EUROPEAN COMMISSION. State aid No. N 166/2007 Regional aid Corporate Income Tax Act (Article 184) Bulgaria

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1 EUROPEAN COMMISSION Brussels, C(2008) PUBLIC VERSION WORKING LANGUAGE This document is made available for information purposes only. Subject: State aid No. N 166/2007 Regional aid Corporate Income Tax Act (Article 184) Bulgaria Sir, 1. PROCEDURE (1) By notification of 29 March 2007, registered at the Commission on the same day (A/32760), the Bulgarian authorities notified the above-mentioned measure concerning a regional investment aid scheme. (2) By letters dated 25 May 2007 (D/52267), 14 August 2007 (D/53378) and 9 January 2008 (D/50063), the Commission requested additional information on the measure in question. The Bulgarian authorities provided the requested information by letters dated 13 June 2007, registered at the Commission on the same day (A/34876), 5 September 2007, registered at the Commission on the same day (A/37261), 19 November 2007, registered at the Commission on the same day (A/39523), 9 January 2008, registered at the Commission on the same day (A/401), 5 February 2008, registered at the Commission on the same day (A/2239) and by letter of 28 February 2008, registered at the Commission on the same day (A/3987). (3) On 17 October 2007, in Brussels, a meeting was held between the Commission services and the Bulgarian authorities, where inter alia the above-mentioned measure was discussed. Негово Превъзходителство господин Ивайло Георгиев Калфин Министър на външните работи ул. Ал. Жендов 2 BG СОФИЯ Commission européenne, B-1049 Bruxelles Belgique Europese Commissie, B-1049 Brussel België Телефон: (0)

2 2. DESCRIPTION OF THE AID MEASURE 2.1. Objective of the aid scheme (4) The notified scheme is a tax incentive scheme aiming to boost productive investments in the assisted regions of Bulgaria, where the rate of unemployment for the year preceding the current year was by 35 per cent or more higher than the national average unemployment for the same period. (5) The tax relief which is covered under Article 184 of the Corporate Income Tax Act (hereafter: CITA) is regarded either as i) regional aid, provided all the requirements stipulated in Article 189 of the CITA have been complied with, or as ii) de minimis aid provided all the requirements stipulated in Article 188 of the CITA have been complied with. According to Article 190(2) of the CITA, the assets, which are supported under de minimis rule stipulated in the CITA, are excluded from the scope of initial investment, for which regional aid can be granted. The present notification and the decision only covers the part on regional aid (i.e. Article 184(2)(b) of the CITA). It is the responsibility of the Member State to assure that any de minimis aid will be granted in compliance with all the conditions stated in the Regulation No. 1998/ Legal basis (6) The legal basis of the scheme is: - The Corporate Income Tax Act 2 : in particular Articles 184, 189, 190; - The State Aid Act 3 ; - The Rules of Application of the State Aid Act Administration of the scheme/authority granting the aid (7) The scheme will be operated by the Ministry of Finance. The National Revenue Agency is the authority competent for the proper application of tax legislation and for controlling the practical application of the scheme. The National Revenue Agency is divided into 28 regional tax directorates and there is one directorate dealing with large taxpayers Geographical scope of the scheme (8) The scheme is applicable to the assisted areas of Bulgaria, where the rate of unemployment is by 35 per cent or more higher than the average unemployment in Bulgaria. The whole territory of Bulgaria qualifies as an assisted region under the derogation in Article 87(3)(a) of the EC Treaty, in conformity with the 1 Commission Regulation (EC) No. 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid OJ L 379 of , p State Gazette No. 105 of , effective , amended and supplemented, SG No. 52/ , effective , supplemented, SG No. 108/ , effective , amended and supplemented, SG No. 110/ , effective State Gazette no 86 of , in force as of State Gazette no 26 of , in force as of the same date. 2

