State aid in European football: A review of the EC’s ruling on Real Madrid, FC Barcelona and Valencia CF

Published 27 July 2016 By: Benoît Keane


On 4 July, the European Commission ordered Real Madrid, FC Barcelona, Valencia CF as well as four other Spanish clubs to repay millions in illegal State aid having found the clubs in breach of EU State aid law. There were in fact three separate investigations that were all wrapped up in what Sky Sports might have billed as “Super State Aid Day”. Each case brings lessons for football clubs and other professional sports on the need to comply with EU State Aid rules in particular in tax, property and even financial transactions involving the State. Although the full decisions remain to be published, much can be already gleaned from the Commission’s letters to Spain outlining its allegations and the subsequent press statement announcing its findings.1


Brief recap of State aid rules

At the heart of the EU State aid rules lies the principle that fair competition with the European Union would be undermined if uncompetitive companies are given an advantage over more competitive rivals through public subsidies. EU State aid rules prohibit the granting of public funds by the State (whether at a national or local level) to an enterprise (or “undertaking”) in a manner that confers an advantage that would not be provided by a prudent market investor in the same position. Specifically, Article 107 of the Treaty on the Functioning of the European Union (TFEU) states:

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, in so far as it affects trade between Member States, be incompatible with the internal market”.

Aid can take a wide range of forms including property transactions (sale by the State at undervalue or to the State at over market value), tax breaks, State-backed bank guarantees, offsetting of tax or social security etc. Any aid above the de minimis threshold2 which is granted by a Member State must either conform to the exceptions set out in EU regulations or be individually notified to the European Commission for approval.

In the case of aid to sport, the Commission has set out new exceptions for support to professional sport (such as infrastructure) in the General Block Exemption Regulation and has also confirmed that State aid for the support of amateur sport is unlikely to fall within the scope of the State aid rules.3 The Commission has the power to investigate any transaction where there is a suspicion of illegal State aid or, as in the Spanish football cases, following the receipt of a complaint by the public or competitors.


Real Madrid – Las Tablas

The first investigation concerned the exchange of land owned by Real Madrid known as “Las Tablas” in return for public land owned by the City of Madrid around the Bernabeu stadium (following a particularly complex set of circumstances).4 In its letter of December 2013 informing Spain of the investigation, the Commission outlined its concerns about the transaction:

Prima facie, Real Madrid appears to enjoy an economic advantage from the fact that a plot of land [Las Tablas], which at the time of its acquisition was valued at EUR 595,194 and kept in the books with a value of EUR 488,000, appears 13 years later, in an operation to offset mutual debts, with a value of more than EUR 22 million.5

For property transactions with the State, the Commission has issued guidance in the form of a Communication on how to ensure that there is no illegal State aid.6 According to the Commission, “a sufficiently well-publicized, open and unconditional bidding procedure, comparable to an auction, accepting the best or only bid is by definition at market value and consequently does not contain State aid”. However, not all State property needs to be sold on the open market in order to avoid a State aid concern. Where the property is to be sold pursuant to a closed sale, then “an independent evaluation should be carried out by one or more independent asset valuers prior to the sale negotiations in order to establish the market value on the basis of generally accepted market indicators and valuation standards”. So long as the price paid in the private transaction reaches or exceeds the price established by the independent evaluation, there should be no State aid concerns.

In opening its investigation into the Las Tablas deal, the Commission observed that the City of Madrid had failed to obtain an independent valuation of the deal. The Commission also had its doubts that market increase alone could explain the new valuation to the site. One complainant to the Commission pointed out that the value of property in the neighbourhood around Las Tablas had increased by around 250% whereas the increase in value attributed by the City of Madrid for Las Tablas in 2011 was around 3700%. In its letter to Spain, the Commission stated:

Whatever the decisive point in time for determining the value of the "Las Tablas" area, the remarkable increase of the alleged value of the land raises serious doubts. It is true that the Spanish real estate market rose considerably after 1998. But real estate started going down sharply already in 2008. The classification of the area had not changed in the meantime.7

Given these uncertainties, the Commission obtained its own independent expert assessment of the land transactions to establish the market value of the sites involved. This expert report showed that the land had increased in value but was still only worth EUR 4.3 million and not close to the EUR 22.7 million provided for in the transaction. Consequently, the Commission concluded that “the land affected by the transaction was overvalued by EUR 18.4 million”.8

The Commission has now ordered Real Madrid to pay the amount back to the City – a move that will at least be popular with one half of Madrid. However, the scrutiny of the Commission into complex property deals that spanned over two decades should serve as a warning to clubs. There is nothing wrong with a club seeking to obtain the best possible deal but not in a manner that involves the State giving it assistance that no prudent private investor would countenance. Clearly, the most effective way of preventing a State aid problem in a closed sale with the State is for the site to be valued by an independent expert.


