuna. This archipelago is not the ‘beneficiary country’ (which is Saint-Pierre-et-Miquelon). However, since both groups of islands are on the Commission’s list of countries eligible for development aid, the aid cannot be objected to on this ground. Furthermore, CIL is not a non-operational subsidiary of a foreign company,

• the vessel cannot be resold without the approval of the French authorities since the aid is granted on the condition that CIL actually operates the vessel for at least five years mainly to and from Saint-Pierre-et-Miquelon,

• the aid intensity exceeds 25 % (see recital 115).

The Commission must still verify the ‘development component’, namely satisfy itself that the aid will contribute to the development of the beneficiary territory. This analysis must take into account the circumstances and specific needs of the territory in question. In this connection, the French authorities underlined that the economy of Saint-Pierre-et-Miquelon was in a particularly difficult situation when the aid was granted. The archipelago was historically dependent on industrial fishing. The sudden and total collapse of this industry in 1993, following the settlement in Canada’s favour of a dispute with France on fishing rights and a Canadian moratorium on cod fishing, meant an urgent need to re-orient the territory’s economy. Opportunities for reorientation were considerably hampered by the small size of the archipelago and its population, its relative isolation and limited economy. Diversifying into tourism therefore seemed to be the best option, taking advantage of the territory’s untouched nature and its proximity to North America. As Saint-Pierre-et-Miquelon could not offer long-stay tourism it seemed reasonable to try developing the archipelago as a cruise port.

In the comments submitted following the Decision of 2 December 1999 initiating the procedure, the French authorities claimed that operating Le Levant would contribute to Saint-Pierre-et-Miquelon’s development, in particular by creating jobs and expenditure in the territory generated by its operation.

• the Commission found on the basis of the information at its disposal that the economic benefits linked to operation of le Levant could be estimated at FRF 5,52 million for the period 1999-2001, i.e. some EUR 0,84 million,

• as regards the creation of direct jobs, the Commission considered that there was no proof of any effect as the information provided by the French authorities only stated that ‘four former fishermen from the islands had been trained to work on the ship’,

• finally, as regards the effect on the archipelago’s infrastructure development and the indirect effects linked to the possible entry of other operators, the Commission found that the French authorities’ assertions had not been quantified and that it was not necessary to take them into account in the assessment of the aid measure for le Levant.

In the fresh observations submitted following the Commission’s supplementary decision of 6 December 2006, the French authorities and the interested parties provided information which the Commission did not have when Decision 2001/882/EC was adopted and which give a different impression of the economic effects of operating Le Levant.

This new information shows that the aid to le Levant generated economic effects, admittedly limited but which could none the less contribute to Saint-Pierre-et-Miquelon’s economic development.

The Commission accepts that this dependence on very limited sources of jobs and income may hold back the territory’s development. In view of the particular geographic characteristics of Saint-Pierre-et-Miquelon and the very small size of its domestic market, the Commission admits that economic diversification was useful for its development and that tourism could prove a promising path for diversification when the aid was granted. The Commission also accepts the French authorities’ comments that the small size of the archipelago limited the possibilities for proposing long-stay tourism but that on the other hand it was suited to developing cruise activities.

• Le Levant is a small capacity ship as it carries only about 95 passengers, which obviously limits its impact on the market,

• the cruises offered by Le Levant from Saint-Pierre-et-Miquelon (i.e. outside Community waters) were mainly targeted at the North American market50, both because of the marketing networks set up by CIL and the geographic location of the archipelago, which made it a cruise ‘hub’ (some 4 600 kilometres from Paris, but only 25 kilometres from the Canadian coast)51,

• the Commission also notes that according to the information it has received, no other operator established in the Community offers or offered in the period in question, cruises to Saint-Pierre-et-Miquelon and that the cruises organised by Le Levant, which combined top luxury and unusual destinations, were clearly targeted at a very narrow segment of the cruise market, and one which was not highly developed in Europe.

In the light of the above, the Commission finds that the aid in question could make a contribution to Saint-Pierre-et-Miquelon’s development by creating jobs and diversifying its economy and that although modest, this contribution is greater than the distortion of trade between Member States that the aid could cause.

The Commission also finds that this aid was necessary. The profitability forecasts for operating the vessel from Saint-Pierre-et-Miquelon under the terms of the package approved by the French authorities were such that the project’s profitability could only be guaranteed as a result of the aid. The project to build and operate Le Levant could therefore not have been achieved without the aid.

For the above reasons, the Commission therefore finds that the aid to Le Levant includes a ‘development component’.