30.4.2007   

EN

Official Journal of the European Union

L 112/1

(1)

Following a complaint, the Commission questioned the French authorities about the measures subject to this Decision by letters of 19 July 1999, 16 December 1999, 24 August 2000 and 9 December 2000. France replied to the Commission by letters of 19 August 1999, 24 February 2000 and 25 January 2001. The Commission met the French authorities on 26 January 2000 and a delegation of the inter-branch committee for natural sweet wines (CIVDN) on 31 March 2000.

(2)

Since the measures were applied without prior authorisation from the Commission, they were entered in the register of non-notified aid under the number NN 139/2002.

(3)

By letter dated 21 January 2003, the Commission informed France of its decision to initiate the procedure laid down in Article 88(2) of the Treaty in respect of the aid.

(4)

The Commission decision to initiate the procedure was published in the Official Journal of the European Union  (2). The Commission called on the other Member States and interested parties to submit their comments on the aid in question.

(5)

The French authorities sent their comments by letter of 16 and 18 June 2003. The Commission received comments from the complainant which it sent to the French authorities by letter of 6 August 2004. The French authorities replied by letter of 10 September 2004.

(6)

In 1996, the CIVDN decided to set up a wine conversion project aiming to replace part of the production of natural sweet wines in the Eastern Pyrenees region by grubbing up and replanting with quality wine varieties, in order to remedy the structural crisis facing this product, demonstrated by regular collapses in outlets. The purpose of the aid was to finance improvements to the quality of the vine population in the region. The scheme was fully wound up on 1 August 2002.

(7)

Producers in the region had access to two types of aid designed to implement this conversion project (known as the ‘Rivesaltes Plan’):

(8)

By decision 96-1 of 5 July 1996, the CIVDN for registered designation of origin (AOC) introduced an inter-branch contribution to finance the conversion plan for ‘Rivesaltes’ and ‘Grand Roussillon’.

(9)

The purpose of the contribution, amounting to FRF 50/hectolitre (3) produced in the Eastern Pyrenees Region where the natural sweet wines concerned are made, was to finance the payment of a ‘set-aside premium’ for any plot which, having produced ‘Rivesaltes’ or ‘Grand Roussillon’ wine in 1995, would produce table wine or ‘vin de pays’ from the 1996 to the 2000 harvests inclusive. The capital generated from levying the contribution was assigned to a special fund.

(10)

The ‘set-aside premium’ was in effect granted to producers undertaking not to claim the registered designations of origin (AOC) ‘Rivesaltes’ or ‘Grand Roussillon’ for five years. This premium was also designed to compensate for the loss of revenue caused by the impact on pricing of no longer using these two designations. The premium did not imply stopping or reducing production, but merely compensating for producing without the registered designation of origin. The aim was therefore to rapidly reduce the potential for marketing AOC wines.

(11)

The premium amounted to FRF 5 000 a year per hectare ‘set aside’. All plots benefiting from aid ceased to receive the premium in the year they were converted.

(12)

The Commission was not informed of the overall amount of aid paid under this scheme. No information was provided on the amount of revenue that the inter-branch contribution generated nor on the number of hectares for which aid was received.

(13)

According to the French authorities, the conversion plan for the AOC Rivesaltes vineyard as adopted in 1996 covered 3 250 hectares: 1 250 hectares for production of ‘Muscat de Rivesaltes’; 1 000 hectares for production of ‘Côtes du Roussillon’ and ‘Côtes du Roussillon Villages’ (Syrah, Mourvèdre, Roussanne, Marsanne and Vermentino) and 1 000 hectares for the production of varietal ‘vins de pays’ (Chardonnay, Cabernet, Merlot…).

(14)

To support this plan, the French authorities had agreed to provide FRF 111 million in financial assistance, distributed as follows: FRF 85 million via the Office national interprofessionnel des vins [National Inter-branch Wine Office] and FRF 26 million by local authorities (Languedoc-Roussillon and the Eastern Pyrenees General Council).

(15)

This assistance would cover aid amounting to FRF 25 000/ha for conversion to AOC Muscat de Rivesaltes, and FRF 40 000/ha for conversion to AOC Côtes du Roussillon Villages and ‘vin de pays’.

(16)

According to the French authorities, the real costs of conversion in the region could be estimated at FRF 110 000/ha. The French authorities confirmed that the conversion plans had mostly been implemented (2 350 ha out of the 3 250 ha planned).

(17)

According to the French authorities, the total cost of the conversion plan implemented came to FRF 258,5 million (EUR 39,4 million). The public authorities contributed FRF 75,250 million (EUR 11,01 million) of the FRF 111 million (EUR 16,9 million) initially provided for. According to the information provided by the French authorities, as a proportion of the total funding, 29,11 % of the conversion costs actually incurred was covered by public bodies.

(18)

The French authorities pointed out that they send an annual report to the Statistical Office of the European Communities, in accordance with Article 9 of Council Regulation (EEC) No 822/87 of 16 March 1987 on the common organisation of the market in wine (4), including a statement of the area under vines, broken down by department and by type of grape produced (wine grapes, including quality wine produced in certain regions (quality wine psr), table grapes) and a statement of grubbed-up areas and vine planting submitted in the same format with a breakdown by department and by type of grape produced. The French authorities enclosed a copy of the tables sent for the 1997/98 marketing year.

(19)

By Decision 97-3 of 29 December 1997, the CIVDN introduced an inter-branch contribution starting on 1 January 1998 to finance advertising campaigns and for operating the following AOCs: ‘Rivesaltes’, ‘Grand Roussillon’, ‘Muscat de Rivesaltes’ and ‘Banyuls’.

(20)

The amount per hectolitre excluding tax was set as follows: ‘Banyuls and Banyuls Grand Cru’: FRF 25/hl; ‘Grand Roussillon’: FRF 30/hl; ‘Muscat de Rivesaltes’: FRF 50/hl and ‘Rivesaltes’: FRF 30/hl.

(21)

These contributions were allocated as follows: ‘Rivesaltes’: FRF 25/hl for advertising and FRF 5/hl for operations; ‘Grand Roussillon’: FRF 45/hl for advertising and FRF 5/hl for operations; ‘Banyuls’: FRF 20/hl for advertising and FRF 5/hl for operations.

(22)

By Decision 98-1 of 10 July 1998, the CIVDN introduced an inter-branch contribution starting on 1 September 1998 to finance advertising campaigns and for operating the following AOCs: ‘Rivesaltes’, ‘Grand Roussillon’ and ‘Maury’.

(23)

The amount of contributions per hectolitre excluding tax were set as follows: ‘Grand Roussillon’: FRF 25/hl; ‘Maury’: FRF 5/hl; ‘Rivesaltes’: FRF 35/hl.

(24)

These contributions were allocated as follows: ‘Rivesaltes’: FRF 30/hl for advertising and FRF 5/hl for operations; ‘Grand Roussillon’: FRF 20/hl for advertising and FRF 5/hl for operations; ‘Maury’: FRF 5/hl for operations.

(25)

The previous two contributions were repealed by Decision 99-1 of 17 December 1999, by which the CIVDN introduced an inter-branch contribution to finance publicity and promotion initiatives and for operating the following AOCs: ‘Banyuls’, ‘Banyuls Grand Cru’, ‘Muscat de Rivesaltes’, ‘Rivesaltes’, ‘Grand Roussillon’, and ‘Maury’.

(26)

The amounts per hectolitre excluding tax were set as follows: ‘Grand Roussillon’: FRF 25/hl; ‘Rivesaltes’: FRF 35/hl; ‘Banyuls’ and ‘Banyuls Grand Cru’: FRF 25/hl; ‘Muscat de Rivesaltes’: FRF 55/hl; ‘Maury’: FRF 0/hl.

(27)

These contributions were allocated as follows: ‘Rivesaltes’: FRF 30/hl for advertising and FRF 5/hl for operations; ‘Grand Roussillon’: FRF 20/hl for advertising and FRF 5/hl for operations; ‘Muscat de Rivesaltes’: FRF 50/hl for advertising and FRF 5/hl for operations; ‘Banyuls and Banyuls Grand Cru’: FRF 20/hl for advertising and FRF 5/hl for operations.

(28)

This contribution was continued, with slight modifications, by Decision 00-1. At the time the examination procedure was initiated, the Commission did not have any information on the duration of this scheme or as to whether it would be continued.

(29)

Dealing first with the nature of the contributions in this case, the Commission noted that they were directly approved by the French Government under the procedure provided for in Law 200 of 2 April 1943 creating an inter-branch committee for natural sweet wines and liqueur wines with registered designations. The Government's approval is thus a precondition for such contributions to be adopted. Law No 200 stipulates, in particular, that contributions are to be compulsory for all members of the branches concerned as soon as they have been approved by the Government or, in the case in point, its Commissioner. It follows that this type of contribution requires an official act in order to take full effect. Consequently, the Commission considered at this stage of the examination procedure that this was a case of parafiscal charges, i.e. public resources.

(30)

With regard to the ‘set-aside premium’ provided for in the French aid scheme, no provision was made for such premiums under the common market organisation (CMO) and, more specifically, Council Regulation (EEC) No 456/80 of 18 February 1980 on the granting of temporary and permanent abandonment premiums in respect of certain areas under vines and of premiums for the renunciation of replanting (5). That Regulation provided only for a premium for temporary or permanent cessation of production, payable when a producer decided to contribute to reducing the Community's wine-growing potential by, in particular, grubbing up vines. Since potential was not reduced and no abandonment initiatives were financed by the premium, the scheme did not appear, at the time the examination procedure was initiated, to fall within the scope of the former common organisation of the market in wine under Regulation (EEC) No 822/87.

(31)

The purpose of the aid would appear to have been to give financial support to producers who, as business operators, had freely decided to undertake a purely commercial venture, for charges which seem to be expenditure connected with the exercise of economic activity. According to the consistent practice of the Commission and according to the case law of the European Court of Justice (6), operating aid is aid intended to relieve an undertaking of the expenses which it would itself normally have had to bear in its day-to-day management or its usual activities. This concept is reiterated in point 3.5 of the Community guidelines on State aid in the agriculture sector (7) (hereinafter ‘agriculture guidelines’), according to which such aids, by their very nature, are likely to interfere with CMO mechanisms.

(32)

The Commission noted here that the aid was granted per hectare and per year, and is therefore closely connected with the quantity of wine produced. The Commission explained that under no circumstances can it approve aid which would be incompatible with the rules governing a CMO or which would disturb the smooth operation of the market organisation concerned. When the examination procedure was initiated, it considered that the ‘set-aside premium’ seemed to constitute operating aid likely to interfere with the mechanisms of the wine CMO and that it could therefore be incompatible with the applicable market and competition rules.

(33)

Regarding the conversion costs, Article 14 of Regulation (EEC) No 822/87 stipulated that all national aid for planting vineyards would be prohibited from 1 September 1988, except where such planting met criteria relating, in particular, to reducing production or improving quality without resulting in an increase in production. Accordingly, only varieties that would bring about an improvement in quality and that did not have high productivity in the wine-growing area concerned would be allowed.

(34)

Commission Regulation (EEC) No 2741/89 of 11 September 1989 laying down criteria to apply under Article 14 of Council Regulation (EEC) No 822/87 on national aid for the planting of wine-growing areas (8) laid down the criteria for examining draft national aid schemes for the planting of wine-growing areas permitted under Articles 87, 88 and 89 of the Treaty. Article 2 of Regulation (EEC) No 2741/89 stipulates that draft national aid must satisfactorily demonstrate compliance with the objective of reducing production quantity or improving quality without leading to increased production.

(35)

Article 5 of Regulation (EEC) No 2741/89 stipulates that the amount of aid granted per hectare of vineyard planted may not exceed 30 % of the actual cost of grubbing-up and planting. The French authorities conclude that, since the total cost of the conversion carried out amounted to FRF 258 500 000 and the public authorities contributed FRF 75 250 000, taking all financing together, the public authorities contributed 29,11 % of the costs of the conversion scheme actually carried out. But Article 5 of Regulation (EEC) No 2741/89 stipulated that the relevant factor for calculating the conversion costs was the aid actually granted per hectare of vines planted. At the stage of the examination procedure, this logic seemed to exclude overall calculations relating to the conversion exercise as a whole and, consequently, calculations based on the average per hectare of the total costs. Moreover, the French authorities calculated this average in relation to differentiated conversion schemes.

(36)

The Commission considered at that stage that in view of the costs per hectare put forward by the French authorities (FRF 110 000/ha), the aid granted in this case should have been capped at FRF 33 000/ha and 30 % of the real costs incurred by the individual producers. It follows that any aid granted in excess of that ceiling or of 30 % of the real costs incurred by individual producers might be incompatible with the applicable rules.

(37)

By virtue of the powers conferred on it under Article 10 of Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (9), the Commission asked the French authorities to send it all the necessary information on the two conversion measures carried out. In particular, this was to include information concerning the number of wine-growers who had received national aid for planting areas under vines; the area concerned, broken down by soil type; the part of that area which was planted after grubbing; the part of that area recognised as suitable for producing quality wine psr; the intended use of the planted areas (wine grapes, table grapes, grapes for drying, nursery or parent vine for root-stocks, etc.); the varieties used; proof that the French authorities granted prior authorisation for the use of the aforesaid varieties; the development of production potential and all relevant information about the level of aid.

(38)

As for aid for advertising used by certain AOCs, the French authorities have pointed out that the rules governing the parafiscal charges intended to finance the CIVDN were regularly notified and had already been examined and approved by the Commission. Indeed, in the context of State aid No N 184/97 (10) (Aid and parafiscal charges for the benefit of the CIVDN), the Commission most recently approved State aid financed by a parafiscal charge to cover, among other things, advertising and operating measures for the benefit of the CIVDN. However, according to the information received, the contributions in the case in hand are levied by the CIVDN in addition to the parafiscal charges intended for the communication and advertising measures already authorised by the Commission. Consequently, when the examination procedure was initiated, the Commission considered that the authorisation given previously did not tacitly authorise subsequent amendments or any other measure on top of the previously authorised aid.

(39)

The Commission has asked the French authorities to send it the necessary information about these aid schemes, including any schemes not mentioned or notified which may currently be in force, so as to allow it to assess their compatibility with, in particular, the negative and positive criteria applicable to advertising and the maximum amount of aid which may be authorised. This information should also make it possible to measure the repercussions of any accumulation of aid involving the previously authorised scheme and the non-notified schemes concerned by this Decision.

(40)

The Commission has also noted that the mechanisms of the parafiscal charges in this case are very similar to those of the charge already authorised by the Commission. It is also clear from the texts introducing these charges that they affect only the wine production in a specific region. At the stage of the examination procedure, it could therefore be concluded that no imported products were or had been subject to the parafiscal charges concerned in this case.

(41)

The complainant submitted the following comments and requested their identity to be treated as confidential. After having examined the grounds given for so doing, the Commission considers it right to respect the complainant's request.

(42)

According to the complainant, the set-aside premium and the conversion aid are but two elements of a single aid scheme designed to reduce the quantity of a certain product placed on the market. Aid allocated for setting aside plots and aid allocated under the conversion scheme must be taken together for assessment of compliance with Community law.

(43)

The complainant is of the opinion that the autonomous financial management of the Rivesaltes Plan provided for in CIVDN Decision No 96-1 of 5 July 1996 was breached since the set-aside premium was financed by funds that were not exclusively generated by the inter-branch contribution introduced in 1996. Thus the complainant believes that the set-aside premium was financed by the CIVDN's own resources to the tune of over FRF 11 million. Moreover, the complainant believes that part of the funding obtained through advertising contributions was used to finance the plan, in particular the set-aside premium.

(44)

According to the complainant, the General Council of the Eastern Pyrenees paid the CIVDN FRF 2 million at the beginning of the 2000 financial year to fund the set-aside premium. In addition, the General Council is alleged to have claimed in the March 2003 edition of its magazine ‘L'accent Catalan’ to have directly paid wine-growers aid per hectare amounting to EUR761 and then EUR 1 293 under the Rivesaltes Plan on top of the aid paid as a set-aside premium and the conversion aid. The complainant believes that that this aid was not notified to the Commission.

(45)

The complainant deems that the capital generated by parafiscal charges for advertising in favour of the CIVDN was used to finance advertising campaigns for their own products, i.e. for certain enterprises, rather than to finance advertising campaigns for the various categories of AOCs in general. It is alleged that these practices are still applied today by the inter-branch wine committee of Roussillon (CIVR), the body that replaced the CIVDN when it went into liquidation. These aid schemes are held not to comply with EU rules in that they do not have an aim of general interest.

(46)

According to the complainant, during 2001 and 2002, the CIVDN continued to demand that merchants pay parafiscal charges even though the body that replaced it afterwards, the CIVR, had also begun to invoice contributions in contradiction with national law.

(47)

By letter of 16 June 2003, the French authorities submitted their comments concerning the Commission's decision to initiate the procedure provided for in Article 88(2) of the Treaty in respect of the aid measure notified.

(48)

The French authorities confirmed at the outset that the measures in question had not been continued beyond the five-year period set initially, which began in the 1996/97 marketing year. In any event, the Commission was informed by letters dated 14 December 2000 and 6 December 2001 that the CIVDN had been wound up. The CIVR, which replaced the CIVDN, did not implement any of the same type of measures.

(49)

The French authorities explained that the aim of the measure was not to reduce the wine-growing potential since the commitment made by beneficiaries was essentially to agree to market table wine or ‘vin de pays’, rather than AOC wine produced from set-aside plots. As such, this premium could not be treated, as the Commission deems, as a mere operating aid unduly constituting liquidity relief.

(50)

In fact, the purpose of the premium was to reward beneficiaries for undertaking not to market AOC production from the set-aside plots. It did therefore not constitute a supplement to beneficiaries' revenue but rather compensated them for a loss in income.

(51)

Thus, when the measure was implemented, one hectare under AOC Rivesaltes vine would generate, on the basis of the maximum authorised yield of 40 hl, a production of between 25 hl of natural sweet wine at FRF 1 140/hl and 15 hl of table wine or ‘vin de pays’ at FRF 350/hl, giving a turnover of between FRF 32 250 and FRF 33 000/ha. After the land is set aside, one hectare under vine could produce 50 hl of table wine or ‘vin de pays’ (average area yield), i.e. a turnover of between FRF 12 500 and FRF 17 500/ha.

(52)

The average difference after set-aside (loss of revenue for producers) would therefore be about FRF 15 000/ha, from which, in the interests of completeness, the cost of alcohol to produce natural sweet wine should be deducted, i.e. FRF 2 000 for 25 hl, which makes the net difference total FRF 13 000/ha.

(53)

Even if account is taken of the fact that the difference as of 1999 was less, due to the fall in the production price of natural sweet wines (FRF 900/hl), it was still FRF 6 500/ha [FRF 26 000 (turnover/ha AOC) — FRF 17 500 (turnover/ha for table wine or ‘vin de pays’) — FRF 2 000 (cost of alcohol to make natural sweet wines)].

(54)

Under these conditions, the French authorities considered that the set-aside premium could in no way constitute operating aid that would grant beneficiaries undue income supplements or liquidity relief.

(55)

Moreover, the French authorities underline that the set-aside premium did not jeopardise the wine CMO mechanisms by potential market disturbances. Thus no wine was distilled under the compulsory distillation scheme in the Eastern Pyrenees between the 1996/97 and 1999/2000 marketing years. Besides, the amount sent for preventative distillation for the marketing years in question reflects normal market conditions in table wine and ‘vin de pays’.

(56)

Alternatively, the French authorities insist that the measure shows solidarity as it is not financed by the State but by an inter-branch contribution paid by the producers themselves.

(57)

According to the French authorities, this measure constitutes an exceptional addition to national aid to renew vineyards, which was established to implement Regulation (EEC) No 2741/89.

(58)

The French authorities pointed out that aid to improve the vine population was first notified in 1993 (aid No N 769/93), the subject of document (FR/XXX/05.00/017) in successive lists of national aid. Regarding the annual report, the French authorities explained that the communication required under Article 8 of Regulation (EEC) No 2741/89 could be made in the context of the annual communication sent by Member States under Article 9 of Regulation (EEC) No 822/87. However Article 9 of Regulation (EEC) No 822/87 states that ‘by 1 September of each year, the Member States shall forward a communication to the Commission concerning the development of wine-growing potential, which shall include a statement of the areas under vines on their territory’ and ‘by 1 December of each year … a report on the development of wine-growing potential’.

(59)

The French authorities pointed out they send an annual report to the Statistical Office of the European Communities, in accordance with Article 9 of Regulation (EEC) No 822/87, including a statement of the area under vines, broken down by department and by type of grape produced (wine grapes, including quality wine psr, table grapes) and a statement of grubbed-up areas and vine planting submitted in the same format with a breakdown by department and by type of grape produced. The French authorities enclosed a copy of the tables sent for the 1997/98 marketing year. Under these circumstances, the French authorities considered that they could not be accused of failing to meet their obligations under Regulation (EEC) No 822/87.

(60)

In order to make an accurate and thorough assessment of the Rivesaltes Plan conversion aid, the French authorities deemed it necessary to take into account the fact that area under Muscat de Rivesaltes was excluded from the supplement to renewal aid under the plan. These areas only benefited from renewal aid at rates corresponding to national levels. Nonetheless, the FRF 85 million that the French authorities noted in their previous letters included FRF 31 million of national aid to renew vines in the area under Muscat.

(61)

In the end, the conversion aid in the context of the Rivesaltes Plan for the area under varietal ‘vin de pays’ and Côtes du Roussillon villages was assessed as follows:

(62)

In total, under this Plan, FRF 36,623 million was paid for the renewal of vines over an area of 1 238 ha to 875 producers.

(63)

221 cases exceeded FRF 33 000/ha for an area of 166 ha, corresponding to FRF 0,883 million.

(64)

The French authorities sent a list of the varieties used in conversion schemes and the different decrees setting the level of aid for each year.

(65)

The French authorities first specified that these initiatives were not continued after 31 December 2000.

(66)

The advertising initiatives funded by receipts from the compulsory voluntary contribution (CVO) were of the same nature as those funded by revenue from the parafiscal charges, which were notified to and approved by the Commission (aid Nos N 230/90 (11) and N 184/97).

(67)

The credit generated by collecting CVO therefore enabled the initiatives funded by the parafiscal charge to be consolidated. In fact it appeared necessary to step up advertising of this wine to develop outlets for it, given the market situation which had serious impacts on the local wine economy.

(68)

In this respect, the French authorities noted that authorisation to finance promotion aid could be given for up to 100 %. The French authorities pointed out that the publicity aid concerned initiatives to advertise AOC products and was financed by parafiscal charges and voluntary contributions.

(69)

In reply to the Commission's request, the French authorities sent examples of the promotion and publicity material used.

(70)

In their letter dated 10 September 2004, the French authorities replied to the observations made by third parties. They explained that there was a perception that the aid had been diverted from its initial objective and used for the sole profit of an enterprise in competition with the third parties concerned. The French authorities took exception to these allegations, which directly challenged the probity of the various administrations concerned and therefore invited the Commission to dismiss these arguments.

(71)

Article 87(1) of the Treaty states that, ‘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, in so far as it affects trade between Member States, be incompatible with the common market’.

(72)

Article 76 of Regulation (EEC) No 822/87, applicable when the aid was granted, provided that, unless otherwise provided in the same Regulation, Articles 92, 93 and 94 of the Treaty (now Articles 87, 88 and 89) were applicable to the production and sale of wine products.

(73)

Measures which, whatever their form, are likely directly or indirectly to favour certain undertakings or are to be regarded as an economic advantage which the recipient undertaking would not have obtained under normal market conditions are regarded as aid.

