The group's total turnover determines whether the in-house exemption applies

Background

Three Dutch municipalities collaborated on waste management through a joint company that was the parent company (AF) of a group. At the end of 2019, the owner municipalities entered into two agreements with AF – one concerning the municipalities' waste management and one concerning the further handling and treatment of the waste. The contracts were awarded without prior advertising on the basis of the in-house exemption in Article 12(3) of the Public Procurement Directive.

The commercial waste management company AVR-Afvalverwerking BV (AVR), which had previously managed the waste, brought an action challenging whether the conditions for the exemption were actually met. The crux of the dispute was how turnover should be calculated when the controlled legal entity is the parent company of a group – and whether the 80 per cent requirement was met if the turnover of the entire group was taken into account rather than just that of the parent company itself. According to Article 12(5) of the Public Procurement Directive, the percentage must be determined by taking into account the average total turnover over the preceding three years.

The Court of Justice's response: the group is considered as a whole

The Court of Justice was clear: the calculation must be based on the turnover of the entire group. It is therefore not sufficient to look at the parent company's own figures – revenue from subsidiaries operating on the open market must also be taken into account.

The Court's reasoning rests on three main points:

• The wording of the Directive does not limit the assessment to the activities or turnover of a specific legal entity.

• The assessment must be made taking into account all relevant circumstances – and where the controlled party is the parent company of a group, the group constitutes such a relevant context that cannot be disregarded.

• If the parent company is required to prepare consolidated accounts, these accounts constitute an appropriate basis for the 80 per cent assessment.

The Court emphasises that the purpose of Article 12 of the Public Procurement Directive is to prevent distortion of competition. That purpose would be undermined if contracting authorities could place market activities in subsidiaries but still claim that the parent company meets the 80 per cent requirement based solely on its own turnover. It therefore makes no difference whether the external activities are carried out directly by the parent company or indirectly through subsidiaries – the impact on competition remains the same.

What does this mean for you?

The ruling means that the assessment of the activity criterion must in many cases be made at group level, which is of particular significance for local authorities and municipal companies where operations are often organised within a group structure. If a parent company conducts business on behalf of the controlling authorities whilst one or more subsidiaries operate in the open market, there is a risk that the activity criterion is no longer met.

There are a couple of key points to bear in mind:

• Are you reviewing the right company? When purchasing from municipal companies that form part of a group, it is not always sufficient for the company itself to meet the 80 per cent requirement.

• What applies when awarding contracts to subsidiaries or sister companies? It is not yet entirely clear in which situations an assessment should be made at group level when a contract is awarded to a subsidiary or a sister company. Future guidance and case law will have to clarify this.

Our analysis

The judgment provides an important clarification, but it also leaves questions unanswered. The reasoning is, to some extent, difficult to understand, as competition in practice should not be significantly affected if the award without prior competitive tendering is made only to the parent company, not to the subsidiary operating in the open market. However, the Court justifies this on the grounds that the subsidiaries – through the parent company being awarded contracts by the controlling authorities – might otherwise gain an unfair competitive advantage over their competitors.

One question raised by the judgment is how the wording of the grounds for the judgment should be interpreted in other situations. The Court attaches great importance to the fact that it is the parent company that constitutes the controlled party and the party from which the authorities make purchases. As the grounds for the judgment are worded, they could in theory be interpreted to mean that an assessment at group level should only be carried out when the procurement is made from a parent company – which in practice could enable circumvention, for example by establishing a holding company as a new parent company. However, the Court expressly emphasises that the assessment must not be carried out in a manner that opens the door to structural circumvention, which is why such an interpretation appears doubtful and fraught with considerable risk.

Our view is, instead, that the Court's wording regarding the parent company should primarily be seen as reflecting the circumstances of the individual case. The wording does not preclude an assessment at group level even in the case of procurement from a subsidiary or a sister company – but exactly when this is the case will be determined by future guidance and case law.

If you apply the in-house exemption and your business is organised within a group structure, it is high time to review whether the conditions are still met. At Lindahl, we can help you make that assessment and navigate the way forward.

Court and case number

Judgment of the Court of Justice of the European Union in Case C‑692/23 AVR