Serbian State aid control regime overhaul - what should market players know

The Serbian Parliament adopted the new State aid Law* (Law) in October 2019, exactly ten years after State aid regulation entered the Serbian legal system for the first time.[1] The Law aims to regulate the area in more detail, align local rules with the EU acquis and remove some of the main concerns the European Commission continues to flag in its Progress Reports.

From 2004 to 2015, Belgium ran a tax scheme under the logo “Only in Belgium” that allowed multinational companies operating in Belgium to reduce their tax liability on profits exceeding an arm’s-length profit level derived from being part of a multinational group; stand-alone companies that were not part of groups and were only active in Belgium could not claim similar benefits. A total of 39 multinationals benefitted from the scheme. In September 2019, the European Commission initiated 39 separate investigations to assess whether these tax breaks gave their beneficiaries an unfair advantage over their smaller, domestic competitors, and were in breach of EU State aid rules.[2] If the European Commission were to find the tax breaks non-compliant with State aid rules, it could order that around EUR 700 million be recovered from the beneficiaries.

The Belgium example illustrates how advantages granted by the State can impact the market and its participants – beneficiaries and their competitors alike. Market players cannot be bystanders to the aid granting process but should know how best to defend their interests and market positions. Companies that receive a governmental benefit need to be aware if the benefit constitutes State aid and, if so, to ensure that the relevant authorities are duly notified of the aid by the grantor for a compatibility review. This reduces the exposure beneficiaries might face down the road – ex post investigations, disruptive requests for information and on-site inspections, procedural penalties and, most detrimentally, aid recovery. The same holds true for beneficiaries’ competitors and other market players as they can also become formally involved in the proceedings conducted by the regulator or be substantively affected by the aid itself and thus the outcome of the review process.

In the context of Serbian State aid rules, although the regulator – the Commission for State Aid Control (CSAC), is yet to start with the implementation of the Law and the developing of its practice, it is crucial for market players to familiarize themselves with the rights and duties they are likely to have under the Law and the measures the CSAC has the authority to impose well in advance. This article aims to provide an overview of the relevant provisions, along with a brief general summary of the Law.

Brief summary of the Law

Faced with insufficient awareness of State aid rules among the entities that can be in the role of grantors of aid, the legislator included rather detailed provisions in the Law on what types and forms of aid exist, what constitutes compatible aid and which measures do not represent aid (e.g. by referencing Altmark criteria for services of general economic interest).

One of the most evident flaws of the 2009 State aid control framework – the fact that the CSAC was part of the Ministry of Finance which brought its independence and the effectiveness of State aid control into question – has now been rectified. The new CSAC will function as an independent body, formed by and accountable to the Parliament, mirroring the model of the Serbian Commission for Protection of Competition. CSAC’s bodies – the president and Council – are supposed to be elected by the end of 2019.

The CSAC’s main authority is to assess compatibility of State aid with the relevant rules and impose measures, including aid recovery. As a rule of thumb, the CSAC conducts an ex ante control of aid following a grantor’s application, regardless of the type of aid – aid scheme, individual aid or individual aid granted based on aid schemes if it exceeds EUR 10 million in total. If the CSAC has information indicating that certain aid was not notified, it can conduct an ex post control of the aid by initiating ex officio proceedings. In all types of proceedings, only the grantor has the status of a party to the proceedings.

Bylaws that will regulate certain institutes in more detail, including the substantive conditions and criteria for aid compatibility, should be passed by October 2020. Until then, the old bylaws apply.

Rights of beneficiaries and third parties

The right to lodge complaints

If a market player or any other third party has reason to believe certain aid might influence its interests, it may lodge a complaint to the CSAC. The CSAC has a duty to consider every complaint it receives and inform the complainant of the outcome of its complaint. The CSAC may ask the complainant for additional information and documents if necessary. If the CSAC concludes that the aid in question should be further investigated, it will initiate ex officio proceedings; the complainant would not enjoy the status of a party to such proceedings.

The right to be informed

Complainants, persons that have provided information and third parties that demonstrate they have an interest in following proceedings before the CSAC, have the right to be informed of the state of the proceedings following a formal request submitted to the CSAC.

In addition to this, somewhat limited, possibility, market players could in practice also rely on the following rules that regulate the transparency of the CSAC’s work in order to obtain information on the CSAC’s practice and general State aid policy:

• The CSAC has a duty to publish its decisions on its website. The same publication duty applies to conclusions on opening of ex officio proceedings, unless the CSAC Council decides the publication could jeopardize the proceedings.
• The CSAC has a duty to maintain a registry of granted aid, including a separate de minimis aid registry. Cooperation of grantors will be of crucial importance here as they would be the ones “feeding” the registries with their records on granted aid. The main reason for maintaining these registries is to enable the application of aid cumulation rules.
• Based on the data provided by the grantors, the CSAC also has a duty to compile annual reports on granted aid and submit them to the Government for adoption. Third parties will be able to access data used for the preparation of annual reports, subject to the grantor’s consent. Another source of information will be the annual work report of the CSAC, adopted by the Parliament and published on the CSAC’s website.
• The CSAC has an authority to conduct sector enquiries in case of doubts that aid measures in a particular sector or certain form of aid measures can limit or distort competition on the market. A prepared draft report is published on the CSAC’s website and grantors, beneficiaries and other interested parties have the right to comment and provide their remarks on the draft, after which the final report is adopted by the CSAC Council and published.