(74)

The Commission notes that the type of contributions in this case required the adoption of an act by a public authority for their full impact to be felt and that the resources they generated served as a tool to implement a State-supported policy. In addition, there is no proof that the beneficiaries of aid are always those liable to the corresponding charges. For these reasons, the contributions do not meet the criteria for derogations from Article 87(1) of the Treaty, as proposed by Court of Justice case law (12). Consequently, the Commission considers that this is a case of parafiscal charges, i.e. public resources.

(75)

Moreover, according to ECJ case law, measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, therefore, without being subsidies in the strict sense of the word, are similar in character and have the same effect are also considered to be aid (13).

(76)

The existence and type of the aid must be established for the potential beneficiaries of the Rivesaltes Plan and of the inter-branch contributions for publicity and promotion and for operating and financing certain AOCs. In the case in point, the support given did favour certain undertakings since the aid was only granted to AOC producers operating in certain specific regions.

(77)

Lastly, in order to establish whether the aid falls within Article 87(1) of the Treaty, an assessment must be made on whether it is likely to affect trade between Member States.

(78)

The Court has ruled that when State financial aid strengthens the position of an undertaking compared with other undertakings competing in intra-Community trade, the latter must be regarded as affected by that aid (14).

(79)

The fact that there is trade between Member States in the wine sector is demonstrated by the existence of a common market organisation for the sector.

(80)

The following table shows, as an example, the level of trade in wine products between France and the other Member States over the last two years of the afore-mentioned conversion scheme in France.

(81)

The aid granted is therefore likely to affect trade between the Member States and to distort or potentially distort competition since it favours the production of certain national wines to the detriment of production in other Member States. The wine sector is extremely open to competition at Community level and is consequently very sensitive to any measure favouring production in a particular country.

(82)

In the light of the above explanations, the Commission considers that the measures in favour of producers of AOC wines operating in certain specific regions constitute a financial advantage financed by public resources allocated to them which is not available to other operators, which distorts or has the potential to distort competition by favouring certain undertakings and productions, thereby is likely to affect trade between Member States. It is therefore aid within the meaning of Article 87(1) of the Treaty.

(83)

However, Article 87 of the Treaty provides scope for derogations to the general principle that State aid is incompatible with the Treaty, whilst it is clear that some are not applicable to the case in point, notably the derogations under Article 87(2). These were not cited by the French authorities.

(84)

The derogations provided for in Article 87(3) of the Treaty must be interpreted strictly when considering regional or sectoral aid programmes or any individual case of application of general aid schemes. In particular, they may be allowed only where the Commission is able to establish that the aid is necessary to achieve one of the aims in question. Allowing such derogations to apply to aid not meeting that condition would be tantamount to allowing trade between Member States to be affected and permitting distortion of competition that has no justification in the light of the Community interest and, by the same token, undue advantages for the operators of certain Member States.

(85)

The Commission considers that the aid measures in question are not intended to encourage economic development in a region where the standard of living is abnormally low or where there is serious underemployment within the meaning of Article 87(3)(a) of the Treaty. Nor are they intended to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State within the meaning of Article 87(3)(b). Nor again are they intended to promote either culture or heritage conservation within the meaning of Article 87(3)(d).

(86)

Article 87(3)(c) of the Treaty provides that aid to facilitate the development of certain economic activities or of certain economic areas may be considered to be compatible with the common market where such aid does not adversely affect trading conditions to an extent contrary to the common interest. In order to be covered by this derogation, aid must contribute to the development of the sector in question.

(87)

The Commission notes that the French authorities did not notify it of the measures introducing the aid in question, as required by Article 88(3) of the Treaty. Article 1(f) of Regulation (EC) No 659/1999 defines unlawful aid as new aid put into effect in contravention of Article 93(3) of the Treaty. The obligation to notify State aid is enshrined in Article 1(c) of Regulation (EC) No 659/1999 (15).

(88)

Since the measures implemented by France contain elements of State aid, it constitutes new aid, not notified to the Commission, and therefore unlawful under the Treaty.

(89)

In accordance with Point 23.3 of the agriculture guidelines and the Commission notice on the determination of the applicable rules for the assessment of unlawful State aid (16), all unlawful aid under Article 1(f) of Regulation (EC) No 659/1999 must be assessed in accordance with the texts in force at the time when the aid was granted.

(90)

The agriculture guidelines have applied since 1 January 2000. Any aid granted after this date must be assessed in the light of these guidelines. However, any aid granted before this date must, where necessary, be assessed in the light of the measures and practice applicable before 1 January 2000.

(91)

Point 3.2 of the agriculture guidelines states that, even if Articles 87, 88 and 89 of the Treaty are fully applicable to the sectors covered by the CMOs, their application remains, however, subject to the provisions set out in the Regulations concerned. In other words, recourse by a Member State to Articles 87, 88 and 89 of the Treaty cannot override the provisions of the Regulation governing the market organisation concerned (17). The Commission must also assess whether aid runs counter to smooth operation of the market concerned and therefore is incompatible with the single market.

(92)

The aid provided for in the Rivesaltes Plan was granted between 1 January 1997 and 31 July 2000, i.e. before the entry into force on 1 August 2000 of Regulation (EC) No 1493/1999 of 17 May 1999 on the common organisation of the market in wine. Since the measures concerned fall within the scope of the common organisation of the market in wine, they must be examined in the light of the legislation in force at that time, i.e. Regulation (EEC) No 822/87.

(93)

As for the advertising aid introduced for certain AOCs, which, according to the French authorities, was discontinued after 31 December 2000, the compatibility of the aid granted must be assessed in the light of the guidelines for State aid for advertising products listed in Annex I to the EC Treaty and of certain non-Annex I products (18), point 70 of which states that unlawful aid within the meaning of Article 1(f) of Regulation (EC) No 659/1999 is to be assessed in accordance with the rules and guidelines applicable at the time when the aid is granted.

(94)

Regarding State aid financed by parafiscal charges, the measures financed by this aid and the methods of financing the aid itself must be assessed by the Commission.

(95)

The set-aside premium was financed by an inter-branch contribution, which was a compulsory charge levied by public authorities for the wine conversion project. The purpose of the premium was to compensate producers for the loss of income deriving from their commitment not to claim the registered designation of origin (AOC) ‘Rivesaltes’ and to refocus their production on table wine and ‘vin de pays’.

(96)

However, the set-aside premiums as provided by the French aid scheme were not provided for in the market organisation nor, specifically, by Regulation (EEC) No 456/80. That Regulation provided only for a premium for temporary or permanent cessation of production, payable when a producer decided to contribute to reducing the Community's wine-growing potential by, in particular, grubbing up vines.

(97)

The Commission states that the purpose of the French measure was not to reduce wine production but solely to cease using the Rivesaltes AOC. Since potential was not reduced and the premium did not finance any abandonment, the measure does not fall within the scope of the previous organisation of the market in wine.

(98)

Although Regulation (EEC) No 456/80 appears not to apply because no production was abandoned, the measure must be assessed in the light of other horizontal measures regarding State aid. Article 17 of Regulation (EEC) No 456/80 stated that the provisions of this Regulation did not prevent aid from being granted under national rules that is designed to achieve the same objectives as those pursued by this Regulation, provided they are assessed within the meaning of Articles 92, 93 and 94 of the Treaty (now Articles 87, 88 and 89).

(99)

The measure in question does not provide for abandonment of production. It cannot therefore be treated as a measure designed to achieve the same objectives as those pursued by Regulation (EEC) No 456/80, in other words, to reduce wine-growing potential.

(100)

The French authorities themselves explained that the aim of the measure was not to reduce the wine-growing potential since the commitment made by beneficiaries was essentially to agree to marketing table wine or ‘vin de pays’, rather than AOC wine, produced from set-aside plots.

(101)

The French authorities specified that the purpose of the premium was to reward beneficiaries for undertaking not to market AOC production from the set-aside plots. Thus, in their opinion, it did not constitute a supplement to beneficiaries' revenue but rather compensated them for a loss in income. As such, this premium could not be treated as a mere operating aid which unduly constitutes liquidity relief.

(102)

However, in contrast to the French authorities' recommendation, the Commission is of the opinion that the purpose of the national aid is to give financial support to producers who, as business operators, had freely decided to undertake a purely commercial venture, the costs of which constitute expenditure in connection with economic activity. In fact, State compensation to economic operators for a loss of voluntarily sustained income constitutes public aid with the impact of mitigating the economic effects of their decision.

(103)

According to the consistent practice of the Commission before the agriculture guidelines were adopted on 1 January 2000 and according to the Court of Justice case law (19), operating aid is aid intended to relieve an undertaking of the expenses which it would itself normally have had to bear in its day-to-day management or its usual activities. The Court notes that it is consistent practice that operating aid can in no cases be declared as compatible with the single market under Article 87(3)(c) of the Treaty since by its very nature this aid has the potential to alter trading conditions to an extent that is contrary to common interest.

(104)

This principle is reiterated in point 3.5 of the agriculture guidelines, which state that unilateral state aid measures which are simply intended to improve the financial situation of producers but which in no way contribute to the development of the sector, and in particular aids which are granted solely on the basis of price, quantity, unit of production or unit of the means of production are considered to be comparable to operating aids which are incompatible with the common market. Point 3.5 adds that by their very nature, such aids are likely to interfere with the mechanisms of the CMOs.

(105)

The Commission notes that the aid was granted per hectare per year on the basis of continued production and that it was therefore closely linked to the quantity of wine produced.

(106)

It considers that the set-aside premium constitutes operating aid likely to interfere with the mechanisms of the common organisation of the market in wine and that it is therefore incompatible with the applicable market and competition rules.

(107)

Article 14 of Regulation (EEC) No 822/87 stipulated that all national aid for planting vineyards would be prohibited from 1 September 1988, except where such planting met criteria relating, in particular, to reducing production or improving quality without resulting in an increase in production.

(108)

Commission Regulation (EEC) No 2741/89 laid down the criteria for examining draft national aid schemes for the planting of wine-growing areas permitted under Articles 92, 93 and 94 of the Treaty (now Articles 87, 88 and 89).

(109)

Article 2 of that Regulation stipulates that draft national aid must satisfactorily demonstrate compliance with the objective set out in the second subparagraph of Article 14(2) of Regulation (EEC) No 822/87 of reducing production quantity or improving quality without leading to increased production.

(110)

Article 3 of that Regulation states that planting must involve varieties which, in the terrain concerned, are not considered high-productivity varieties, are recognized as improving quality and are specifically authorised by the national authorities under the draft aid measure concerned.

(111)

The French authorities pointed out that they send an annual report to the Statistical Office of the European Communities, in accordance with Article 9 of Regulation (EEC) No 822/87, with a statement of the area under vines, broken down by department and by type of grape produced (wine grapes, including quality wine psr, table grapes) and a statement of grubbed-up areas and vine planting submitted in the same format with a breakdown by department and by type of grape produced. The French authorities enclosed a copy of the tables sent for the 1997/98 marketing year.

(112)

The Commission did receive from the French authorities information on the varieties used in the conversion projects enabling it to ascertain compliance with the conditions referred to in points 107 to 110. This information had allowed the Commission previously to conclude that the vine varieties met the requirements of Community legislation applicable at the time the aid was granted.

(113)

Article 5 of Regulation (EEC) No 2741/89 stipulated that the amount of aid granted per hectare of vineyard planted may not exceed 30 % of the actual cost of grubbing-up and planting. The costs to be taken into account in allocating the aid may be determined on a flat-rate basis in each region, particularly in the light of geomorphological characteristics.

(114)

According to the information provided by the French authorities, as a proportion of the total funding, 29,11 % of the conversion costs actually incurred was covered by public bodies. Thus the French authorities concluded that the total amount of the aid did not exceed the 30 % ceiling set by EU legislation.

(115)

Article 5 of Regulation (EEC) No 2741/89 stipulated that the relevant factor for calculating the conversion costs was the aid actually granted per hectare of vines planted. This logic excludes overall calculations relating to the conversion exercise as a whole and, consequently, calculations based on the average per hectare of the total costs.

(116)

The Commission considers that, in view of the costs per hectare put forward by the French authorities (FRF 110 000/ha), the aid granted in this case should have been capped at FRF 33 000/ha and 30 % of the real costs incurred by the individual producers.

(117)

The new information provided by the French authorities shows that, in total, under this Plan, FRF 36,623 million was paid for the renovation of vines over an area of 1 238 ha to 875 producers. 221 cases exceeded FRF 33 000/ha for an area of 166 ha, corresponding to FRF 0 883 million.

(118)

The Commission concludes that individual cases that exceed the ceiling of 30 % of actual costs and/or the ceiling of FRF 33 000/ha constitute State aid that is incompatible with the applicable rules.

(119)

The Commission most recently approved State aid No N 184/97, valid until the end of 2002, financed by a parafiscal charge to cover, among other things, advertising and operating measures for the benefit of the CIVDN. The initial measure was approved by the Commission in 1990 under State aid No N 230/90. The Commission had then concluded that the aid granted for collective promotion to improve and to consolidate the product image of natural sweet wine and to develop sales was in accordance with the rules governing national aid for the promotion of agricultural products and certain products that are not listed in Annex II to the EEC Treaty, except for fishery products (20), applicable to this type of aid. Moreover, the Commission considered that the CIVDN's administrative expenses were not to be counted as aid.

(120)

The Commission deems that the authorisation given for State aid N 184/97 does not constitute a tacit authorisation for further modifications, or other measures, such as the case in point, on top of the previously authorised aid.

(121)

However the French authorities confirmed that the advertising initiatives funded by CVO receipts were of the same nature as those financed through the parafiscal charge that had been notified to and approved by the Commission. According to the French authorities, it therefore constituted exclusively an increase in the overall budget for the measure.

(122)

Since the same conditions had been applied when these aid schemes were granted, the Commission, in referring to its Decision on State aid N 184/97, is therefore in a position to conclude that advertising and operating aid for the AOCs financed by the new contributions are compatible with the applicable competition rules.

(123)

The Commission takes note of the comments from third parties, according to which the measures financed breached the applicable competition rules on advertising aid for agricultural products since it was paid to specific undertakings. However the supporting documents submitted show instead that these advertising campaigns could be treated as technical assistance schemes where the beneficiaries were wine producers.

(124)

In accordance with the case law of the Court of Justice (21), the Commission normally considers that the financing of State aid by means of compulsory charges may influence the aid by having a protective effect which goes beyond the aid as such. The levies in question are compulsory charges. According to the same case law, the Commission considers that aid may not be financed by parafiscal charges that also apply to products imported from other Member States.

(125)

The Commission already concluded, notably in State aid N 184/97, that the scheme introduced by the French authorities did not affect imported products.

(126)

The documents introducing parafiscal charges in the case in point show that they impact only on the production of natural sweet AOC wine in the Eastern Pyrenees Region. The set-aside premium was financed by a contribution that only affected regional production of the wine concerned, therefore excluding all imported products.

(127)

It can therefore be concluded that no imported products are or have been subject to the parafiscal charges concerned in this case.

(128)

The State aid operated by France in the form of ‘set-aside premiums’ granted to French wine producers that undertake not to claim the registered designations of origin (AOC) ‘Rivesaltes’ or ‘Grand Roussillon’ from the 1996 harvest to the 2000 harvest inclusive is incompatible with the single market.

(129)

The State aid operated by France in the form of the conversion plan for the AOC Rivesaltes vineyard from the 1996 harvest to the 2000 harvest inclusive, that was granted to individual cases exceeding 30 % of the actual costs and/or exceeding the EUR 5 030,82/ha (FRF 33 000/ha) ceiling is incompatible with the single market.

(130)

The State aid operated by France between 1 January 1998 and 31 December 2000 in the form of advertising and operating aid to the ‘Rivesaltes’, ‘Grand Roussillon’, ‘Muscat de Rivesaltes’ and ‘Banyuls’ AOCs is compatible with the single market under Article 87(3)(c) of the Treaty.

(131)

The measures in question were not notified to the Commission in accordance with Article 88(3) of the Treaty and therefore constitute unlawful aid under Article 1(f) of Regulation (EC) No 659/1999.

(132)

The Commission regrets that France operated the above aid measures in contravention of Article 88(3) of the Treaty.

(133)

It should be remembered that, in the case of aid measures implemented without awaiting the Commission's final decision, given the binding nature of the rules of procedure laid down in Article 88(3) of the Treaty, which the Court of Justice recognised as having direct effect in its judgments of 19 June 1973 in Case 77/72, Carmine Capolongo v. Azienda Agricola Maya (22); 11 December 1973 in Case 120/73, Gebrueder Lorenz GmbH v. Federal Republic of Germany (23) and 22 March 1977 in Case 78/76, Steinike & Weinlig v. Federal Republic of Germany (24), the unlawfulness of the aid concerned cannot be regularised ex post facto (judgment of 21 November 1991 in case C-354/90, Fédération Nationale du Commerce Extérieur des Produits Alimentaires v. French Republic) (25).

(134)

The Court of Justice recalled that where an aid measure, of which the method of financing is an integral part, has been implemented in breach of the obligation to notify, national courts must in principle order the reimbursement of charges or contributions levied specifically for the purpose of financing that aid. It also noted that it is for the national courts to uphold the rights of the persons concerned in the event of a possible breach by the national authorities of the prohibition on putting aid into effect, referred to in the last sentence of Article 88(3) of the Treaty and directly applicable. Such breaches cited by interested individuals and ascertained by national courts must result in the courts drawing the necessary consequences, in accordance with national law, with regard to both the validity of the acts giving effect to the aid and the recovery of financial support granted (26).

(135)

Where an unlawful aid is incompatible with the common market, Article 14(1) of Regulation (EC) No 659/1999 provides that the Commission must decide that the Member State concerned take all necessary measures to recover the aid from the beneficiary. Such reimbursement is necessary to re-establish the situation applying previously, and involves cancelling all the financial advantages from which beneficiaries of the unlawfully granted aid have unduly benefited since the date the aid was granted.

(136)

Article 14(2) of Regulation (EC) No 659/1999 stipulates that recovery includes interest at an appropriate rate fixed by the Commission. Such interest is payable from the date on which the unlawful aid was made available to the beneficiary.

(137)

The aid must be reimbursed in accordance with the procedures laid down by French law. The amounts include interest from the date on which aid was granted until the date of its effective recovery. It is to be calculated at the Commission's reference rate, laid down by the method for setting the reference and discount rates (27).

(138)

The Commission does not have data on the overall amount of aid granted under the ‘set-aside premium’ since it does not know the amount of receipts taken nor the number of hectares for which aid was received. Whilst specifying that they do not in any way alter the Commission's conclusions, the Commission notes the comments made by third parties, according to which the ‘set-aside premium’ was the subject of additional public aid and financing undeclared by the French authorities. According to the information available to the Commission, the amount of public aid to finance the ‘conversion aid’ totalled EUR 11,01 million.

(139)

This Decision will not prejudice the conclusions the Commission may draw, if necessary, for the financing of the common agricultural policy by the European Agricultural Guidance and Guarantee Fund (EAGGF),

30.4.2007   

EN

Official Journal of the European Union

L 112/14

(1)

By letter of 15 October 2004, registered as received on 25 October, the Commission was sent a complaint concerning alleged unlawful state aid in favour of FRUCONA Košice, a.s.. The complainant sent additional information on 3 February 2005. A meeting with the complainant took place on 24 May 2005.

(2)

On the basis of the information provided by the complainant, the Commission asked Slovakia by letter of 6 December 2004 to inform it about the disputed measure. Slovakia responded by letter of 4 January 2005, registered as received on 17 January, informing the Commission about possible unlawful aid granted to FRUCONA Košice a.s. and asking it to approve the aid as rescue aid to a company in financial difficulties. Slovakia submitted additional information by letter of 24 January 2005, registered as received on 28 January. The Commission asked for further information by letter of 9 February 2005, to which it received answers by letter of 4 March 2005, registered as received on 10 March. A meeting with the Slovak authorities took place on 12 May 2005.

(3)

By letter of 5 July 2005, the Commission informed Slovakia that it had decided to initiate the procedure laid down in Article 88(2) of the EC Treaty in respect of the aid.

(4)

The Commission decision to initiate the procedure was published in the Official Journal of the European Union  (2). The Commission invited interested parties to submit their comments on the measure.

(5)

The Slovak authorities submitted their observations by letter of 10 October 2005, registered as received on 17 October 2005. The Commission received comments from one interested party (the beneficiary) by letter of 24 October 2005, registered as received on 25 October. It forwarded them to Slovakia, which was given the opportunity to react; Slovakia's comments were received by letter dated 16 December 2005, registered as received on 20 December. A meeting with the beneficiary at which he was given the opportunity to explain his submission took place on 28 March 2006. Slovakia submitted additional information by letter dated 5 May 2006, registered as received on 8 May.

(6)

The recipient of the financial support is FRUCONA Košice a.s. (hereinafter referred to as ‘the beneficiary’), which, at the time of the decisive events, was active in the production of spirit and spirit-based beverages, non-alcoholic beverages, canned fruit and vegetables, and vinegar. Currently, the beneficiary no longer produces spirit and spirit-based beverages. Nevertheless, it is active on the wholesale market for spirit and spirit-based beverages. The company is situated in a region eligible for regional aid under Article 87(3)(a) of the EC Treaty.

(7)

At the time of the decisive events, the beneficiary employed about 200 persons. In his comments on the decision to open the formal investigation, the beneficiary provided the Commission with data on its turnover (including excise duties and VAT), which are shown in the following table.

Table 1

Turnover in different segments of production, including excise duties and VAT [SKK]

(8)

These data differ considerably from the data obtained by the Commission from the Slovak authorities and given in the decision to open the formal investigation (5). In their reaction to the beneficiary's comments after the opening of the formal investigation, the Slovak authorities did not dispute the accuracy of the above figures. According to the Slovak authorities, the beneficiary fulfils the criteria of a medium-sized enterprise.

(9)

The disputed measure is a write-off of a tax debt by the Košice IV tax office (‘tax office’) under what is known as an arrangement with creditors. This procedure is governed by Act 328/91 on Bankruptcy and Arrangement with Creditors (‘Bankruptcy Act’).

(10)

Arrangement with creditors (‘arrangement’ or ‘arrangement procedure’) is a court-supervised procedure which, like the bankruptcy procedure, aims at settling the financial situation of indebted companies (6). Under the bankruptcy procedure, the company ceases to exist and either its assets are sold to a new owner or the company is liquidated. In contrast, under the arrangement procedure, the indebted company continues its business without change of ownership.

(11)

The arrangement procedure is initiated by the indebted company. The aim is to reach an agreement with the creditors (‘agreement’) whereby the indebted company pays off part of its debt and the remainder is written off. This agreement has to be approved by the supervising court.

(12)

Creditors whose receivables are secured, for example by means of a mortgage, act as separate creditors. For the arrangement proposal to be accepted, all the separate creditors have to vote in favour, whereas for other creditors a qualified majority suffices. Separate creditors vote individually and have a right to veto the proposal.

(13)

Separate creditors have a privileged position also in the bankruptcy procedure. The proceeds from the sale of the secured assets in the bankruptcy procedure are meant to be used exclusively to satisfy the claims of the separate creditors. If the claims of the separate creditors cannot all be met from this sale, the outstanding amounts are incorporated into the second group with the claims of the other creditors. In the second group, the creditors are satisfied proportionally.

(14)

Pursuant to the Bankruptcy Act, the company applying for an arrangement with creditors has to submit to the supervising court a list of measures for its reorganisation and for the ongoing financing of its activity after the arrangement.

(15)

Under Act 511/92 on the Administration of Taxes and Fees and Changes to the System of Local Financial Authorities (‘Tax Administration Act’), a company has the possibility of asking the tax authorities for deferral of payment of taxes. Interest is charged on the deferred amount and the deferred debt has to be secured.

(16)

The Tax Administration Act also governs the tax execution procedure, the aim of which is to satisfy the State's tax claims through sale of real estate, movable assets or the firm as a whole.

