Eligibility of expenditure of operations part-financed by the Structural Funds

The Regulation establishes common rules at Community level on eligible expenditure for certain types of operations part-financed by the Structural Funds. The objective is to guarantee the uniform and fair implementation of the Structural Funds across the Community in 2000-06.

ACT

Commission Regulation (EC) No 1685/2000 of 28 July 2000 laying down detailed rules for the implementation of Council Regulation (EC) No 1260/1999 as regards eligibility of expenditure of operations co-financed by the Structural Funds [Official Journal L 193 of 29.07.2000] [See amending acts].

SUMMARY

Where eligibility of expenditure is concerned, the general Regulation on the Structural Funds stipulates that the relevant national rules are to apply to eligible expenditure unless the Commission deems it necessary to adopt common rules.

The Regulations establishing the European Regional Development Fund (ERDF), the European Agricultural Guidance and Guarantee Fund (EAGGF), the European Social Fund (ESF) and the Financial Instrument for Fisheries Guidance (FIFG) specify the types of operation that they may help to part-finance.

Expenditure is eligible when it is incurred between the date when eligibility commences (the date on which the Commission receives the grant application) and the final date of eligibility (fixed in the Commission Decision granting a contribution from the Funds).

These common rules on eligible expenditure apply to the following forms of assistance from the Funds: operational programmes (OPs), single programming documents (SPDs), Community Initiative programmes (CIPs), technical assistance and innovative actions. They do not affect which Fund can part-finance an operation. Moreover, Member States are always free to adopt stricter national provisions.

ELIGIBILITY RULES

Rule No 1 - Expenditure actually incurred

As a general rule, the final beneficiaries are the bodies or public or private firms directly responsible for commissioning the operation concerned. In the case of State aid schemes and aid granted by bodies designated by the Member States, the final beneficiaries are the bodies which grant the aid to the individual recipients.

Payments by final beneficiaries (advance payments, intermediate payments and payments of the balance) are cash payments accompanied by receipted invoices or accounting documents of equivalent probative value. This provision is without prejudice to clauses in contracts signed under public procurement procedures and complies with the special rules applying to investment in the forestry sector. In some specific cases, other costs and contributions may be included in the payments by final beneficiaries:

Depreciation:

The cost of depreciation of real estate or equipment counts as eligible expenditure provided that national or Community grants have not contributed towards their purchase, and provided the cost complies with accounting standards and relates to the part-financing period of the operation concerned.

Contributions in kind:

Contributions in kind count as eligible expenditure if they involve the provision of land or real estate, equipment or materials, research or professional activity, or unpaid voluntary work.

Such contributions must be valued by an independent expert or organisation. The value of unpaid voluntary work is assessed on the basis of the amount of time spent and the normal hourly and daily rate for the work carried out.

Overheads:

Overheads count as eligible expenditure provided that they are based on real costs and allocated pro rata to the operation, according to a duly justified fair and equitable method.

Payments into venture capital, loan and guarantee funds are treated as expenditure actually paid out.

Expenditure relating to subcontracts is not eligible where the contracts concerned result in an increase in the cost of implementing the project with no corresponding added value, or are with intermediaries or consultants paid a percentage of the total cost of the project.

Rule No 2 - Accounting treatment of revenue

Revenue may be derived from sales, rentals, services, enrolment fees or other equivalent receipts. It reduces the amount of the contribution from the Structural Funds. No later than at the closure of the assistance, revenue must be deducted from the eligible expenditure of the part-financed operation, either in full or in part depending on whether it was generated entirely or only in part by that operation.

Rule No 3 - Financial and other charges and legal expenses

Except in the case of global grants, interest on debts (other than expenditure on interest subsidies to reduce the cost of borrowing for businesses in the context of a State aid scheme), charges for financial transactions, exchange costs and other purely financial costs are not eligible for part-financing by the Structural Funds. Nor are fines, financial penalties and expenditure on disputes.

Conversely, the Structural Funds may part-finance the bank charges for opening and administering an account and the costs of legal advice, lawyers' fees, technical or financial expertise, accounting and audit. The same rules apply to trans-national financial transactions under the Peace II programme and the Interreg III, Leader+, Equal and Urban II Community Initiatives after deduction of the interest received on advance payments.