3 Commission decision of 24 January 2007 on the Bulgarian regional aid map for (9) According to the CITA, the areas, where the rate of unemployment for the year preceding the current year was by 35 per cent or more higher than the national average unemployment for the same period, are designated annually by an order of the Minister of Finance on a motion by the Minister of Labour and Social Policy, which are promulgated in the State Gazette Duration of the scheme (10) The tax relief can be applied to initial investment projects (respectively the acquisition of eligible assets forming part of initial investment projects) which were started after 31 December 2006 but before 1 January (11) The scheme comes into effect retroactively as from 1 January 2007, after its approval by the Commission Budget of the scheme (12) The annual estimated tax foregone is EUR 11 million (BGN 22 million) Beneficiaries (13) The beneficiaries of the scheme are all types of enterprises (small, medium and large), which are subject to the corporate income tax in Bulgaria and which implement investment projects in the assisted areas of Bulgaria where the rate of unemployment for the year preceding the current year was by 35 per cent or more higher than the national average unemployment for the same period. The foreseen number of beneficiaries varies from 101 to 500. (14) The scheme will not apply to undertakings that are in difficulty in the meaning of the Community guidelines on State aid for rescuing and restructuring firms in difficulty Nature and form of the aid under the scheme (15) The aid will be awarded in the form of tax relief. The scheme provides that any taxable entity shall be allowed to retain up to 100 per cent of the corporation tax in respect of the tax profit derived thereby from the manufacturing activities carried out solely in the areas where the rate of unemployment for the year preceding the current year was by 35 per cent or more higher than the national average for the same period 8. 5 State Aid N 1/2007 Bulgaria Regional aid map for , OJ C 73 of , p Article 183(1) of the CITA. 7 OJ C 244 of , p According to Article 185 of the CITA, where an area no longer qualifies as an assisted area due to increased employment, those entities which have acquired the right to corporate tax relief shall preserve the said right during the next five successive years, reckoned from the year during which the area drops out of the list, subject to fulfilment of the rest of the conditions stipulated in the CITA. 3

4 (16) According to Article 189 of the CITA, the retained tax must be invested in material and immaterial assets, which form part of an initial investment project. The initial investment must be made within four years after the beginning of the year for which the tax was retained. Further, according to Article 189 of the CITA, the initial investment must be made in areas where the rate of unemployment for the year of relief is by 35 per cent or more higher than the national average for the same period. (17) The Bulgarian authorities confirmed that under the notified scheme the acquisition of material and immaterial assets must be related to the implementation of a specific investment project Sectoral scope of the scheme (18) The scheme provides aid in all sectors of the economy, with the exception of the production, processing and marketing of the products listed in Annex I to the EC Treaty, fishery, coal industry, steel, shipbuilding, and synthetic fibres Mechanism of granting the aid under the scheme (19) The aid under the notified scheme is granted automatically on the submission of an annual tax return by the beneficiary (a taxable entity). There is therefore no separate application for the aid, with the exception of cases foreseeing aid for large investment projects (see explanations below). (20) The tax relief shall be established by the taxpayer himself on the basis of the provisions laid down in the CITA. Under the notified scheme the beneficiary's entitlement to the tax relief is thus conferred directly by the CITA and the Bulgarian authorities do not exercise ex ante control or adopt any additional documents. Benefiting of the aid under the scheme depends on compliance with the requirements of the CITA, implementation of which is subject to ex post control by the National Revenue Agency. (21) In the annual tax return the taxpayer declares the overall amount of the initial investment project and the duration of its implementation. This information has to be declared in the annual tax return for the year for which the corporation income tax is retained. The annual tax return also specifies the legal basis for the corporate income tax relief. On the basis of this information in the annual tax return, risk analysis is performed by the authorities. The process of risk analysis involves assessing the risk represented by the failure of the taxpayer to comply with the tax and social security legislation and to pay its taxes and social security contributions. (22) On the basis of the conducted risk analysis, the need to check specific facts and circumstances concerning the tax relief used is assessed or, if the initial analysis has indicated a high risk of violation of the conditions of the relevant laws, an inspection is ordered. (23) If non-compliance with the conditions for relief of the corporate income tax is established, the amount concerned has to be paid back to the State budget with the interest due. That means that the revenue authorities issue a revised assessment for the amount of the unjustified aid. The revised assessment is the basis for the voluntary payment or enforced collection of the amount due. 4