(17)

Between November 2002 and November 2003 the beneficiary benefited from the possibility offered by the Tax Administration Act to have its obligation to pay excise duty on spirit deferred (7). In total, the deferred debt amounted to SKK 477 015 759 (EU-12,6 million). Before agreeing to defer these payments, the tax office secured each of its receivables against the beneficiary's assets, as stipulated in the Act. The Slovak authorities submit that the value of these securities based on the beneficiary's accounts was SKK 397 476 726 (EU-10,5 million). The beneficiary, however, claims that the value of these securities, as estimated by experts at the end of 2003, was SKK 193 940 000 (EUR 5 million). This is, according to the beneficiary, the value of the secured assets (movables, real estate and receivables) expressed in so-called expert prices.

(18)

As of 1 January 2004, the amended Tax Administration Act limited the possibility to request a tax deferral to only once a year. The beneficiary used this opportunity for the December 2003 excise duty payable in January 2004. However, it was not able to pay or have deferred the January 2004 excise duty payable on 25 February 2004. As a result, the beneficiary became an indebted company within the meaning of the Bankruptcy Act. It also lost its licence for the production and processing of spirit.

(19)

On 8 March 2004 the beneficiary applied to the competent regional court for the arrangement procedure. Having determined that all the necessary legal requirements were met, the regional court decided by a decision of 29 April 2004 to allow the arrangement procedure to go ahead. At the hearing on 9 July 2004 the creditors voted in favour of the arrangement proposed by the beneficiary. The arrangement was confirmed on 14 July 2004 by a decision of the supervising regional court.

(20)

In August 2004 the tax office appealed against this confirmatory decision of the court. By a decision of 25 October 2004, the Supreme Court decided that the appeal was not admissible and declared the decision of the regional court approving the arrangement to be valid and enforceable as of 23 July 2004. The public prosecutor subsequently appealed against the decision of the regional court under the extraordinary further appeal procedure. The procedure is still pending before the Supreme Court.

(21)

The creditors, including the tax office, agreed with the beneficiary on the following arrangement: 35 % of the debt would be repaid by the beneficiary within one month from the validity of the agreement and the remaining 65 % of the debt would be forgone by the creditors. All the creditors were therefore treated on identical terms. The actual amounts per creditor are shown in the following table.

Table 2

The state of the debts of the beneficiary before and after the arrangement procedure [SKK]

(22)

The claims of the tax office included in the arrangement procedure amounted to SKK 640 793 831 (EUR 16,86 million) and comprised unpaid excise duties for the period May 2003–March 2004, VAT for the period January-April 2004 and added penalties and interest. The claims forgone by the tax office amounted to SKK 416 515 990 (EUR 11 million). The arrangement provided the tax office with SKK 224 277 841 (EUR 5,86 million).

(23)

In the arrangement procedure the tax office acted as a separate creditor and, as such, voted separately in favour of the arrangement. The privileged position of the tax office was due to the fact that some of its receivables included in the arrangement procedure were secured in connection with the deferral of the beneficiary's tax debt in 2002 and 2003 (see paragraph 17). All the other creditors voted in favour of the proposed arrangement. Their receivables were common trade receivables not secured in any manner.

(24)

In its arrangement proposal, in accordance with the requirements of the Bankruptcy Act, the beneficiary spelt out reorganisation measures relating to production, distribution and the workforce (including redundancies).

(25)

On the organisational and workforce fronts, the beneficiary planned the following measures: creation of a universal production group for all the production activities, reorganisation of its transport facilities by exclusion of vehicles with the lowest residual value and reorganisation of commercial activities. These measures were to be accompanied by the redundancy of 50 employees in March-May 2004. Over the same period, a further 50 employees were to work on 60 % remuneration.

(26)

In the production and technical area, the beneficiary stated that, since the company had lost its licence for the production of spirit, the related production facilities would be rented out as of April 2004. The beneficiary planned to reduce or cease production of some unprofitable non-alcoholic beverages and stated that any introduction of a new product in this category would be preceded by an analysis of its profitability.

(27)

The beneficiary also mentions the following measures: the cost restructuring that should result from lower production costs following the abandonment of the production of spirit and from the abolition of part of the company's own transport and the sale of old equipment for scrap.

(28)

The beneficiary also planned to sell an administrative building, a shop and a recreational facility and mentioned the possibility of selling or letting out the vinegar production facility. In their comments on the decision to open the formal investigation procedure, the Slovak authorities confirmed that the sale of the administrative building, shop and recreational facility had not taken place.

(29)

The beneficiary planned an intensive sale of its stocks of ready-to-sell products (10).

(30)

According to this proposal, the beneficiary was to finance the arrangement through its own resources (sale of stocks) of SKK [less than 150] million and through external financing in the form of a loan from a commercial bank of SKK 100 million. From the information submitted by the beneficiary in response to the opening of the formal investigation, the outstanding debt was eventually covered by the revenue from the issue of new shares (SKK 21 million; EUR 0,56 million), the revenue from the sale of stock (SKK [less than 150] million; EUR [less than 3,9] million) and a supplier loan from Old Herold s.r.o. (SKK [70-130] million; EUR [1,8-3,4] million). The maturity of the invoices of Old Herold s.r.o. was 40 days, which, according to the beneficiary, was a long period considering the beneficiary's precarious financial situation. This prolonged maturity permitted the beneficiary to accumulate the necessary cash.

(31)

The Slovak authorities informed the Commission after the opening of the formal investigation that the outstanding debt of the beneficiary towards the tax office amounting to SKK 224 277 841 was paid on 17 December 2004. They confirmed that they had suspended the debt write-off agreed in the arrangement procedure pending the procedure before the European Commission.

(32)

In its decision to initiate the formal investigation, the Commission raised doubts that the disputed write-off did not involve state aid. Specifically, it considered that the behaviour of the tax office in the arrangement procedure did not meet the market economy creditor test. In particular, it found that the tax office was in a situation legally different from the other creditors, as it possessed secured claims and had the possibility to initiate the tax execution procedure. It doubted that the arrangement procedure led to the best possible outcome for the State, when compared with the bankruptcy procedure or the tax execution procedure.

(33)

The Commission then raised doubts as to the compatibility of the disputed aid with the common market. It first raised doubts that the aid could be considered to be compatible as rescue aid, as the Slovak authorities had claimed. Rescue aid can only be liquidity support in the form of loan guarantees or loans. The disputed measure, however, is a debt write-off, which corresponds to a non-refundable grant. In addition, the measure was not granted with the prospect that the beneficiary would present a restructuring plan or a liquidation plan or reimburse the aid in full within six months of authorisation of the rescue measure.

(34)

The Commission then considered the compatibility of the disputed measure as restructuring aid and raised doubts as to whether two of the main conditions were fulfilled: the existence of a restructuring plan ensuring the return to long-term viability within a reasonable time-frame and the limitation of the aid to the minimum necessary.

(35)

In addition to the facts described in Part II above, the beneficiary submitted the following comments.

(36)

The beneficiary argues that the reason for its financial difficulties at the beginning of 2004 was the change of the Tax Administration Act, which restricted the possibility to request the deferral of taxes to once a year. This was an important change for the beneficiary, which had, in his own words, been relying on this possibility in previous years.

(37)

On the merits of the case itself, the beneficiary first submitted that the Commission did not have jurisdiction to review the contested measure because the measure was put into effect before the date of accession and was not applicable after accession. The measure is claimed to have been put into effect before accession because the arrangement procedure was initiated on 8 March 2004 and, as the beneficiary submits, approved by the court on 29 April 2004, i.e. before the accession of the Slovak Republic to the European Union. Furthermore, the tax authorities are said to have signalled their agreement to the proposed arrangement in the negotiations preceding the initiation of the arrangement procedure. A meeting with the Tax Directorate of the Slovak Republic took place in December 2003, and on 3 February 2004 the local tax office sent the beneficiary a letter in which it allegedly confirmed the possibility of proceeding by way of an arrangement.

(38)

The beneficiary further submitted that, even if the Commission found itself competent to act, the contested measure did not constitute state aid because the market economy creditor principle was met.

(39)

First, the beneficiary submits that the comparison of the arrangement procedure with the tax execution procedure is misleading because the initiation of the former excludes or suspends the latter. The tax execution procedure was not, therefore, an option for the tax office. In addition, according to the beneficiary, had it not voluntarily initiated the arrangement procedure, after some weeks or months it would have had a legal obligation to launch the bankruptcy procedure or an arrangement procedure pursuant to the insolvency legislation.

(40)

Second, the beneficiary submits that the decision of the State to avoid bankruptcy and instead to seek a solution through the arrangement procedure met the market economy creditor test. By way of evidence, it submits statements from two auditors and one bankruptcy receiver that the tax office would receive more and would receive it more quickly under the arrangement procedure than under the bankruptcy procedure. It also submits further material and statistics to demonstrate that the bankruptcy procedure in Slovakia lasts on average 3-7 years and brings only a very limited return from the sale of assets (11).

(41)

The beneficiary bases his analysis mainly on a report by the auditing company EKORDA dated 7 July 2004, which the tax office allegedly had at its disposal before the creditors' vote on 9 July 2004. No evidence, however, was submitted showing that this was indeed the case.

(42)

According to the report by EKORDA, the revenue from the sale of assets in the case of bankruptcy would be, at best, SKK 204 million (EUR 5,3 million), and, after deduction of various fees of SKK 45 million, only SKK 159 million (EUR 4,2 million). The beneficiary himself corrected the amount of the fees to be deducted (SKK 36 million) and arrived at the figure of SKK 168 million (EUR 4,4 million). Even though the tax office as the only separate creditor and by far the largest creditor would receive most of this revenue, it would still be less than what the tax office received after the arrangement.

(43)

To arrive at this result, EKORDA used as the basis the book value as at 31 March 2004 of fixed assets, stocks, cash and short-term receivables after adjustment, reflecting their unrecoverability and low value. It adjusted the nominal value of the beneficiary's assets by a so-called liquidation factor for each component of the assets in the event of sale under bankruptcy proceedings (45 % for fixed assets, 20 % for stocks and short-term receivables, and 100 % for cash).

(44)

EKORDA mentions the future tax revenue accruing from the operation of the beneficiary (12) as well as the employment trend in the region and the trend in the food-processing industry in Slovakia as very important factors affecting the decision to keep the beneficiary in business.

(45)

The beneficiary also mentions two other reports. The auditor Marta Kochová concluded that the maximum revenue from the sale of the assets, which, however, were not evaluated, would be SKK 100 million (EUR 2,6 million) or, after deduction of fees of SKK 22 million, only SKK 78 million (EUR 2 million). No further information on this report was provided. The receiver Mrs Holovačová is said to state that, in her opinion, the arrangement procedure is generally more advantageous for creditors than bankruptcy. One consideration is the fact that the creditor has an interest in the continuity of the economic activity of the debtor (future revenues from trade or from taxes).

(46)

Third, the beneficiary submits that long-term considerations should be taken into account, such as future tax revenue. It is asserted that the case law excluding social-political considerations from the market economy creditor test (13) does not apply when the calculation of future tax revenue is considered by the public authority. According to the beneficiary, the situation of the public authority here is analogous to the situation of a market economy creditor who is a supplier interested in the survival of a client. The beneficiary then refers to the case law on the market economy investor principle.

(47)

The beneficiary concludes that the market economy creditor test was met and the disputed measure does not constitute state aid.

(48)

Should the Commission nevertheless conclude otherwise, the beneficiary argues that the disputed measure is compatible as restructuring aid. It submits that the tax office had verified the capacity of its business plan to restore long-term viability before agreeing to the arrangement. The absence of a formal restructuring plan is, according to the beneficiary, irrelevant in a situation where the Commission is assessing the case ex post because the Commission is now able to see whether the beneficiary in fact became viable. However, the beneficiary considers that, in the case of an ex ante assessment, a detailed restructuring plan is necessary. It then briefly describes the restructuring measures undertaken: increase of own capital, lay-offs, sale of stocks. It considers that the halting of the production of spirit and spirit-based beverages and the renting out of the production assets to the company Old Herold s.r.o. was indeed a restructuring measure. Even though the halting of production was originally imposed on it by the loss of the licence, the beneficiary did not apply for a new licence after the arrangement.

(49)

According to the beneficiary, the requirement that its contribution to the restructuring should be significant was also met.

(50)

Finally, the beneficiary submits that the fact that it is active in an assisted region and is one of the largest regional employers should be taken into account when applying the guidelines applicable to restructuring aid.

(51)

In their reply to the opening of the formal investigation, the Slovak authorities made some comments on the factual issues, which have already been mentioned in Part II above.

(52)

The Slovak authorities confirmed that the tax office, at the time of the vote in the arrangement procedure, did not take into account the state aid aspect. The tax office did not consider the arrangement as a form of state aid and therefore the beneficiary was not requested to provide a restructuring plan, which differs from the business plan submitted to the court pursuant to the insolvency legislation.

(53)

In their response to the comments submitted by the beneficiary, the Slovak authorities submitted the following observations.

(54)

The Slovak authorities would not find relevant in the present case the beneficiary's observations on the average length of the bankruptcy procedure and the average return from the sale of assets in a bankruptcy procedure. According to them, given the low number of creditors and the existence of assets with a positive liquidation value which exceeded the amount paid to the State after the arrangement, the bankruptcy procedure would have been completed in a shorter-than-average period and the yield of the tax office would have been higher than in the case of the arrangement. The Slovak tax authorities carried out an on-the-spot inspection at the company on 21 June 2004 and found that, as at 17 June 2004, the beneficiary had cash amounting to SKK 161,3 million, receivables of SKK 62,8 million, stocks of spirit and spirit-based beverages with a value of SKK 84 million and fixed assets with a book value of SKK 200 million.

(55)

The Slovak authorities consider that the tax execution procedure was a genuine alternative for the tax office. They confirm that the tax office had the possibility of initiating this procedure prior to the arrangement procedure, as it could have done even if the court had refused to confirm the arrangement (because the tax office as separate creditor would not have voted in its favour).

(56)

The Slovak authorities do not agree with the assertion of the beneficiary that his financial difficulties were due to the change in the Tax Administration Act. According to them the financial difficulties of the beneficiary were due to the financial strategy of using indirect taxes for the running of its own business. Instead, the beneficiary should have simply collected the taxes from its clients and transferred them to the state budget.

(57)

The Slovak authorities do not agree that the meeting with the Tax Directorate of the Slovak Republic in December 2003 is evidence of preliminary agreement with the arrangement on the part of the tax office. They submitted a letter of 6 July 2004 that had been sent by the Tax Directorate of the Slovak Republic to the subordinate tax office, instructing it not to agree with the arrangement proposed by the beneficiary because it was unfavourable for the State. This letter then referred to another, more general, letter of 15 January 2004 from the Minister of Finance to the subordinate Tax Directorate, instructing it not to agree to proposals for arrangements with creditors that would involve the tax authorities writing off tax receivables. Moreover, the Slovak authorities interpreted the letter of 3 February 2004, referred to by the beneficiary (see paragraph 37), as explicitly disagreeing with the 35 % arrangement.

(58)

The Slovak authorities submit that the beneficiary had not paid excise duties within the prescribed deferment period (January 2001 to March 2004) and had had its tax obligations regularly deferred.

(59)

According to the Slovak authorities, significant differences in the estimates of the two auditors' reports raise doubts as to the credibility of both reports. They have, in particular, doubts regarding the liquidation factor assigned to current assets by EKORDA. This factor should be higher than 20 %.

(60)

Finally, according to the Slovak authorities, the beneficiary had not drawn up a viable restructuring plan and the measures proposed in the context of the arrangement procedure could not be considered to be restructuring measures.

(61)

As some of the relevant events in the present case took place before the accession of the Slovak Republic to the European Union on 1 May 2004, the Commission first has to determine whether it is competent to act with regard to the disputed measure.

(62)

Measures that were put into effect before accession and are no longer applicable after accession cannot be examined by the Commission either under the so-called interim mechanism procedure, governed by Annex IV, point 3 of the Accession Treaty, or under the procedures laid down in Article 88 of the EC Treaty. Neither the Accession Treaty nor the EC Treaty requires or empowers the Commission to review these measures.

(63)

However, measures put into effect after accession clearly do fall within the field of competence of the Commission under the EC Treaty. In order to determine the moment when a certain measure was put into effect, the relevant criterion is the legally binding act by which the competent national authority undertakes to grant aid (14).

(64)

The beneficiary claimed in the present case that the disputed measure was put into effect before accession and is not applicable thereafter (see paragraph 37).

(65)

The Commission cannot accept the arguments put forward by the beneficiary. The proposal to initiate the arrangement procedure is not an act of the granting authority, but an act of the beneficiary. The decision of the court to commence the arrangement procedure is likewise not an act of the granting authority. This decision only permitted the beneficiary and his creditors to proceed with negotiations on the arrangement, but clearly did not constitute the granting event. There is no evidence that the Tax Directorate would have expressed its agreement with the disputed measure at the meeting in December 2003. On the contrary, the Slovak authorities denied any such preliminary agreement. The letter of 3 February 2004 is explicit in refusing to accept the proposal to settle at the level of 35 %.

(66)

The decision of the competent authority to write off some of its claims was taken on 9 July 2004, when the tax office agreed to the arrangement proposed by the beneficiary.

(67)

Accordingly, the question of whether the measure is applicable after accession no longer arises.

(68)

The Commission therefore concludes that it is competent to assess the disputed measure pursuant to Article 88 of the EC Treaty.

(69)

Article 87(1) of the EC Treaty states that 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 and affects trade between Member States is incompatible with the common market.

(70)

Writing off a debt towards a public authority such as a tax office is a form of using state resources. Since it benefits an individual undertaking, the measure is selective.

(71)

Until the events that triggered the insolvency procedure, the beneficiary operated in the market for the production of spirit and spirit-based beverages, non-alcoholic beverages and canned fruit and vegetables. In 2003 it was the third-largest producer of spirit and spirit-based beverages in Slovakia. Since the loss of its licence for the production of spirit and spirit-based beverages in March 2004, it has been active on the wholesale market for spirit and spirit-based beverages produced by another company, Old Herold, s.r.o., using the production facilities it rents from the beneficiary. In all segments in which the beneficiary was active prior to the arrangement procedure and in which it is active at present there is trade between Member States.

(72)

In the decision to open the formal investigation procedure, the Commission raised doubts as to whether the measure distorted or threatened to distort competition by conferring on the beneficiary an advantage that it would normally not be able to obtain on the market. In other words, the Commission had doubts as to whether the State had behaved as a market economy creditor in relation to the beneficiary.

(73)

It was established that the arrangement contained the same debt arrangement conditions for both the private creditors and the tax office. The creditors were to be paid 35 % of the debt within a prescribed period, a requirement with which the beneficiary complied. The remaining 65 % was written off.

(74)

However, prior to the arrangement, the tax office was in a legally and economically more advantageous position than the creditors before the arrangement. It therefore needs to be examined in detail whether the tax office used all the means at its disposal to obtain the highest possible repayment of its receivables, as a market economy creditor would do.

(75)

In order to determine whether the market economy creditor test was met, the Commission has to determine whether the tax office was better off accepting the conditions of the arrangement as proposed by the beneficiary compared with the possible outcome of a bankruptcy procedure or a tax execution procedure.

(76)

In brief, the Slovak Republic submits that, in its view, the measure constitutes state aid. It acknowledges that, at the time of the arrangement, the question of state aid was simply not considered. Contrary to this, the beneficiary argues that the measure is free of aid and submits documents described above, in particular reports from two auditors.

(77)

On the basis of the information submitted by both the beneficiary and the Slovak authorities, the Commission established the following facts on the financial situation of the beneficiary in the year in question to the extent relevant for the application of the market economy creditor test. The figures as at 31 March 2004 provided by the beneficiary and the figures as at 17 June 2004 provided by the Slovak authorities cannot be verified by the Commission in the beneficiary's accounts. The Commission, however, has no reason to doubt any of these data.

Table 3

Financial situation of the beneficiary 2003-04 [SKK million]

(78)

The Commission will first examine the evidence submitted by the beneficiary in support of its opinion that the bankruptcy procedure would leave the tax office worse off than the arrangement procedure. As neither the Slovak authorities nor the beneficiary submitted any calculation with regard to the tax execution procedure, the Commission will examine what the tax office could have obtained via this procedure. Finally, it will examine circumstantial evidence submitted by both the Slovak authorities and the beneficiary.

(79)

The Commission does not consider the EKORDA report a reliable basis for comparing the proposed arrangement with a potential bankruptcy procedure. The Slovak authorities share these doubts.

(80)

At the outset, the Commission notes that, in issuing its report on 7 July 2004 (just two days before the creditors' meeting), EKORDA used for its calculations the status of the beneficiary's assets as at 31 March 2004. It is clear from Table 3 that the level of the various assets changed considerably after 31 March 2004. In particular, a considerable portion of the stocks was sold, which led to an increase in cash. These changes are of great importance when applying EKORDA's liquidation factors, ranging from 20 % for stocks and short-time receivables to 100 % for cash. Assuming that the liquidation factors estimated by EKORDA are correct and applying the methodology used by EKORDA, the following table shows how the outcome of EKORDA's calculation would have been different if based on figures from 28 April 2004 and 17 June 2004, i.e. still before the creditors' meeting on 9 July 2004. These figures also show that the liquidation factors proposed by EKORDA are not realistic.

Table 4

Comparison of the probable yield from the sale of the beneficiary's assets in a bankruptcy procedure [SKK million]

(81)

It must be noted that the business plan submitted by the beneficiary to the court forecast the sale of stocks at [less than SKK 150] million over the period March-May 2004. EKORDA must have therefore been aware that the assets of the beneficiary would be subject to significant changes after 31 March 2004 and did not take this into account.

(82)

If EKORDA had taken into account the book value of the beneficiary's assets from 28 April 2004, it would have arrived at the conclusion that the yield obtained in bankruptcy would have been higher (SKK 238 million; EU-6,3 million) than what the beneficiary proposed in the arrangement (SKK 225 million; EUR 5,93 million (26). This conclusion would have been even stronger if the analysis had been made in June 2004 (SKK 275 million; EUR 7,2 million), still well in time for the tax office to exercise its right of veto and reject the proposal, with the effect of terminating the arrangement procedure. Again, it is noted that these results were obtained using EKORDA's assumptions and methodology.

(83)

The Commission, however, is unable to accept the methodology used by EKORDA and does not find the assumptions of its analysis credible. This conclusion is reinforced by the doubts of the Slovak authorities as described in paragraphs 55 and 60.

(84)

To start with, in its report EKORDA does not explain how it determined the three liquidation factors. The Slovak authorities stated that the liquidation factor for the stocks should be higher than 20 %.

(85)

The Commission observes that in 2004 the beneficiary was able to generate SKK [less than 150] million from the sale of its stocks (see paragraph 30). This is more that [40-50] % of the book value of stocks on which EKORDA based its assessment. This strongly suggests that the liquidation factor of 20 % was too low. The changes in the balance sheet in 2004 with regard to stocks supports this conclusion. In addition, the beneficiary itself in its business plan estimated the yield from the sale of stocks over the period March-May 2004 to be SKK [less than 110] million (see paragraph 30). EKORDA ignored this estimate. Finally, from the nature of the beneficiary's activities it can be assumed that the stocks comprised final products that could have been easily sold direct to distributors or consumers, rather than semi-finished products requiring further processing.

(86)

Furthermore, EKORDA used double adjusting with regard to the short-term commercial receivables. First, it adjusted their book value by 40 % (the book value being SKK 166 million and the value that EKORDA used in its calculations being SKK 98 million) and then applied the low liquidation factor of 20 %. This methodology is questionable. It is acceptable to adjust the book value of receivables to reflect their actual value at a given time. However, EKORDA does not provide any clarification as to why the yield in the bankruptcy/liquidation would be only one fifth (SKK 20 million) of what the beneficiary itself believed it would be able to obtain from its debtors (SKK 98 million).

