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Counsel, AEQUO Law Firm
State Aid in Ukraine: The First Tiny Steps
A Chinese proverb says that a journey of a thousand miles begins with a single step. Ukraine is taking the first tiny steps towards fully-functional state aid system. The aim of this article is to analyse the key achievements of Ukraine, what else needs to be done to have a European state aid system and to analyse the latest state aid trends in the EU.
Among key Ukraine’s undertakings in the competition sphere under the Association Agreement were adoption of state aid rules similar to those which apply in the EU,establishment of independent competent supervising authority and enactment of respective secondary regulatory framework. The deadline for implementation of the said measures was 1 January, 2019. Ukraine also undertook to create a register of state aid measures, which needs to contain information about all state aid measures, by 1 January 2021.
The Antimonopoly Committee of Ukraine (AMCU) was designated as a competent supervising authority in the field of state aid.
Starting from 2 August 2017 the Law of Ukraine On State Aid to Undertakings (State Aid Law) came into effect and, consequently, Ukraine successfully launched its state aid control system, which is expected to function on the same footing as the European one.
Furthermore, 3 public registers (a register on state aid measures, a register of AMCU decisions as well as a register on state aid proceedings) were created by the AMCU and are accessible on the AMCU’s official web-site. At the same time, it must be noted that as of today the said Registers are empty and contain no entries on state aid measures, proceedings and respective decisions of the supervising authority.
Therefore, we can conclude that Ukraine is moving faster than the roadmap envisaged by the Association Agreement and has already implemented many important state aid instruments ahead of the agreed schedule.
At the same time, the Cabinet of Ministers of Ukraine (CMU) should have adopted compatibility criteria for different types of aid by transposing respective acquis communautaire into Ukrainian legislation. On the date of this article 4 documents establishing compatability criteria for (i) professional training aid; (ii) rescue and restructuring; (iii) regional aid and aid to small and medium-size enterprises (iv) employment of certain categories of employees and creating new jobs, were adopted.
As an example, the main purpose of the professional training aid, which may be granted in any economic sector and in any form, is to facilitate and increase professional development of employees. The aid may not be provided to undertakings, which are in bankruptcy or liquidation proceedings, have debts to state (municipal) budgets for more than 6 months, or for professional training and retaining, which are mandatory in accordance with law. State aid can cover trainers’ and trainees’ salary, travel expenses (except accommodation), educational materials. State aid may not exceed 50% of the eligible costs (it may be increased by 10% in case of disabled or disadvantaged workers, internally displaced persons, war veterans, medium-sized enterprises and by 20% for small enterprises). The amount of state aid is determined with applicable taxes.
Other resolutions, which must establish aid intensity, eligible costs, compatibility criteria and exemptions in such important fields as, research and development and environmental aid, have not been adopted yet. The document reflecting general criteria on compatibility of state aid also remains only in draft form.
AMCU’s First Decision on State Aid
On 4 January 2018 the AMCU issued its first state aid decision! The AMCU analysed notification on new state aid and supporting materials submitted by the state aid provider — Department of Health Protection of Kyiv Regional State Administration.
All beneficiaries of the aid were 9 budget non-profit municipal enterprises providing medical services in Kyiv Region. State aid in the total amount of around UAH 154 million was earmarked to finance procurement of modern medical equipment for the hospitals.
In assessing compatibility of the intended state aid the AMCU analysed the concept of state aid. In particular, the AMCU cited Article 2 of the State Aid Law, which provides that state aid is support in any form to undertakings through state or local resources, which distorts or threatens to distort competition by creating advantage or the production certain goods or conduct of certain activities. It is apparent that the definition of “state aid” given in the Law is rather ambiguous. However, it is based on European practice, which avoids a clear definition of this notion as in this case EU Member States would have invented an innovative way how to avoid the application of strict state aid rules. As it follows from the definition, in order to qualify as state aid a measure must cumulatively meet all criteria as follows:
— It confers on recipients a benefit, which is normally inaccessible in normal market conditions;
— The advantage is granted by the state or through state/local resources;
— The measure affects or may affect competition;
— The measure is selective, i.e. it favors certain undertakings over others.
It is apparent that health services are purely public ones and since recipients are non-profit municipal medical enterprises a minimum of 2 elements of state aid are missing: there is no “undertaking” and the aid can hardly affect competition. Furthermore, the State Aid Lawprovides that social aid to consumers is compatible per se.