The right to appeal

The final decision of the CSAC may be challenged by filing a lawsuit to the Administrative Court within 30 days of the grantor’s receipt of the CSAC’s decision. Besides the grantor as the party to the proceedings, third parties should be able to challenge CSAC decisions if they can demonstrate a legitimate interest in doing so.[3] The deadline for the lawsuit is in this case increased to 60 days from the grantor’s receipt of the CSAC’s decision.[4]

In a comparable case (challenging of a decision of the Commission for Protection of Competition),[5] the Administrative Court adopted the rather unnuanced approach of dismissing the lawsuit simply because the claimant was not a party to the proceedings and did not go into the question of legitimate interest at all. If this reasoning would be applied to State aid control cases, grantors would effectively be the only ones with the standing to challenge CSAC’s decisions, which is why the Administrative Court would need to re-evaluate this approach in future State aid cases; while third party lawsuits will probably remain less likely to succeed in practice, challenges by the beneficiaries should be allowed as their interest in quashing the decision (esp. if recovery of aid was ordered) would be indisputable.

Filing a lawsuit does not defer the enforceability of the CSAC’s decision, however, the claimant may ask for a deferment until the Administrative Court decision becomes legally binding.

Duties of beneficiaries and third parties

Duty to provide information/documents

The CSAC may request and order the provision of data, documents and objects from beneficiaries or third parties within ex post control proceedings. Failure or a delay in complying with the CSAC order may lead to a periodic penalty (see below Measures the CSAC can impose). The CSAC may also request provision of data, documents and objects from beneficiaries or third parties within a sector inquiry it is conducting. Persons that provide confidential data or documents to the CSAC have the right to seek protection of such data or documents.

Duty to allow an announced on-site inspection

The CSAC has the authority to perform an announced inspection at the premises of a beneficiary if it can be justifiably assumed that the aid under review was not compatible with the Law or if false or incomplete data was provided to the CSAC. The legal basis for the inspection is a conclusion that contains legal grounds and reasoning for performing the inspection, time and place of the inspection, designation of documents and data that will be inspected, data on authorized CSAC personnel who will perform the inspection. The conclusion on inspection needs to be delivered to the beneficiary at least three days before the inspection is performed. Actions performed during the inspection need to be recorded in the inspection minutes.

The CSAC has the right to enter and inspect business premises, vehicles, land and other premises of the beneficiary; to inspect business and other documents; to take oral or written statements from the representative of the beneficiary or its employees.

The beneficiary has a duty to allow an unobstructed performance of the inspection and enable inspection of data and documents designated in the conclusion on inspection. The CSAC’s authorised personnel may inspect additional documents only if the beneficiary volunteers them for inspection.

Measures the CSAC can impose

Recovery measure

If the CSAC finds that certain aid was not compatible with the Law, it will order the grantor to recover the aid (including interest) from the beneficiary and seize any further granting of the unused portion of the aid. The CSAC can also impose a temporary or permanent seizure of granting of aid as a separate or interim measure. Aid cannot be recovered once 10 years have passed since it was granted.

If the grantor shows that recovery of interest could lead to the bankruptcy or seizure of the business activities of the beneficiary, the CSAC can allow that interest not be recovered.

Periodic penalty

The CSAC may impose a penalty in the range of RSD 5,000 to RSD 200,000 (approx. EUR 40 to EUR 1,660) per day of breach to beneficiaries or other market players if they do not deliver data/documents requested within ex post proceedings, if they are late with the delivery of the data/documents or they deliver false or incomplete data. A periodic penalty cannot be imposed if more than one year has elapsed since the failure to comply with the CSAC’s request.

The daily amount of the periodic penalty is capped at 5% of the party’s average daily turnover, whereas the total amount of the penalty cannot exceed 1% of the total annual turnover that the party generates in Serbia. The penalized party may be exempted from the penalty if it shows that enforcing the penalty would result in its bankruptcy or could hinder or lead to seizure of its business activities.

Commitments

Within ex post proceedings, the Law enables the grantor to request a stay of proceedings subject to the grantor undertaking measures that would make the aid in question compatible with State aid rules. This option is important from the beneficiary’s perspective as the offered measure would most likely affect the aid itself. The CSAC proceedings are supposed to be terminated once the agreed measures are carried out within the set deadlines.

For more information on the Serbian State Aid Law, contact your regular CMS source or local CMS expert Anja Tasić.

* Petrikic & Partneri in cooperation with CMS Reich-Rohrwig Hainz assisted the Foreign Investors Council with the preparation of comments to the draft Law and participation in the public debate and meetings with the Ministry of Finance.

[1] The first Serbian law regulating State aid control was adopted in 2009, following the conclusion of the Stabilisation and Association Agreement with the EU and its Member States in 2008.
[2] These investigations follow the General Court‘s annulment of the European Commission‘s 2016 decision that dealt with the same tax rulings collectively and concluded that they formed an aid schemethat was illegal under EU State aid rules. As the General Court found that the European Commission had failed to establish the existence of a scheme in the first place, the European Commission is now assessing the compatibility of each tax rulings with EU State aid rules individually.
[3] This matter is not regulated by the Law but rather the Law on Administrative Disputes.
[4] Ibid.
[5] Practice in the State aid control area does not exist, to the best of our knowledge. Although competition law cases are comparable, an important difference is that market players whose agreements/practices are under review are parties the proceedings before the Commission for Protection of Competition.