(87)

Furthermore, the liquidation factor of 45 % for non-current assets seems to be too low. According to the beneficiary, the value of its assets pledged in favour of the tax office was SKK 194 million (27). This value is, according to the beneficiary, expressed in prices estimated by independent experts at around the end of 2003/beginning of 2004. In the Commission's view, such an ‘expert price’ should normally reflect the general price of the asset, expressing the price at which the asset could be sold at the time. EKORDA does not provide any clarification as to why the yield from the bankruptcy sale of the non-current assets would generate only 45 % of their book value of SKK 205 million (28) whereas the beneficiary himself valued these assets much higher.

(88)

As to the argument of the beneficiary that it would be difficult to find a buyer because most of the pledged machinery was confined to the production of spirit and spirit-based beverages, non-alcoholic beverages or canned products, the Commission has the following two comments to make. First, it is noted that the ‘expert price’ of the pledged real estate was SKK 105 million, which in itself is higher than the total yield forecast by EKORDA (SKK 92 million). Second, the actual developments in the company show that some of these production assets quickly found a user, Old Herold, s.r.o., once the beneficiary had lost its licence to produce spirit and spirit-based beverages. It seems therefore that there was an imminent interest from a competitor for these production assets.

(89)

In addition, the credibility of EKORDA's report is also affected by the manner of calculating the various fees involved in a bankruptcy procedure that were to be subtracted from the total yield from the sale of the assets. Whereas EKORDA deducted SKK 45 million in fees, the beneficiary in its submission gave the figure of SKK 36 million and the estimate of the auditor Ms Kochová is SKK 22 million at most. Such discrepancies raise doubts as to the accuracy of EKORDA's assumptions regarding the level of the fees and, therefore, also the level of the yield that could have been obtained in a bankruptcy procedure. It is noted, nevertheless, that, considering the beneficiary's situation on 17 June 2004, even with fees of SKK 36 million, the yield in bankruptcy would have been higher than with the proposed arrangement.

(90)

Finally, the Commission notes that the Slovak authorities do not support the beneficiary's claim that the tax office would have had EKORDA's report at its disposal prior to the creditors' meeting on 9 July 2004.

(91)

As to the report by Ms Kochová, the Commission cannot assess it because it does not have a copy of it. From the information submitted it is not clear when and for what purpose this report was drawn up or on what assumptions and data it was based. The Commission, however, observes that the conclusions of this auditor are significantly different from the conclusions of EKORDA. The report of the receiver Ms Holovačová states only that, in general, the arrangement procedure is more advantageous for creditors than bankruptcy. The Commission cannot accept either of these two reports as evidence in support of or against the beneficiary's assertion that the market economy creditor test was met.

(92)

On the basis of the evidence available, the Commission therefore concludes that the sale of the assets in a bankruptcy procedure would, in all probability, have led to a higher yield for the beneficiary's creditors. Considering that the tax office would be satisfied in the first group as a separate creditor and, in addition, obtain most of the yield distributed in the second group (owing to the size of its claims when compared to other creditors), the Commission concludes that almost the entire yield obtained in the bankruptcy would accrue to the tax office.

(93)

The tax office, unlike the private creditors, was entitled to initiate on its own initiative the tax execution through the sale of real estate, machinery or the firm as a whole. The Commission finds irrelevant the argument of the beneficiary that the arrangement procedure shelters the company from the tax execution procedure. As confirmed by the Slovak authorities, the tax execution procedure was indeed an option for the tax office, either prior to the launch of the arrangement procedure or after the tax office's veto on the proposed arrangement. This possibility therefore needs to be considered when applying the market economy creditor test. The beneficiary does not compare the proposed arrangement with the possible outcome of tax execution.

(94)

In its analysis the Commission relies on the data provided by both the beneficiary and the Slovak authorities. In this context it is noted that the Slovak authorities confirmed that the pledge in favour of the tax office equalled SKK 397 million, as stated in the decision to open the formal investigation procedure. This value is said to have been obtained from the beneficiary's accounts. The beneficiary, for its part, submits that the value of the pledged assets expressed in ‘expert prices’ is SKK 194 million (see paragraph 17). While the Commission does not need to determine which figure is correct, the following conclusions can nevertheless be made.

(95)

First, the pledge was the countervalue of the deferred tax debt of the beneficiary, required by the Tax Administration Act. If the value of the beneficiary's assets actually amounted to only half of the pledge, as suggested by the expert opinion submitted by the beneficiary, then the securities required by the State for those deferrals were insufficient. In these circumstances, the tax deferrals permitted by the tax office between November 2002 and November 2003 for a total amount of SKK 477 million therefore in all probability did not meet the market economy creditor test. As these tax deferrals were put in effect before the date of accession and are not applicable thereafter, the Commission is not competent to assess the compatibility of those measures with the common market. For the purpose of this case, it is also unnecessary for the Commission to determine whether those measures constituted state aid. However, if the earlier deferrals already constituted state aid, the market economy creditor principle can no longer be referred to when the deferred debts are later (partly) written off.

(96)

Second, even if the lower figure submitted by the beneficiary were used in the calculation of the proceeds from a tax execution procedure, a market economy creditor would, had he had the possibility, have favoured this procedure over the arrangement procedure.

(97)

In a tax execution procedure the tax authority can sell the debtor's assets (receivables and other current assets, movable assets, real estate) directly. At the time when the tax office voted in favour of the arrangement, the beneficiary had stocks worth SKK 84 million, enforceable receivables of SKK 63 million and cash of SKK 161 million (see paragraph 54). It should be noted that the value of the current assets alone (SKK 308 million; EUR 8,1 million) would exceed the yield obtained under the arrangement (SKK 225 million; EUR 5,93 million). Even if the receivables were wholly deducted (29), the value of the current assets alone (SKK 245; EU-6,4 million) would still exceed the yield obtained under the arrangement. In addition, the beneficiary had other assets, the value of which was at least SKK 194 million.

(98)

Furthermore, tax execution would not involve administrative fees as in the case of bankruptcy proceedings. It is a procedure that is initiated and controlled by the tax authority itself, so it can be assumed that it would be conducted in a speedy manner.

(99)

The Commission therefore concludes that tax execution against the beneficiary's assets would have led to a higher return than the arrangement.

(100)

The Commission takes particular note of the letter submitted by the Slovak authorities from the director of the Tax Director to his subordinate, the director of the tax office in question (see paragraph 57). The letter is clear proof that the Tax Directorate (which had had prior direct contacts with the beneficiary) opposed the proposed arrangement and gave the local tax office a clear instruction not to vote in favour of the arrangement. The reason mentioned in the letter was that the proposed arrangement was ‘not advantageous’ for the State.

(101)

It was also shown by the Slovak authorities that there was a clear policy instruction given by the Ministry of Finance at the beginning of 2004 to tax offices to the effect that they should not accept arrangements that propose writing off tax offices' receivables (30). This instruction was given in connection with the amendment of the Tax Administration Act as of 1 January 2004, in an effort to strengthen discipline in tax collection.

(102)

In addition, the Commission notes that the tax office itself had appealed against this arrangement as early as 2 August 2004, i.e. not even one month after the arrangement was agreed upon.

(103)

The beneficiary submitted that the tax office had signalled its agreement to the arrangement even prior to the beneficiary launching the procedure. The Commission considers that the evidence submitted by the beneficiary indicates quite the opposite. In his letter of 3 February 2004 to the beneficiary, the director of the tax office writes that, although in principle he is not against the use of the arrangement procedure, he does not agree with the beneficiary's proposal for an arrangement featuring 35 % repayment of the debt.

(104)

On the basis of this evidence, the Commission cannot but conclude that the Slovak authorities were opposed to the arrangement proposed by the beneficiary and were opposed to it before the launching of the arrangement procedure on 8 March 2004, before the creditors' vote on 9 July 2004 and also after the court approved the arrangement.

(105)

The beneficiary submitted that long-term effects, such as the continuity of the tax revenue for the State, should be taken into account (see paragraph 46).

(106)

First, it needs to be stressed that the market economy creditor test differs from the market economy investor test. Whereas a market economy investor is in a position to decide whether to enter into a relationship with the company in question and will be driven by the long-term strategic prospect of obtaining an appropriate return from his investment (31), a ‘market economy creditor’, who is already in a commercial or public law relationship with the insolvent company, will aim to obtain the repayment of sums already due to him (32) on conditions as advantageous as possible in terms of the degree of repayment and the time-frame. The motivations of the hypothetical market economy creditor and the market economy investor will therefore be different. Accordingly, the case law has defined separate tests for the two situations.

(107)

Second, as to the analogy with the creditor-supplier, it is important to note that the nature of his receivables and the nature of those of the State are fundamentally different. Because the relations of the supplier to the insolvent firm have an exclusively contractual basis, he might genuinely suffer from the loss of a business partner. If the insolvent company is liquidated or sold off, the supplier would need to find a new client or contract with the new owner. The risk is higher when his dependency on the insolvent firm is considerable. Such a creditor will indeed consider the future. In contrast, the relations of the State with the insolvent firm are based on public law and therefore are not dependent on the will of the parties. Any new owner taking over the assets of the liquidated firm would automatically be obliged to pay taxes. Moreover, the State is never dependent on one taxpayer. Finally and most importantly, the State is not profit-driven when levying taxes and does not act in a commercial manner or with commercial considerations when doing so. The above analogy is therefore not well founded.

(108)

The Commission concludes that the situation of the State in the present case cannot be compared to the situation of a hypothetical market economy investor or to the situation of a hypothetical dependent market economy creditor. The loss of future taxes cannot therefore be taken into account when applying the market economy creditor principle.

(109)

Finally, from the overview of taxes submitted by the beneficiary it is noted that a large majority of the taxes paid by the beneficiary since 1995 have been indirect taxes (excise duties and VAT). As these taxes are paid by final consumers, the liquidation of the beneficiary would have no impact on their collection as long as consumers continued to purchase the taxed products (in this case, mainly spirit and spirit-based beverages) from other producers. The beneficiary's argument regarding considerable future tax loss is therefore not credible.

(110)

On the basis of the above evidence, the Commission concludes that in the present case the market economy creditor test was not met and that the State conferred on the beneficiary an advantage that it would not have been able to obtain from the market.

(111)

The Commission therefore concludes that the disputed measure constitutes state aid within the meaning of Article 87(1) of the EC Treaty.

(112)

The state aid granted to the beneficiary is equal to the amount of debt written off by the tax office in the arrangement procedure, viz. SKK 416 515 990.

(113)

The primary objective of the measure is to assist a company in difficulty. In such cases, it is possible to apply the exemption of Article 87(3)(c) of the EC Treaty, which allows state aid that facilitates the development of certain economic activities where such aid does not adversely affect trading conditions to an extent contrary to the common interest and where the relevant conditions are met.

(114)

In view of the beneficiary's production portfolio, the Commission assessed whether the special rules applicable to agriculture apply in the present case. Basing itself on the information on the beneficiary's turnover submitted by the Slovak authorities, the Commission in its decision to open the formal investigation arrived at the conclusion that most of beneficiary's products are not products falling under Annex I to the EC Treaty and that, therefore, the general state aid rules apply.

(115)

In its comments on the decision to open the formal investigation, the beneficiary disputed the turnover data previously provided by the Slovak authorities (see Table 1) but not the Commission's decision to base its assessment on the general state aid rules. Without wishing to determine whether the figures provided by the beneficiary are accurate (33), the Commission verified whether its above conclusion would hold up against the new data. It concludes that most of the beneficiary's turnover is generated by products not falling under Annex I to the EC Treaty. The general, and not the sector-specific, state aid rules thus apply.

(116)

Rescue and restructuring aid to ailing companies is currently governed by the Community guidelines on state aid for rescuing and restructuring firms in difficulty (34) (‘new guidelines’), which replaced the previous text adopted in 1999 (35) (‘1999 guidelines’).

(117)

The transitional provisions of the new guidelines stipulate that they will apply for the assessment of any rescue or restructuring aid granted without the authorisation of the Commission (unlawful aid) if some or all of the aid is granted after 1 October 2004, the date of publication of the new guidelines in the Official Journal of the European Union (point 104). Should, however, the aid be unlawfully granted before 1 October 2004, the examination is to be conducted on the basis of the guidelines applicable at the time the aid was granted (point 104).

(118)

The Commission notes that the tax office's approval of the arrangement was issued on 9 July 2004 and took effect as of 23 July 2004. This means that the aid was unlawfully granted before 1 October 2004. The 1999 guidelines, which were applicable at the time the aid was granted, therefore apply.

(119)

The Commission concludes that the beneficiary is a medium-sized company within the meaning of Commission Regulation (EC) No 70/2001 on the application of Articles 87 and 88 of the EC Treaty to state aid to small and medium-sized enterprises (36).

(120)

According to point 5(c) of the 1999 guidelines, a firm is regarded as being in difficulty where it fulfils the criteria under domestic law for being the subject of collective insolvency proceedings.

(121)

The beneficiary was party to the arrangement procedure, which is applicable to insolvent companies as defined in the Bankruptcy Act. It is therefore eligible for rescue and restructuring aid.

(122)

The disputed measure was initially described by the Slovak authorities as rescue aid. Pursuant to the 1999 guidelines, the Commission raised doubts as to the compatibility of the aid as rescue aid on the grounds described in Part III above.

(123)

Neither the Slovak authorities nor the beneficiary commented on these doubts. No new facts have been presented to the Commission in this respect.

(124)

Since the above doubts have not been allayed, the Commission concludes that the aid is not compatible as rescue aid within the meaning of the 1999 guidelines.

(125)

The Commission raised doubts as to whether the aid was compatible as restructuring aid within the meaning of the 1999 guidelines on the grounds described in Part III above.

(126)

The Commission notes that the Slovak authorities, with whom lies the burden of proof to show that the state aid is compatible with the common market, have not submitted any new facts in support of this conclusion. It took due note of the comments submitted by the beneficiary.

(127)

According to the 1999 guidelines, the granting of restructuring aid must be linked to and conditional on implementation of a feasible and coherent restructuring plan to restore the firm's long-term viability. The Member State commits itself to the plan, which must be endorsed by the Commission. Failure by the company to implement the plan is regarded as misuse of aid.

(128)

The restructuring plan must be such as to enable the beneficiary to restore its long-term viability within a reasonable timescale and on the basis of realistic assumptions as to the future operating conditions. The plan should describe the circumstances that led to the beneficiary's difficulties and identify appropriate measures to address these difficulties. Restructuring operations cannot be limited to financial aid designed to make good debts and past losses without tackling the reasons for difficulties.

(129)

For companies situated in assisted areas and for small and medium-sized companies, the 1999 guidelines stipulate that the conditions for authorising aid may be less stringent as regards the implementation of compensatory measures and the content of monitoring reports. Nonetheless, these factors do not exempt such companies from the requirement to draw up a restructuring plan or the Member States from the obligation to make the granting of the restructuring aid conditional upon implementation of a restructuring plan.

(130)

After the opening of the formal investigation, the Slovak authorities confirmed that the business plan that the beneficiary was obliged to produce as a condition for the launching of the arrangement procedure was considered only by the competent court, i.e. not by the granting authority, and that neither the court nor the tax office monitored the implementation of the plan.

(131)

Contrary to this confirmation, the beneficiary submitted that the tax office had studied the ability of the business plan to restore long-term viability prior to its approval of the arrangement, but it did not produce any evidence to support this claim.

(132)

The beneficiary further argued that the absence of a formal restructuring plan is irrelevant in the case of ex post assessment of aid by the Commission, as the Commission is then in a position to assess whether the beneficiary actually became viable. According to the beneficiary, a formal restructuring plan can be required only in the case of ex ante assessment, the only sort of assessment to which the 1999 guidelines apply.

(133)

This line of argument is not correct. The 1999 guidelines apply to the compatibility assessment of both notified and unlawful aid. Whenever the assessment takes place, the condition that the restructuring aid be subject to the establishment of a viable restructuring plan is valid. The Commission has to conduct its assessment on the basis of the information available at the time the aid was granted.

(134)

It may be concluded that the tax office as the granting authority did not have any opportunity to evaluate a restructuring plan and to make the writing-off of its receivables subject to implementation of a restructuring plan that would be duly monitored. It follows that the first formal condition, which is fully applicable also to ex post assessment, was not met.

(135)

As to the substance of the business plan, the Slovak authorities have not submitted any information that would allay the Commission's doubt as to whether the plan represents a genuine restructuring plan as required by the 1999 guidelines.

(136)

The Commission cannot but stand by the conclusion it gave in the decision to open the formal investigation. The business plan submitted is merely a plan dealing with the beneficiary's acute problem of mounting debt to the State. The plan does not analyse in any way the circumstances that led to the beneficiary's difficulties or the financial situation of the company at that time or its financial prospects. Since this analysis was missing, the beneficiary did not propose any concrete steps addressing the individual reasons that led to the difficulties. The only measure described in detail is the proposed financial restructuring through the arrangement with the creditors.

(137)

The plan does not mention at all the increase in the beneficiary's own capital, mentioned by the beneficiary as one of the restructuring measures. There is nothing in the file to show that the capital increase by Hydree Slovakia should be considered as a measure ensuring that the beneficiary would not in the long term repeat its strategy of financing its production through VAT and excise duty debt, which is what eventually led to its difficulties. The Slovak authorities themselves confirmed that the capital increase does not in any way decrease the risk of the financial problems being repeated. These doubts are all the stronger when it is considered that the capital increase amounted to SKK 21 million, while the restructured debt was SKK 644 million.

(138)

The capital increase in itself is no proof of the market's belief in the beneficiary's return to long-term viability. The Commission notes that the beneficiary did not manage to obtain any loan from a private bank, despite its active efforts.

(139)

The Commission further notes that the renting out of the production facilities to the beneficiary's competitor Old Herold s.r.o. was clearly motivated by the fact that the beneficiary had lost its licence to produce spirit and spirit-based products and not by the fact that the production would have been loss-making and thus in need of restructuring. It is true that the beneficiary itself could have requested a new licence after the arrangement was finalised but did not do so. The Commission, however, observes that the beneficiary continues to sell the products produced by Old Herold using the beneficiary's facilities and does so under its own brand name and even plans to increase these sales, as stated in the annual report for the period 29 April-30 December 2004. The letting of these production assets therefore cannot be considered as a restructuring measure because, on the basis of all the evidence available, there was no need for restructuring of this part of production.

(140)

As to the remaining measures proposed in the business plan, the Commission's doubts have not been allayed. These measures are simply activities in the normal run of business rather than rationalisation measures (sale of old equipment or vehicles). The two proposed structural measures (abandonment of the production of non-profitable non-alcoholic products and the sale of some real estate) were described very vaguely without any indication of the precise products or a timetable. The Slovak authorities confirmed that as of 10 October 2005 the real estate intended for sale (an administrative building, a shop and a recreational facility) had not been sold, i.e. that this planned measure had not been implemented as announced.

(141)

The combination of the absence of a formal restructuring plan and of a genuine analysis of the difficulties, the measures necessary to address these difficulties and the market conditions and prospects leads the Commission to the conclusion that the business plan submitted by the beneficiary is not a genuine restructuring plan as required by the 1999 guidelines (37). The Commission's doubts that the beneficiary would restore long-term viability have therefore not been allayed.

(142)

Although its conclusion that, in the absence of a genuine restructuring plan, its doubts as to the long-term viability persist is in itself sufficient to conclude that the aid is not compatible with the common market, the Commission will also analyse the other central criterion of the 1999 guidelines, i.e. that the aid is limited to the strict minimum necessary.

(143)

Pursuant to point 40 of the 1999 guidelines, the amount and intensity of the aid must be limited to the strict minimum needed to enable restructuring to be undertaken in light of the existing financial resources of the beneficiary. The beneficiary is expected to make a significant contribution to the restructuring from its own resources.

(144)

The costs of restructuring amounted to SKK 644 591 440 (EUR 16,96 million), the total amount of debt restructured through the arrangement. The beneficiary paid 35 % of this amount, i.e. SKK 225 607 028 (EUR 5,93 million).

(145)

The Slovak authorities did not provide any further explanation in respect of the doubts expressed by the Commission in this connection. The beneficiary explained how he financed payment of the debt remaining after the arrangement (see paragraph 30). According to the beneficiary, its own contribution amounted to SKK [less than 300] million (EUR [less than 7,9] million).

(146)

First, the Commission notes that the resources available to the beneficiary exceeded the amount of debt remaining after the arrangement. This suggests that the aid was not limited to the minimum necessary.

(147)

More importantly, the Commission considers that the credit provided by Old Herold does not qualify as an own contribution by the beneficiary within the meaning of the 1999 guidelines. Payables constitute a permanent source of financing of the operation of the firm. They are short-term loans, which, however, have to be paid back. It is only if suppliers agree to a payment maturity longer than is normal that additional resources are available to the company for restructuring; such deferral constitutes a sign that the market believes in the feasibility of the return to viability.

(148)

The beneficiary did not in any way demonstrate that the deferral of payment by Old Herold went considerably beyond what is normal commercial practice between the beneficiary and its suppliers. The maturity of 40 days seems to be standard practice, especially in view of the fact that it was granted to the beneficiary after the arrangement. The beneficiary was therefore no longer in financial difficulties. The very purpose of the arrangement was precisely to help the beneficiary out of its financial problems.

(149)

The Commission therefore concludes that this prolonged maturity cannot be considered as a contribution to restructuring from external resources.

(150)

Without this deferral, the own contribution of the beneficiary within the meaning of the 1999 guidelines amounts to SKK [less than 170] million (EUR [less than 4,5] million) and thus corresponds to [less than 27] % of the restructuring costs.

(151)

Unlike the new guidelines, the 1999 guidelines did not contain any thresholds indicating when the own contribution of the beneficiary is considered to be significant.

(152)

Considering the practice of the Commission in applying the 1999 guidelines and the trend in Commission policy in this respect towards the introduction of thresholds under the 2004 guidelines (38), the Commission considers the contribution of [less than 27] % to be rather low. Such a contribution might be accepted under the 1999 guidelines only if all the other conditions for approving the aid were fulfilled, and the Commission would have to take into account such criteria as whether the company is active in an assisted area and to what extent the sources of financing reflect the belief of the market, other than the beneficiary itself and its shareholders, in the long-term viability of the company or other specific features of the case.

(153)

In the light of the above, the Commission cannot accept in the present case that the contribution of the beneficiary is significant. It concludes that its doubts as to whether the own contribution of the beneficiary was significant and whether the aid is limited to the minimum necessary have not been allayed.

(154)

The Commission concludes that the aid is not compatible with the common market as rescue or restructuring aid. In addition, no other derogation laid down in the EC Treaty is applicable to the present case.

(155)

The Commission finds that the Slovak Republic has unlawfully granted the write-off of tax debt in favour of FRUCONA Košice a.s. in breach of Article 88(3) of the EC Treaty. This aid is not compatible with the common market under any derogation laid down in the EC Treaty.

(156)

Even though the implementation of the write-off by the tax office has been suspended pending the present procedure before it, the Commission finds that the advantage for the beneficiary was created at the point at which the tax office decided to forgo part of its claims and thus put the aid at the disposal of the beneficiary. This moment was the entry into force of the creditors' agreement on 23 July 2004. The advantage over the beneficiary's competitors resided in the fact that the tax office had not enforced its tax claims.