We believe that the most prominent part of the said decision is that the AMCU directly referred to European “soft law” in the field of state aid. In particular, the AMCU cited point 24 of the Commission Notice on the notion of state aid as referred to in Article 107(1) of the Treaty on the Functioning of the EU, according to which “in some Member States, public hospitals are an integral part of a national health service and are almost entirely based on the principle of solidarity. Such hospitals are directly funded from social security contributions and other State resources and provide their services free of charge on the basis of universal coverage. The Union Courts have confirmed that, where such a structure exists, the relevant organisations do not act as undertakings”.
Having analysed all the circumstances of the notifications and relevant European acts, the AMCU has drawn a logical conclusion that in the given case recipients are not undertakings in the meaning of the State Aid Lawand, thus, the support measure does not constitute state aid.
European State Aid Trends
Unlike Ukraine, the EU is very active in monitoring, investigating and recovering illegal state aid. Within recent years, in-depth high-profile investigations of tax measures in different EU Member States were a key priority of the European Commission (EC), which is the EU’s competent authority in the field of state aid.
Due to absence of taxation policy harmonization between EU Member States, in order to attract big investors to the country governments sometimes offer such companies lucrative exclusive conditions for conducting business by issuing individual tax rulings. Such rulings often relieve the undertakings of some tax liabilities or other general tax rules, which are normally inaccessible to other businesses. The EC has been extremely strict in this respect and treats such exclusions from general rules as harmful to competition.
In December 2017 the EC initiated a state aid investigation against 2 tax schemes of IKEA, which via favourable tax rulings allegedly received from the Netherlands illegal state aid enabling the furniture giant to save around USD 1 billion. All IKEA shops pay a 3% license fee of their turnover for use of IP objects to the IKEA IP Company established in the Netherlands, which further distributes dividends to a Luxemburg-based holding company. The EC believes that the royalties, paid over many years, were excessively high. In addition, due to special arrangements with the Luxemburg authorities, the profits received by the holding company were tax exempted. Another scheme involved acquisition of IP objects used by IKEA in the franchise business, which was financed by an intra-group loan from another IKEA company from Liechtenstein. In the new tax ruling the Netherlands approved the price of the disposed IP objects, interest rate of the loan and deduction of taxes from the interest, which should have been paid. The EC will assess whether such tax rulings granted unfair tax advantages to IKEA, which used the tax schemes for decades. If the decision goes against IKEA, the EC may rule to recover illegal aid (amount of unpaid taxes) granted for 10 years with interest.
Consequently, the EC has already exposed and applied huge penalties for illegal tax rulings between Luxemburg and Fiat Chrysler Automobiles as well as Amazon, the Netherlands and Starbucks and Ireland — Apple. Besides, in December 2017 the Irish Government already started collection from Apple of illegally granted tax exemptions for the record-high sum of EUR 13 billion (currently the biggest case of the EC). McDonalds’ and French energy giant Engie may also receive “invoices” from the EC for illegal tax benefits in Luxemburg.
The European state aid system has been developing over the last 60 years. From decade to decade soft European state aid rules became stricter and stricter. Unfortunately, Ukrainian undertakings do not have any time to warm up and need to run a marathon from the very start.
Given that the State Aid Law establishes only a general state aid framework, the Ukrainian state aid system will not be efficient without secondary legislation. Therefore, it is very important to enact the respective by-laws (general criteria on compatibility of state aid, research and development, environmental protection and energy), establishing notification thresholds, de minimis criteria, maximum ceilings for aid, compatibility criteria, etc., as soon as possible.
Furthermore, Ukraine needs to adopt rules on services of general economic interest (SGEI). That is, when undertakings discharge public service obligations. Such rules are of primary importance as they establish respective compatibility criteria and may help to exclude such activities as: postal services, telecommunications, broadcasting, utilities, energy, public transport, from the state aid concept if certain conditions are met. The definition and 4 compatibility conditions for SGEI need to meet the so-called Altmark criteria, established by the European Court of Justice in Altmark Trans GmbH and Regierungspräsidium Magdeburg v Nahverkehrsgesellschaft Altmark GmbH Judgment (2003). The said rules need to be transposed into Ukrainian legislation.
Finally, we can conclude that the Ukrainian state aid system is still rather idle and is only in the process of full-scale deployment. However, the situation will change completely in 2019 as state aid providers will not be able to transfer compensations to the recipients without a decision from the AMCU authorizing such transfer.