Rule No 4 - Purchase of second-hand material

The purchase of second-hand equipment is eligible provided the seller of the equipment provides a declaration stating its origin and confirming that at no point during the previous seven years has it been purchased with the aid of national or Community grants. The price of the equipment may not exceed its market value or the cost of similar new equipment. The equipment must have the technical characteristics necessary for the operation.

Rule No 5 - Purchase of land

The purchase of land which has not been built on is eligible for part-financing by the Structural Funds provided the transaction does not represent more than 10% of the total eligible expenditure of the operation. There must be a direct link between the purchase and the objectives of the operation. A qualified independent expert or an official body must confirm that the price of the land does not exceed the market value.

For environmental conservation operations, the managing authority authorises the purchase of land and its use for a period specified in the light of the operation's objectives. Under no circumstances may such land be used for agricultural purposes. The purchase must be made by or on behalf of a public institution or a body governed by public law.

Rule No 6 - Purchase of real estate

Real estate means buildings that have already been built and the land on which they are built. The purchase of real estate is eligible if there is a direct link between the purchase and the objectives of the operation. The building may not have received a national or Community grant within the previous ten years. A qualified independent expert or an official body must confirm that the price of the land does not exceed the market value.

Rule No 7 - VAT and other taxes and charges

In general, VAT counts as eligible expenditure only if it is genuinely and definitively borne by the final beneficiary (or by the individual recipient in the context of a State aid scheme) and if Directive 77/388/EEC has been complied with. Whether the final beneficiary or the individual recipient is a public or private body does not affect whether the VAT is eligible.

Other taxes, levies and charges (in particular direct taxes and social security contributions on wages and salaries) arising from part-financing by the Structural Funds are not eligible unless they have been genuinely and definitively borne by the final beneficiary (or by the individual recipient in the context of a State aid scheme).

Rule No 8 - Venture capital and loan funds

Venture capital funds, venture capital holding funds and loan funds are investment tools set up specifically to provide equity or other forms of risk capital, including loans, to small and medium-sized enterprises (SMEs). They are set up as independent legal entities governed by agreements between the shareholders, or as separate blocks of finance within an existing financial institution.

These funds are eligible for part-financing by the Structural Funds, whose participation may be accompanied by co-investments or guarantees from other Community financing instruments. Under no circumstances can the Commission become a partner or shareholder.

The part-financers or sponsors of funds must submit a prudent business plan specifying, among other things, the targeted market, the appropriations, the terms and conditions of financing, the operational budget of the fund, the part-financing partners, the fund's by-laws, the independence of the management and the provisions for winding up the fund. The managing authority must evaluate such business plans carefully.

Funds may invest only in the establishment, early stages (seed capital) or expansion of SMEs, and only in activities which are judged to be economically viable. They may not invest in firms in difficulty. Moreover, the contribution of such funds is subject to the ceilings laid down in the general Regulation on the Structural Funds.

When the operation is closed, the eligible expenditure of the fund (the final beneficiary) is the capital that has been invested in or loaned out to SMEs, including the management costs incurred. Management costs may not exceed 5% of the paid-up capital on a yearly average.

The Commission recommends (but does not insist on) the following standards of good practice:

• the financial contribution of the private sector should be substantial, and above 30%;
• in principle, funds should not hold a majority stake in firms;
• funds should cover a wide enough target population to ensure that their operations are economically viable;
• the credibility and professionalism of the fund's management team must be impeccable.

Rule No 9 - Guarantee funds

Guarantee funds are financing instruments that guarantee venture capital, loan funds and other risk financing schemes against losses arising from their investments in SMEs. Such funds may be mutual funds subscribed by SMEs, commercially-run funds with private-sector partners, or wholly publicly-financed funds. Participation by the Structural Funds' should be accompanied by part-guarantees provided by other Community financing instruments.

Like venture-capital and loan funds, guarantee funds are set up as independent legal entities and the Commission may not become a partner or shareholder. The part-financers or sponsors of these funds must submit a prudent business plan. Any part of the Structural Funds' contribution left over after the guarantees have been honoured must be reused for SME development activities in the same eligible area.