(157)

To restore the status ex ante, the state aid must be recovered,

30.4.2007   

EN

Official Journal of the European Union

L 112/32

(1)

By letter of 19 October 2005, registered as received on the same day, Germany, acting in accordance with Article 88(3) of the EC Treaty and with the Framework on state aid to shipbuilding (1) (hereinafter the shipbuilding framework), notified its intention of granting regional aid to the company Detlef Hegemann Rolandwerft GmbH & Co. KG (Rolandwerft). The Commission requested further information by letter of 16 November 2005, to which Germany replied by letter of 23 December 2005, registered as received on the same day. By letter of 18 January 2006, registered as received on the same day, Germany modified the notified aid.

(2)

By letter of 22 February 2006, the Commission informed Germany of its decision to initiate in respect of the aid the procedure laid down in Article 88(2) of the EC Treaty. The Commission decision was published in the Official Journal of the European Union. The Commission invited Germany and the other interested parties to submit comments. By letter of 28 June 2006, registered as received on the same day, the ‘Verband für Schiffbau und Meerestechnik’ (German Shipbuilding and Ocean Industries Association) submitted comments. By letter of 30 June 2006, registered as received on 7 July, the beneficiary also submitted comments.

(3)

The comments were transmitted to Germany by letter of 17 July 2006. Germany replied to these comments by letter of 11 August 2006, addressed to the Commission and registered as received on the same day.

(4)

Germany's response to the initiation of the formal investigation procedure was submitted by letter of 6 April 2006, registered as received on the same day. Annexes were submitted by letter of 11 April 2006, registered as received on 12 April. The Commission requested further information on 17 August 2006 which Germany submitted by letter of 14 September 2006, registered as received on 15 September. Germany submitted further information by letter of 20 November 2006, registered as received on the same day. A meeting with representatives of Germany and the shipyard took place on 22 November 2006. Following the meeting, Germany submitted further information by letter of 24 November 2006, registered as received on the same day.

(5)

The beneficiary of the aid, Rolandwerft, is a shipyard located in Berne, in the district of Wesermarsch, Lower Saxony (Germany), an assisted area pursuant to Article 87(3)(c) of the EC Treaty. The yard is located on the shores of the river Weser, which runs into the North Sea. Rolandwerft belongs to the Hegemann group. It is a large undertaking that does not rank as a small or medium-sized enterprise under the Commission Recommendation concerning the definition of micro, small and medium-sized enterprises (2).

(6)

Rolandwerft produces sea-going vessels. Its central area of business is the construction of feeder ships, i.e. the smallest sub-category of container ships. In addition, the yard builds specialised ship types such as roro/lolo-vessels or car carriers. In 1999, responding to a change in market demand, it began to produce larger ships measuring up to […] (3) m in length, with a weight of […] tonnes and a cargo capacity of up to 850 TEU. In order to be able to produce these larger ships, Rolandwerft had to carry out an investment programme for the adaptation of the yard, including expansion of the ship lift. An extension of the fitting-out quay was also planned but had to be postponed for financial reasons. Rolandwerft is also active in the field of ship repair. The repair activities are carried out either on land or in the water.

(7)

The ships are produced first in sections in hall 3 and in larger modules on the outside work area. The sections and modules are transferred via the outside work area to hall 1, where they are assembled into ships. The ships are transported to the ship lift and lowered into the water. Further fitting-out takes place on a quay which can take ships of up to 140m in length. It is performed using a 50t quay crane and an 8t construction crane, both operating on the crane track.

(8)

Since the early 1990s, Rolandwerft has been able to fit out two ships simultaneously (except at times of low demand). The original quay allowed both ships, which were shorter at the time, to be berthed directly at the quay. In 1999, when Rolandwerft began building larger ships, the quay was too short. For financial reasons, Rolandwerft did not extend the quay immediately but, as a transitional solution, berthed the second ship alongside the ship berthed at the quay (parallel berth). For each ship fitted out on the parallel berth, Rolandwerft had to rent an additional auto crane on some […] occasions for […] each and a smaller swimming crane on […] occasions for […] each.

(9)

However, the fitting-out or repair of a ship at the parallel berth was complicated, expensive and not profitable. Moreover, it increased the risks of accidents.

(10)

The objective of the aid is to promote investments in five different areas of the yard's activity, namely halls 1 and 3, quay 1, automatic welding machines and the construction of an additional quay. Most of the investments have already been carried out. The aid application was submitted before the investments were started.

(11)

According to the information submitted by Germany, the investments will lead to the creation of 35 jobs at Rolandwerft. The yard previously subcontracted some of the works to a steel company in […] which produces bow sections for Rolandwerft. The investments will enable Rolandwerft to integrate bow-section construction into its own shipbuilding process.

(12)

Hall 1 is to be extended by 55m. The Commission was informed that, at the moment, a significant part of the shipbuilding work currently take place outside of hall 1. After the investment, almost all of the work will be carried out indoors.

(13)

Hall 3 is where the sections are constructed. It originally had an entrance door that was only 17,4 metres wide, whereas the ships built by Rolandwerft are normally 22,2 m wide. Therefore, the sections had to be produced not in the position necessary for assembly but sideways, in order to be able to pass through the entrance door. This meant that the sections had to be turned through 90o using auto cranes to permit subsequent assembly; this was a time-consuming and expensive process. In addition, the narrow entrance limited the depth of the sections, which obliged Rolandwerft to construct more sections than were actually needed. To remedy this, it was necessary to widen the entrance. This part of the project was carried out in 2004.

(14)

Another part of the project which was carried out in 2004 is the extension of the hall in a north-westerly direction. In this part of the hall, sections are welded together into modules. With the extension, the section welding can be carried out indoors, i.e. independently of the weather conditions. The crane tracks were lengthened into the new part of the section-construction hall.

(15)

The single sections are constructed on keel blocks, which are also used to transport the sections. Germany explained that, owing to the fact that Rolandwerft has built larger ships since the investments made in 1999, the old keel block system is no longer adequate. Furthermore, to be welded together, the sections must be accurately lined up. Before the investment, the positioning of the sections was done using an auto crane, a time-consuming and cost-intensive process. And so in 2004 the yard invested in modern hydraulic keel blocks, which significantly facilitate the lining-up of the sections.

(16)

In an additional investment project started in August 2005, Rolandwerft extended hall 3 in a south-easterly direction, also with a view to the work being carried out indoors.

(17)

The investment project also provides for a 96m extension of the crane track on the original quay, which is 200m long. Before the extension, only about half of the ship could be equipped using the crane. For the other half, Rolandwerft had to use […] auto cranes. The crane track was extended so that the ship could be fitted out over its full length using the rail crane. This investment was also carried out in 2004.

(18)

Another investment carried out in 2004 was the purchase of modern and faster automatic welding machines.

(19)

The investment programme for 2005-06 includes the construction of an additional fitting-out quay, with the original quay being extended by about 180m. The construction of this quay requires, among other things, excavation of the ground on the riverside, filling-up of the ground on the land side and a link to the road network. The crane track has to be extended by a further 150m, an additional 35-tonne crane has to be purchased and installed, and the media connection has to be installed. The works were started in August 2005.

(20)

This investment is the result of the decision to build larger ships as of 1999. At the time, the yard invested in a further fitting-out of the ship lift to adapt its facilities. According to the beneficiary, the investments in the quay were postponed for two main reasons. First, the financial means available were needed more urgently for Peene-Werft, which was also owned by the Hegemann group and underwent a significant restructuring programme at the time. On account of the downturn on the market that lasted a few years, no additional means were available to complete the investment measures at Rolandwerft. Second, since the fitting-out and repair of two ships in parallel was technically quite feasible (even if not particularly efficient), it was the investment which could best be postponed.

(21)

A further benefit arising from the investment is that the new quay will enable the yard to participate in shipbuilding and repair tenders for navy vessels in the future. Given the risks inherent in handling two ships berthed in parallel, Rolandwerft was barred from carrying out shipbuilding or ship-repair activities for the German navy. Because of the risks and despite the fact that Rolandwerft belonged to a group of yards which could, in theory, bid for the award of such contracts, the German navy refused to award contracts to it.

(22)

Total project costs amount to EUR 13 million. They can be broken down as follows:

(23)

Germany intends to grant Rolandwerft state aid amounting to EUR 1,56 million. Eligible costs are equal to the total project costs of EUR 13 million and the aid intensity is thus 12 %. The aid will be granted under an approved regional aid scheme (4). The aid application was submitted before the start of the investment projects.

(24)

The granting authority is the Land of Lower Saxony, acting through NBank in Hannover.

(25)

The Commission initiated the formal investigation procedure as it had doubts as to whether the aid was compatible with the shipbuilding framework. It doubted that the investments in the new fitting-out quay could be considered as investments in existing installations.

(26)

In addition, the Commission had misgivings as to whether the investments of Rolandwerft might lead to an increase in the yard's shipbuilding capacity that would be incompatible with the shipbuilding framework and the common market.

(27)

The Commission received comments from the beneficiary Rolandwerft and from the German Shipbuilding and Ocean Industries Association.

(28)

According to the beneficiary, the investment project will not lead to an increase in the yard's shipbuilding capacity. The beneficiary points out that every increase in productivity will lead to an increase in the capacity of the existing installations. This does not, however, necessarily mean that the capacity of the yard as a whole will also increase. In the case of Rolandwerft, the investments will indeed lead to a productivity increase but will not result in a capacity increase of the yard as a whole. Instead, the productivity increase will be absorbed by a higher level of internal production activities formerly outsourced. The volume of production measured in compensated gross tons (CGT) will, therefore, not increase.

(29)

The beneficiary submitted an overview of the ships built in recent years and of the yard's order book. In 2004 Rolandwerft built […] ships with a total of around […] CGT. In 2006 the building of […] ships with a capacity of […] CGT is planned. For 2007 and 2008 an annual output of […] CGT is envisaged.

(30)

The beneficiary explains that, in the past, the yard occasionally bought sections or entire hulls from third companies. However, the output of Rolandwerft could not be increased further even by buying hulls and sections from outside because the fitting-out of a ship always took a certain amount of time and the existing installations did not allow for an efficient fitting-out of a larger number of ships. For example, it was possible to build only one ship at a time in each of the existing shipbuilding halls. The assembling of a ship in hall 1 took around […] weeks.

(31)

The beneficiary provided information on the production flow at the yard. It pointed out that the yard was already being fully utilised and that there was no possibility of producing more ships on completion of the investment project. The installations at the yard limited total capacity to between some […] — […] CGT, which could be achieved before the implementation of the investment project by subcontracting some of the work.

(32)

The beneficiary explains that the investment project will allow the yard to participate in tenders for the construction, repair and conversion of navy ships. This has not yet been possible since the works would have had to be carried out at the parallel berth. Consequently, output in CGT would decline from its current level as navy vessels are not regarded as commercial vessels. The beneficiary concludes that, even if the Commission does not share Germany's opinion that the shipbuilding framework does not prohibit investment aid for projects resulting in a capacity increase, this is irrelevant when assessing the compatibility of the aid to Rolandwerft as the capacity will not increase.

(33)

The beneficiary also argues that the investments relate solely to existing installations. In particular, the investment in extending the quay so that two ships can be fitted out directly from the quay does not constitute a new installation. The yard already has two fitting-out berths that are in parallel. The beneficiary stresses that the use of the parallel berth involves an increased risk and that the navy refuses, therefore, to award contracts to Rolandwerft. The planned investment measure constitutes a modification of the existing quay aimed at increasing its productivity. The beneficiary provides information on how many weeks per year the parallel berth was used and will be used.

(34)

The beneficiary also explains that the lengthening of the crane track and the installation of a crane linked to the quay extension will replace the inefficient and expensive auto and swimming cranes which would at present be used for fitting-out ships in the parallel berth. Fitting out the second ship directly from the quay after completion of the investment project will lead to greater cost effectiveness and productivity.

(35)

The German Shipbuilding and Ocean Industries Association (the ‘Association’) takes the view that the Commission's concern about a potential increase in capacity cannot be justified on the basis of the shipbuilding framework or by the current market situation and that in particular the planned aid will not lead to distortions of competition.

(36)

The Association argues that the stance of EU policy on state aid to shipbuilding has changed over the years. The shipbuilding framework does not contain any provisions that prohibit the granting of investment aid designed to increase capacity. The Association assumes that such provisions were no longer regarded as being appropriate. It also points out that sector-specific rules contained in the shipbuilding framework had, as far as possible, been removed. The capacity issue is mentioned only in the context of closure aid. Other types of aid, such as restructuring aid, are covered by the general state aid rules.

(37)

The Association also claims that a restrictive interpretation of the rules would be at variance with the LeaderSHIP 2015 initiative, which is one of the measures for implementing the Lisbon Strategy. The competitiveness and productivity of European industry are to be increased through investments into research, development and innovation, which also entails investment in modern production equipment. If state aid for investment could not go hand-in-hand with capacity increases, this would run counter to the objectives of LeaderSHIP 2015, and in particular the objective of safeguarding and strengthening presence in selected market segments. One of these market segments is that for small and medium-sized container vessels, where Europe is still exceptionally well positioned vis-à-vis Korea and China.

(38)

The Association takes the view that the planned investments do not distort competition. There is no overcapacity as the world shipbuilding market is experiencing an upswing. Demand remains healthy, although a slight weakening is expected in 2008-09. With world trade growing steadily, sea transport is also expanding. This is the case in particular with the transport of industrial goods by container ships. As a result, the demand for larger vessels of 5 000 TEU to 8 000 TEU that cannot enter smaller ports is rising. This is leading to an increased demand for smaller feeder ships for the subsequent distribution of the containers. Rolandwerft can build ships of up to 900 TEU.

(39)

According to the Association, feeder ships are an important segment in the portfolio of German yards. Nevertheless, the main competitors are Chinese yards, which are the clear market leaders, with 42,5 % of worldwide orders, followed by Germany with 26,8 %.

(40)

Again according to the Association, there are very few European competitors for ships of up to 900 TEU. These are located predominantly in Germany and the Netherlands. The Association considers that this segment has good growth potential. Since Chinese yards offer their vessels at low prices, German and European yards will retain their market position only if they can guarantee high quality and steadily increase productivity.

(41)

The Association also points out that China and Vietnam will further increase their shipbuilding capacities and hence their market shares. This demonstrates that competition in shipbuilding is worldwide rather than being confined to Europe.

(42)

In its comments on the initiation of the formal investigation procedure, Germany argues that paragraph 26 of the shipbuilding framework does not contain any provisions relating to capacity. In particular, the paragraph does not stipulate that investment aid for projects resulting in a capacity on the back of a productivity increase would be inadmissible. Germany also stresses that increased productivity in the shipbuilding industry is one of the main objectives of Community policy in this sector. It mentions that the LeaderSHIP 2015 initiative is aimed at improving the competitive situation of European yards and at reducing the disadvantages faced by the European shipbuilding industry following the subsidisation of shipbuilding in Asia. According to Germany, this objective can be achieved only by raising productivity.

(43)

Germany also takes the view that it cannot be deduced from paragraph 3 of the shipbuilding framework that the impact of an investment project on capacities has to be taken into account in assessing compatibility with the common market. In addition, the shipbuilding sector is no longer characterised by the factors mentioned in paragraph 3 of the shipbuilding framework but, above all by a healthy order book, high prices and capacity shortages.

(44)

In addition, Germany points out that the market share of the European shipbuilding industry has decreased over the last few decades and that Japan, Korea and China have increased their market shares with the help of state subsidies. Such subsidisation is mentioned in paragraph 3(c) of the shipbuilding framework as one of the factors which has to be taken into account. European shipyards thus have to make every effort to increase productivity.

(45)

According to Germany, every increase in productivity automatically leads to an increase in the output of the installation. An increase of productivity as defined for the purposes of the shipbuilding framework cannot, therefore, mean that the same amount is produced but with less input. Germany goes on to stress that the purpose of regional aid should be to contribute to regional development and job creation. And so, with this in mind, a productivity increase should not result in job reduction.

(46)

As regards the market situation, Germany observes that freight transport is increasing and that a trend towards larger vessels is discernible in the container ship segment. There are already vessels with a capacity of TEU 5 000 and recent forecasts point to vessels with a capacity of TEU 8 000. As such larger vessels could enter only a few ports, smaller vessels would still be needed for subsequent distribution. There will, therefore, still be a strong demand for feeder ships of 850 TEU, such as the ones built by Rolandwerft.

(47)

Germany also provides further details of the investments and photographs illustrating the measures and the situation at the yard.

(48)

The extension of hall 1 will allow the yard to build a ship in its entirety in the hall, something which is currently not possible. Covering existing work areas will make for greater productivity and efficiency.

(49)

Germany goes on to explain that, at present, a ship berthed at quay 1 occupies only two thirds of the quay. The southern part of the unused quay will be extended. This does not lead to the construction of a new installation for the purposes of the shipbuilding framework. Once the quay has been extended, it will be equipped with a crane as a replacement for the existing auto crane.

(50)

Germany points out that the parallel berth was used […] a year in the period 2003-05 (including deliveries). It emphasises once again that the parallel berth will be moved to the new quay. The new quay will be used for approximately the same period of time per year as the parallel berth in recent years. Germany also explains that the fitting-out of a ship in the second berth involved an increased risk as the swimming crane needed would have to be located in the middle of the river Weser. As a result, no ships will, in future, be fitted out at the second berth on quay 1.

(51)

According to Germany, the extension of the fitting-out quay to allow two ships to be fitted out at the quay does not constitute the construction of a new installation. It is simply a minor extension of the existing quay. Even before the investment, the quay is longer than a feeder ship and so the yard would, in any case, be able to fit out two shorter ships at the same time.

(52)

Germany argues that Rolandwerft thus already has two fitting-out slots although one of them is located in the second ‘row’. As the second ship cannot be reached by the crane installed on the quay, auto cranes or swimming cranes have to be used. Fitting-out a ship directly from the quay once it has been extended will make the work much more efficient. Germany also points out that the German navy refused to award contracts to Rolandwerft because it fitted out ships in the second row.

(53)

Germany argues that the relocation of the second berth to an extended existing quay does not rank as the construction of a new installation but is instead a measure for increasing the productivity of the two berths by locating them in a row instead of in parallel. The new crane to be installed on the new quay will replace the auto cranes and swimming cranes used at the moment. Using the new crane will enhance productivity.

(54)

Germany stresses that the measure is necessary because fitting out a ship in the second row is time-consuming and inefficient. Moreover, the measure will enable Rolandwerft to participate in tenders for ship repair and ship conversion issued by the German navy.

(55)

Germany moreover explains that Rolandwerft originally built smaller feeder ships that could both be berthed at the quay at the same time. However, market demand has increasingly shifted towards larger and longer feeder ships and two such ships could no longer be berthed at the quay at the same time. For fitting-out and repair work, therefore, the yard started to berth a second ship in parallel to the ship berthed directly at the quay. The extension of the quay is thus simply an adaptation of the fitting-out facilities to the needs of longer ships.

(56)

Germany explains that, in the past, Rolandwerft has occasionally collaborated with Peene-Werft and fitted out prefabricated hulls from that yard. Lately, however, it has delivered only ships which were built in their entirety at its yard. As regards repair work, Germany points out that these activities cannot be extended if the current level of new building is maintained. Part of the repair work is carried out on land, requiring use of the outside work area, which is already being used for new building.

(57)

Germany goes on to explain that the new crane will not only be used at the new quay but will also make for optimal utilisation of the lifting process at the original quay by increasing the maximum lifting capacity.

(58)

Germany points out that the Association agrees with its assessment. It considers that the Association's comments are important as it represents the political and economic interests of the German maritime industry, German yards and their suppliers. Moreover, the Association, as the representative of various interest groups, possesses up-to-date market information. If it concludes that the planned aid for Rolandwerft will not harm the shipbuilding industry in Germany, the Commission should take this into account. Germany also makes the point that the Commission did not receive any negative comments regarding the aid.

(59)

As regards the comments from the beneficiary itself, Germany stresses that the position taken by Rolandwerft is that the investment project will not lead to a capacity increase. Germany reiterates its view that this issue is not relevant for the assessment of the compatibility of the aid.

(60)

According to Article 87 of the EC 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 is, in so far as it affects trade between Member States, incompatible with the common market. Pursuant to the established case law of the Court of Justice and the Court of First Instance of the European Communities, the criterion of trade being affected is met if the recipient firm carries out an economic activity involving trade between Member States.

(61)

The grant is provided by the Land of Lower Saxony and is thus imputable to the State. It confers on Rolandwerft an advantage that the company would not have obtained on the market. Rolandwerft manufactures sea-going vessels. As these products are traded, the measure threatens to distort competition and affects trade between Member States. Consequently, the grant constitutes state aid within the meaning of Article 87(1) of the EC Treaty and has to be assessed accordingly.

(62)

Article 87(2) and (3) of the EC Treaty provide for exemptions to the general prohibition of state aid laid down in Article 87(1).

(63)

For the assessment of aid to shipbuilding, the Commission has issued the shipbuilding framework. This framework lays down a set of special rules which apply to aid for the industry where and in as far as the specificities of the sector require special treatment. According to the shipbuilding framework, ‘shipbuilding’ means the building in the Community of self-propelled seagoing commercial vessels and ‘ship repair’ the repair or reconditioning in the Community of such vessels. The activities of Rolandwerft are caught by these definitions and so the aid to Rolandwerft has to be assessed in the light of the shipbuilding framework. Rolandwerft does not build Community fishing vessels. According to the Guidelines for the examination of state aid to fisheries and aquaculture, (5) no aid may be granted to shipyards for the construction of Community fishing vessels.

(64)

Point 26 of the shipbuilding framework lays down that ‘Regional aid to shipbuilding, ship repair or ship conversion may be deemed compatible with the common market only if [the aid is] granted for investment in upgrading or modernising existing yards, not linked to a financial restructuring of the yard(s) concerned, with the objective of improving the productivity of existing installations;’.

(65)

The aid intensity may not exceed 12,5 % or the applicable ceiling for regional aid under Article 87(3)(c) of the EC Treaty, whichever is the lower. In the present case, the ceiling of 12,5 % is applicable. Moreover, the aid must be limited to eligible expenditure as defined in the applicable guidelines on national regional aid. (6)

(66)

These investment measures are designed to rationalise the production process at Rolandwerft by upgrading equipment and by covering the work area located outside. They can therefore be considered as investment in the modernisation or upgrading of an existing yard.

(67)

Part of the project concerns the extension of hall 1 and the extension of hall 3 in a north-westerly as well as a south-easterly direction. The Commission considers that these extensions concern existing installations. The project does not de facto lead to the construction of an additional hall. The extension aims merely to provide cover for shipbuilding activities currently taking place outdoors.

(68)

The remaining investments in hall 3 aimed at lengthening the crane track, widening the entrance door and upgrading the keel block system also constitute investments in existing installations. Moreover, the Commission considers that the lengthening of the crane track on quay 1 and the investments in the upgrading of the welding machines are investments in existing installations. It had already taken this view in its decision to initiate the formal investigation procedure.

(69)

The Commission assumes that the investments have the objective of improving the productivity of the existing installations. The hall extensions will improve productivity by allowing work to be carried out regardless of the weather. The widening of the entrance door of hall 3 will lead to a significant reduction in costs as the sections will no longer need to be turned through 90o and it will be possible to build longer sections. The same applies to (i) the lengthening of the crane track in hall 3 and on quay 1, which will dispense with the need for […] auto cranes, (ii) the acquisition of a hydraulic keel block system, as a result of which manual positioning of sections using auto cranes will no longer be necessary, and (iii) the purchase of automatic welding machines, which will reduce the time and costs associated with manual welding.

(70)

While there will be a clear effect on productivity, the impact on capacity will be limited as no new installations are to be set up in the yard and any increase in capacity would simply be the result of the productivity increases of the existing installations. Moreover, the beneficiary pointed out that the productivity increase will not lead to any increase in the capacity of the yard measured in CGT because it will be absorbed by increased performance of activities formerly outsourced. The Commission therefore considers that there is no disproportionate capacity increase.