Spanish Sports Tax benefitting Real Madrid, FC Barcelona, Athletic Club Bilbao, and Club Atletico Osasuna

In the second case, the Commission conducted an in-depth investigation into a Spanish tax regime which applied to four clubs, notably Real Madrid, FC Barcelona, Athletic Club Bilbao, and Club Atletico Osasuna.9 The Spanish “ley del deporte” of 199010 obliged all Spanish professional “sport clubs” (clubes deportivos) to convert into “sports limited companies” (sociedades anónimas deportivas). However, the sports law exempted any clubs which had had a positive balance in the preceding 4-5 years. Whilst no specific clubs were mentioned in the legislation, only the aforementioned clubs benefitted from the exemption and there was no possibility for sport limited companies to reconvert to the status of sports club.

The treatment of sports clubs deviated from the fiscal regime applicable to sports public limited companies. Sports clubs are treated as non-profit entities (Entidades Sin Animo De Lucro) and qualified for a partial corporate tax exemption according to the Spanish Corporate Tax Law (Ley del Impuesto sobre Sociedades) giving them a lower tax liability as compared to other football clubs registered as sports limits companies (25% instead of 30%). This meant that the four clubs (Real Madrid, FC Barcelona, Athletic Club Bilbao, and Club Atletico Osasuna) were taxed at a lower rate to other Spanish clubs.

The main issue under investigation then was whether the four clubs received an unfair selective advantage over their competitors. It is not necessarily contrary to the State aid rules to have one tax regime for non-profit organisations and another for companies due to the different nature of the organisations and the purpose of the taxation system. However, where there is no objective justification for the differentiation in treatment then the tax advantage provided to some undertakings over others in a largely equivalent legal and factual position could amount to a selective advantage contrary to the State aid rules.

In order to determine whether there has been a selective advantage conferred by a taxation measure, the Commission first identifies the general or reference taxation system and then assesses whether the measure favours certain enterprises over others in a comparable legal and factual situation.11 The Commission also examines whether the taxation measure may be justified by the “logic of the system12 (for example banks are often taxed in a very specific manner due to the logic of the banking system as compared to other companies).

Having regard to these principles, the Commission examined whether the four Spanish clubs were in an equivalent legal and factual position to other clubs in Spain. Although the four clubs were by law non-profit entities, the Commission considered in its letter to Spain setting out its allegations that “in reality they conduct for the most part profit oriented professional activities.13 In this regard, the Commission noted that Real Madrid and Barcelona generated EUR 512 million and EUR 483 million in revenues respectively in 2011/12 from commercial activities such as broadcasting rights, sponsorship and ticket sales etc. As such, they appeared to be in an equivalent position to other clubs that are registered as companies but treated in a different way under the tax regime without any apparent justification.14

The Commission also looked at how sports clubs are treated around the European Union as legal entities. It found that the “forms of incorporation of sports teams in other Member States shows that football clubs in the EU are by no means structured uniformly or similarly”.15 Some legal systems do not make provision for specific structures of relevance to sport clubs with the result that football clubs operating in one of these jurisdictions may adopt any legal structure available under national law.16 Others jurisdictions provide sport-specific legal structures and make the adoption of these structures compulsory at least upon those wishing to participate in the first division of the football league championship.17 In a crucial passage, the Commission concluded:

usually the clubs have a choice between different sport specific forms of incorporation (club or limited company), or if not […], the incorporation as limited company is compulsory for all without exception.18

By contrast, no other Spanish clubs other than the four already designated were able to choose their preferred form of incorporation.

The Commission also highlighted as an “aggravating element” the fact that the Spanish tax law introduced a lasting distinction based on an economic performance of the clubs in 1990 without any possible scope of review. According to the Commission:

The four clubs qualified for this distinction decades ago at a given point in time. If Spain considered that the legal entity of club was not appropriate for professional competitions, the system should have been changed for all clubs or it should have allowed regular review of the situation. If economic success during four seasons in a row justified retaining the legal form of a club, it would make sense that sport limited companies should be allowed to re-convert to clubs after four successful seasons.19

In its decision, the Commission seems to have confirmed this rationale, finding that “the four clubs benefitted from this lower tax rate during over twenty years, without an objective justification”.20 As a consequence, the clubs have been ordered to pay back the shortfall in unpaid taxes. Although it is for Spain to calculate the relevant taxes, the Commission acknowledges that the amount to pay back may be rather limited (between 0 – 5 million) due to the finances of the clubs concerned over the relevant period. Spain has though adjusted its legislation on corporate taxation to end its different treatment of sports clubs which became effective as of January 2016. Most importantly, the Commission has established the principle that all football clubs be treated alike for fiscal matters or be given the option to choose their preferred tax status.


Bank guarantees to Valencia football clubs

The third case concerned an investigation into guarantees given by the State-owned Valencia Institute of Finance for loans granted to three Valencia football clubs, most notably Valencia CF as well as Hercules and Elche.21 It is interesting to note that the Commission had initially accepted the formal assurances from Spain that no aid had been given to these clubs – only to re-open the case following complaints from citizens and articles in the press concerning State support to the clubs in question.

In 2009, the Valencia Institute of Finance, which is controlled by the regional government,22 provided a guarantee for a bank loan of EUR 75 million from the Spanish bank Bancaja to Fundaciόn Valencia Club de Fútbol (“Fundacion Valencia”). The purpose of the loan was to finance the acquisition of shares of Valencia CF by the Fundacion Valencia, in the context of the capital increase decided by Valencia CF.

The bank guarantee covered 100% of the loan’s principal plus interest plus costs of the guaranteed transaction. The interest rate of the underlying loan was equal to Euribor 1 year + 3.5% margin + 1% commitment fee. There was an annual bank guarantee premium of 0.5% to be paid by the Fundacion Valencia. As a counter guarantee, the Valencia Institute of Finance received a pledge on shares of Valencia CF. The duration of the underlying loan was 6 years, with a grace period of 4 years.

According to the Commission’s Guarantees Notice,23 bank guarantees provided by the State must be at a rate that would be applied by a private market investor having regard to the circumstances of the party taking the loan. The Guarantee Notice stipulates that the fulfilment of certain conditions could be sufficient for the Commission to rule out the presence of State aid, such as that the borrower is not in financial difficulty and that the guarantee does not cover more than 80% of the outstanding loan or other financial obligation. However, when the borrower does not pay a risk-carrying price for the guarantee, it obtains a selective advantage. Moreover, where the borrower is a firm in financial difficulty, it would not find a financial institution prepared to lend on any terms, without a State guarantee.

At the time of the bank guarantees provided to it, Valencia CF was in dire financial straits in the period 2008 – 2012. The Commission noted that Valencia CF has incurred significant losses since 2007, with losses of EUR 26.1 million in 2007 increasing to losses of EUR 59.2 million in 2009. The club’s turnover was also decreased from 2008 to 2009. In addition, Valencia CF had significant levels of debt. The Commission considered the fact that the banks required a State backed guarantee up to 100% of the loan plus interest showed that market operators were not willing to bear the risk of insolvency of the club.

For these reasons, the Commission considered that Valencia CF would have been unable to obtain the bank guarantees on the market for the price and conditions provided to it by the State. It found no corresponding market example of such a premium benchmark and in its view the annual guarantee premiums of 0.5% for buying the shares in Valencia FC did not reflect the risk of default for the guaranteed loans, particularly given the fact that Valencia CF could be considered to be a firm in difficulty. Similarly, the Commission found that no adequate remuneration was provided by Hercules24 and Elche25 for bank guarantees that they had received.

The State aid rules do permit aid to be granted to firms in difficulty provided there is a rescue and restructuring plan put in place so that the aid is put to good use (which is notified for approval by the Commission). However, the Commission found no such plan in the case of the funds made available to Valencia CF and the other two clubs. According to the Commission:

The state financing was not linked to any restructuring plan to make the clubs viable and none of them implemented compensatory measures to offset the distortion of competition created by the subsidy.26

As a result of the Commission’s decision, Valencia CF has to repay EUR 20.4 million whilst Hercules and Elche have to repay EUR 6.1 million and EUR 3.7 million respectively. The decision is a sober reminder that it is not for the State to simply bail out clubs without any regard to the interests of taxpayers, however much they are loved. A clear rescue and restructuring plan that is approved by the European Commission should have been put in place – and may well have resolved the problems that beset the clubs of Valencia.



It remains to be seen whether the clubs at the centre of the three Spanish cases will accept or challenge the Commission’s decisions before the EU Courts. In any event, the three decisions emphasise the importance of obtaining State aid advice and if necessary EU approval when engaging in transactions with the State – whether that is a property deal or infrastructure development project or tax offsetting arrangement.

An interesting element of these cases has also been how they have been pursued by not only rivals to the clubs in question but also by disgruntled fans in the countries in question, unhappy no doubt that their taxes are being used to shore up a rival team. It seems that fans and clubs are now demanding fair play not only on the pitch but also in the market.


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Benoît Keane

Benoît Keane

Benoît Keane specialises in European sports law. Based in Brussels, he acts in cases before the European Commission and European Court of Justice as well as in cases before national courts where there is an EU law dimension. He has participated in many of the leading European sports law cases of recent years, including the competition law cases relating to financial fair play, third party ownership and sports eligibility rules. He has also appeared as a legal expert on EU law before the Court of Arbitration for Sport.