5 2.11. Definition of initial investment under the scheme (24) Under the notified scheme the taxpayer will be entitled to the tax relief provided that the investment project results in the setting-up of a new establishment, the extension of an existing establishment, diversification of the output of an establishment into new, additional products, or a fundamental change in the overall production process of an existing establishment. (25) The scheme provides that an investment in an asset which replaces an existing asset shall not qualify as initial investment. (26) Under the scheme initial investment does not include assets acquired in case of takeover. (27) The Bulgarian authorities have confirmed that only projects for which expenses are incurred after the date of publication of the scheme on the internet are eligible for aid under the scheme Eligible expenses under the scheme (28) Eligible expenses are costs related to both material (acquisition of land, buildings, machinery and plant/equipment) and immaterial (acquisition of patent rights, licences, know-how or unpatented technical knowledge) assets forming part of the initial investment. (29) Lease can be taken for costs related to the acquisition of machinery and plant/equipment in case the lease takes the form of financial leasing and if the contract contains an obligation to purchase the asset at the expiry of the term of the lease. (30) Expenditure on the purchase of transport equipment (moveable assets) will not be eligible for aid for initial investment under the scheme. (31) Replacement investment will be excluded from the scheme. (32) In all cases under the scheme the acquired material and immaterial assets forming part of the initial investment must be new. (33) The material and immaterial forming part of the initial investment must have been purchased from third parties under market conditions. (34) The costs of investments in immaterial assets forming part of the initial investment must not exceed 50 per cent of the total eligible investment expenditure for the project. Further, the immaterial assets forming part of the initial investment must be amortizable assets, they must be used exclusively in the establishment receiving the aid under the scheme and must be included in the assets thereof and remain in the establishment receiving the aid for the period of at least five years Definition of a large investment project and individual notification requirement (35) Under the scheme a "large investment project" is defined as an "initial investment" with an eligible expenditure above the BGN equivalent of EUR 50 million, determined according to the official exchange rate of the lev against the euro. 5

6 (36) According to the CITA, in the cases where the tax relief is granted for a large investment project which has received aid from all sources whereof the total value exceeds the lev equivalent of EUR 37.5 million, determined according to the official exchange rate of the lev against the euro, the tax relief may be enjoyed for the relevant year solely if: a. the taxable entity has notified the revenue authority of the project at the latest before commencement of the implementation thereof; b. a decision authorising the aid by the European Commission has been received following a notification procedure provided for in Article 88(3) of the EC Treaty. (37) The Minister of Finance shall inform the European Commission according to the procedures established in the State Aids Act. The taxable entity shall be obligated to provide the Minister of Finance with the information necessary for the transmission of a notification to the European Commission. (38) In cases which are not covered by point 36 of this decision, the tax relief for a large investment project may be granted to a beneficiary under the scheme only if the adjusted regional aid ceiling for a large investment project is complied with as laid down in the Decision of the European Commission approving the Bulgarian regional aid map for Starting date of the project and incentive effect principle (39) Since the scheme sets objective criteria, which, when fulfilled, automatically give legal entitlement to the tax credit, it follows that there is no provision stipulating that an application for aid must be submitted before the start of the project. (40) In the cases where the tax relief is granted for a large investment project, which has received aid from all sources whereof the total value exceeds the lev equivalent of EUR 37.5 million, determined according to the official exchange rate of the lev against the euro, the project has to be notified to the revenue authority at the latest before commencement of the implementation thereof. (41) In all other cases the award of aid is automatic and does not require any administrative decision Aid intensity (42) Aid is calculated in reference to material and immaterial investment costs resulting from the initial investment project. The global amount of the aid is expressed as a percentage of the eligible costs. (43) The maximum allowed aid intensity established by the scheme is 50 per cent Gross Grant Equivalent (hereafter: GGE): the tax retained must not exceed 50 per cent of the present value of the material and immaterial assets forming part of the initial investment, determined at the 31 December of the year of relief 10. Under the 9 State Aid N 1/2007 Bulgaria Regional aid map for , OJ C 73 of , p The interest rate for the purposes of determination of the present value of the initial investment shall be the reference interest rate for the year of relief set by the European Commission. 6

7 notified scheme small and medium-sized enterprises (hereafter: SME) 11 are not eligible for a further bonus. (44) For large investment projects with eligible expenditure exceeding EUR 50 million, such ceiling is subject to adjustment in accordance with point 67 of the Guidelines on national regional aid 12 (hereafter: RAG). No SME bonuses will be granted to large investment projects. (45) The Bulgarian authorities have confirmed that the calculation of the aid intensity is in line with point 41 of the RAG, thus that, the aid intensity in GGE is the discounted value of the aid expressed as a percentage of the discounted value of the eligible costs Own contribution (46) The Bulgarian authorities confirm that in all cases the beneficiary will provide a contribution of at least 25 per cent of the value of the material and immaterial assets forming part of the initial investment, in a form which is free of any public support, including de minimis support Maintenance of the investment (47) The scheme foresees that the investment must be maintained in the assisted region concerned for at least five years (also in case of SMEs) after its completion. For the purpose of ex post control by the tax authorities, the compliance with this condition shall be declared every year by the beneficiary in the annual tax returns until the above-mentioned five year period expires Cumulation of aid (48) The scheme foresees the possibility of cumulating the aid granted under this scheme with aid from other sources (whether the aid comes from local, regional, national or Community sources) under the condition that the total amount of aid will not exceed the applicable aid intensity ceiling prescribed by the scheme. According to Article 190(2) of the CITA, the assets, which are supported under de minimis rule stipulated in the CITA, are excluded from the scope of initial investment, for which regional aid can be granted under the present scheme. Compliance with cumulation rules is monitored by means of ex post control by the National Revenue Agency 13. (49) The Bulgarian authorities confirm that under the CITA no more than one tax relief may be used for an expenditure item of a given investment project. In addition, the Bulgarian authorities inform that the information in the annual tax return is structured so that it is easy to detect cases in which a taxable entity uses more than one tax relief under the CITA Ex post control mechanism 11 As defined by the Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, OJ L 124 of Guidelines on national regional aid for , OJ C 54 of , p In addition, the Bulgarian authorities inform that at present there are no regional investment aid schemes, under which the aid is calculated on the basis of wage costs, and such schemes are not foreseen. 7

8 (50) The Bulgarian authorities have committed to check tax declarations of all beneficiaries under the scheme in order to verify whether the beneficiary has complied with all the conditions to benefit from the tax relief as stipulated by the CITA. For example, the Bulgarian authorities will check in particular the type of the activity carried out by the beneficiary, the financial situation of the undertaking, the area in which the activity is being carried out, and the total amount of support from all sources perceived by the beneficiary over the last three years. (51) On the basis of the outcome of this control, tax declarations are categorised into three groups: (1) entities that do not fulfil all the conditions of the CITA; such entities will be audited with a view to be denied the right to benefit from the relief; (2) beneficiaries of regional aid which will be subject to further inspections in particular with regards to the implementation of an initial investment project. Depending on the findings of each examination, further regular examinations will be planned for each entity (once a year) in the course of the next three years to follow up the implementation of the investment project and the fulfilment of the rest of the requirements relative to the investment of the funds retained; (3) beneficiaries of de minimis support will be controlled to check their compliance with the conditions of tax relief under the CITA. (52) At each stage of the examinations, where failure to fulfil the conditions for relief of corporation tax is ascertained, tax audits will be conducted to establish the amount of the wrongfully retained tax and its payment to the budget. 3. ASSESSMENT 3.1. State aid character of the scheme (53) According to the proposed aid measure, the aid in the form of tax relief will be granted to undertakings carrying out investment projects in some of the assisted regions of Bulgaria. (54) The aid will be provided by public authorities through State resources (revenue foregone for the State) within the meaning of Article 87(1) of the EC Treaty. (55) The aid foreseen under this scheme constitutes an economic advantage because it allows the beneficiaries to reduce the investment costs that they should normally face in order to develop this type of projects. It may therefore distort or threaten to distort competition. (56) The measure is selective because it applies only to undertakings carrying out investments in regions of Bulgaria where the rate of unemployment for the year preceding the current year was by 35 per cent or more higher than the national average unemployment for the same period. (57) In view of the fact that the scheme concerns sectors and undertakings involved in trade between Member States, there is a risk that the aid could affect that trade. (58) Consequently, the proposed aid measure constitutes State aid within the meaning of Article 87(1) of the EC Treaty. 8

9 3.2. Legality of the aid measure (59) The Bulgarian authorities have fulfilled their obligation according to Article 88(3) of the EC Treaty by notifying the aid before putting it into effect. The Commission takes note of the fact that the scheme will enter into force retroactively as from 1 January 2007, after its approval by the Commission Compatibility of the aid measure (60) Having established that the notified scheme involves State aid within the meaning of Article 87(1) of the EC Treaty, it is necessary to consider whether the scheme can be found to be compatible with the common market. (61) The Commission has examined the proposed aid measure in the light of Article 87(3)(a) of the EC Treaty and in the light of the Guidelines on national regional aid 15 (hereafter: RAG). This assessment has lead to the following observations: The scheme applies to all sectors, maintaining the multi-sectoral and open character of the scheme. However: In accordance with point 8 of the RAG, no aid under the scheme will be granted to firms involved in the production, processing and marketing of the products listed in Annex I to the EC Treaty, coal industry, steel, shipbuilding, synthetic fibres and fishery. Assistance to firms in difficulty is excluded from the scheme, in accordance with point 9 of the RAG. The scheme relates to initial investment in line with point 34 of the RAG as it covers investment in material and immaterial assets in relation to the setting-up of a new establishment, the extension of an existing establishment, diversification of the output of an establishment into new, additional products or a fundamental change in the overall production process of an existing establishment. Expenditure on the purchase of transport equipment (moveable assets) will not be eligible for aid for initial investment under the scheme. In accordance with point 41 of the RAG, the level of aid is calculated as a percentage of the discounted value of the investment project's eligible material and immaterial costs and will not exceed the applicable regional aid ceiling. The scheme includes a reference to the applicable Bulgarian regional aid map for and the aid intensity ceilings are in conformity with the regional aid map, including the adjustment of the ceilings in accordance with point 67 of the RAG. The duration of the scheme is in line with the duration of the regional aid map for Bulgaria. The notified scheme will expire on 31 December Cf. 59 of the Transitional and Final Provisions of the CITA. 15 Guidelines on national regional aid for , OJ C 54 of , p

10 Since the tax relief is granted automatically, footnote 41 of the RAG applies, and, therefore, the incentive effect conditions stipulated in point 38 of the RAG do not have to be fulfilled. The individual notification requirement for large investment projects is in line with section 4.3 of the RAG. The scheme includes a clause stipulating that the beneficiary makes a financial contribution of at least 25 per cent of the total eligible costs and that this contribution will be free of any public support in accordance with point 39 of the RAG. In accordance with point 108 of the RAG, the scheme excludes the award of aid to projects which have started before the publication of the scheme. Replacement investments are excluded from the scheme in accordance with point 34 of the RAG. In line with point 54 of the RAG, the scheme ensures that the acquired assets are new. The conditions of the lease taken for costs related to the acquisition of machinery and plant/equipment are in conformity with point 53 of the RAG. In line with point 55 of the RAG, the scheme contains a clause ensuring that the eligible costs of investments in immaterial assets do not exceed 50 per cent of the total eligible investment expenditure for the project. Furthermore, the scheme ensures that such eligible immaterial assets are used exclusively in the establishment receiving regional aid, are regarded as amortisable assets, are purchased under market conditions and are included in the capital assets of the firm and remain in the establishment receiving the regional aid for five years for all undertakings, in line with point 56 of the RAG. The aid under the scheme is conditioned on the obligation of maintaining the investment in the assisted region concerned during a minimum period of five years (also in case of SMEs) after its completion in accordance with point 40 of the RAG. Finally, the Commission observes that the Bulgarian authorities have committed to implement a strict ex post control mechanism for each beneficiary that has benefited from the corporate tax relief under the scheme. (62) In view of the above, the Commission considers that the notified aid scheme is compatible with the common market in accordance with Article 87(3)(a) of the EC Treaty. 4. DECISION (63) The Commission has accordingly decided to consider the aid scheme compatible with the EC Treaty. (64) The Commission reminds the Bulgarian authorities that the reporting conditions described in the Commission Regulation (EC) No. 794/2004 implementing Council 10

11 Regulation (EC) No. 659/1999 laying down detailed rules for the application of Article 93 of EC Treaty 16 have to be respected. (65) The Commission further reminds the Bulgarian authorities that all plans to modify this aid scheme have to be notified to the Commission. If the Commission does not receive a reasoned request by fifteen working days of the date of the receipt, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: Your request should be sent by registered letter or fax to: European Commission Directorate-General for Competition State Aid Greffe B 1049 Brussels Fax No: Yours faithfully, For the Commission Neelie KROES Member of the Commission 16 OJ L 140 of , p