Between 1995 and 2000 all three Basque provinces (Alava, Vizcaya and Guipuzcoa) offered tax exemptions to small and medium sized companies who fulfilled certain prerequisites. Up to 300 companies benefited from the policy. However, yesterday the European Court of Justice ruled that these tax cuts are illegal and hamper free competition.

The tax exemption was available to companies during their first ten years of business and included tax credits for investment in new material and reductions in tax payable on these for the first five years.

However, the cuts were challenged by the regional government of neighboring La Rioja that claimed that companies were leaving other Spanish regions to set up business in the Basque country in order to benefit from the more favorable fiscal conditions offered there. In 2001 the EU established that the Basque fiscal policy was incompatible with the common market conditions and ordered the Basque government to suspend them and to recover lost funds.

Yesterday’s ruling said that these tax breaks could not be justified and while the ECJ recognised the rights of the regional governments to design fiscal policy, it ruled that they had to do so in a way that was compatible with European fiscal policies. The verdict is final and ends 15 years of legal contention.