(71)

The Commission thus comes to the conclusion that measures 1 to 6 in the table in paragraph 22 can be considered as investments in the modernisation or upgrading of an existing yard with the objective of improving the productivity of existing installations. The related costs of EUR 8 360 000 can accordingly be considered as eligible costs.

(72)

Measures 7 and 8 in the table in paragraph 22 concern the construction of an additional quay and the purchase of a new crane. The Commission considers that, for two reasons, these investments rank as measures to upgrade or modernise Rolandwerft. First, before the investments, Rolandwerft used to fit out and repair two ships at the same time by berthing one ship in parallel to the ship berthed directly at the quay. This process was inefficient and costly. The investments will enable Rolandwerft to berth two ships directly at the quay and will improve the fitting-out of the two ships. Second, the investments are the last in a series of investments started in 1999 with a view to enabling the yard to build larger ships. The yard had adapted its production because demand had shifted from much smaller feeder ships to the feeder ships currently built by Rolandwerft. The Commission considers that an adaptation of production to market demand can be considered as modernisation.

(73)

The investments are also aimed at improving the productivity of existing installations. The fitting-out at the original quay will become more efficient because the ships are no longer berthed alongside one another and there is no longer any need to cross over the ship berthed at the quayside. And so, although it can be assumed that the new quay is not merely a relocated existing installation, the Commission considers that the construction of the new fitting-out quay will lead to a productivity increase at the original quay.

(74)

In addition, the second crane to be installed at the extended quay will also lead to a productivity increase at the original quay. The combined lifting capacity of both cranes now amounts to 85 tonnes, compared with the previous figure of 50 tonnes, and permits the lifting of heavy loads for which a rented swimming crane was needed previously. After the investment, a swimming crane will be needed only for lifting the ship's engine. All other lifting activities can be carried out with the two cranes on the extended quay. Second, the original crane will often be used for activities on a smaller outdoor work area located behind the quay. After the investment, the second crane can be used when the first crane is needed for activities on the outdoor work area. Fitting-out will not, therefore, have to be disrupted at such times.

(75)

The Commission therefore finds that the aim of the investment is to improve the productivity of the existing installations at the yard.

(76)

Further, the Commission finds that the investment will not lead to an undue increase in capacity.

(77)

The Commission would first emphasise that Rolandwerft has been fitting out two ships at a time for more than fifteen years. Fitting-out in a second row was intended as a transitional solution until the necessary investment in the quay was undertaken. According to the information submitted by Germany, the transitional period was so long because of the specific situation on the market and the special conditions at the yard. The Hegemann group, as the owner of the yard, had decided to invest the available funds as a matter of priority in Peene-Werft. After the completion of the Peene-Werft restructuring project in 2005 and as a consequence of the market upturn, the Hegemann group was able to finalise its modernisation project for Rolandwerft. Given that the yard has regularly fitted out two ships at a time over the past 15 years (with interruptions at times of low demand), the Commission sees no reason to conclude that, before the investment, Rolandwerft had the capacity to fit out only one ship.

(78)

From a technical point of view, Rolandwerft will not be able to increase its new building and repair work because of the bottlenecks at preceding stages, namely in the halls and the outside work area. Both operations are already working to their limits, thereby preventing an increase in potential output. With regards to the yard's repair work, Germany explained that about 50 % of each repair job must be carried out on land, i.e. on the outside work area, but that the capacity there was already absorbed by new building activities. Additional repair work is therefore possible only in place of — and not in addition to — new building. The same arguments hold for ship conversion. As the investment does not affect the bottlenecks, the capacity for new building and ship repair/conversion cannot increase. Furthermore, the specific bottlenecks cannot be easily removed because this could be achieved only by duplicating the entire production process.

(79)

The Commission also examined whether the new quay would increase the yard's capacity for fitting out prefabricated hulls. But here too, the halls are the bottleneck. While the new ships built by Rolandwerft are pre-fitted out in the yard's halls, this is not the case with prefabricated hulls, which are usually empty and require a significant amount of fitting-out. For this, technical equipment normally used in the halls for the new building would be needed at the quayside. When the halls and their equipment are being fully utilised, the equipment cannot be used at the same time for fitting out the hulls. As a consequence, Rolandwerft cannot expand its fitting-out of hulls built elsewhere while at the same time maintaining its high level of new building and repair work.

(80)

Germany also explained that, at present, the fitting-out of hulls is neither being carried out nor planned. At times of peak demand, such activities are highly unlikely because the order books of potential hull suppliers are full for years ahead and Rolandwerft would not, therefore, be able to obtain prefabricated hulls of the required high quality on the market. This is borne out by the actual activities of Rolandwerft in recent years, when Rolandwerft did not, in addition, fit out prefabricated hulls although, in theory, it could have done at the parallel berth. Germany made the point that, after a market downturn when hulls would potentially be available on the market as yards would have free capacity, it could be assumed that the order books of Rolandwerft too would be slimmer. In such a case, Rolandwerft would, for reasons of profitability, rather use its own capacities to build the hulls than to fit out prefabricated hulls. Even if it did fit out prefabricated hulls, this would be in the place of — and not in addition to — new building.

(81)

The Commission notes that, hypothetically, even if a slight increase in capacity for fitting out prefabricated hulls did result from the investment, such an increase could be at most minimal for the technical reasons given above. Since the productivity increase achieved, mainly in the form of lower crane-rental costs, would be significant, a marginal capacity increase resulting from the occasional fitting-out of hulls could not be regarded as disproportionate.

(82)

The Commission further notes that, in support of its statement that no capacity increase was being sought, Rolandwerft has offered to undertake not to step up use of the new quay for a period of five years. This commitment, submitted by Germany, provides that the yard limit its activities at the new quay in the field of new building, fitting-out of prefabricated hulls, and ship repair and conversion to […] a year for a period of five years after the completion of the investment in the new quay. The use of the new quay for only […] is in line with the yard's planning for the next few years as submitted to the Commission. Rolandwerft has also undertaken not to build in the second row during that period. The Commission notes that these commitments cannot be regarded as proof that the investments will not lead to any capacity increase, but it welcomes them as further evidence that the technical, practical and economic reasons submitted by the beneficiary are well founded and that the aim of the investment is not to increase capacity but to improve productivity.

(83)

The Commission therefore takes the view that the investments in the new quay and the purchase of the new crane constitute upgrading or modernisation of an existing yard with the aim of increasing the productivity of the existing installations. They will not lead to a disproportionate capacity increase. The Commission therefore considers that the construction of the new quay and the purchase of the new crane fulfil the conditions for the granting of regional investment aid laid down in the shipbuilding framework. The investments amounting to EUR 4 640 000 are thus eligible for regional aid.

(84)

The Commission comes to the conclusion that the planned regional aid for Rolandwerft, amounting to 12 % of EUR 13 000 000, i.e. EUR 1 560 000, fulfils the conditions for regional aid laid down in the shipbuilding framework. The planned aid therefore fulfils the necessary conditions to be considered compatible with the common market,

30.4.2007   

EN

Official Journal of the European Union

L 112/41

(1)

By letter dated 9 February 2004 (D/51178), the Commission sent a request for information to the French authorities concerning the tax-oriented leasing provisions in favour of certain undertakings approved by the Minister for the Budget introduced by Article 77 of Law No 98-546 of 2 July 1998 on various economic and financial measures (2). By letter dated 18 March 2004, the French authorities requested an extension of the period they had been allowed for furnishing the information requested. The Commission received the said information from the French authorities by letter dated 3 May 2004 (A/33117). By letter dated 6 July 2004 (D/54933), the Commission asked the French authorities to produce further information, which it received on 2 August 2004 (A/36007).

(2)

By letter dated 14 December 2004 (D/205909), the Commission notified the French authorities of its decision to initiate the formal investigation procedure laid down in Article 88(2) of the EC Treaty. The decision was published in the Official Journal of the European Union  (3). In it, the Commission invited France and interested parties to submit their comments within a certain time limit.

(3)

By letters dated 6 January 2005 (A/30266) and 4 February 2005, the French authorities requested an extension of the time limit, which was granted by letters dated 11 January 2005 (D/50220) and 16 February 2005 (D/51190).

(4)

The Commission received the French authorities’ comments on 15 March 2005 (A/32251). It also received, within the deadline, comments from 16 interested parties, which were forwarded to the French authorities on 9 June 2005 (D/54454).

(5)

By letter dated 7 July 2005 (A/35587), the French authorities asked the Commission to extend the time limit granted to it for commenting on the interested parties’ comments. The Commission granted the request and the French authorities finally submitted their comments by letter dated 20 July 2005 (A/35981).

(6)

By e-mail dated 2 March 2006 (A/31655), the French authorities sent the Commission further comments on the scheme at issue.

(7)

Pursuant to the first paragraph of Article 39 C of the General Tax Code, the depreciation of assets leased out or otherwise made available is spread over the normal period of use.

(8)

Article 77 of Law No 98-546 introduces two provisions into the General Tax Code aimed at combating tax avoidance by partnerships and economic interest groupings (EIGs) (4) when they carry out movable asset financing operations.

(9)

The second paragraph of Article 39 C of the General Tax Code provides that the tax-deductible depreciation of an asset leased out by an EIG may not exceed the amount of any leasing charges collected by it, less any other charges relating to the asset.

(10)

Since the declining depreciation and the financial charges are, by definition, concentrated on the first few years of the asset’s use, the EIG’s results show an exceptional loss during that period and become positive only during a later period when the amount of the leasing charges collected exceeds total costs (depreciation and financial charges included). Because EIGs are governed by the law on partnerships, they can deduct the losses thus posted during the first few years of the operation from the taxable profits earned by their members from their current activities. The ceiling on depreciation provided for in the second paragraph of Article 39 C of the General Tax Code is intended, therefore, to combat abusive recourse to this type of financing for the purpose of tax avoidance.

(11)

An exception to this limitation, introducing a depreciation system favourable to certain undertakings, has nevertheless been inserted in the General Tax Code. Article 39 CA of the General Tax Code thus stipulates that the ceiling laid down in the second paragraph of Article 39 C of the Code shall not be applicable to the financing by EIGs of depreciable movable assets according to the declining balance method over a period of at least eight years (5) provided that the operation has been approved in advance by the Minister for the Budget.

(12)

Such approval is subject to a number of criteria. These are essentially as follows:

(13)

As a rule, the EIG — which is generally made up of financial institutions — acquires the asset to be financed at the market price and leases it out to its user. The leasing charges paid by the user and the price of the end-of-contract purchase option enable the EIG to cover its own financing costs, including capital and interest.

(14)

Apart from the removal of the depreciation ceiling (6), the grant of ministerial approval makes it possible to increase by one point the declining depreciation coefficient normally applicable to the asset concerned. Moreover, the resale of the asset by the EIG to its user once two thirds of the normal period of use of the asset has elapsed is exempt from transfer capital gains tax.

(15)

As to the criterion relating to the existence of a significant economic and social interest (7), the French authorities have indicated that there are no guidelines for assessing such an interest and that the examination is carried out in the light, firstly, of the indirect fallout from the investment in the labour market area, the conditions of competition and the development of the activity in the economic area concerned, including the contribution to the growth or establishment of a production, management or decision-making centre, and, secondly, of the investment’s contribution to improving safety and protection of the environment.

(16)

Article 39 CA of the General Tax Code provides that the passing-on to the user of the asset of two thirds at least of the tax advantage which the EIG derives from the grant of approval (8) must take the form of a reduction in the amount of the leasing charge or of the purchase option. Moreover, the exact amount of the advantage to be passed on by the EIG to the user must be determined at the time of grant of the approval.

(17)

At the Commission’s request, the French authorities furnished a breakdown by area of activity of all applicants for approval and of the actual beneficiaries of the scheme at issue:

(18)

The French authorities pointed out in this connection that, of the 56 applications which did not form the subject matter of an approval decision, 21 were withdrawn, 13 led to no further action being taken and 22 were rejected. According to the French authorities, of the 22 applications that were rejected 15 concerned the financing of an asset in the maritime transport sector and the remaining 7 the financing of an asset in the air transport sector.

(19)

The French authorities also pointed out that approval procedures under Article 39 CA of the General Tax Code have been suspended since 14 December 2004, the date on which the decision to initiate the formal investigation procedure was notified to them.

(20)

In its decision of 14 December 2004 the Commission found that an advantage seemed to granted under Article 39 CA of the General Tax Code to investors belonging to tax EIGs and to the users of assets financed by EIGs. As far as the selectivity of the measure in question was concerned, the Commission noted, firstly, that the Minister for the Budget seemed to enjoy a discretionary power when it came to assessing the approval grant criteria and that this enabled him to select the beneficiaries of the scheme at issue according to subjective standards. Secondly, it appeared that the tax arrangements provided for in Article 39 CA of the General Tax Code constituted an aid measure for the benefit mainly of the transport sector. The Commission thus took the view that the measure at issue did not appear to be justified by the nature or general scheme of the French tax system. In its opinion, the advantages in question also involved the use of state resources, distorted competition and affected intra-Community trade.

(21)

As to the compatibility of the scheme at issue with the common market, the Commission considered at that stage that none of the exceptions provided for in Article 87(2) and (3) of the Treaty were applicable in the present context. Nor did the scheme appear to satisfy the conditions of the Community guidelines and frameworks in the field of state aid. It was therefore prima facie incompatible with the common market.

(22)

The Commission accordingly decided to initiate the formal investigation procedure in order to allay its doubts both as to the state aid nature of the scheme at issue and as to the scheme’s compatibility with the common market.

(23)

As part of their comments, the French authorities maintained, firstly that the scheme provided for in Article 39 CA of the General Tax Code did not constitute state aid. It was simply a technical procedure for implementing the ordinary law which made it possible to place the method of financing concerned under the supervision of the authorities, and not a departure from the ordinary law. The ceiling on deductible depreciation provided for in the second paragraph of Article 39 C of the General Tax Code sought, by introducing a presumption of tax avoidance, to prevent recourse to that financing mechanism for tax optimisation purposes. The scheme provided for in Article 39 CA of the General Tax Code was also designed to combat tax avoidance. However, the heavy capital goods concerned by that provision were characterised by a relatively long return on investment, and in those circumstances recourse to leasing was motivated not only by a desire for tax optimisation but also by economic necessity.

(24)

The French authorities stated that, viewed as a whole, the approval grant criteria made it possible to carry out prior monitoring of capital goods financing operations involving leasing with a purchase option and to deny the benefit of the tax scheme at issue to all financing operations primarily motivated by tax optimisation considerations.

(25)

This was especially the case with the criterion that the investment be of significant economic and social interest, particularly in relation to employment, the satisfaction of which required that the approval application be backed up by commitments to hire staff. The jobs created had to be maintained for the minimum period of use of the asset, i.e., the duration of the leasing contract or of the ‘making available’, namely at least eight years. They also had to lead to a net increase in the number of employees of the company seeking approval and be directly related to the investment.

(26)

The French authorities pointed out that some applications for approval had been rejected on the ground that the financing proposal submitted lacked significant economic and social interest. Two types of situation were characterised by such lack of interest. Firstly, the lack or insufficiency, both quantitative and qualitative, of new hirings capable of strengthening or making possible the establishment of a management or decision-making centre. And, secondly, the state of affairs whereby the applicant’s financial position enabled him to have recourse to other means of financing which were not in the nature of an incentive.

(27)

The criterion relating to the passing-on to the user of most of the tax advantage accruing to the EIG's members under Article 39 CA of the General Tax Code also made it possible, according to the French authorities, to combat tax optimisation by excluding from the benefit of that provision operations which were designed only to generate increased cash flow.

(28)

The French authorities pointed out, further, that the monitoring arrangement thus introduced was not discretionary in character. They referred in this connection to the decision by the French Constitutional Council to the effect that an approval such as that provided for in Article 39 CA of the General Tax Code was not so much a discretionary measure as one which conferred on the Minister for the Budget sole power to ensure that the operation in question satisfied the conditions laid down by law (9).

(29)

At all events, so the French authorities claimed, the tax advantage attaching to the deduction of the amount of depreciation did not lead to any loss of tax revenue, being more akin to a different breakdown, over time, of the taxable base. Moreover, the determination of the exact share of the advantage retained by the investors belonging to the EIG was in the nature of an exercise in remuneration the amount of which was a function of market conditions and the outcome of a classic commercial negotiation.

(30)

In answer to the Commission’s allegation of selectivity of the tax scheme at issue, the French authorities put forward several arguments.

(31)

First of all, they contended, the scheme was a general measure potentially applicable both to the industrial sector and to the transport sector. Examples of its application were: pulping machinery, hydrocarbon storage tanks, printing presses and refrigerating units, all of which were industrial assets which could be depreciated according to the declining balance method over a period of at least eight years. The French authorities pointed out, moreover, that certain means of transport, such as lorries and buses, were excluded from the measure’s scope owing to their shorter depreciation period. The depreciation period in question applied, therefore, to all assets whose return on investment required a fairly long time.

(32)

Secondly, the concentration of the benefit of the scheme at issue on transport equipment was due, in reality, to matters outside the French public authorities’ control, namely, changes in industrial companies’ financial circumstances and the attractiveness of transport equipment to investors. Such equipment comprised assets highly attractive in the eyes of investors who, in order to limit their risks, opted for assets which were easily negotiable should the operator encounter difficulties.

(33)

Thirdly, the scheme at issue did not favour French companies in so far as nationality was not a factor in becoming a member of an EIG. A foreign investor, in particular a financial institution, could thus benefit from the scheme and from the resulting increased cash flow irrespective of its tax domicile.

(34)

At all events, even supposing that the scheme provided for in Article 39 CA of the General Tax Code were a departure from the ordinary law, it was of unlimited scope and duration and was based on objective, horizontal tax avoidance combating criteria. Just like the aid scheme in Commission Decision 96/369/EC of 13 March 1996 concerning fiscal aid given to German airlines in the form of a depreciation facility (10), it could not, therefore, be classified as state aid.

(35)

With regard to the exemption from capital gains tax on the transfer of title in an asset, the French authorities stated that the advantage which the members of an EIG derived from such exemption also had to be passed on to the tune of at least two thirds to the user of the asset. They maintained that this exemption, which was conditional, was justified by the nature and overall structure of the French tax system. It was necessary, in the event of an early transfer of title, in order to ensure the maintenance of the tax advantage resulting from the deduction of the depreciation under conditions of ordinary law. The French authorities pointed out, moreover, that the exemption would be included in the ordinary law as from 1 January 2007. From that date onwards, any capital gains on the transfer of equity interests held for more than two years would be exempted, apart from a share of the costs and charges equal to 5 % of the net total of the transfer capital gains taken into account in determining the taxable amount. In view of the date of conclusion of the contracts for the making available of assets between EIGs and users, the date on which the early transfer of title in those assets would be possible would be after 1 January 2007 inasmuch as such transfer could not take place until after the contracts had been two-thirds implemented. EIG members would benefit, therefore, from the exemption under the ordinary law.

(36)

The French authorities pointed out that the exemption from transfer capital gains tax was not automatic. One of the conditions for such exemption was that the actual user of the asset had to show that, in view of the asset’s cost, he was unable to purchase it directly without endangering his financial equilibrium. According to the report of 25 March 1998 by the rapporteur of the National Assembly’s Finance Committee, that condition was to be viewed in the context of the implementation of alternatives to the tax deduction for subscription of co-ownership shares in ships (quirats) (hereinafter called ‘the co-ownership shares scheme’), which was abolished by the 1998 Finance Act.

(37)

With regard to the compatibility of the tax scheme at issue with the common market, the French authorities maintained that, even if the scheme were to constitute state aid, it was in keeping with Article 87(3) of the Treaty as it facilitated the development of certain activities without adversely affecting trading conditions to an extent contrary to the common interest. Article 39 CA of the General Tax Code did not place domestic economic operators at an advantage over operators from other Member States and was no more advantageous than schemes in force in other Member States.

(38)

The French authorities drew attention to the specific situation of maritime transport services, the operators of which were the main users of the scheme at issue. They pointed out that the scheme was a measure having an effect equivalent to the co-ownership shares scheme — a scheme for financing vessels registered in France — which had previously been notified to and approved by the Commission under Article 87(3) of the Treaty (11). The co-ownership shares scheme had, they said, been abolished in 1998 owing to its excessive budgetary cost. They pointed out that it was against a background both of stagnating numbers of commercial vessels registered in France and of the desire to reduce tax expenditure that the legislature had decided to adapt the tax-oriented leasing arrangements. The entry into force of Article 39 CA of the General Tax Code had led, not to an expansion of the French shipping sector, but to a consolidation and rejuvenation of the fleet under the French flag. During the same period, other Member States’ fleets had grown in terms both of numbers of units and of tonnage. The scheme’s entry into force had therefore not affected the development of other Member States’ shipping sectors.

(39)

In addition, the scheme provided for in Article 39 CA of the General Tax Code fitted in perfectly with the Community guidelines on State aid to maritime transport (hereinafter called ‘the 1997 Community guidelines’) and with Commission communication C(2004) 43 — Community guidelines on State aid to maritime transport (hereinafter called ‘the 2004 Community guidelines’) (12). In particular, it helped to enhance the competitiveness of the Community fleets in the world market for maritime transport, to safeguard Community employment both on board and on shore, to maintain maritime know-how in the Community and to develop maritime skills (point 2.2. of the above-mentioned Community guidelines). Furthermore, it made an effective contribution to improving safety and protecting the environment by enabling the renewal of the fleet. As regards, more particularly, the safeguarding of the employment of seafarers and of high-quality jobs on shore, the French authorities pointed out that the quid pro quos required for purposes of the grant of approval included the need to possess, in the territory of the Union, a strategic decision-making centre for managing maritime activities and ships. Not only jobs related to the direct management of maritime transport, but also those related to ancillary activities such as insurance, brokerage and finance thus benefited indirectly from the tax scheme at issue.

(40)

The French authorities pointed out, however, that neither the 1997 Community guidelines (13) nor those of 2004 (14) established a strict relationship between the aid needed to maintain and develop maritime transport and the level of employment created. It was stated, moreover, in the 2004 Community guidelines (point 3.1) that ‘at this stage, there is no evidence of schemes distorting competition in trade between Member States to an extent contrary to the common interest’ and that ‘such measures have been shown to safeguard high quality employment …’.

(41)

Lastly, as regards the application in the present case of the principle of legitimate expectation, the French authorities referred to Commission Decision 2002/15/EC of 8 May 2001 concerning State aid implemented by France in favour of the Bretagne Angleterre Irlande company (hereinafter called ‘BAI’ or ‘Brittany Ferries’) (15), in which the scheme at issue was examined.

(42)

The French authorities also referred to their letter to the Commission dated 17 March 1998 (A/32232) mentioning the introduction of the second paragraph of Article 39 C and Article 39 CA of the General Tax Code. They considered that, notwithstanding that letter and the various cases examined by the Commission (16) in which mention was made of Article 39 of the General Tax Code, no proceedings had been initiated in respect of that scheme in the six years following its entry into force.

(43)

In these circumstances, the Commission’s silence had — so the French authorities maintained — created a legitimate expectation in the compatibility of Article 39 CA of the General Tax Code with the common market, and this precluded any request for recovery from the undertakings concerned.

(44)

Sixteen interested parties sent their comments to the Commission pursuant to Article 88(2) of the Treaty within the time limit allowed. A list of these interested parties is attached to this Decision.

(45)

As regards, firstly, the question whether the scheme at issue could be classified as aid, most of the interested parties were opposed to the Commission’s position on this score.

(46)

Thus, according to, among others, Caisse Nationale des Caisses d’Epargne et de Prévoyance (hereinafter called ‘CNCE’), Calyon Corporate and Investment Bank (hereinafter called ‘Calyon’) and BNP Paribas (hereinafter called ‘BNP’), the arrangements provided for in Article 39 CA of the General Tax Code did not constitute state aid but created a means of monitoring the application of the ordinary law as it related to the depreciation of certain assets. The combination of the second paragraph of Article 39 C and Article 39 CA of the General Tax Code was aimed at combating excessive tax revenue losses, as witnessed the parliamentary work prior to the adoption of Law No 98-546 (report by the Finance Committee to the National Assembly of 25 March 1998).