When the operation is closed, the eligible expenditure of the fund (the final beneficiary) is the amount of the paid-up capital of the fund necessary, on the basis of an independent audit, to cover the guarantees provided, including the incurred management costs, which may not exceed 2% of the paid-up capital on a yearly average.

Rule No 10 - Leasing

Expenditure incurred in the context of leasing operations is eligible for part-financing by the Structural Funds on the following terms:

Aid granted to the lessor:

The lessor is the direct recipient of the Community part-financing, which is used to reduce all the leasing rentals made by the lessee for the duration of the leasing period for the assets covered by the leasing contract.

The expenditure eligible for part-financing is the purchase of the asset by the lessor, the amount of must be lower than the market value of the rented asset. Other costs connected with the leasing contract (tax, lessor's margin, interest refinancing costs, overheads, insurance charges, etc.) are not eligible expenditure.

Aid granted to the lessee:

The lessee is the direct recipient of the Community part-financing. Rent paid to the lessor is eligible for part-financing by the Member States. However, other costs connected with the leasing contract, (tax, lessor's margin, interest refinancing costs, overheads, insurance charges, etc.) are not eligible.

Sale and lease back:

Leasing rental paid by a lessee under a sale and lease-back scheme may count as eligible expenditure.

Rule No 11 - Costs incurred in managing and implementing the Structural Funds

As a general rule, the costs incurred in the management, implementation, monitoring and inspection of the Structural Funds are not eligible for part-financing. However, on certain conditions, exceptions can be made for expenditure:

• relating to the preparation, selection, appraisal and monitoring of assistance and of operations, except for expenditure on the acquisition and installation of computerised systems for management, monitoring and evaluation;
• on meetings of monitoring committees and sub-committees relating to the implementation of assistance, including the costs of experts and third-country participants;
• relating to audits and on-the-spot checks.

Expenditure on salaries, including social security contributions, is eligible only for civil servants or other staff seconded to carry out the tasks referred to above and eligible for Community assistance.

In the context of general assistance from the Structural Funds (Objective 1 , Objective 2 , Objective 3), Community part-financing of expenditure on implementation, monitoring and inspection depends on the total amount of assistance and is subject to the following ceilings: (a) 2.5% where the total contribution is less than or equal to 100 million, (b) 2% where the total contribution is between 100 million and 500 million, (c) 1% where the total contribution is between 500 million and 1 billion, and (d) 0.5% where the total contribution is more than 1 billion. For the Community Initiatives, the special programme Peace II and innovative actions, the ceiling is 5% of the total contribution.

Technical assistance measures (studies, seminars, information measures, evaluation and the acquisition and installation of computerised systems for management, monitoring and evaluation) are not subject to ceilings.

Rule No 12 - Eligibility of operations depending on the location

As a general rule, operations part-financed by the Structural Funds should be located in the eligible region. Exceptions can be made in cases where a region concerned by a measure will benefit wholly or partly from an operation located outside that region. In such cases, the operation must be located in a NUTS III area immediately adjacent to the eligible region. The maximum eligible expenditure is then calculated pro rata to the expected benefits (at least 50%), but may not exceed 10% of total expenditure on the measure or 5% of the total expenditure on assistance.

In the case of operations financed by the FIFG or relating to the most remote regions, eligibility for part-financing is subject to the Commission's approval. The evaluation will take account in particular of the proximity of the operation to the region, the expected benefit to the region and the amount of the expenditure in proportion to the total expenditure under the measure.

Regulation (EC) No 1685/2000 is retroactive and applies from 5 August 2000.

RELATED ACTS

Commission Regulation (EC) No 1681/94 of 11 July 1994 concerning irregularities and the recovery of sums wrongly paid in connection with the financing of the structural policies and the organization of an information system in this field [Official Journal L 178 of 12.07.1994].

This regulation was amended by Regulation (EC) No 2035/2005 [Official Journal L 328 of 15.12.2005], whose provisions apply from 1 January 2006 onwards.

Last updated: 02.01.2006