Real Madrid Football has become an interesting case of study to understand the criteria development of the EU Commission in this matter, since it issued two very different decisions. We will briefly explain in this article how it changed over the years.
EUROPEAN FOOTBALL MARKET
For a better understanding of the European football market, it should be taken into account that Real Madrid played not only in the Spanish National League but also in the European competition (UEFA Champions League at that time), so it also competed with other Estate Member clubs. Even if Real Madrid hadn’t played an European tournament, European football must be considered a single market, since all of them had to use the same market for goods and services, whether to apply for loans or to engage the services of players and trainers. Thus it’s assumable to think that the described situation in the cases to be commented here could place Real Madrid in a privileged situation, facing Spanish clubs as well as its counterparts in other EU Member States.
QUESTION RAISED TO EUROPEAN COMMISSION
Background (Reclassification of the lands)
On 7 May 2001 the President of the Madrid Autonomous Region and the President of Real Madrid Football Club reached an agreement by virtue of which they modified the legal classification of the land where Real Madrid sport complex was located. This meant that 30,000 m2 of land owned by Real Madrid, that were initially classified as private sporting use, were reclassified now as all-purpose tertiary use (possibility of building offices, commercial establishments, hotels, etc.). Thanks to this reclassification, Real Madrid sold afterwards two parts of its assets at a price amounting 480 million euros were later four 54-story towers were built in one of the best and most expensive areas of the city of Madrid.
Such big amount of money allowed the Club to pay off its previous debt and provided the Club with a financial strong base outstripping its competitors.
Question Raised
EU Commission addressed an issue in September 2002 (P-2491/02), when the Member of the European Parlament (“MEP”) Pere Esteve accounted the reclassification facts described in the background paragraph above.
Pere Esteve questioned the EU Commission regarding Article 87 of Title VI of the EC Treaty, which states:
“Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market.”
If this reclassification operation would be considered as a state aid, granting Real Madrid an excessive profit could be understood as a breach of EU law.
The EU Commission answered about the possible infringement of state aid rules in the case at issue, and stated that accordingly with the case law of the Court of Justice, only advantages granted directly or indirectly through state resources are considered to be state aid within the meaning of article 87 of the EC Treaty.
The Commission also highlighted that the new qualification of the land in question did not seem to involve any direct or indirect transfer of resources by neither the city of Madrid nor the Autonomous Community of Madrid. The fact that the new qualification conferred an advantage to Real Madrid could not be considered an infringement within the meaning of article 87 of the EC Treaty.
NEW QUESTION INVESTIGATED BY EUROPEAN COMMISSION – THE CHANGE OF TREND
Background (Real State Transfers)
Some years before the case above mentioned, in 1996, the Madrid City Council and Real Madrid firstly entered into a land swap agreement. This is a mechanism by which specific plots of public land were traded as private owned plots, belonging to the Football Club. In 1998 both parties reached a final agreement, validating the transfer of several plots of public land from the City Council in favour of Real Madrid, officially complying with the terms of the previous arrangement.
The transference of a particular plot of land worth 0.6 million euros was deemed illegal under the existing regulations at the time. Consequently, the Madrid City Council failed to fulfil its contractual obligations, which impelled both parties to sign a new settlement agreement to seek compensation in favour of Real Madrid for the not transferred plot of land, valued then at a staggering amount of 22.7 million euros.
Question Investigated
A change of tendency commenced in 2011, when some Spanish citizens filed official lawsuits against the Club in relation to a number of real estate transfers by means of which Real Madrid would have allegedly obtained illegal state aid from the Madrid City Council.
When investigated by the European Commission, the valuation described in the Real Estate Transfer Background paragraph, was deemed as “non-reflecting the market value”. A further, independent study concluded that such plot of land had been not only overvalued in 2011, but also crucially undervalued in 1998. This initial valuation fell under the category of “’basic sport area for public use” according to the Spanish Urban Law. The problem with this approach was that it did not reflect the potential market prices payable for its commercial exploitation throughout the following years after the reclassification, focusing only on its current value as an infrastructure in the short term. In fact a correct valuation of the land could imply a real price closer to 4.3 million euros.
In 2016 the European Commission issued a Decision focused on determining whether the City Council had conducted itself in accordance with the “market economy vendor principle”.
The European Commission underlined that the City Council had failed to undertake an assessment of the commercial rationale value in view of the real future commercial use, prior to the establishment of the initial contracts and/or settlement agreement; and also had failed to seek legal guidance before delving into the initial phase of the agreement.
As a result, the European Commission determined that the Madrid City Council did not conduct itself as a “market economy vendor”, thereby overpaying Real Madrid 18.4 million euros. It was the Decision of the Commission that the State diverted the money of tax payers in order to finance a private and professional football club, while putting the rest of EU clubs in a clear disadvantage. Spanish Administration must now recover the sum of 18.4 million euros from Real Madrid Football Club.
This Decision was appealed and probably during 2019 a final resolution will be issued on this file.
NEW INVESTIGATIONS ON OTHER POSSIBLE STATE AIDS TO FOOTBALL CLUBS IN SPAIN
In addition to the Real Madrid investigation, we can mention a second case in which four other Spanish clubs (Barcelona, Osasuna, Bilbao and Real Madrid) were under the scope of the European Commission, concerning the possibility that these clubs were, as a matter of fact, being incorporated as a non-profit organisation for tax purposes, in order to get tax benefits and exemptions. According to Spanish law, they should have been treated as limited liability companies, yet this was not the case.
By the aforementioned mechanism, some clubs enjoyed 5% reduced taxation on their profits for more than twenty years. It must be remarked that during the investigation, there was a change of legislation, which put an end to the favourable discrimination.
According the European Commission point of view in that case no plausible justification of the arrangement could be alleged.
Nevertheless at the end of February 2019 the EU Court decided to annul the Commission’s 2016 Decision (prohibition on Spain granting a differentiated tax regime to clubs that are not public limited companies). The EU Court considers that the Commission did not assess the data well, and it is proven that the European body did not sufficiently prove that the scheme was advantageous for these four clubs. Finally the EU Court ensured that the differentiated tax regime that these four clubs enjoy since 1990 is legitimate.
Finally, in a third case analysed, the European Commission concluded that public guarantees for loans were given to three clubs (Valencia, Hércules and Elche) which were not in financial need, at rates significantly more favourable than market level, thus obtaining an unfair economic advantage over other clubs. An estimated 30.2 million euros are yet to be recovered.
CONCLUSION
As a general rule, State aid or intervention is forbidden unless exerted under specific circumstances. Sport clubs and organizations, including professional football clubs, must comply with State aid regulations and are not immediately granted an exemption. Therefore, the decisions and conclusions of the European Commission are a welcome contribution to the goal of levelling the playing field for professional sports and professional sport clubs across Europe.
March 2019
Ángel Valdés Burgui
Partner
Lupicinio International Law Firm