(47)

Société Générale (hereinafter called ‘SG’), BNP and Brittany Ferries argued, for their part, that Article 39 CA of the General Tax Code did not provide for any ring-fencing derogating from the ordinary law, but instead represented a return to the ordinary law on depreciation. The scheme was thus a general one. According to SG, the economic advantage resulting from the tax deferment under Article 39 CA of the General Tax Code had to be compared to the ordinary law on depreciation and not to the derogatory restrictive regime provided for in the second paragraph of Article 39 C of the General Tax Code. Moreover, the scheme at issue was open to all economic operators in France, and Article 39 CA of the General Tax Code referred to no asset or economic sector in particular. The granting of the advantages resulting from the application of that article was thus reserved neither for the French commercial sea fleet nor for French financial institutions.

(48)

The identity of the members of an EIG was not, it was contended, a criterion for the grant of approval and the scheme at issue contained no restriction as to an EIG’s members, who were a source of revenue raising. According to these interested parties it could not therefore reasonably be supposed that the combined provisions of Articles 39 C and 39 CA of the General Tax Code conferred a selective tax advantage on the members of EIGs.

(49)

The approval provided for in Article 39 CA of the General Tax Code was not, it was further contended, granted in a discretionary manner. On the contrary, argued Gaz de France and BNP, the grant of ministerial approval was subject to objective, non-discriminatory conditions. BNP pointed out in this connection that, according to the case law of the Court of Justice (17), it was for the Commission to demonstrate the discretionary character of the treatment of economic operators in the case of individual measures, inasmuch as the existence of a margin of discretion granted to the authorities could lead to a finding of the selectiveness of a measure only where what was involved was an individual measure and not the general scheme on which that measure was based. It pointed out further that the tax authorities could not impose conditions which were not provided for by law. In the present case, the law stated explicitly what were the applicable criteria for assessing the existence of a ‘significant economic and social interest’. BNP, CNCE and Calyon referred in this context to the Constitutional Council decision (18) mentioned by the French authorities. At all events, any decision not to grant approval could be appealed against on grounds of ultra vires before the administrative courts, which would give judgment in the light of the grounds for such refusal.

(50)

In the opinion of, among others, Calyon and BNP, the selectivity of the scheme at issue was due to market practices and the specificities of transport assets (certain guarantees of long-term value added and liquidity) and not to the wording of Article 39 CA of the General Tax Code. Transport assets, so they maintained, had special features which made them suitable for long-term financing. Moreover, even had it been the case that Article 39 CA of the General Tax Code did not require prior approval by the Minister for the Budget, the beneficiaries under the scheme would have been the same as they were then.

(51)

Furthermore, in BNP’s opinion, the criteria governing the application of Article 39 CA of the General Tax Code were justified by the nature and overall structure of the French tax system, certain business sectors being in need of considerable investment.

(52)

CNCE maintained, further, that financial advantages similar to those resulting from the application of Article 39 CA of the General Tax Code could be obtained by applying the provisions of the ordinary law. The specificities of Article 39 CA of the General Tax Code did not give rise to any real differentiation as compared with the ordinary law on depreciation from the point of view of the quantum of the tax consequences. In CNCE’s view, those specificities were, firstly, the benefit of the one-point increase in the declining depreciation coefficient and, secondly, the possibility of benefiting from exemption from transfer capital gains tax. BNP acknowledged, however, that the State calculated the budgetary cost of applying Article 39 CA by taking as point of reference the second paragraph of Article 39 C of the General Tax Code.

(53)

As far as the one-point increase in the depreciation coefficient was concerned, the advantage was, it was claimed, offset by the fact that any losses posted were deductible, under Article 39 CA of the General Tax Code, only to the tune of one quarter of the profits subject to ordinary corporation tax which each member of the EIG earned from its activities. That tax advantage was intended, moreover, to offset the specific constraints or restrictions imposed for purposes of the grant of approval. BNP pointed out in this connection that the benefit derived by an EIG from the one-point increase in the depreciation coefficient was hedged with conditions and relatively modest. It could not, at all events, confer any competitive advantage. Air France pointed out for its part that a financing operation performed under the scheme at issue generated, compared with a financing operation involving a direct loan, a saving of between 6 and 10 % of an aircraft’s price. It added that the saving to the lessee was altogether comparable to the potential financial gain to be had by having recourse to other tax schemes.

(54)

As far as the exemption from transfer capital gains tax was concerned, CNCE pointed out that the possibility of requesting it resulted from the overall structure of the French tax system and could not therefore be classified as state aid. Its economic rationality rendered it necessary or functional in relation to the system’s effectiveness. The exemption from transfer capital gains tax was justified by the need to maintain the cash flow advantage resulting from the first component of Article 39 CA of the General Tax Code. According to Calyon, in the specific case of ships, the exemption made it possible to place the shipowner in a situation comparable to that which he would have been in had he purchased the ship directly and had he had sufficient financial capacity to deduct the depreciation for tax purposes. According to BNP, the exemption from capital gains tax was designed so as not to negate the advantage linked to the tax deferment in the event of early exercise of the purchase option by the user. SG indicated, for its part, that the exemption from transfer capital gains tax was intended only to offset specific constraints related to the tax arrangements at issue such as, for example, the prohibition on transferring the lessor’s shares unless there was an explicit request to that effect made originally by the user. The increased operating charges for the user compensated for that exemption.

(55)

According to Brittany Ferries, the exemption from capital gains tax provided for by Article 39 CA of the General Tax Code was no more favourable than that resulting from the ordinary law provisions (subject to a 5 % share of the costs and charges) applicable from 2007 onwards.

(56)

Air France pointed out that the savings resulting from the tax arrangements at issue were comparable to those achieved using other means of financing with tax levers existing in the world. Moreover, the operations financed under Article 39 CA of the General Tax Code were subject to quid pro quos liable to temper that provision’s advantages. Air France pointed out, furthermore, that, in some cases, the EIG could contractually pass on the tax-related risks and ancillary costs to the lessee, which had the effect of reducing appreciably the potential saving to the user.

(57)

Lastly, a number of interested parties, including Compagnie Méridionale de Navigation, maintained that the scheme at issue introduced, for shipowners, numerous constraints in the form of quid pro quos demanded by the State for approval grant purposes. The advantages flowing from the tax scheme thus offset the extra cost of managing vessels under the French flag, which was basically due to the cost of French crewing, one of the highest in Europe. Fouquet Sacop pointed out in this connection that the scheme had induced it to opt for rapid growth under the French flag, the constraints and extra costs related to that flag being offset by the tax scheme at issue. CMA CGM, Broström Tankers, Pétro Marine and Louis Dreyfus Armateurs stated that, without the benefit of the scheme, they would have been unable to invest in French-flagged vessels and, in so doing, to take part in the development of the Community fleet. Bourbon Maritime indicated for its part that the arrangements provided for in Article 39 CA of the General Tax Code made it possible to maintain high-quality jobs linked to the direct management of maritime transport and its ancillary activities and that they contributed effectively to the improvement of safety and the protection of the environment.

(58)

As regards, secondly, the requirement in Article 87(1) of the Treaty as to an effect on trade between Member States, several interested parties pointed out that the members of an EIG and the users of the assets concerned could be foreign operators or their French subsidiaries. Moreover, the scheme at issue was no more favourable than those existing in other Member States. SG stated in this connection that those of its clients concerned by the approvals who were French were in a minority.

(59)

As regards, thirdly, the compatibility of the scheme at issue with the common market, CNCE stated that the approvals granted to maritime operators were in keeping with the spirit of the 1997 and 2004 Community guidelines (19). The measure at issue was thus compatible with the common market pursuant to Article 87(3)(c) of the Treaty, as interpreted in the light of the principles set out in the said Community guidelines.

(60)

Brittany Ferries maintained that the scheme provided for in Article 39 CA of the General Tax Code was compatible with the common market pursuant to Article 87(3)(c) of the Treaty inasmuch as the measure sought only to compensate for ‘market failures’ in relation to the financing of investments in heavy capital goods. It was also stressed by the majority of interested parties that the other Member States had reacted accordingly by introducing similar measures.

(61)

As regards, fourthly, the application in the present case of the principle of legitimate expectation, the majority of interested parties — being beneficiaries under the scheme — maintained that they had always been convinced that the measure at issue did not constitute state aid within the meaning of Article 87(1) of the Treaty. The application in the present case of the above-mentioned principle therefore precluded any recovery.

(62)

SG pointed out in this respect that, under the scheme preceding the one at issue, any partnership losses generated by depreciation could be fully offset against the tax liability of the partnership members. The Commission had never considered that ordinary law scheme to be state aid.

(63)

It was also maintained that the Commission had refrained from acting for six years. According to Calyon, the Commission appeared to have learned of several asset financing operations under Article 39 CA of the General Tax Code without ever having raised the question of their validity in the light of Article 87 of the Treaty (20). CNCE maintained in this connection that the period which had elapsed between the date on which the Commission learned of the aid and the date on which the formal investigation procedure was initiated was excessively long, and Calyon described that period as unreasonable. What is more, the Commission had already exceptionally established the existence of a legitimate expectation on the part of beneficiaries which precluded any reimbursement of aid once a period of about three years had elapsed between the Commission’s learning of the measure and its adopting its final decision (21).

(64)

Some interested parties also stressed that the Commission had previously approved the co-ownership shares scheme — a scheme which was more favourable from a tax point of view than the scheme at issue here — and that that circumstance had given rise to their legitimate expectation in the lawfulness of the scheme at issue. Moreover, according to CNCE, the creation of a legitimate expectation on the part of beneficiaries did not require the Commission to have ruled on an identical scheme. The acceptance of a merely similar scheme could, it argued, give rise to such an expectation. And the Commission had in fact accepted a similar scheme in its Decision of 8 May 2001 (22). CNCE and SG also referred to several similar schemes approved by the Commission (23) and to the judgment of the Court of Justice in RSV v Commission  (24).

(65)

More specifically, Brittany Ferries considered that the Commission Decision of 8 May 2001 (25) had given rise to a legitimate expectation on its part that the scheme at issue did not comprise any state aid.

(66)

CNCE stressed also that France had adopted Law No 98-546 some three months after informing the Commission about it in accordance with Article 88(3) of the Treaty. The Commission had not replied within two months of that notification, and so the measure in question was covered by the existing aid arrangements within the meaning of the Lorenz case law (26).

(67)

Two interested parties who asked not to be named submitted comments to the Commission as part of the formal investigation procedure.

(68)

In the comments which it transmitted to the Commission within the period allowed, the first of these parties maintained that the scheme at issue was unlawful. It asked the Commission to extend the scope of the present administrative procedure to include the co-ownership shares scheme. It considered, like the Commission in its decision initiating the formal investigation procedure, firstly, that the scheme at issue was selective in that it favoured French shipowners, and, secondly, that it affected trade between Member States inter alia in the cross-Channel market. It pointed out in this connection that, as was clear from the Finance Committee report of 25 March 1998, the scheme at issue in this case, replacing as it did the co-ownership shares scheme, had been introduced to keep the French shipping industry happy.

(69)

Moreover, by favouring French operators, the tax arrangements at issue helped to increase overcapacity in the cross-Channel market by enabling cash-strapped companies to acquire new ships. The distortion of competition resulting from the scheme’s application was illustrated by the acquisitions of ships, through this tax mechanism, by Seafrance and Brittany Ferries. The latter had, it was claimed, seen their capacity increase considerably following these new ship acquisitions.

(70)

The second interested party who requested that its identity be withheld referred in its comments to the preferential competitive position enjoyed by French operators — foremost among which was Brittany Ferries — owing to their ships being financed through the scheme at issue. It mentioned in this connection the continued presence of Brittany Ferries on the cross-Channel routes and on the France/Ireland route despite the unfavourable competitive conditions prevailing there — conditions which had led, moreover, to the withdrawal of P&O from the market.

(71)

According to the French authorities, the comments from most of the interested third parties confirmed their position regarding the assessment of the scheme at issue, which was that:

(72)

The comments submitted by the two interested parties whose identity had been kept confidential were, in the French authorities’ opinion, based on inaccurate or imprecise data.

(73)

As to the argument that Brittany Ferries’ eligibility under the tax EIG scheme had led indirectly to the withdrawal of P&O from the western and central English Channel, the French authorities replied that only two vessels operated by Brittany Ferries had qualified under the scheme and that the financing of its Mont St Michel ferry by the mechanism had been approved by the Commission’s decision of 8 May 2001 (27).

(74)

According to the French authorities, an in-depth investigation was carried out by the British competition authorities when the above-mentioned operator withdrew from the market. No distortion of competition was found to be at the root of the operator’s withdrawal. Moreover, the falling turnover of some operators was due to the steadily increasing competition from low-cost airlines and not to the commissioning of new vessels by other shipowners.

(75)

As for the call by one of those interested parties for the Commission to extend the scope of its investigation to include the co-ownership shares scheme, the French authorities pointed out that that scheme had been declared compatible with the Treaty rules in the Commission’s decision of 3 May 1996.

(76)

Lastly, in the French authorities’ opinion, the increase in cross-Channel capacity was not attributable to companies which had benefited under the tax EIG scheme. Account should be taken instead of new entrants on the routes on which the incumbent operators had previously operated. The French authorities also pointed out that Eurotunnel had doubled its freight-handling capacity between 2000 et 2003 and that P&O had bought out Stena Line’s share of their joint venture and had modernised its fleet.

(77)

Following the initiation of the formal investigation procedure under Article 88(2) of the Treaty and bearing in mind the arguments put forward in that context by the French authorities and by interested parties, the Commission takes the view that the tax scheme provided for in Article 39 CA of the General Tax Code constitutes state aid within the meaning of Article 87(1) of the Treaty.

(78)

Pursuant to Article 87(1) of the 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, in so far as it affects trade between Member States, be incompatible with the common market’.

(79)

The classification of a national measure as state aid presupposes that the following cumulative conditions are met: (1) the measure confers an advantage through state resources; (2) the advantage is selective; and (3) the measure distorts or threatens to distort competition and is capable of affecting trade between Member States (28).

(80)

The reasons why it is considered that the scheme provided for in Article 39 CA of the General Tax Code, as described above, satisfies these cumulative conditions need to be explained.

(81)

Pursuant to the first paragraph of Article 39 C of the General Tax Code, the depreciation of assets leased out or otherwise made available is spread over the normal period of use.

(82)

The second paragraph of Article 39 C and Article 39 CA of the General Tax Code concern the depreciation rules applicable to the financing, notably by EIGs, of assets leased out or otherwise made available. According to the French authorities, these two provisions were introduced with a view to combating abusive recourse to this method of financing.

(83)

The French authorities and a number of interested parties claim that the scheme provided for in Article 39 CA of the General Tax Code corresponds to a return to the ordinary law in relation to the deduction of depreciation, that is to say, to the provisions of the second paragraph of Article 39(1) and the first paragraph of Article 39 C of the said Code, and therefore does not constitute state aid. The second paragraph of Article 39 C of the General Tax Code constitutes, in their view, an exception to the provisions contained in those articles.

(84)

According to settled case law, the application of Article 87(1) of the Treaty only requires it to be determined whether under a particular statutory scheme a state measure is such as to favour ‘certain undertakings or the production of certain goods’ over others which are in a legal and factual situation that is comparable in the light of the objective pursued by that scheme (29).

(85)

Consequently, in order to identify what constitutes an advantage as contemplated in the case law on state aid, it is imperative to determine the reference point or the common system applicable, under a particular statutory scheme, against which that advantage is to be compared (30). In this respect, the Court of Justice has ruled, moreover, that the determination of the reference framework is of particular importance in the case of tax measures since the very existence of an advantage may be established only when compared with ‘normal’ taxation, i.e. the rate of taxation in force in the geographical area constituting the reference framework (31).

(86)

In the present case, in order to determine the reference point under the scheme of depreciation of assets leased out or otherwise made available, account need be taken only of the provisions on the financing of such assets by partnerships such as EIGs. Otherwise, the factual and legal situations taken into consideration for the purpose of determining the advantage would not be comparable, either from the point of view of the members of the EIG or from that of the users of the assets in question.

(87)

Hence the reference point applicable in the present case for determining the deductible depreciation is the limitation in principle of such depreciation to assets financed by EIGs, as provided for in the second paragraph of Article 39 C of the General Tax Code (32). The criterion cannot be the first paragraph of Article 39 C of the General Tax Code inasmuch as that provision is not applicable to financing operations by EIGs, that is to say, by structures grouping together several legal entities — as a rule financial institutions — which thus share between them the risks inherent in an operation, as opposed to a financing operation carried out by a single financial institution bearing on its own the risks involved. It should be pointed out further in this connection that, unlike financing methods which do not entail recourse to an EIG, a financing operation using as an intermediary such a tax-transparent structure makes it possible to achieve tax optimisation, any losses posted by an EIG during the first few years of its activity being deductible from the taxable profits earned by its members from their current activities.

(88)

The Commission considers, therefore, that the French authorities and certain interested parties are not justified in maintaining that the scheme provided for in Article 39 CA of the General Tax Code constitutes a return to the ordinary law on depreciation, and that the second paragraph of Article 39 C of the said Code constitutes the reference point against which the tax advantage resulting from the application of Article 39 CA is to be assessed. It is relevant to note, moreover, that Article 39 CA of the General Tax Code provides expressly that the tax advantage in question is to be calculated from the balance of the positive or negative discounted values relating respectively to the tax reductions or additional tax contributions, compared with those which would result from the application of the provisions of the second paragraph of that article.

(89)

It should be pointed out that only members of EIGs (33) which finance movable assets the depreciation period of which is at least eight years qualify for the tax advantages resulting from the application of Article 39 CA of the General Tax Code, namely, (1) exemption from the ceiling in principle on deductible depreciation, (2) the one-point increase in the depreciation coefficient, and (3) possible exemption from transfer capital gains tax.

(90)

As regards, firstly, the removal of the ceiling on deductible depreciation pursuant to Article 39 CA of the General Tax Code, it should be noted that each member of an EIG is able, during the period of depreciation of the asset when the EIG is posting a loss, to deduct the EIG’s losses, in proportion to its rights, from its own taxable profits. No account is taken, in this context, of the ceiling on depreciation laid down in the second paragraph of Article 39 C of the General Tax Code.

(91)

Consequently, the application of the exception provided for in Article 39 CA of the General Tax Code makes possible, during the loss-making period, a reduction, by each of the EIG’s members, of the base which would normally be taxable under the second paragraph of Article 39 C of the General Tax Code. The fact that the amount of the depreciation is not limited to the amount of the leasing charges collected, less any other charges relating to the leased asset, makes it possible to increase the amount of the depreciation during the first few loss-making financial years. The fact that, pursuant to Article 39 CA of the General Tax Code, such losses are only deductible to the tune of one quarter of the profits taxable at the normal rate of corporation tax which each member of the EIG earns from the rest of its activities may limit that advantage, but it cannot call into question its existence.

(92)

The French authorities maintain in this respect that the tax savings thus obtained during the first few years of the financing operation are neutralised by the additional tax payable once the EIG starts to make a profit, the leasing charges payable being greater than the annual depreciation expense. The Commission considers, however, that the advantage gained lies in the delayed payment of tax and corresponds to the balance of the discounted values of the taxes paid throughout the depreciation period taking into account the interest rates applied.

(93)

Senate Report No 413 (34) confirms this analysis when it states that ‘[t]he tax savings thus obtained by the members during the first few years of operation are offset by the additional tax payable thereafter when the financing structure earns profits’. However, this time-lag makes it possible, so the report says, to achieve an increase in cash flow equal to the difference between the discounted values of the tax savings for the first few years and the additional tax contributions in subsequent years. The Commission would also point out that it is stated in Tax Instruction No 120 of 17 June 1999 (35) that the tax advantage resulting from the application of Article 39 CA of the General Tax Code makes it possible to achieve tax savings.

(94)

It would appear, therefore, that the scheme introduced by Article 39 CA of the General Tax Code seeks to enable the members of an EIG to enjoy an advantage in the form of a tax deferment.

(95)

No support can be given to the argument that users for whom an EIG does not receive approval pursuant to Article 39 CA of the General Tax Code have recourse to other methods of financing in order to circumvent the tax-deductible depreciation ceiling provided for in the second paragraph of Article 39 C of the Code and are therefore not placed at a disadvantage compared with those for whom the EIG does receive approval. It should be pointed out first of all that, in the case of an aid scheme, the Commission may confine itself to examining the general characteristics of the scheme in question without being required to examine each particular case in which it applies (36). Secondly, such an argument means having to take into account individual situations which are factually and legally distinct (37) and, what is more, hypothetical.

(96)

Lastly, it cannot be ruled out that users who cannot benefit from the provisions of Article 39 CA of the General Tax Code may be unable to have recourse to an alternative method of financing. This might be the case where a bank decided, in the light of the financial situation of the undertaking concerned, not to assume alone the risks inherent in the financing operation (leasing in its own right) or where, for reasons to do with the user’s balance sheet structure or financing capacity, other financing methods proved impossible (direct investment with recourse to debt or equity). At all events, even if such users were actually able to have recourse to an alternative financing method and thereby circumvented their depreciation ceiling, the fact remains that the most advantageous solution initially chosen would have to be abandoned in favour of a necessarily less favourable second choice and that they would not benefit from the tax treatment specific to leasing out by an EIG (in the form of the obligation laid down in Article 39 CA of the General Tax Code to pass on part of the tax advantage to the user).

(97)

Besides the removal of the ceiling on the amount of deductible depreciation, the members of an EIG benefit from a one-point increase in the declining depreciation coefficient and, in the event of early transfer of title in the asset to the user and provided certain conditions are met, from exemption from capital gains tax (38).

(98)

The increased coefficient and the possible exemption from transfer capital gains tax are advantages from which the members of an EIG benefit under Article 39 CA of the General Tax Code, but from which they would not benefit under the reference tax framework, namely the second paragraph of Article 39 C of the Code. At all events, the application of Article 39 CA of the General Tax Code as far as these two advantages are concerned cannot constitute a return to the ordinary law on depreciation, as claimed by the French authorities, since the first paragraph of Article 39 C of the Code makes no provision whatsoever for such tax advantages.

(99)

In these circumstances, the argument to the effect that, from 2007, the exemption from transfer capital gains tax will come under the ordinary law is irrelevant inasmuch as the existence of that advantage must be assessed in the light of the legal framework in force and not in that of a future legal situation (39). Nor is it claimed by the parties that an amendment of the applicable legal framework would make the advantage granted earlier disappear.

(100)

With regard to the state origin of the advantages resulting from the application of the scheme at issue, it will be recalled that the concept of aid is more general than that of subsidy because it embraces not only positive benefits, such as subsidies themselves, but also measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, therefore, without being subsidies in the strict sense of the word, are similar in character and have the same effect (40). It follows from this that a measure by which the public authorities grant to certain undertakings exemption from, a reduction in or a deferral of payment of the tax normally due, which, although not involving a transfer of state resources, places beneficiaries in a more favourable financial situation than other taxpayers constitutes state aid within the meaning of Article 87(1) of the Treaty (41). In the present case, therefore, although the measures resulting from Article 39 CA of the General Tax Code do not involve any transfer of state resources, it cannot be denied that they entail a loss of tax resources and hence constitute state financing.

(101)

In these circumstances, the Commission considers that the members of an EIG benefit from advantages in the form of tax savings (removal of the depreciation ceiling and increase in the depreciation coefficient) and, in the event of early transfer of title in the asset carried out under certain conditions, of a tax exemption, both of which represent a cost to the budget of the French State.

(102)

In conclusion, as far as the members of EIGs are concerned, given that they must pass on two thirds at least of the overall tax advantage resulting from the application of Article 39 CA of the General Tax Code to the user of the asset in question, the Commission considers that the advantage from which they benefit amounts, at most, to one third of that overall advantage. The Commission would reiterate in this connection that the members of EIGs are mainly financial institutions.

(103)

As far as the users of the assets in question are concerned, the passing-on of part of the overall tax advantage accruing to the members of an EIG takes the form, under the provision at issue, of a reduction in the amount of their leasing charges or in the amount of the purchase option. This advantage passed on to users thus reduces the charges normally borne by their budgets as part of leasing operations. Since the advantage passed on accounts for at least two thirds of the advantage accorded to the members of the EIG through state resources, it must be considered that users benefit, through this measure, from an advantage granted through state resources within the meaning of Article 87 of the Treaty which amounts to at least two thirds of the overall advantage.

(104)

The French authorities and certain interested parties maintain, however, that the tax scheme provided for in Article 39 CA of the General Tax Code is a general measure under French tax law. It must therefore be examined whether the overall advantage accruing to the members of an EIG and to users is of a selective character.

(105)

It should be noted first of all that the specificity of a state measure, namely its selective character, is one of the defining features of state aid within the meaning of Article 87(1) of the Treaty. In that regard, it is necessary to determine whether or not the tax scheme at issue entails advantages accruing exclusively to certain undertakings or certain sectors of activity (42).

(106)

As a general rule, a tax measure which is likely to be found to be state aid differs from a general tax provision in that the number of recipients tends to be limited in law or in fact. Hence what matters, for a measure to be found to be state aid, is that the recipient undertakings belong to a specific category determined by the application, in law or in fact, of the criterion established by the measure in question (43).

(107)

In the present case, Article 39 CA of the General Tax Code applies only to movable assets depreciable according to the declining balance method over a period of at least eight years and acquired new, with the exception of ships, which may be acquired second hand. Senate Report No 413 (44) states that ‘the … measure is designed specifically to encourage heavy investment through highly favourable tax leveraging’.

(108)

The reduction in taxation resulting from the application of this measure therefore benefits, in law, exclusively the members of the EIGs financing such assets (45) and — by reason of the obligation to pass on two thirds at least of the overall tax advantage accruing to an EIG’s members — the users of such assets. Investors belonging to an EIG who do not finance assets covered by Article 39 CA of the General Tax Code and the users of assets with a depreciation period of less than eight years cannot, by contrast, claim the benefit of the tax advantage.

(109)

Even if the users of assets which are not eligible under Article 39 CA of the General Tax Code may be advised to try to have recourse to a form of financing other than a tax EIG, they are nevertheless deprived of this method of financing.

(110)

In view, moreover, of the depreciation period of the assets in question provided for in Article 39 CA of the General Tax Code, that provision benefits, in fact, mainly undertakings operating in the — particularly maritime and air — transport sector, and EIGs financing assets in that sector.

(111)

In that respect, the information furnished by the French authorities shows that, of the 189 applications for approval lodged under Article 39 CA of the General Tax Code, 182 concerned the transport sector. And, according to that information, the maritime transport sector alone accounted for 75 % of the applications for approval lodged and 82 % of the approvals granted (see the table in recital 17 above).

(112)

The introduction of this scheme derogating from the ceiling on the depreciation of assets financed by EIGs was primarily motivated by the desire on the part of the legislature to promote the transport sector, and, more particularly, maritime transport.

(113)

That this is the case can be seen from the following.

(114)

Firstly, of all the assets that are eligible under Article 39 CA of the General Tax Code, ships alone are expressly referred to in Tax Instruction No 120 (46). It is thus stipulated that the only second-hand assets capable of benefiting under the tax scheme provided for in Article 39 CA of the General Tax Code are ships. As far as the approval grant procedure is concerned, it is also stipulated that approval applications for ships must be submitted before they are ordered inasmuch as they start to depreciate as soon as they are laid down (47).

(115)

Secondly, as is clear from the preparatory work prior to the adoption of Law No 98-546 and, more particularly, from Senate Report No 413 (48), the previously existing tax arrangements applied to all economic sectors whereas Article 39 CA of the General Tax Code applies ‘only to heavy capital goods (aircraft, high-speed trains, ships, etc.)’. As regards, more specifically, the maritime sector, the said report criticises the fact that, compared with the co-ownership shares scheme, the scheme at issue is not favourable enough to boost investment in the sector. It also states that the introduction, in Article 39 CA of the General Tax Code, of a provision on exemption from capital gains tax in the event of early transfer of title in an asset to the user was motivated by the fact that the scheme at issue was less favourable to maritime investment. The French authorities likewise pointed out in this connection in their comments of 3 May 2004 that it was with a view to ending the stagnation in the number of commercial vessels registered in France and to reducing tax expenditure that provision had been made for the possibility of EIGs benefiting, subject to certain criteria, not only from depreciation-related tax deferment, but also from exemption from capital gains tax on the asset transfer.

(116)

Thirdly, General Report No 66 on the 1999 Finance Bill (49) states that ‘Law No 98-546 … made possible the creation of a new tax arrangement in favour of maritime investment’. It also states that, although the preferential scheme of financing by leasing introduced by Article 39 CA of the General Tax Code does not apply only to ships, in reality it was designed mainly with them in mind.

(117)

In the light of all the above considerations, the Commission takes the view that the scheme provided for in Article 39 CA of the General Tax Code is selective in character in that it favours certain economic operators active in the transport sector and in the financial sector. Since the scheme does not apply to all economic operators, it cannot be considered to be a general tax policy measure.

(118)

This assessment cannot be called into question by the arguments raised by the French authorities.

(119)

Firstly, the French authorities’ argument based on the multiplicity of sectors potentially concerned by the tax measure at issue cannot be accepted. Apart from the fact that certain assets only are concerned by the tax scheme, the very marginal number of approval applications for financing assets in sectors other than transport (50) does not leave any doubt as to the scheme’s specificity. It has been ruled in any event that the fact that the number of undertakings able to claim entitlement under a measure is very large, or that they belong to different sectors of activity, is not sufficient to call into question its selective character (51).

(120)

Secondly, contrary to what the French authorities claim, the argument that there are equivalent tax measures in the other Member States is irrelevant for purposes of justifying the existence of the scheme provided for in Article 39 CA of the General Tax Code. Comparison of the tax rules applicable in all of the Member States, or even some of them, would inevitably distort the aim and functioning of the provisions on the monitoring of state aid. In the absence of Community-level harmonisation of the tax provisions of the Member States, such an approach would in effect compare different factual and legal situations arising from legislative and regulatory disparities between the Member States (52). It has also been ruled that the fact that a Member State seeks to approximate, by unilateral measures, the conditions of competition in a particular sector of the economy to those prevailing in other Member States cannot deprive the measures in question of their character as aid (53). Similarly, the fact that competitors in other Member States benefit from comparable tax measures, even illegal ones, is irrelevant for purposes of classifying the scheme at issue as aid (54).

(121)

Thirdly, France and some interested parties claim that the non-selective character of the scheme at issue is established by the lack of discretionary power on the part of the French authorities when it comes to granting approval.

(122)

The Commission would point out that, according to the case law, even interventions which, prima facie, apply to undertakings in general may be to a certain extent selective and, accordingly, be regarded as measures designed to favour certain undertakings or the production of certain goods. That is the case, in particular, where the administration called upon to apply a general rule has a discretionary power so far as concerns the application of the measure at issue (55).

(123)

In the present case, it should be pointed out straight away that, inasmuch as the tax measure at issue can benefit only the users of certain assets and the members of the EIGs financing them and in fact benefits mainly the transport and financial sectors, the condition of specificity is already fulfilled. Other financing schemes, concerning assets in sectors other than transport and/or having a depreciation period of less than eight years, might include safeguards of such a character as to rule out any attempt at tax optimisation. Consequently, in view of the limited scope of this tax measure, it is not necessary, in order to establish the selective character of the measure, to determine whether the competent national authorities have a discretionary power in the measure’s application (56).

(124)

When questioned about the scope of the examination they carry out to establish whether the investment in question is of significant economic and social interest (57) both in general and from an employment standpoint in particular, the French authorities stated that that interest was determined in the light of six criteria, including that of ‘the impact of the investment on the economic environment of the area in which it is to be carried out and in which the user operates’. In the Commission’s opinion, the assessment of that criterion necessarily involves giving the national authorities a margin of discretion.

(125)

Despite the legitimacy of such a goal, there is no link between this criterion as to the existence of an economic interest on the part of the investment and the objective sought by the legislature in making the carrying out of the investment subject to the prior grant of ministerial approval. The criteria governing the grant of approval are said to be intended to help establish that recourse to the method of financing via an EIG does not pursue any tax optimisation goal. The criterion as to the economic interest of the investment is, however, not likely to prevent such optimisation. Irrespective of the period of depreciation of the assets concerned, such financing operations may well not pursue any tax optimisation goal, but this does not necessarily mean that they are deprived of any significant economic and social interest primarily in terms of employment.

(126)

Reference may be made once more here to Senate Report No 413 (58), which states that the criterion as to the existence of a significant economic and social interest is ‘a means to promote goods manufactured in France or financing operations for the benefit of a French user’. More generally, the report also states that the approval procedure leaves the authorities too wide a margin of discretion.

(127)

The unsuitability of the criterion as to the economic interest of the investment in the light of the objective pursued therefore increases, in the Commission's opinion, the margin of discretion enjoyed by the national authorities in its application.

(128)

Still concerning the margin of discretion enjoyed by the French authorities for approval granting purposes, it should be noted that the Constitutional Council decision of 30 December 1987 (59), which was referred to by the French authorities and some interested parties, is irrelevant in the present context. What was involved in that instance was a tax measure which provided that a new legal person resulting from the merger of two companies could take over for a limited period all or part of the losses of the merged companies and that, in the event of the partial contribution of capital to a company in the group, any losses not yet deducted before the merger could be set off, with the approval of the Minister for the Budget and within the limits of that approval, against any future profits. The Constitutional Council was asked to rule on the conformity of that approval procedure with Article 34 of the Constitution, which entrusts to the legislature the task of determining the scope of a tax advantage. It held that the measure in question did not allow the legislature to subdelegate its taxation powers to the Minister and that the latter had conferred on him only the power to ensure, in keeping with the legislature's objective of preventing tax avoidance, that the conditions laid down by law were met. On that occasion, what the Constitutional Council was being called on to do was to rule on compliance with the respective powers of the legislative and regulatory authorities in tax matters and not at all on whether the Minister had a discretionary power when adopting the individual measures needed to implement the law.

(129)

In any event, the Commission considers that the conditions of Article 87(1) of the Treaty cannot be called into question by decisions of national courts.

(130)

Fourthly, in response to the argument that the national authorities did not have arbitrary power since their decisions could be appealed against before the national courts with a view to reviewing the grounds for withholding approval, it should be pointed out that, in order to preclude characterisation as a general measure, it is not necessary to determine whether the conduct of the tax administration is arbitrary. It need only be established that the administration has a discretionary power enabling it to vary the conditions for granting the tax concession in question according to the characteristics of the investment project submitted for its assessment (60). It has been ruled, moreover, that debt remissions granted in the course of judicial proceedings and in accordance with the applicable national law were selective in character as they did not flow automatically from the application of the law, but from the discretionary decisions made by the public bodies in question. In making this ruling, the Court again made it clear that Article 87(1) of the Treaty does not distinguish between measures of state intervention by reference to their causes or aims but defines them in relation to their effects (61). In the present case, a fortiori, the fact that decisions withholding approval may be appealed against before a national court cannot call into question the existence of a margin of discretion on the part of the national authorities in applying the ministerial approval grant criteria.

(131)

Lastly, the Commission considers that the French authorities’ argument centred on the absence of a distinction based on the nationality of the members of an EIG and of users likewise does not call into question the selective character of the scheme provided for in Article 39 CA of the General Tax Code (62), especially since Senate Report No 413 (63) states that the condition as to the existence of a significant economic and social interest of the investment is ‘a means to promote goods manufactured in France or financing operations for the benefit of a French user’.

(132)

In the light of the above, the Commission considers that the scheme provided for in Article 39 CA of the General Tax Code is selective in character.

(133)

The French authorities claim that the combined provisions of the second paragraph of Article 39 C and Article 39 CA of the General Tax Code are a means of ex ante control by the tax authorities aimed at combating tax avoidance through the abuse of movable asset financing operations by tax-transparent structures such as EIGs. They consider that the scheme provided for in Article 39 CA of the General Tax Code is thus justified by the nature and overall structure of the tax system. They state in this connection that the scheme provided for in Article 39 CA of the General Tax Code is ‘based on objective, horizontal tax avoidance combating criteria’.

(134)

It is true that the definition of state aid does not include national measures introducing a differentiation between undertakings when that differentiation arises from the nature and overall structure of the system of charges of which they form part. This justification based on the nature or overall structure of the tax system reflects the consistency of a specific tax measure with the internal logic of the tax system in general. However, tax differentiations cannot be simply dictated by the general aims and objectives pursued by the State in adopting the measures in question (64).

(135)

In the present case, the Commission considers that, by limiting the amount of deductible depreciation, the second paragraph of Article 39 C of the General Tax Code does in fact seek to combat abusive recourse to tax-transparent structures with a view to achieving a tax saving as part of operations to finance assets leased out or otherwise made available. That objective is clearly necessary and rational for purposes of ensuring the effectiveness of the scheme of tax-deductible depreciation of assets leased out or otherwise made available and must therefore be considered to form an inherent part of the said scheme (65).

(136)

On the other hand, the scheme provided for in Article 39 CA of the General Tax Code cannot be justified by the nature and overall structure of the French system of depreciation of assets leased out or otherwise made available. Although derogations from the ceiling in principle on depreciation provided for in the second paragraph of Article 39 C of the General Tax Code are admissible, they should be based only on criteria the fulfilment of which would be capable of preventing recourse, for tax optimisation purposes, to the financing of the said assets by means of tax-transparent structures such as EIGs.

(137)

Firstly, the limitation of the scope of the derogation in question to the financing of assets depreciable over a period of at least eight years cannot be justified, either in itself or in combination with the other approval grant criteria, in the light of the objective pursued by the French authorities. During the course of the present administrative procedure, those authorities have provided no explanation as to why, in the light of the objective of combating tax avoidance, the derogation was limited to assets having such a depreciation period.

(138)

Secondly, as indicated above, of the ministerial approval grant criteria, that which relates to the existence on the part of the financing operation of an economic and social interest, particularly in relation to employment, leaves the national authorities a margin of discretion. This criterion bears no relationship, moreover, to France’s objective of combating tax avoidance. At all events, such a social objective is not capable in itself of excluding the scheme at issue from classification as aid within the meaning of Article 87(1) of the Treaty inasmuch as that article does not distinguish between measures of state intervention by reference to their causes or their aims but defines them in relation to their effects (66). It has been ruled, furthermore, that Article 87(1) of the Treaty would be deprived of effectiveness if specific measures were to be excluded from classification as state aid for reasons to do with the creation or maintenance of employment, since it is with a view to creating or safeguarding jobs that most aid measures are granted (67).

(139)

The French authorities also claim that the tax scheme provided for in Article 39 CA of the General Tax Code has made possible a rejuvenation and consolidation of the commercial sea fleet. Similarly, Air France states that the scheme promotes the renewal of its fleet, which has been made necessary by changes in environmental standards. However, apart from the fact that such claims confirm the Commission’s assessment as to the selective character of the scheme at issue, the pursuit of economic or industrial policy objectives cannot be considered to exclude a selective measure from the application of Article 87(1) of the Treaty (68). It has been ruled, moreover, in a similar context that a scheme providing for an interest rate subsidy on loans granted to natural persons, SMEs, local and regional public bodies and bodies providing local public services for purchasing vehicles or for leasing them with intention to purchase was an aid measure and could not be justified by the fact that it was aimed at modernising the commercial vehicles on the road in Spain in the interest of environmental protection and improving road safety (69).

(140)

All of the general interest grounds to which the scheme at issue is claimed to have the object or effect of contributing — namely employment and the renewal or consolidation of the ships or aircraft concerned — however legitimate they may be, are not justified by the nature and overall structure of the tax scheme at issue and are even irrelevant when it comes to classifying a measure as state aid within the meaning of Article 87(1) of the Treaty.

(141)

The Commission also considers that it is irrelevant, for the purposes of applying Article 87(1) of the Treaty, that the scheme provided for in Article 39 CA of the General Tax Code is less favourable to beneficiaries than was the co-ownership shares scheme, the scheme at issue in the case falling to be assessed by the Commission at the time of its implementation (70).

(142)

In the light of the above, the Commission considers that the scheme provided for in Article 39 CA of the General Tax Code is not justified by the nature and overall structure of the tax scheme at issue and that its selective character is therefore beyond question.

(143)

As indicated above, the beneficiaries under the tax scheme provided for in Article 39 CA of the General Tax Code are, firstly, economic operators active in the sectors of transport and industry and, secondly, the members of EIGs financing assets in those sectors, being financial institutions for the most part. All of these operators are active in the Community markets of the above-mentioned sectors.

(144)

In principle, aid which is intended to release an undertaking from costs which it would normally have had to bear in its day-to-day management or normal activities distorts the conditions of competition (71). It has been ruled that any grant of aid to an undertaking exercising its activities in the Community market is liable to cause distortion of competition and affect trade between Member States (72).

(145)

In the present case, in view of the nature and international dimension of the sectors in question, the Commission considers that the aid at issue strengthens the position of operators in these sectors participating in national and intra-Community trade.

(146)

Beneficiaries under the scheme at issue are in a privileged position vis-à-vis both their national competitors (73) and their competitors in other Member States who, either because they do not finance or use assets eligible under the scheme or because they are not taxable in France, do not qualify under the scheme.

(147)

On this last point, while it is true that, from a formal point of view, there is no legal obstacle to economic operators from Member States other than France financing or using assets covered by Article 39 CA of the General Tax Code, it is undeniable that, in practice, the scheme at issue favours operators whose tax domicile is in France. It is noteworthy in this respect that all the interested parties benefiting under the scheme at issue who submitted comments as part of the formal investigation procedure are companies incorporated under French law. As regards, moreover, the sector mainly concerned by the tax arrangements at issue, namely maritime transport, the French authorities have themselves stated that the arrangements’ adoption was intended to end the stagnation in the number of commercial vessels registered in France and to reduce tax expenditure. Lastly, as indicated above, Senate Report No 143 (74) states that the scheme is ‘a means to promote goods manufactured in France or financing operations for the benefit of a French user’.

(148)

Consequently, without its being necessary to carry out an economic analysis of the actual situation in the markets concerned (75) and in view of the fact that the tax scheme introduced by France strengthens the position of the economic operators who benefit from it compared with other operators competing in intra-Community trade, the Commission considers that the scheme affects trade between Member States and distorts competition between those operators.

(149)

In the light of all the above considerations, the Commission takes the view that the scheme provided for in Article 39 CA of the General Tax Code constitutes aid within the meaning of Article 87(1) of the Treaty.

(150)

As indicated above, the tax advantages resulting from the application of Article 39 CA of the General Tax Code are, firstly, the removal of the ceiling on deductible depreciation, secondly, the one-point increase in the depreciation coefficient and, thirdly, the possible exemption from transfer capital gains tax.

(151)

The amount of the aid, for each leasing operation, corresponds to the difference between the discounted values of the taxes paid throughout the depreciation period, taking into account the one-point increase in the depreciation coefficient, and those which would have resulted from the application of the provisions of the second paragraph of Article 39 C of the General Tax Code, to which difference must be added any exemption from transfer capital gains tax (76). This amount is determined, for each leasing operation, in accordance with the procedure laid down in paragraphs 46 and 47 of Tax Instruction No 120 (77) for the purpose of passing on part of the overall advantage to the user.

(152)

As regards the exact apportionment of the overall advantage accruing under Article 39 CA of the General Tax Code, the members of an EIG are required — as the direct beneficiaries — to pass on at least two thirds of that advantage to the user of the asset in question. In the context of each leasing operation, the exact amount of the advantage to be passed on to the user is determined, in accordance with the provisions of Article 39 CA of the General Tax Code, at the time of grant of approval.

(153)

Pursuant to Article 88(3) of the Treaty, Member States must notify any plans to grant or alter aid. They may not put the proposed measures into effect until the procedure has resulted in a final decision.

(154)

In the present case, the French authorities informed the Commission, by letter dated 17 March 1998 (A/32232), of the introduction of arrangements limiting the depreciation of leased-out assets so as to combat use of the mechanism solely for tax optimisation purposes and providing for an exception to such limitation. In their letter, the French authorities stated that the arrangements did not appear to constitute state aid notifiable to the Commission in advance under Article 88(3) of the Treaty.

(155)

The Commission considers that, in these circumstances, the letter cannot be deemed to be a notification within the meaning of Article 88(3) of the Treaty. It would point out, moreover, that the letter did not comply with the formal rules mentioned in the Commission’s letter to the Member States No SG (81) 12740 of 2 October 1981, which was in force at the material time. France therefore acted unlawfully by implementing the aid scheme at issue in infringement of Article 88(3) of the Treaty.

(156)

In so far as the tax scheme at issue constitutes state aid within the meaning of Article 87(1) of the Treaty, its compatibility with the common market must be assessed in the light of the exceptions provided for in paragraphs 2 and 3 of that article. It will be recalled that the actual beneficiaries of the scheme at issue operate, according to the information transmitted by the French authorities, in the maritime, air and rail transport sectors and, marginally, in the industrial sector (78). Inasmuch as the members of EIGs are financial institutions for the most part, the said beneficiaries also operate in the financial sector.

(157)

The exceptions provided for in Article 87(2) of the Treaty, which concern aid of a social character granted to individual consumers, aid to make good the damage caused by natural disasters or exceptional occurrences and aid granted to the economy of certain areas of the Federal Republic of Germany, are irrelevant in the present context regardless of who the beneficiaries of the scheme at issue are.

(158)

As for the exception in Article 87(3)(b) of the Treaty, it is sufficient to note that the tax scheme at issue is not an important project of common European interest and does not seek to remedy a serious disturbance in the French economy. Nor does it seek to promote culture and heritage conservation within the meaning of the exception in Article 87(3)(d) of the Treaty.

(159)

The Commission would point out in this connection that neither the French authorities nor any interested parties invoked the above-mentioned exceptions during the course of the administrative procedure.

(160)

Examination of the exceptions provided for in Article 87(3)(a) and (c) of the Treaty will be carried out sector by sector.

(161)

The Commission takes the view, in relation to the exception provided for in Article 87(3)(c) of the Treaty, which authorises aid to facilitate the development of certain economic activities where such aid does not adversely affect trading conditions to an extent contrary to the common interest, that there is no basis for considering that the aid granted to the air transport sector under the scheme at issue is compatible with the common market. None of the exemptions provided for in this respect by the Commission’s guidelines on the application of Articles 92 and 93 of the EC Treaty and Article 61 of the EEA Agreement to State aids in the aviation sector (79) is applicable in the present case.

(162)

Nevertheless, it should be noted that the Commission authorises exceptionally certain types of operating aid in the air transport sector:

(163)

The Commission accordingly agrees to France’s not including in the calculation of any aid to be recovered aid amounts relating to:

(164)

In all other cases, aid granted to air transport undertakings under the scheme at issue is incompatible with the Treaty.

(165)

In accordance with Article 87(3)(c) of the Treaty, the Community guidelines of 1997, then those of 2004 (83), specify the state aid schemes which may be authorised, with a view to promoting the interests of Community maritime transport undertakings in the face of competition from third countries, in the pursuit of general objectives such as: