THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Whereas:

HAS ADOPTED THIS REGULATION:

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Whereas:

HAS ADOPTED THIS REGULATION:

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Whereas:

HAS ADOPTED THIS REGULATION:

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Whereas:

HAS ADOPTED THIS REGULATION:

THE COUNCIL OF THE EUROPEAN UNION,

Whereas:

HAS ADOPTED THIS DECISION:

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Whereas:

1.   PROCEDURE

(1)

On 24 April 2007 France notified the Commission of its intention to implement an aid scheme to subsidise undertakings processing and marketing fisheries and aquaculture products. In the framework of the preliminary examination provided for in Article 4 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (2), a request for additional information was sent to France on 7 June 2007, in order to obtain further information about the beneficiaries of the aid and the legal basis of the scheme. The French authorities replied on 11 July 2007. The Commission sent them a further request for additional information on 11 September 2007, to which France replied on 26 October 2007.

(2)

On the basis of the documents in its possession, the Commission considered that the aid scheme notified raised doubts as to its compatibility with the common market. It informed France, on 16 January 2008, of its decision to open the formal investigation procedure provided for in Article 88(2) of the Treaty and Article 6 of Regulation (EC) No 659/1999.

(3)	The decision of the Commission to open the formal investigation procedure was published in the Official Journal of the European Union (3). The Commission invited interested parties to submit their comments on the measures in question within a month.

(4)	France submitted its comments in the form of a note sent in a letter dated 18 February 2008. The Commission did not receive any other comments from interested parties.

2.   DESCRIPTION

(5)	According to the information contained in the notification, the aid scheme in question aims to subsidise, through the use of purely public funds, undertakings which process and market fisheries and aquaculture products.

(6)	The purpose of this scheme is to grant aid to undertakings other than small and medium-sized undertakings, so that they can enjoy the same support as that available to the SMEs under Council Regulation (EC) No 1198/2006 of 27 July 2006 on the European Fisheries Fund (4).

(7)

The aid would come from the Fonds d’Intervention Stratégique des Industries Agro-Alimentaires (FISIAA) (agri-food industries strategic intervention fund). This fund set up by the French authorities consists of a budget entry in the State budget which is managed by the Ministry of Agriculture and Fisheries. All undertakings which process and market products included in Annex I to the Treaty may benefit from the subsidies granted from the FISIAA. Consequently, both undertakings in the agriculture sector and those in the fisheries and aquaculture sector could be involved. It is foreseen that in 2007 aid will be reserved solely for undertakings with more than 750 employees or with a turnover of more than 200 million euro. According to the explanations submitted by France, it seems likely that this priority will be maintained in respect of aid granted after 2007. This hypothesis is supported by the text of a new call for projects launched in December 2007 (see recital 9).

(8)

The notification is accompanied by a call for projects which was launched on 2 March 2007 with a view to selecting the projects meeting the objectives of the FISIAA. According to the French authorities, this call for projects only involves undertakings in the agricultural sector and the specifications are only given ‘as an example’ of the conditions on which aid would be granted to undertakings in the fisheries and aquaculture sector.

(9)

A new call for projects was launched on 17 December 2007 for tenders which are eligible for selection for 2008. This call for projects does not explicitly mention undertakings processing and marketing fisheries and aquaculture products, but refers to all products included in Annex I to the Treaty (including fisheries and aquaculture products). It also mentions the new eligibility rules with a view to receiving support from the European Fisheries Fund (EFF).

(10)

The Commission only became aware of this new call for projects, which was announced on the Internet site of the French Ministry of Agriculture and Fisheries (5), after it had decided to open the formal investigation procedure. This new call for projects is not mentioned in the reply from the French authorities dated 18 February 2008. The latter merely observe that ‘the delay in receiving approval has already prevented packaging undertakings from participating in the FISIAA 2007 call for projects [launched on 2 March 2007 but notified on 24 April 2007].’

(11)

According to the French authorities, the FISIAA is currently defined by its intervention framework, that is the aid scheme applicable to undertakings in the agricultural sector, registered under number N 553/2003 and approved by a Commission Decision of 28 July 2004 (6). The purpose of notifying the aid scheme which is the subject of this Decision is therefore to extend this framework of intervention to include undertakings in the fisheries and aquaculture sector.

(12)

The budget indicated for the FISIAA is 13 million euro for 2007 for all of the beneficiary sectors (both agriculture and fisheries and aquaculture). To the extent to which it is open to all of the undertakings engaged in these two sectors, it is not possible at this stage, according to the French authorities, to predict the share of the sum which would actually be given to undertakings in the fisheries and aquaculture sector.

(13)

As for the spending which may be covered by the subsidy, the call for projects specifies that the aim of the FISIAA is to support projects from undertakings which can combine tangible and intangible investments and which have a ‘highly structure-creating character’ and/or a ‘strong commercial positioning’ and/or are ‘innovative in nature’. All investments for the purpose of implementing storage, packaging, processing and/or marketing processes are potentially eligible. In particular, these investments may consist of spending on acquiring new equipment, the acquisition and fitting out of immovable property linked to the project, and on staff dedicated to the project or intangible services such as patents, studies and consulting. The intensity of the FISIAA aid is not to exceed 15 % of eligible spending on tangible investments and EUR 100 000 on intangible investments.

3.   REASONS FOR OPENING THE PROCEDURE

(14)	The aim of this aid scheme is to grant aid to companies other than small and medium-sized undertakings, so that they can enjoy — from purely national funds — the same support as that available to SMEs under Regulation (EC) No 1198/2006. The aid would be financed by the FISIAA.

(15)

The examination of this aid scheme in the light of the guidelines for the examination of State aid to fisheries and aquaculture (7) (hereinafter referred to as the guidelines) was undertaken with reference to the criteria laid down in Regulation (EC) No 1198/2006. However, the measures eligible for support from the EFF as regards the processing and marketing of fisheries and aquaculture products only cover SMEs, while this aid scheme is geared specifically to undertakings other than SMEs.

(16)	Consequently, the Commission considered that there was some doubt as to the compatibility of the aid with the common market.

4.   COMMENTS FROM FRANCE AND INTERESTED PARTIES

(17)	France puts forward two arguments in support of the compatibility with the common market of granting aid under the FISIAA to undertakings processing and marketing fisheries and aquaculture products.

(18)

Firstly, France reiterates the observation it made in its reply of 26 October 2007, which is that, although processing undertakings in the fisheries or agricultural sector often carry out the same types of activities, the Commission did not conclude that granting aid to large undertakings in the agri-foods sector carried the risk of distorting competition and opened up the possibility for Member States to grant them State aid.

(19)	Moreover, France is asking the Commission to specify why it considers that aid can be granted to large-scale undertakings in 2007 and 2008 under the Financial Instrument for Fisheries Guidance (FIFG), whilst similar aid from purely national funds may not be granted.

5.   ASSESSMENT

(20)

Firstly, the Commission notes that the call for projects under the FISIAA for 2007 was launched on 2 March 2007 with a deadline for responding of 2 May 2007, while the French authorities only notified the Commission of their intention to open this call for projects to undertakings in the fisheries and aquaculture sector on 24 April 2007. In other words, the call for projects was launched before the Commission was aware of an aid scheme for the benefit of undertakings processing and marketing fisheries and aquaculture products, and certainly before it was able to provide its opinion on the compatibility of such a scheme with the common market. This is why the Commission initially asked France whether the document attached to its notification (that is the text for the call for projects dated 2 March 2007) was addressed solely to undertakings in the agricultural sector, which France confirmed in its letter dated 11 July 2007 (‘The first call for projects was limited to undertakings in the agricultural sector (…). Therefore the call for projects for the FISIAA will only mention processing and marketing undertakings in the fisheries and aquaculture sector once this aid scheme has been approved’). If this had not been the case, the aid scheme would have been reclassified as unlawful aid (unmodified) in the terms of Article 1(f) of Regulation (EC) No 659/1999.

(21)

A similar question is raised by the new call for projects launched on 17 December 2007, of which the Commission only became aware after the formal investigation procedure had been opened (see recital 9). This new call for projects includes exactly the same terms as the call for projects of 2007, and therefore does not explicitly mention processing and marketing undertakings in the fisheries and aquaculture sector, but, as for the previous call for projects, it refers to both Annex I to the Treaty (which covers fisheries and aquaculture products) and Regulation (EC) No 1198/2006.

(22)

The Commission stresses that the approval of a State aid scheme is not automatic and that a Member State cannot pre-empt the Commission’s decision before the examination of the aid scheme has been completed. For these reasons the Commission cannot accept the claim that ‘the delay in approval [of the aid scheme in question] has already prevented undertakings in the processing sector of the fisheries sector from participating in the call for projects for the FISIAA in 2007’. Neither can it accept that a second call for projects was launched without explicitly excluding the possibility for undertakings in the fisheries sector to benefit from FISIAA subsidies in 2008, or at least without stating that this possibility was subject to prior approval by the Commission.

(23)

Under 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, insofar as it affects trade between Member States, be incompatible with the common market’.

(24)	The aid in question, which consists of subsidies financed from the national budget (see recital 7), does indeed constitute aid granted by the State.

(25)	As the decision to grant these subsidies is taken at a national level after selection by the Ministry of Agriculture and Fisheries of the projects submitted as part of a call for projects, the aid is attributable to the State.

(26)	The measures notified are likely to affect the exchanges between Member States and risk distorting competition to the extent that they favour national production of processed fisheries products to the detriment of the production of other Member States.

(27)	Consequently, aid which is the subject of this Decision constitutes State aid in the terms of Article 87(1) of the Treaty.

(28)

Given that the aid is intended for the fisheries and aquaculture sector, it must be analysed in the light of the guidelines. Point 5.3 of the guidelines determines that they shall apply from 1 April 2008‘to any State aid notified or intended to be applied on or after that date’. As the French authorities stated that they were waiting to receive approval from the Commission before allowing undertakings in the fisheries and aquaculture sector to benefit from this aid scheme, the Commission considers that it has not been applied and that, consequently, it should be analysed in the light of the guidelines.

(29)	The guidelines refer, in point 3.2, to the criteria laid down by Regulation (EC) No 1198/2006. Consequently, it is in the light of this Regulation that compatibility of the aid scheme in question must be examined.

(30)

The Commission notes that the measures eligible for aid from the EFF for processing and marketing on the basis of Regulation (EC) No 1198/2006 only apply to SMEs. Therefore, the Commission considers that the aid scheme which is the subject of this Decision, which is only addressed to undertakings other than SMEs, does not meet the intervention criteria for the EFF.

(31)

The French authorities do not contest this analysis as they state that ‘the call for projects No 2 would be addressed to large undertakings in the marine products processing and marketing sector, that is to undertakings with more than 750 employees and a turnover of more than 200 million euro, as such undertakings are excluded from the EFF, as is the case for undertakings processing agricultural products. (…) The French authorities are aware that reading the 2004 fisheries and aquaculture guidelines in conjunction with Article 104 of Regulation (EC) No 1198/2006 relating to the European Fisheries Fund leads the Commission to state that large undertakings may not benefit from public aid.’

(32)

This being the case, France justifies the aid scheme in question by saying it wishes to harmonise the situation of undertakings in the fisheries and aquaculture sector with regard to the granting of public aid with that of undertakings in the agricultural sector, for which a similar aid scheme was approved in 2004. However, given that the aid scheme is intended for the fisheries and aquaculture sector for which specific guidelines have been adopted, the Commission cannot accept the fact that an aid scheme of the same kind exists which has been approved for another sector of activity. Moreover, the Commission recalls that the scheme applicable to undertakings in the agricultural sector has been maintained until 31 December 2008 by way of derogation in accordance with point 196 of the Community guidelines for State aid in the agriculture and forestry sector 2007-2013 (8). However, this case involves a new aid scheme which applies to undertakings in the fisheries and aquaculture sector. It must therefore be examined with regard to the rules applicable to the sector, and not by analogy with an existing scheme in another sector of activity which has been approved on the basis of rules which differ from those applicable to State aid in the fisheries and aquaculture sector. Therefore, this argument is not acceptable.

(33)

Similarly, the analogy with aid to large undertakings which may be granted in 2007 and 2008 within the framework of the FIFG cannot be accepted in order to justify implementing a new aid scheme, which is strictly national, for the benefit of these undertakings (see recital 19). Indeed the rules governing the administration of structural intervention programmes and aid granted within this framework and the rules governing State aid are independent of each other, unless explicit reference is made thereto (as is the case in the guidelines, which refer to criteria laid down in Regulation (EC) No 1198/2006). Consequently, the fact that, for reasons exclusively linked to budgetary constraints, aid may still be granted under the 1999-2006 EFF programming, has no effect on the rules which apply to this aid scheme.

6.   CONCLUSION

(34)	On the basis of the analysis in part 5 above, it must be concluded that the scheme for aid allocated from the FISIAA to undertakings in the fisheries and aquaculture sector, as notified by France on 24 April 2007, is incompatible with the common market,

HAS ADOPTED THIS DECISION:

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Whereas:

HAS DECIDED AS FOLLOWS:

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Whereas:

HAS ADOPTED THIS DECISION:

THE EFTA SURVEILLANCE AUTHORITY (1),

Whereas:

I.   FACTS

1.   Procedure

By letter dated 5 March 2002 (Doc. No 02-1733-A), the Authority received a complaint alleging that State aid had been granted by Norway through the Research Council of Norway (hereinafter the RCN) to various research projects in connection with the development of the software programme Turborouter.

The Authority requested information from the Norwegian authorities by letter dated 26 April 2002 (Doc. No 02-2605-D). The Ministry of Trade and Industry replied by letter dated 3 June 2002 (Doc. No 02-4177-A), which included RCN’s comments on the Turborouter project.

After various exchanges of correspondence (8), by letter dated 8 March 2006 (Event No 363353), the Authority informed the Norwegian authorities that it had decided to initiate the procedure laid down in Article 1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement in respect of R&D aid granted by the Research Council of Norway in connection with the development of the software programme Turborouter.

By letter dated 7 April 2006, the Norwegian authorities submitted comments to the Authority’s decision to open the formal investigation procedure.

The Authority’s Decision No 60/06/COL to initiate the procedure was published in the Official Journal of the European Union and the EEA Supplement thereof (9). The Authority called on interested parties to submit their comments.

The Authority received comments from one interested party. By letter dated 1 December 2006 (Event No 400677) the Authority forwarded these comments to the Norwegian authorities. By letter from the Ministry for Government Administration and Reform dated 8 January 2007 (Event No 405517) forwarding a letter from the Ministry of Education and Research dated 5 January 2007, the Norwegian authorities submitted comments.

2.   The four projects related to the software programme Turborouter supported with RCN funds

2.1.   Description of the projects

In the following, the Authority will only provide a brief description of the projects under assessment. For a detailed description of each of them, reference is made to the Authority’s Decision No 60/06/COL (10).

2.1.1.   Project 40049 — Strategic activities within maritime transport and logistics (the first version of the software programme Turborouter)

Turborouter is a tool (11) for optimising vessel fleet scheduling, i.e. to decide which vessels to assign different cargoes to. It combines the knowledge and experience of the planners with the calculating capabilities of the computer. Turborouter is based on electronic sea charts where scheduling information can be displayed and includes a database for vessels, ports, cargoes, etc; automatic calculation of port-to-port distances; vessel position reports and automatic update of estimated time of arrival; sophisticated optimisation routines for fleet scheduling and schedule visualisation or schedule calculator for manual planning.

The first version of the pilot software Turborouter was developed in the first year of research of one of the sub-projects of Project 40049 ‘Strategic activities within maritime transport and logistics’ called ‘Methods and analytical tools for design and operation of integrated transport and logistics chains’.

2.1.2.   Further development of the software programme Turborouter

According to the information provided by the Norwegian authorities, the RCN selected several projects related to the development of the software package Turborouter for R&D support.

2.1.2.1.   Project 138811 — AlgOpt

The aim of this project (12) was to develop and carry out practical tests of algorithms to calculate the optimal utilisation of a fleet of ships, given the obligations to load cargoes for several customers, the requirements as to when cargoes must be loaded and discharged in the destination port, the possibility of carrying joint cargoes of a limited number of bulk goods on each voyage, as well as limitations that mean that not all the vessels involved are suitable for serving all customers or all ports. Algorithms should be integrated into a software concept that would offer users full control and the possibility of overriding the suggestions made by the algorithms.

According to the information submitted by the Norwegian authorities, the Project AlgOpt was only a pre-study defining the user requirements and investigation of the feasibility of using Turborouter for the contract partner, the company Beltship Management AS.

2.1.2.2.   Project 144265 — Shiplog II

The Shiplog project mainly dealt with transport at sea. This project (13) was supposed to use the results of a previous project called Shiplog (which did not involve the use of Turborouter) to focus on the requirements for door-to-door delivery of goods, when transport at sea is a key element. One of the main activities concerned the integration of Transport Chain Management System (TCMS) and Turborouter, which should specify the interface and demonstrate the exchange of information between Turborouter and the TCMS demonstrator. This project failed to achieve its objective mainly because TCMS and Turborouter could not be satisfactorily integrated.

2.1.2.3.   Project 144214 — Library of optimisation routines for scheduling in shipping

The pre-competitive research project ‘Library of optimisation routines for scheduling in shipping’ was aimed at developing algorithms for advanced optimisation and scheduling of very complex shipping operations. The Norwegian authorities have explained that the library of algorithms is very trade and company specific and must thus be company owned and not part of the standard Turborouter ‘tool kit’.

2.2.   Description of the relationship between the four grants of aid and the Norwegian aid scheme for industrial R&D programmes

According to the information provided by the Norwegian authorities, the four grants of aid covered by the present Decision received aid within the framework of the aid scheme ‘Industrial R&D Programmes’ (brukerstyrte forskningsprogrammer).

The aid scheme called ‘Industrial R&D Programmes’ (brukerstyrte forskningsprogrammer) which was administered by the RCN was established prior to the entry into force of the EEA Agreement.

In December 1994, the Authority adopted a Decision on several aid schemes for research and development existing in Norway prior to the entry into force of the EEA Agreement, amongst others, the aid scheme Industrial R&D Programme (brukerstyrte forskningsprogrammer, Case No 93-183). In this Decision, the Authority proposed appropriate measures to bring the scheme in line with the State aid rules of the EEA Agreement (14). In particular, the Authority proposed to Norway the introduction of detailed provisions which would ensure that awards of aid were granted in accordance with the principles laid down in Chapter 14 of the State Aid Guidelines.

Norway accepted the appropriate measures proposed by the Authority by letter dated 19 December 1994. The acceptance of appropriate measures implied that the award of aid under the Industrial R&D Programme would be done in accordance with the provisions of the Authority’s R&D Guidelines as they were adopted in 1994.

The aid was granted by the RCN to these projects within the R&D scheme Industrial R&D Programme.

3.   Doubts of the Authority expressed in Decision No 60/06/COL

On 8 March 2006, the Authority decided to open the formal investigation procedure provided for in Article 1(2) in Part II of Protocol 3 to the Surveillance and Court Agreement on R&D aid granted by the RCN in connection with the development of the software programme Turborouter (Decision No 60/06/COL). In the opening decision, the Authority described the complaint, the four projects related to the software programme Turborouter supported with RCN funds and the relationship between the four grants of aid and the Norwegian scheme for Industrial R&D Programmes.

The Authority made a detailed assessment of the applicable legal framework to the assessment of the four projects concerned (15). Following the acceptance of the appropriate measures suggested in the Authority’s Decision No 217/94/COL, any grant of aid under the Industrial R&D Programme had to be done in accordance with the 1994 R&D Guidelines. Hence, by definition, any aid granted under the scheme Industrial R&D Programmes which does not comply with the provisions of the 1994 R&D Guidelines would fall outside the scope of application of the scheme. Accordingly, it would constitute new individual aid and should, as such, be notified to the Authority individually and be assessed on the basis of the R&D Guidelines applicable at the time the aid was granted.

As to the reasons for opening the formal investigation, the Authority expressed doubts on several points as to whether the four R&D projects concerned had received support within the framework of the aid scheme Industrial R&D Programmes.

The Authority had doubts as to whether these projects went beyond the stage of applied or pre-competitive research to constitute a commercial product. The borderline between a pilot project, which could not be used commercially, and a commercial final product seemed very diffuse in the case in hand because the software needs to be adapted anew for each new application specific to each final user. The Authority questioned to what extent the further development of the software programme Turborouter, for use in developing applications which serve concrete needs for the final users, can be covered by the definition of applied research.

On the basis of the information available at that stage of the procedure, the Authority was not in the position of ascertaining whether these projects were correctly classified as pre-competitive development activities or whether, on the contrary, they were already too close to the market to be eligible for state aid.

Furthermore, the Authority had doubts concerning the financing of the projects, in particular regarding the effective disbursement of the own-contributions, in kind, of the beneficiaries of the projects.

Following the arguments put forth by the complainant, the Authority had doubts as to whether the overall costs of the projects had been artificially increased to cover operational expenses of the beneficiary undertakings and whether the real research cost of the projects corresponded to the amounts granted by the RCN.

It seemed to the Authority that it was Marintek, the research institute that developed the first software programme Turborouter, which had the necessary know-how and technological competence to do the project. Therefore, it appeared rational to assume that most of the work would have been carried out by its own staff. This would imply, in principle, that the involvement of the staff of the participating undertakings would most probably have been related to the definition of the users needs and/or, to some degree, of testing. To the extent that the contribution in kind of the participating undertakings may not have corresponded to research costs, the overall costs of the research project would be lower and the aid intensities accordingly higher.

For these reasons, the Authority had doubts both as to whether the above mentioned projects had received aid in compliance with the applicable R&D Guidelines and as to whether the beneficiaries had used the aid in contravention of the accepted appropriate measures on the scheme Industrial R&D Programmes.

4.   Comments from third parties

On 24 November 2006, the Authority received comments from an interested party which were more of a general nature than directly related to the doubts the Authority expressed in Decision No 60/06/COL to open the formal investigation procedure on R&D granted in connection with the development of the software programme Turborouter. This party alleged that the Norwegian Research Council had given substantial funds to a new project called OPTIMAR (16). This project is entirely supported by the Norwegian Research Council for the years 2005-09. Ideally, this project is directed by the Department of Operative Research of the Norwegian University of Science and Technology (hereinafter NTNU) in Trondheim. The ultimate goal for this project is to further develop Turborouter into a commercial project, a process which is already under way.

This party added, ‘Prof Marielle Christiansen (Head of OPTIMAR project) in Trondheim considers that it is very difficult for companies to participate and take advantage of results from this program which is said to be a public research programme with the view of broadening the base for all Norwegian companies, because they are already working closely with SINTEF and MARINTEK and had promised to share the research results with these commercial organisation (SINTEF and MARINTEK are both institutes located in Trondheim and has for a number of reasons close ties with the Technical University NTNU).’

In the opinion of this party, ‘Turborouter is very much the common element in this issue as all personnel working at NTNU/Dept of Oper Res/Marintek/SINTEF see TURBOROUTER as their common goal’.

This party alleges that the companies working to develop TURBOROUTER are now getting even more state aid through the NTNU, covered as funds to basic research.

The final comment made was that Turborouter was not used by any of the companies that received funds to develop it, which lead this party to conclude that the funds received in the research project were merely subsidies to their daily operations.

5.   Comments by the Norwegian authorities

5.1.   Comments to the Authority's decision to open a formal investigation procedure

5.1.1.   Comments from the Ministry of Government Administration and Reform

In the letter dated 7 April 2006, the Ministry of Government Administration and Reform referred to the description made in the Authority Decision No 60/06/COL of the formal correspondence with the Norwegian authorities. The Norwegian authorities made further reference to the meetings between the Authority and the Norwegian authorities in October 2002, and in September 2004 and added that a meeting had been held between the Authority and the Norwegian authorities in Brussels on 22 May 2003.

The Norwegian authorities pointed out that the Authority’s Decision No 60/06/COL did not describe how the aid to the development of the Turborouter programme distorted competition in the EEA or in third markets. In their opinion, this question should be clarified because the Turborouter R&D programme failed to deliver the expected results. Although the Norwegian authorities acknowledged that the intangible know-how from the project had been disseminated into other R&D projects, they did not consider it evident that this had affected competition in the Internal Market, or in third country markets.

The Norwegian authorities questioned some of the facts in the complainant’s allegations that were reiterated in the Authority's decision, in particular, the allegations in Section 3 on page 3 in Decision No 60/06/COL and the supporting quotes from the complainant.

The Norwegian authorities first of all questioned how the complainant had been able to classify the projects as being too close to the market. Further, they questioned how the complainant was able to allege that the R&D results had not been disseminated despite the fact that Marintek received the property rights to the programme. Finally, they questioned how the complainant was able to claim that the own-capital contributions from the participating companies were in reality lower than stated in the application form. According to the RCN, the complainant has had its request for access to the application forms and the R&D contracts denied for professional confidentiality reasons. On this background, the Norwegian authorities believed that the allegations from the complainant generally seem to be lacking in substantiation. The Norwegian authorities added, ‘The allegations from the complainant that the own-capital contributions from the concerned companies were lower than stated in the application forms also implies that these firms are accused of misusing State aid. This also raises questions related to the legal certainty of the companies that participated in the Turborouter projects. These claims from the complainant should therefore clearly be substantiated.’

5.1.2.   Comments from the Research Council of Norway

In a letter enclosed to the above mentioned letter from the Ministry of Administration and Reform, the Research Council of Norway (hereinafter the RCN) commented upon the Authority’s Decision No 60/06/COL. The RCN pointed out that it had forwarded to the Authority all available information and clarification requested, including the submission of copies of all project documentation for the four projects related to the development of Turborouter supported with funds from RCN. According to the RCN, in the meetings and correspondence up to and including the letter from the Norwegian authorities of 20 June 2003, the only matter of discussion was the correct classification of the projects according to the Guidelines for aid for R&D.

Regarding the description of the projects, the RCN alleged that the tables given in the description of the funding of the projects in the Authority’s Decision No 60/06/COL did not comply entirely with the figures given in the text. The funds granted by the RCN to the projects consisted of two parts. One part of funds from RCN was in fact private funds originating from the Norwegian Shipowners' Association, while the rest was public funds. The table below, which is the same as submitted to the Authority in the letter of 11 April 2003, describes the situation. Regarding Project 138811 AlgOpt, the table in Decision No 60/06/COL gives the figures as they were at the start of the project. During the execution, the project was given additional funding of NOK 100 000 of which NOK 25 000 was granted from RCN.

Table 1

Projects supported by RCN, involving development of Turborouter

	P 40049		P 144265		P 138811		P 144214
	Strategic activities within maritime transport and logistics		Shiplog II		AlgOpt		Library of optimisation routines for scheduling in shipping
	NOK 1 000	%	NOK 1 000	%	NOK 1 000	%	NOK 1 000	%
Own Funds	4 500	43	800	13	625	61	1 950	28
Other private funds	0	0	3 250	52	75	7	2 750	39
Other public funds	0	0	0	0	0	0	0	0
RCN prgr. MARITIM	6 000	57	2 150	35	325	32	2 300	33
Of which NSA	1 380	13	750	12	120	12	805	12
Of which public	4 620	44	1 400	23	205	20	1 495	21
Total funds	10 500	100	6 200	100	1 025	100	7 000	100
Personnel and indirect	8 700	83	800	13	545	53	4 100	59
Purchase of R&D	600	6	2 150	35	380	37	2 900	41
Equipment	450	4	100	2	0	0	0	0
Other operating costs	750	7	3 150	51	100	10	0	0
Total cost	10 500	100	6 200	100	1 025	100	7 000	100
Contract partner	Marintek		UECC		Beltship Management AS		Beltship Management AS
Participants	NTNU		Marintek		Marintek		Marintek
			R.S. Platou Shipbrokers				Iver Ships AS
			Iver Ships AS				Shipnet AS
			LogIT AS				Laycon Solutions AS
			Lorentsen & Stemoco AS
			Astrup Fearnleys AS
			DFDS Tollpost Globe
			Shipnet AS
			Wallenius Wilhelmsen
			SINTEF Tele og data
Project Period	Jan. 1996-Dec. 1998		Jan. 2001-Dec. 2002		Jan. 2000-Oct. 2000		Jan. 2001-Dec. 2002

Regarding the Authority’s comment in Decision No 60/06/COL that the RCN did not seem to control how the own contributions of the beneficiaries were distributed to various activities and whether they were effectively disbursed, the RCN considered that they had described how eligible costs were controlled before aid was paid to the contracting partner and how the different contributions were disbursed in previous correspondence with the Authority (17).

Regarding the classification of the Projects 138811 AlgOpt, 144265 Shiplog II and 144214 Library of optimisation routines for scheduling in shipping, the RCN restated that all three projects were classified as pre-competitive development based on a thorough assessment and evaluation of the project applications according to the RCN procedures and guidelines for project evaluation. These procedures and guidelines were put in place to make sure that aid granted under the aid scheme Industrial R&D Programmes are in accordance with the principles laid down in Chapter 14 of the State Aid Guidelines.

The RCN explained that there is an internal system of quality assurance of RCN’s activities. This system is called DOKSY. DOKSY comprises a broad documentation of the guidelines, procedures and practices that are followed in the RCN. One of these documents is the guidelines for determining aid intensity applied to retained projects. This internal document, DOKSY-5-6-1-4-IE, entitled ‘ Støtteandel etter EØS-bestemmelser ’ (aid intensities according to EEA rules) corresponds to the Authority's R&D Guidelines. The document applies definitions and corresponding aid intensities in compliance with the definition of the different R&D stages in the Authority's R&D Guidelines. The assessment and classification of all the projects that receive aid from the RCN is based on the DOKSY guidelines.

After 1999, in addition to DOKSY 5-6-1-4-IE, all projects have been evaluated using the computer-based system ‘ Provis ’. Provis is described in Doksy No 5-6-1-2-EE ‘ Prosjektvurdering i Provis ’. In Provis, each project is evaluated according to 11 different aspects. The most important aspects in Provis related to the classification of research categories, are aspect No 3 ‘Research Content’ and aspect No 9 ‘Additionality’ . For each of the aspects, there are several criteria or characteristics that are applied in order to characterise to what extent the project is in compliance with the aspects.

In the description of the Guide for evaluation of aspect No 3 in Doksy No 5-6-1-2-IE, it is underlined that ‘Research content indicates to what degree the project produces new knowledge’. This criterion is directly linked to the description of Industrial Research in the R&D guidelines where the requirement is that the activity is ‘aimed at the acquisition of new knowledge’ .

In the Guide for evaluation of aspect No 9 in Doksy No 5-6-1-2-EE, the description is, ‘Additionality indicates to what degree support from the Research Council will trigger efforts, actions, results and effects that would not have been achieved had support not been granted.’ This criterion is linked to the R&D guidelines, point 14.7, Incentive effect of R&D aid.

On this basis, the RCN argued that since the evaluation of the projects was thoroughly carried out in accordance with the RCN procedures and guidelines for project evaluation, it should not be questionable that they were correctly classified. The RCN, after the complaint was raised and the Authority started their preliminary investigation, looked again at these projects and nevertheless reiterated its original position.

In the case of Project 144265 Shiplog II, regarding the Authority’s remark that the amount granted by the RCN equalled the sum necessary to purchase R&D, the RCN argued that this does not imply that the private means invested in Shiplog II were not used on R&D activities, ‘In industry-driven projects, which can be applied for by private companies, we generally encourage cooperation between private companies and public R&D institutions. In order to promote such cooperation we may in some calls for proposals for industry-driven projects state that the application will be evaluated favourably if the external purchases of R&D from research institutions (institutes or universities) are at least as high as the support given by the RCN. The purpose of this approach is to provide the incentives for increased investments by private sector towards purchase of R&D from research institutions. This is the reason why the funds granted by the RCN correspond exactly to the amount necessary to purchase R&D services in several projects.’

In its Decision No 60/06/COL, the Authority stated that it was questionable whether this approach of the RCN led beneficiaries to include their normal operating cost in the R&D costs. Therefore it questioned whether the figures for the total project costs had been inflated to seemingly obtain more public financing. In the opinion of the RCN, it is not understandable how the RCN's approach with a built-in incentive structure to promote the purchase of R&D might lead to such results.

In its letter to the Authority dated 31 January 2005, the RCN explained the standard procedure for documentation of project costs valid at the time of these projects, ‘For the involved projects, the contracting partner was required to submit a cost claim report (regnskapsrapport) three times a year detailing the cost of the project, including a verification of the persons involved (by name), the number of working hours spent by each person, and the cost per hour charged to the project account. The report is signed by the project responsible person. At the end of the year, the accounts for the year are also checked and signed by a certified accountant. The accountant is external to the contract partner. The RCN payment was contingent upon approval of the submitted accounts.’

The RCN informed the Authority that it had been in contact with United European Car Carriers (UECC) and with Jebsens (successor of Beltship Management) and requested further documentation on the costs related to these projects. The letter from Jebsens dated 17 March 2006 and the letter from UECC dated 29 March 2006 were forwarded to the Authority. The cost claim reports for Project 144265 Shiplog II provided in the letter from UECC include signed cost statements from the other participating partners. The companies did not have any general recording system for working hours, which means that the hours spent on the projects were only documented in the cost claim reports sent to the RCN three times a year. No further documentation exists. In the opinion of the RCN, this means that the costs of the projects have to be assessed by the available cost claim reports.

The RCN finally pointed out that these cost claim reports were in accordance with reporting procedures of the RCN, and that the beneficiaries had fulfilled all their obligations according to the contracts awarding the grants. In the opinion of the RCN, ‘unless clear evidence of the contrary there is no reason to believe that any misuse of aid has taken place.’

5.2.   Comments to third party’s comments

By letter of the Ministry for Government Administration and Reform dated 8 January 2007 (Event No 405517) forwarding a letter from the Ministry of Education and Research dated 5 January 2007, the Norwegian authorities submitted observations to the third party comments.

In the opinion of the Norwegian authorities, the comments regarding the project OPTIMAR do not provide any information related to the four projects which are the subject of the Authority’s decision 60/06/COL, ‘Though it is not explicitly stated, it seems like the third party is of the opinion that illegal State aid has been granted to support a basic research project called Optimisation in Maritime Transportation and Logistics, OPTIMAR. We are of the opinion that this is not the case. In support of the OPTIMAR project, the Norwegian University of Science and Technology (NTNU) in Trondheim receives funds from the RCN under Project No 1666S6. The industrial partners that were participants in the four original projects do not take part in this basic research project.’

Regarding the third party’s allegation that Turborouter is not used by any of the companies that received funds, the RCN is of the opinion that even if this should be the case, it is not an argument for any illegal use of State aid in the case of the four projects which are the subject of the Authority's Decision No 60/06/COL. It is one of the most typical features of research and development that there is a risk involved. Sometimes research results can be applied in operations or used in commercial products or services, sometimes they cannot.

II.   APPRECIATION

1.   The presence of state aid

1.1.   State aid within the meaning of Article 61(1) EEA Agreement

According to Article 61(1) of the EEA Agreement,

Thus, in order for a measure to be considered State aid, it must constitute a selective advantage in favour of certain undertakings, be granted through state resources, distort competition and affect trade between the Contracting Parties to the EEA Agreement.

The Authority already came to the conclusion that the grants given by the RCN to the projects related to the development of the software programme Turborouter under review constitute State aid in its assessment in Decision No 60/06/COL. In this respect, reference is made to point II.2 of this Decision. This assessment has not been disputed by the third party or the Norwegian authorities. The Authority therefore upholds its view that the grants constitute State aid.

1.2.   The applicable legal framework

In Decision No 60/06/COL to open the formal investigation procedure on R&D aid granted by the RCN in connection with the development of the software programme Turborouter, the Authority explained in detail what would be the applicable legal framework for the assessment of the four projects concerned by this investigation. For the sake of understanding of the assessment hereinafter, the Authority briefly outlines the legal situation (18) below.

The four projects assessed in this Decision were granted R&D aid in the framework of the Industrial R&D Programme (brukerstyrte forskningsprogrammer, Case No 93-183). The Industrial R&D Programme was already in place before 1994. By way of Decision No 217/94/COL of December 1994, the Authority assessed the Industrial R&D Programme and proposed appropriate measures to require that the granting of aid be done in accordance with the principles laid down in Chapter 14 of the State Aid Guidelines.

The acceptance by the Norwegian authorities of the proposed appropriate measures implied that, thereafter, any grant of aid under the Industrial R&D Programme had to be done in accordance with the R&D rules applicable at the time when the Authority adopted Decision No 217/94/COL, i.e. the 1994 R&D Guidelines (19).

1.3.   The assessment of the projects on the basis of the aid scheme Industrial R&D Programmes

The Authority considered, by the opening of a formal investigation in Decision No 60/06/COL, that the four projects had been granted R&D aid in the framework of the Industrial R&D Programme. This program was already in place before 1994. Following the adoption of new R&D guidelines in 1994, thereinafter any grant of aid under a R&D scheme had to be done in accordance with the new rules. Hence, the Authority considered that, by definition, any aid granted under the scheme Industrial R&D Programmes which does not comply with the provisions of the 1994 R&D Guidelines, would fall outside the scope of application of the scheme. Accordingly, the measure would constitute new individual aid and should, as such, be notified to the Authority individually.

In the following, the Authority will assess whether the application of the scheme Industrial R&D Programmes to the four concrete projects identified as relating to the development of the software programme Turborouter was done in line with Article 61(3)(c) of the EEA Agreement on the basis of the provisions of the 1994 R&D Guidelines.

1.3.1.   Project 40049 — Strategic Activities within maritime transport and logistics (The first version of the software programme Turborouter)

One of the sub-projects covered by Project 40049 ‘Strategic activities within maritime transport and logistics as industrial research’ led to the development of the first version of the software programme Turborouter. The RCN classified the whole Project 40049 Strategic activities within maritime transport and logistics as industrial research as a whole.

Basic industrial research was defined under Point 14.1.(2) of the 1994 R&D Guidelines as ‘original theoretical or experimental work whose objective is to achieve new or better understanding of the laws of science and engineering as they might apply to an industrial sector or the activities of a particular enterprise.’

Although Turborouter has become a commercial software tool, the Authority considers that the RCN funds allocated to the sub-project ‘Methods and analytical tools for design and operation of integrated transport and logistics chains’ of Project 40049 which led to the development of the first software programme Turborouter concerned a phase of R&D which qualified as industrial research within the meaning of the 1994 R&D Guidelines. As the Authority noted in Decision No 60/06/COL, since the first software was developed in the first phase of the sub-project back in early 1996, the software has been further improved and also marketed. However, it seems that the granting of aid to Project 40049 which resulted, amongst others, in the development of the first software Turborouter, cannot, by this fact, be considered in relation to market proximity to be beyond the stage of industrial research as it was classified by the RCN. The Authority has no reason to question the RCN’s assessment that the sub-project ‘Methods and analytical tools for design and operation of integrated transport and logistics chains’ achieved a new or better understanding of the laws of science and engineering applicable to an industrial sector, which constitutes industrial research within the meaning of the 1994 R&D Guidelines.

As industrial research, Project 40049 was granted aid from the RCN for an amount corresponding to 43,8 % of the costs of the project. This intensity is below the maximum aid intensity allowed by the Guidelines according to which ‘the level of aid for basic industrial research should not be more than 50 % of the gross costs of the project or programme.’

For the purpose of calculating the intensity of aid from R&D activities, Section 14.5.1 of 1994 R&D Guidelines foresaw the following eligible costs:

‘—	personnel costs (researchers, technicians, other supporting staff) calculated as a sum of the total amount needed to carry out the project;

—	other running costs calculated in the same way (costs of materials, supplies, etc.);

—	instruments and equipment, land and buildings;

—	consultancy and equivalent services including bought-in research, technical knowledge, patents, etc.;

—	additional overhead costs incurred directly as a result of the R&D project or programme being promoted.’

According to the information provided by the Norwegian authorities, the costs of the project taken into account in the determination of the granting of aid were covered by the definition of eligible costs provided in the 1994 R&D Guidelines. Section 3 to the ‘Retningslinjer for Norges Forskningsråds behandling av brukerstyrte og næringsrettede prosjekter’ referred to the costs that could be considered eligible by the RCN when assessing the granting of R&D aid to a project. They covered personnel costs (salary and social costs for R&D personnel, i.e. researchers, technicians and assistants related to the project and necessary to carry it out), purchasing of R&D services (consultancy services and equivalent services), operating costs (including material costs and other operating costs directly related to the project and necessary to complete it) and equipment and instruments if used only for R&D. Thus, the Authority considers the description of the eligible costs to be in accordance with the definition provided for in the 1994 R&D Guidelines.

The project was exclusively carried out by the research institute Marintek without further participation of or collaboration with private undertakings at this stage of the R&D.

As already mentioned in the decision to open the formal investigation procedure, under the 1994 R&D Guidelines, and accordingly under the provisions of the aid scheme Industrial R&D Programmes, there was no written obligation to disseminate the results of research. Thus, even if the allegation brought forward by the complainant that the result of the research had not been disseminated and that the research institute Marintek had received the property rights to sell the programme were correct, it would not contravene the provisions of the R&D Guidelines applicable at the time of the granting of aid.

For these reasons, the Authority considers that the granting of aid to Project 40049 falls within the scheme Industrial R&D Programme as amended on the basis of Chapter 14 of the Authority’s 1994 R&D Guidelines. The aid is therefore granted in accordance with Article 61(3)(c) EEA.

1.3.2.   The projects relating to the further use of the software programme Turborouter

1.3.2.1.   Doubts of the Authority expressed in Decision No 60/06/COL

In 2000, the RCN authorised the granting of R&D aid to three R&D projects which concerned the use and further development of the software programme Turborouter: Project 138811 ‘AlgOpt’ , Project 144265 ‘Shiplog II’ and Project 144214 ‘Library of optimisation routines for scheduling in shipping’ .

In Decision No 60/06/COL to open the formal investigation procedure, the Authority expressed doubts regarding the classification of the R&D projects as pre-competitive research and regarding the classification of the different parts of each project within each research category. Moreover, the Authority questioned whether the aid intensities were respected and whether the financing of the projects was done in accordance with the provisions of the 1994 R&D Guidelines and accordingly with Article 61(3)(c) of the EEA Agreement. The Authority had doubts as to whether the financial contributions of the private participants, mostly to be disbursed in kind, really corresponded to working hours related to the development of the R&D projects or whether, on the contrary, they covered operating costs of the concerned undertakings.

1.3.2.2.   The applicable provisions of the R&D Guidelines

The RCN classified all three projects as pre-competitive development activity. Point 14.1.(2) of the R&D Guidelines of 1994 distinguished between three categories of research: fundamental, basic industrial and applied research and development. Applied research and development corresponded to the concept of pre-competitive research used from the adoption of the 1996 R&D Guidelines onwards. According to this provision, applied research ‘covers investigation or experimental work based on the results of basic industrial research to acquire new knowledge to facilitate the attainment of specific practical objectives such as the creation of new products, production processes or services. It could normally be said to end with the creation of a first prototype.’ Development is considered to cover ‘work based on applied research aimed at establishing new or substantially improved products, production processes or services up to but not including industrial application and commercial exploitation.’

Section 14.4 of the 1994 R&D Guidelines sets out the aid intensities allowed. ‘The intensity of aid that may be accepted is assessed by the EFTA Surveillance Authority on a case-by-case basis. The assessment takes into consideration the nature of the project or programme, the technical and financial risk involved, overall policy considerations related to the competitiveness of European industry, as well as the risk of distortion of competition and effect on trade between the Contracting parties to the EEA Agreement. A general evaluation of such risks leads the EFTA Surveillance Authority to consider that basic industrial research may qualify for higher levels of aid than those for applied research and development activities which are more closely related to the market introduction of R&D results and, there, if aided, could more easily lead to distortions of competition and trade’. Taking account of these factors, the 1994 R&D Guidelines state that the level of aid for basic industrial research should not be more than 50 % of the gross costs of the project and consider that, as the activity being aided gets nearer to the marketplace, the level of aid should be lower. It is only in the 1996 R&D Guidelines that the permissible gross aid intensity for pre-competitive development activities is fixed at 25 % of the eligible costs.

1.3.2.3.   Assessment of whether the aid was granted in accordance with the R&D Guidelines and of whether the aid was misused

(a)   Classification as pre-competitive development activity.

As mentioned above and explained in detail in the Decision No 60/06/COL, the Authority expressed doubts as regards the classification of Project 138811 ‘AlgOpt’ , Project 144265 ‘Shiplog II’ and Project 144214 ‘Library of optimisation routines for scheduling in shipping’ as pre-competitive development activities.

In its Decision No 60/06/COL, the Authority expressed doubts regarding the difference between the pre-competitive phase of a product and the final commercial product in respect of these kinds of IT projects. The Norwegian authorities have not made clear what this difference should be. However, they have stressed that the classification of the projects was based on a thorough assessment and evaluation of the projects according to the RCN procedures and guidelines for project evaluation. According to the information provided, these guidelines incorporate the provisions of the Authority’s R&D Guidelines.

The RCN explained that there is an internal system of quality assurance of RCN’s activities called DOKSY. DOKSY comprises a broad documentation of the guidelines, procedures and practices that are followed in the RCN. One of these documents is the guidelines for determining aid intensity applied to the selected projects. This internal document, DOKSY-5-6-1-4-IE entitled ‘Støtteandel etter EØS-bestemmelser’ (aid intensities according to EEA rules) corresponds to the Authority's R&D Guidelines. The document applies definitions and corresponding aid intensities in compliance with the definition of the different R&D stages in the Authority's R&D Guidelines. The assessment and classification of all the projects that receive aid from the RCN is based on the DOKSY guidelines.

After 1999, in addition to DOKSY 5-6-1-4-IE, all projects have been evaluated using the computer-based system ‘Provis’, which is described in Doksy No 5-6-1-2-EE ‘Prosjektvurdering i Provis’. According to the provisions of Provis, each project is evaluated according to eleven different aspects (20). For each aspect, Provis foresees the application of several criteria or characteristics to characterise to what extent the project is in compliance with the aspects. One of the most important aspects related to the classification of research categories is the research content.

In the description of the Guide for evaluation of the research content of a project in Doksy No 5-6-1-2-IE, it is underlined that ‘Research content indicates to what degree the project produces new knowledge’. According to the information provided by the RCN, this criterion is directly linked to the description of the R&D guidelines where the requirement is that the activity is ‘ aimed at the acquisition of new knowledge’ .

The RCN has informed the Authority that the evaluation of the projects was thoroughly carried out in accordance with the RCN procedures and guidelines for project evaluation, more specifically, on the basis of the requirements laid down in the Doksy and Provis internal documents, in line with the R&D Guidelines.

On the basis of the information brought forward before and during the formal investigation procedure the Authority has not been able to conclude that there has been mismanagement or failed assessment of the projects. In lack of such conclusive evidence, and in light of the above described routines and the capacity of the professional staff working for the RCN, the Authority has no basis for concluding that they have made an incorrect assessment of the projects as pre-competitive research.

(b)   The participation of the beneficiary undertakings and the aid intensities:

The Norwegian authorities have clarified the figures regarding the financing of the projects as mentioned above under Section 4.1.2 of this Decision.

The Authority raised doubts in its Decision No 60/06/COL to open the formal investigation procedure on the participation of the companies involved in the research project. In its opinion, it would seem rational to assume that most of the work would have been carried out by the own-staff of the research institute Marintek which would imply, in principle, that the participation of the staff of participating shipping companies as the final users of the software, would have most probably been related to the definition of the users needs and/or, to some degree, of testing. Therefore, the Authority questioned whether the figures for the total project costs had been inflated to seemingly obtain more financing.

The Norwegian authorities provided the Authority with copies of cost claim reports which the participating undertakings had to submit to the RCN three times a year detailing the costs of the project, including a verification of the persons involved, the number of working hours spent by each person and the cost per hour charged to the project account. According to the explanations given by the Norwegian authorities, these reports are signed by the project responsible person and verified and signed by a certified accountant at the end of the year. The Authority has no reason to question the truthfulness of these reports on the basis of which the beneficiary undertakings were granted the R&D aid amounts.

Although it could be argued in general that it might be desirable to introduce certain controls during the development of the research projects to verify the accuracy of these costs reports, the Authority considers that the RCN has properly applied the provisions of the 1994 R&D Guidelines which do not require the carrying out of any further checks.

1.4.   Conclusion

On the basis of the foregoing assessment, the Authority considers that the granting of aid to the above mentioned R&D projects was done in compliance with the provisions of the existing aid scheme Industrial R&D Programmes, which was in line with the applicable R&D Guidelines. The Authority could not establish in the course of this formal investigation procedure that the beneficiaries of R&D aid for Project 40049 ‘ Strategic activities within maritime transport and logistics’ , Project 138811 ‘ AlgOpt’ , Project 144265 ‘Shiplog II’ and Project 144214 ‘Library of optimisation routines for scheduling in shipping’ used the aid in contravention with the scheme or of Article 61(3)(c) of the EEA Agreement.

Since the projects received State aid within the framework of the scheme Industrial R&D Programmes and not individual aid, there is no need to assess whether the aid would have been compatible if it was granted outside the scheme,

HAS ADOPTED THIS DECISION:

THE EFTA SURVEILLANCE AUTHORITY (1),

Whereas:

I.   FACTS

1.   Procedure

By letter dated 16 October 2003, the Authority received a complaint in which it was alleged that a particular kind of schools, which provide specialised services to the off-shore sector in competition with the complainant, receive State aid through the application of input tax compensation provided for in Article 3 of the Value Added Tax Compensation Act (6). Municipal schools that provide certain educational services exempted from the application of VAT in competition with other undertakings receive a compensation for the input VAT paid on goods and services purchased in relation to the services they provide on a commercial basis, to which private competitors are not entitled. The letter was received and registered by the Authority on 20 October 2003 (Doc. No 03-7325 A).

After various exchanges of correspondence (7), by letter dated 19 July 2006 (Event No 363440), the Authority informed the Norwegian authorities that it had decided to open the formal investigation procedure foreseen under Article 4 in Part II of Protocol 3 to the Surveillance and Court agreement with regard to Article 3 of the Norwegian Act on compensation for value added tax (VAT) with Decision No 225/06/COL.

The Norwegian authorities submitted comments to this Decision by letter dated 18 September 2006 (Event No 388922).

The Authority’s Decision No 225/06/COL was published in the Official Journal of the EU C 305 of 14 December 2006 and the EEA Supplement No 62 of the same date. No further comments from third parties were received after the publication.

2.   Legal framework on VAT and VAT Compensation in Norway

The VAT Compensation Act entered into force on 1 January 2004 with the objective to mitigate distortion of competition resulting from the VAT Act.

VAT is a consumption tax entailing the application of a tax exactly proportionate to the price of supplies of goods and services, independently from the number of transactions taking place in the production or distribution process before the stage at which the tax is eventually charged to an ultimate customer.

As a main rule, a person engaged in trade or business and liable to VAT registration (hereinafter ‘taxable person’), shall calculate and pay tax on sales of goods and services covered by the VAT Act (8) and may deduct input tax on goods and services for use in an enterprise from the output tax charged on sales (9). Thus, the VAT system taxes all supplies by all taxable persons equally. This neutrality is one of the main features of the VAT system.

However, Articles 5, 5a and 5b in Chapter I of the VAT Act exempt certain transactions from the scope of application of the VAT Act: sales by certain institutions, organisations etc. (10), the supply and letting of real estate or rights to real property, the supply of certain services, amongst others, the supply of health and health related services, social services, educational services, financial services, services related to the exercise of public authority, services in the form of entitlement to attend theatre, opera, ballet, cinema and circus performances, exhibitions in galleries and museums, lottery services, services connected with the serving of foodstuffs in school and student canteens, etc. (11).

It follows from the above that any taxable person carrying out the supply of goods and services which are exempt from the VAT Act pays input tax on its purchases of goods and services but cannot deduct the input tax from its tax liability because for such purchases the taxable person is the ultimate customer.

The consequence of the exemption is that the suppliers of the exempted goods and services have to pay input tax on the services and goods they purchase as any final consumer (without having the possibility to charge output tax to the ultimate consumer). This logical consequence of the VAT exemptions has, however, created a distortion at another level. Public entities, just as any integrated company which is tax exempted, will have an incentive to procure ‘in-house’  (12) instead of acquiring services or goods in the market. In order to create a system without any particular incentive to produce goods or services with own resources compared to external acquisition, the Norwegian authorities adopted the VAT Compensation Act.

Article 2 of the VAT Compensation Act lists the entities covered by the Act exhaustively:

(a)	local and regional authorities carrying out local or regional activities in which the local council or county council or another council under the Local Government Act (13) or other special local governmental legislation is the supreme body;

(b)	intermunicipal companies established according to the Local Government Act or other special local governmental legislation;

(c)	private or non-profit undertakings in as far as they carry out health, educational or social services which are statutory obligations of local or regional authorities;

(d)	day care institutions as mentioned in Article 6 of the Day Care Act (14);

(e)	Joint Parish Council (Kirkelig fellesråd).

It follows from Article 3 read in conjunction with Article 4(2) of the VAT Compensation Act, that the Norwegian State compensates input tax paid by taxable persons covered by the VAT Compensation Act when buying goods and services from other taxable persons when they do not have the right to deduct input tax since they are tax exempted according to the VAT Act (15).

3.   The doubts the Authority expressed in the Decision to open the formal investigation procedure

In Decision No 225/06/COL to open the formal investigation procedure with regard to Article 3 of the VAT Compensation Act, the Authority’s preliminary consideration was that the input tax compensation as provided for in Article 3 of the VAT Compensation Act constituted State aid within the meaning of Article 61(1) of the EEA Agreement.

The Authority considered that the compensation granted under the VAT Compensation Act was granted by the State through state resources from the State Budget. In the Authority’s view it was not relevant for this assessment whether or not the State’s cost of the compensation at the central level is counterbalanced by reduced transfers to the local and regional authorities as such.

The Authority further considered that, to the extent that the Norwegian authorities compensate input tax on purchases of goods and services to undertakings not subject to VAT but falling within the scope of Article 2 of the VAT Compensation Act, they grant those undertakings an economic advantage.

In the assessment of selectivity, the Authority raised doubts as to whether the VAT compensation, which in its view constituted a materially selective measure, could be justified by the nature and logic of the VAT system, i.e., whether it met the objectives inherent in the VAT system itself, or whether it pursued other objectives, external to the VAT system. According to the explanations given by the Norwegian authorities, the objective pursued with the introduction of the VAT Compensation Act was to facilitate and encourage the choice by the taxable persons covered by the VAT Compensation Act between self supply and outsourcing of goods and services subject to VAT. The Authority had doubts as to whether this purpose could be said to be in the nature and logic of the VAT system itself which is a tax on consumption. In the Authority’s preliminary view, the VAT compensation was not a part of the VAT system, established in 1970, as such but a separate measure, introduced later, to rectify some of the distortions created by the VAT system.

The Authority pointed out that while mitigating distortions for municipal acquisitions, the VAT compensation had created a distortion of competition between undertakings carrying out the same economic activities in sectors exempted from the application of VAT.

The Authority recalled that, in principle, the beneficiaries under the VAT compensation scheme can receive compensation for input VAT under the conditions of the scheme, regardless of whether aid to operators in these sectors would have an effect on trade. Some of the sectors covered by the VAT Compensation Act are partly or fully open for EEA-wide competition. Aid granted to undertakings in these sectors is thus capable of affecting trade between the Contracting Parties to the EEA Agreement. The Authority had to assess the scheme as such and not its application to each individual sector covered. Based on jurisprudence, the Authority’s preliminary conclusion was that, as a general nationwide scheme, the VAT Compensation Act was capable of affecting trade between the Contracting Parties.

Finally, the Authority expressed doubts that the input tax compensation could be considered compatible with the State aid rules of the EEA Agreement following the application of any of the exceptions foreseen under Articles 61(2) and (3) of the said agreement. Moreover, although aid could potentially, in some situations, be considered compatible under the derogation foreseen in Article 59(2) of the EEA Agreement, the Authority was of the preliminary view that this provision did not justify the compatibility of the VAT Compensation Act as a scheme.

4.   Comments by the Norwegian authorities

By letter dated 18 September 2006 (Event No 388922), the Norwegian authorities submitted comments to the Authority’s Decision to open the formal investigation procedure. The comments were divided into three sections:

4.1.   The framework of the VAT Compensation scheme

The Norwegian authorities explained that VAT is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provisions of services. VAT incurred on expenses is recoverable only to the extent that the tax payer provides services which are subject to VAT. Under the current VAT rules, most of the activities in the municipal sector are not subject to VAT:

By compensating the municipalities for input tax on all goods and services, the Norwegian authorities argued that the purpose of the general VAT compensation scheme is to create a level playing field between self supply and outsourcing:

The Norwegian authorities stressed the view already expressed in the preliminary phase of the investigation that the VAT compensation scheme does not constitute an aid measure for the undertakings falling within the scope of Article 2 of the VAT Compensation Act. The reason for this statement is that when the general VAT compensation scheme was introduced in 2004, the municipal appropriations in the annual fiscal budget were reduced accordingly by the expected amount of input tax compensated. The VAT compensation scheme has therefore no revenue effects for the Government. Thus the system may be described as a self-funding system through allocation of a rebate/compensation cost to municipalities.

4.2.   State aid within the meaning of Article 61(1) of the EEA Agreement

In the letter dated 18 September 2006, the Norwegian authorities expressed their disagreement with the assessment of the Authority that the VAT Compensation Act constitutes State aid for the following reasons:

Economic advantage

The Norwegian authorities believe that it is not correct to deem the VAT compensation as an ‘advantage’, which relieves undertakings of charges that are normally borne from their budgets. Because the municipalities fund the VAT compensation scheme themselves through a reduction of the general grants, no factual economic relief is granted. The VAT compensation scheme neither implies any reduction in the amount of tax nor any kind of tax deferment. Consequently, in the opinion of the Norwegian authorities, it is wrong to compare the VAT compensation scheme to measures which imply a genuine reduction in the recipient's tax burden.

Selectivity

The scope of the VAT Compensation Act is positively defined in that only legal persons falling within Article 2 of the Act can be compensated for input tax on purchases.

A selective tax measure can nevertheless be justified due to the nature or general scheme of the tax system in question. The Norwegian authorities considered that by stating that the VAT compensation is not a part of the VAT system, the Authority dismissed their argument that the VAT compensation can be deemed to be in line with the nature and logic of the VAT system itself. The Norwegian authorities objected to this approach referring to Chapter 17B.3.1 et seq. of the Authority's State Aid Guidelines where various aspects of differential measures are looked into. They considered that VAT compensation is justified by the nature or general scheme of the tax system in question and referred to Chapter 17B.3.4 of the State Aid Guidelines ‘Application of State aid rules to measures relating to direct business taxation’. It is a fundamental principle that the VAT system should be neutral and non-discriminatory. In the opinion of the Norwegian authorities, neutrality may therefore be seen as inherent in the VAT system itself. Neutrality, which is inherent to the VAT system, is also the objective assigned to the VAT compensation scheme. Therefore, the Norwegian authorities believed that it is fair to consider the VAT compensation scheme to be in line with the nature and logic of the VAT system itself.

Moreover, they noted that in case the VAT compensation scheme should be phased out, the distortion of competition resulting from the VAT system would be revived: ‘The fact that the municipalities cannot recover VAT on inputs would distort the municipal authorities' incentives when choosing between “in-house” production of services and purchase of services liable for VAT from private service providers.’

The Norwegian authorities pointed out that, in order to mitigate distortion of competition resulting from the VAT system, the so-called Rattsø Committee assessed several possible measures before it decided that the VAT compensation scheme would be the most suitable (16). One of the possible measures the Committee assessed was to extend the municipalities’ right to deduct input VAT. Another possible measure would be to make the municipalities subject to VAT in general. The Rattsø Committee did not choose to extend the municipalities’ right to deduct input VAT because this measure would imply a disruption to VAT as a general tax. It was also taken into consideration that this measure could create pressure from other groups. Nor did the Rattsø Committee choose to make the municipalities subject to VAT in general. Among other factors, the Committee pointed out that because many municipal services are performed free of charge, there is a lack of calculation basis for the VAT:

Effect on trade

The Norwegian authorities criticised the Authority's assessment of the ‘effect on trade’ criteria.

‘Through the VAT compensation scheme the municipalities are primarily granted refund of input tax on goods and services purchased for their mandatory activities. By law the municipalities are imposed to perform certain services. This is specially the case on the education, health and social area. For instance, in the health sector the municipalities, among other things, are instructed to provide for general practitioner services, nursing services, midwife services and nursing home services. In the social sector the municipalities are instructed to provide for practical and economic support to the receivers, e.g. social housing.’

‘Pursuant to Article 2 and 3 of the VAT Compensation Act, VAT compensation may also be granted to municipalities which carry out non-mandatory activities. Besides the special training performed by the topical county municipal schools, the Ministry does, however, not know of any areas outside the scope of the VAT system where it is questioned whether the recipients of VAT compensation perform their services in competition with other undertakings within the EEA.’

The Norwegian authorities consequently believed that in sectors which are exempted from the scope of application of the VAT Act, very few undertakings established in neighbouring European countries would provide services in competition with Norwegian undertakings covered by the VAT Compensation Act. Moreover, circumstances such as physical distance to the service provider, language difficulties and other forms of cultural attachment are decisive when a service provider is chosen.

The Norwegian authorities considered that in order to perform a true assessment of the VAT compensation scheme in relation to the criteria set out in Article 61(1) of the EEA Agreement, it should be relevant that the competition between Norwegian undertakings and other undertakings in the EEA on sectors exempted from the application of VAT is quite marginal.

Thus, the Norwegian authorities believed that VAT compensation granted to undertakings in sectors exempted from the application of VAT cannot be deemed as capable of affecting trade between the Contracting Parties to the EEA Agreement.

4.3.   General comments

The Norwegian authorities referred to several EU Member States which have introduced refund schemes for the VAT costs on non-taxable or tax-exempt activities for local governments. In Sweden, Denmark, Finland, the Netherlands and the United Kingdom different schemes which provide for refunds of VAT to local governments have been established to eliminate distortions in the decision making of public authorities between public provision and contracting out of public services. Various VAT refund systems of a broadly similar nature are also established in France, Luxembourg, Austria and Portugal.

Further, the Norwegian authorities quoted former Commissioner Mr Bolkestein. In a letter of 1 February 2000 to Michel Hansenne (Belgium), who had asked the European Parliament whether the VAT compensation scheme in the United Kingdom was in compliance with the sixth VAT Directive, Mr Bolkestein stated that a VAT compensation scheme ‘does not conflict with the sixth VAT Directive’ since ‘it entails a purely financial operation between different public bodies and is governed by the respective national policy for the financing of public authorities’.

Mr Bolkestein also commented on ‘a possible scheme whereby the Irish Government would give a subsidy to Irish charities of an amount equivalent to the non-deductive VAT that they had incurred’. He stated that ‘the granting of government subsidies is in itself not contrary to the European Union VAT law’.

The Norwegian authorities admitted that none of these quotations directly addressed the State aid rules. However, in their opinion, it appears from these quotations that the VAT compensation schemes are not deemed to be in conflict with the sixth VAT Directive. In their view, this reflects the fact that VAT compensation schemes are in line with the nature and logic of the VAT system itself.

II.   APPRECIATION

1.   The presence of State aid

1.1.   Introduction

Article 61(1) of the EEA Agreement reads as follows:

The Authority would like to make a preliminary remark regarding the scope of the current assessment. This Decision does not address the decision of the Norwegian authorities to exempt certain transactions from the scope of the application of the VAT Act. It only concerns the compensation for input tax paid by certain persons falling within the scope of the VAT Compensation Act.

Further, the Authority would also like to stress three remarks it already made in Decision No 225/06/COL:

Firstly, as a general rule, the tax system of an EFTA State is not covered by the EEA Agreement. It is for each EFTA State to design and apply a tax system according to its own choices of policy. However, application of a tax measure, such as the input tax compensation provided for in Article 3 of the VAT Compensation Act, may have consequences that would bring it within the scope of Article 61(1) of the EEA Agreement. According to the case-law (17), Article 61(1) does not distinguish between measures of State intervention by reference to their causes or aims but defines them in relation to their effects.

Secondly, the question as to whether the measure at issue constitutes State aid arises only in so far as it concerns an economic activity, that is, an activity consisting of offering goods and services on a given market (18). A measure constitutes State aid only if it benefits undertakings. For the purposes of application of the rules on competition, the concept of an undertaking encompasses entities ‘engaged in an economic activity, regardless of the legal status of the entity and the way in which it is financed’  (19). Although some of the entities which receive input tax refunds do not fulfil the condition of being an undertaking, the fact that some beneficiaries of the VAT Compensation Act are undertakings constitutes sufficient grounds to assess the scheme as such for State aid purposes (20).

Thirdly, aid may be granted to public undertakings as well as to private undertakings (21). A public undertaking, in order to be regarded as a recipient of State aid does not necessarily need to have a legal identity separate from the State. That an entity is governed by public law and is a non-profit making institution does not necessarily mean that it is not an ‘undertaking’ within the meaning of the State aid rules (22).

Fourthly, regarding the general comments from the Norwegian authorities about the existence of similar schemes within the European Union, the Authority would like to note that these systems may be different from the VAT Compensation Act and that it has informed the European Commission about the observations of the Norwegian authorities. Moreover, according to case law ‘any breach by a Member State of an obligation under the Treaty in connection with the prohibition laid down in Article 92 cannot be justified by the fact that other Member States are also failing to fulfil this obligation’  (23)

In the following, the Authority will assess whether the VAT Compensation Act as a scheme (24) fulfils the criteria foreseen under Article 61(1) of the EEA Agreement to be considered State aid.

1.2.   State resources

In order to constitute State aid within the meaning of Article 61(1) of the EEA Agreement, the aid must be granted by the State through state resources.

The compensation is granted by the State directly and is therefore granted by the State through state resources.

The Norwegian authorities have argued that the VAT compensation scheme does not constitute an aid measure because it is a self-funding system. In their opinion, municipalities fund the VAT Compensation scheme themselves through a reduction of the general transfers from the State budget to the municipalities. With the introduction of the VAT compensation scheme in 2004, the municipal appropriations in the annual fiscal budget were reduced in accordance with the expected amount of input tax compensated.

The Authority considers that for State aid purposes it is not relevant whether the amount of money received by the municipalities has been diminished or not. What is important is whether undertakings within the meaning of the competition rules have received financial support by the State through state resources. When a municipality acts as an undertaking it should be viewed for State aid purposes separately from the municipality as a public authority. Whether the State’s cost of the compensation at the central level is counterbalanced by reduced transfers to the local and regional authorities as such does not alter this conclusion. The refund for input tax paid is financed from the state budget and therefore constitutes state resources.

Moreover, in the Authority’s understanding, each municipality does not get a reduction in the state transfer exactly corresponding to the exact VAT compensation it receives.

1.3.   Economic advantage

A financial measure granted by the State or through state resources to an undertaking which would relieve it from costs which would normally have to be borne by its own budget constitutes an economic advantage (25).

The Norwegian authorities have argued that the VAT compensation scheme does not constitute an advantage because the scheme neither entails a reduction in the amount of tax nor any tax deferment. The VAT compensation scheme does not imply any reduction in the recipient’s tax burden.

The Authority does not share this approach. In its opinion the Norwegian authorities do not make the necessary differentiation between the various spheres of the State, i.e., in this case the State as tax authority, the municipalities as state bodies and municipal undertakings as separate entities for State aid purposes.

To determine whether an economic advantage has been granted, the Authority has to assess whether a measure relieves its beneficiaries of charges that they normally bear in the course of their business. The payment of input tax is an operating cost related to purchases in the normal course of an undertakings’ economic activity, which is normally borne by the undertaking itself. To the extent that the Norwegian authorities compensate input tax on purchases of goods and services to undertakings falling within the scope of Article 2 of the VAT Compensation Act, they grant those undertakings an economic advantage. They are granted an advantage because the operating costs which those undertakings will have to put up with are reduced in accordance with the amount of input tax compensated.

The VAT Compensation Act therefore entails the granting of an economic advantage to the beneficiaries of the scheme.

1.4.   Selectivity

Further, to constitute State aid within the meaning of Article 61(1) of the EEA Agreement, the aid measure must be selective in that it favours ‘certain undertakings or the production of certain goods’.

In Decision No 225/06/COL, the Authority considered that the VAT Compensation Act constituted a materially selective measure. The scope of the VAT Compensation Act is positively defined in that only taxable persons falling within Article 2 of the VAT Compensation Act can be compensated for input tax on purchases. The advantage granted under the VAT Compensation Act for undertakings refunded for their input tax implies a relief from the obligation that follows from the general VAT system applicable to all buyers of goods and services.

The Court’s jurisprudence has established that a specific tax measure can nevertheless be justified by the internal logic of the tax system if it is consistent with it (26). Any measure intended partially or wholly to exempt firms in a particular sector from the charges arising from the normal application of the general system constitutes State aid if there is no justification for this exemption on the basis of the nature and logic of the general system (27).

The Authority will assess whether the input tax refund provided for in Article 3 of the VAT Compensation Act falls within the logic of the VAT system. For this assessment, the Authority must consider whether the input tax refund meets the objectives inherent in the VAT system itself, or whether it pursues other objectives not enshrined in the VAT system.

The primary objective of the VAT system is to tax certain supplies of goods or services. The VAT is an indirect tax on the consumption of goods and services. As a rule, VAT is calculated at all stages of the supply chain and on the import of goods and services from abroad. The ultimate consumer pays VAT as part of the purchase price, without the right to deduct the tax.

Although, in principle, all sales of goods and services are liable to VAT, some transactions may be exempt (and as a consequence without a credit for input tax) which means that such supplies are not taxable.

Articles 5, 5a and 5b in Chapter I of the Norwegian VAT Act exempt transactions such as supply and letting of real estate, supply of health and health-related services, social services, educational services, financial services, etc. The providers of these goods and services are treated as final consumers for VAT purposes since they have to pay input tax without being able to request output tax. The consequence of the logic of the system is that exempted supplies of goods and services and final consumers pay input tax without having the possibility to deduct it.

This logical consequence of the VAT system had created, however, a distortion at another level, which the Norwegian authorities have tried to offset with the introduction of the VAT Compensation Act. Thus, it follows that the logic of the VAT Compensation Act is to counterbalance the natural logical consequence of the VAT system when exempting certain supplies. Hence, the logic of the VAT Compensation Act is not to tax end users, as it is in the general VAT system, but to alleviate a certain group of final consumers to avoid distortion of competition between ‘in-house’ and outsourcing for transactions subject to VAT.

The Norwegian authorities have explained that, according to Article 1 of the VAT Compensation Act, the objective of the input tax compensation was to create a level playing field between self-supply and outsourcing of goods and services subject to VAT.

The Authority considers that to compensate for paid input tax for other reasons than the ones set in the VAT system, is not justified by the objective of taxation of a given activity, which primarily inspires the VAT system. The objective pursued by the Norwegian authorities in creating a level playing field between self supply and outsourcing by public entities of goods and services subject to VAT should be seen as commendable as such but can hardly be said to be in the nature and logic of the VAT system itself. In this sense, the Authority refers in particular to the Heiser  (28) jurisprudence according to which the mere fact that a measure has a laudable purpose does not suffice to exclude it from classification as aid within the meaning of Article 61(1) of the EEA Agreement. Article 61(1) of the EEA Agreement does not distinguish between measures of State intervention by reference to their causes or aims but defines them in relation to their effects (29).

The Authority does not ignore that the aim pursued by the Norwegian authorities with the introduction of the VAT Compensation Act was to create neutrality in the procurement of goods and services subject to VAT for the public administration. This neutrality cannot be confused with the neutrality inherent in the VAT system.

Since the purpose of creating a level playing field between ‘in-house’ supply and outsourcing of supplies of goods and services for public authorities is not in line with the logic of the VAT system, this aim could only be taken into consideration in the assessment of compatibility of the measure in question.

For the above-mentioned reasons, the Authority concludes that the VAT compensation cannot be justified by the nature and logic of the VAT system. It therefore constitutes a selective measure.

1.5.   Distortion of competition

A measure must distort or threaten to distort competition for it to fall within the scope of Article 61(1) of the EEA Agreement.

Only public and private entities falling within the scope of Article 2 of the VAT Compensation Act benefit from input tax compensation. However, when these entities provide services exempted from the application of VAT in competition with undertakings falling outside the scope of Article 2 of the VAT Compensation Act, the latter will have to put up with higher purchase costs even though they carry out similar services. Although the input tax compensation has been aimed at mitigating distortions for municipal acquisitions, it has created a distortion of competition between public authorities carrying out economic activities and private undertakings carrying out the same economic activities in sectors exempted from the application of VAT. Accordingly, due to the intervention of the State, the products offered by private operators would, all other factors being similar, be more expensive. Thus competition is distorted. In areas where both public and private operators are compensated, the aid would still threaten to distort competition between national and other EEA operators operating in the same market.

Thus, regarding compensation granted to undertakings producing goods or offering services exempted from the application of VAT, the Authority considers that there is a distortion of competition between undertakings.

1.6.   Effect on trade

A State aid measure falls within the scope of Article 61(1) of the EEA Agreement only in so far as it affects trade between the Contracting Parties to the EEA Agreement.

In their comments to the Authority’s Decision No 225/06/COL, the Norwegian authorities have contested the Authority’s assessment of the effect on trade criterion which was, in their opinion, not based on a fair conception of the situation. In their view, through the VAT compensation scheme municipalities are primarily granted refunds of input tax on goods and services purchased for their mandatory activities. Regarding the non-mandatory activities which municipalities may carry out, the Norwegian authorities failed to see any areas exempted from the application of VAT where the recipients of VAT compensation perform their services in competition with other undertakings within the EEA, apart from the particular kind of schools addressed by the complainant. The Norwegian authorities believe that there are very few undertakings established in neighbouring European countries which compete with Norwegian undertakings covered by the VAT Compensation Act.

The Authority reiterates its position expressed in Decision No 225/06/COL regarding the assessment of the effect on trade. The Authority is required to examine whether an aid scheme is liable to affect trade within the EEA and not to determine its actual effect (30). In principle, all beneficiaries under the VAT compensation scheme can receive compensation for input VAT under the conditions of the scheme, regardless of whether aid to a concrete operator would have an effect on trade. Case law of the ECJ has established 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.’  (31). The EFTA Court has also endorsed this interpretation (32).

The criterion of the effect on trade has been traditionally interpreted to the effect that, in general terms, a measure is considered to be State aid if it is capable of affecting trade between the EEA States (33). Even if the Norwegian authorities are correct in their estimation that only a few undertakings within the EEA compete with the beneficiaries of the VAT Compensation Act, the aid measure may nevertheless affect trade since neither the number of beneficiaries nor the number of competitors are significant elements for the assessment of the criterion effect on trade within the meaning of Article 61(1) of the EEA Agreement (34).

The granting of state support to an undertaking may lead to the internal supply being maintained or increased, with the consequence being that the opportunities for other undertakings to penetrate the market of the EEA States concerned are reduced (35). Therefore, the character of the aid does not depend on the local or regional character of the services supplied or on the scale of the field of activity concerned (36).

There is no threshold or percentage below which it may be considered that trade between the Contracting Parties is not affected (37). Rather on the contrary, according to the jurisprudence (38), whenever state financial aid strengthens the position of an undertaking compared with other undertakings competing in intra-EEA trade, the latter must be regarded as affected by that aid.

Articles 5 and 5a in Chapter I of the VAT Act exempt certain transactions from the scope of application of the VAT Act. Furthermore, Article 5b of the same Act foresees that the supply of certain services, amongst others the supply of health and health related services, social services, educational services, financial services, services related to the exercise of public authority, services in the form of entitlement to attend theatre, opera, ballet, cinema and circus performances, exhibitions in galleries and museums, lottery services, services connected with the serving of foodstuffs in school and student canteens, etc., are not covered by the Act. All theses services are hence exempted from the application of VAT but are, in principle, covered by the VAT Compensation Act (39). Some of these sectors, such as, for example, financial services, services connected with the serving of foodstuffs in schools and students canteens, some dental services, some educational services provided for remuneration, some cinema services, are partly or fully open for EEA-wide competition. Aid granted to undertakings in sectors which are open to competition is thus capable of affecting trade between the Contracting Parties to the EEA Agreement.

For these reasons, and taking into account the Court’s jurisprudence, the Authority considers that the VAT Compensation Act is a general nationwide compensation scheme which is capable of affecting trade between the Contracting Parties to the EEA Agreement.

1.7.   Conclusion

For the above-mentioned reasons, the Authority concludes that the VAT Compensation Act constitutes a State aid scheme within the meaning of Article 61(1) of the EEA Agreement.

2.   Procedural requirements

Pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement, ‘the EFTA Surveillance Authority shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid (…). The State concerned shall not put its proposed measures into effect until the procedure has resulted in a final decision’.

The Norwegian authorities did not notify the VAT Compensation Act to the Authority before it was put into effect. The Authority therefore concludes that the Norwegian authorities have not respected their obligations pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement.

3.   Compatibility of the aid

The Authority considers that none of the derogations mentioned in Article 61(2) of the EEA Agreement can be applied to the case at hand.

As far as the application of Article 61(3) of the EEA Agreement is concerned, the input tax compensation cannot be considered within the framework of Article 61(3)(a) of the EEA Agreement since none of the Norwegian regions qualify for this provision, which requires an abnormally low standard of living or serious underemployment. This compensation does not seem to promote the execution of an important project of common European interest or remedy a serious disturbance in the economy of a State, as is requested for compatibility on the basis of Article 61(3)(b) of the EEA Agreement.

Concerning Article 61(3)(c) of the EEA Agreement, aid could be deemed compatible with the EEA Agreement if it facilitates the development of certain economic activities or of certain economic areas without adversely affecting trading conditions to an extent contrary to the common interest. The aid scheme at hand does not seem to facilitate the development of certain economic activities or areas but, as the Norwegian authorities have stated, it pursues the objective of establishing a level playing field for goods and services subject to VAT between ‘in-house’ provisions and outsourcing of services within municipalities.

The Authority considers that a reduction in the running costs of an undertaking, such as the input tax, constitutes operating aid. This type of aid is, in principle, prohibited. Therefore, the Authority considers that the VAT Compensation Act constitutes an aid scheme which, as it stands today, cannot be considered compatible with the State aid rules of the EEA Agreement.

This notwithstanding, the Authority recalls that, as mentioned above, the question as to whether the measure constitutes State aid only arises in so far as it concerns an economic activity, that is, an activity consisting of offering goods and services on a given market. This implies for the case at hand that in as far as the beneficiaries of the scheme carry out public administration tasks or statutory obligations which do not constitute an economic activity, the State aid assessment including the assessment of the compatibility of the measure is not applicable to them.

Furthermore, according to Article 59(2) of the EEA Agreement, the State aid rules are not applicable to undertakings entrusted with the operation of services of general economic interest in so far as the application of such rules would obstruct the performance of the particular tasks assigned to them and in so far that trade is not affected contrary to the interests of the Contracting Parties to the Agreement.

In general, the States have a wide margin of discretion in the definition of services that could be classified as being services of general economic interest. In this regard, the Authority’s task is to ensure that there is no manifest error as regards the definition of services of general economic interest. The Authority cannot, in the present context, carry out a detailed assessment of whether all suppliers in the sectors exempted from the application of VAT which benefit from the refund of input tax, i.e. which are covered by the aid scheme, comply with the conditions laid down in Article 59(2) of the EEA Agreement. The Authority can only limit itself to indicating that, in the case of the fulfilment of these conditions, the refund of input VAT granted to a given undertaking or to a specific group of undertakings might be considered to constitute compatible State aid within the meaning of Article 59(2) of the EEA Agreement. The VAT Compensation Act is not limited in such a way.

On 28 November 2005, the European Commission adopted a Decision on the application of Article 86(2) of the EC Treaty to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest (40). This Decision was incorporated into the EEA Agreement in July 2006 (41).

According to this Decision (42), hospitals and undertakings in charge of social housing which are entrusted with tasks involving services of general economic interest have specific characteristics that need to be taken into consideration. The intensity of distortion of competition in those sectors at the current stage of development of the internal market is not necessarily proportionate to the level of turnover and compensation. Therefore, hospitals providing medical care, including where applicable, emergency services and ancillary services directly related to the main activities, notably in the field of research, and undertakings in charge of social housing providing housing for disadvantaged citizens or socially less advantaged groups which, due to solvability constraints, are unable to obtain housing at market conditions, are exempted from notification.

However, any refund of input tax granted to an undertaking for the part of the economic activities it carries out which are not part of this public service obligation is not covered by this exception. As assessed above, this refund scheme constitutes State aid and cannot be considered compatible with the rules of the EEA Agreement. In this context, reference can be made to some of the sectors of activity concerned, i.e., to the sectors which are exempted from the application of VAT and regarding which it is clear from the existing case practice either from the European Commission, from the Authority or from existing jurisprudence that the activity constitutes an economic activity which is carried out in competition with others. This is in particular the case of dentists (43) or ambulance services (44).

Moreover, some of the recipients of aid under the VAT compensation scheme can benefit from other exemptions such as de minimis aid, the application of the provisions of block exemption regulations such as the block exemption regulation on SMEs, etc.

However, the scheme as it stands now is not construed to address only public service obligations or any of the above-mentioned exemptions. The VAT Compensation Act is broad in its application and conception. It does not contain the required criteria which would ensure fulfilment of these exemptions. Therefore, the scheme as such cannot be considered compatible with the State aid rules of the EEA Agreement.

4.   Conclusion

The Authority finds that the Norwegian authorities have unlawfully implemented the VAT Compensation Act in breach of Article 1(3) of Part I to Protocol 3 to the Surveillance and Court Agreement. The refund of input tax foreseen under this Act as it stands today is not compatible with the functioning of the EEA Agreement for the reasons set out above.

According to Article 14 in Part II of Protocol 3 to the Surveillance and Court Agreement, in cases of unlawful aid, should it be found incompatible, the Authority orders, as a rule, the EFTA State concerned to reclaim aid from the recipient.

The Authority is of the opinion that no general principles preclude recovery in the present case. According to settled case-law, abolishing unlawful aid by means of recovery is the logical consequence of a finding that it is unlawful. Consequently, the recovery of State aid unlawfully granted, for the purpose of restoring the previously existing situation, cannot in principle be regarded as disproportionate to the objectives of the EEA Agreement in regard to State aid. By repaying the aid, the recipient forfeits the advantage which it had enjoyed over its competitors on the market, and the situation prior to payment of the aid is restored (45). It also follows from that function of repayment of aid that, as a general rule save in exceptional circumstances, the Authority will not exceed the bounds of its discretion, recognised by the case-law of the Court of Justice, if it asks the EFTA State concerned to recover the sums granted by way of unlawful aid since it is only restoring the previous situation (46).

Moreover, in view of the mandatory nature of the supervision of State aid by the Authority under Protocol 3 of the Surveillance and Court Agreement, undertakings to which aid has been granted cannot, in principle, entertain a legitimate expectation that the aid is lawful unless it has been granted in compliance with the procedure laid down in the provisions of that Protocol (47).

The statements made by Commissioner Bolkestein mentioned by the Norwegian authorities referred to the compliance of the concerned schemes with the VAT rules as such. Moreover, at least in one of the statements, Mr Bolkestein included the disclaimer ‘provided that the State aid rules are observed’. Thus, the Authority considers that no legitimate expectations can be justified in these statements.

Furthermore, the Norwegian authorities have not referred to any similar State aid scheme which has been approved by either the European Commission or the Authority on the basis of which the existence of legitimate expectations regarding the VAT Compensation Act could be substantiated.

For these reasons, the Authority considers that there are no exceptional circumstances apparent in this case, which would have led to legitimate expectations on the side of the aid beneficiaries.

The recovery should include compound interests, in line with Article 14(2) in Part II of Protocol 3 to the Surveillance and Court Agreement and Article 9 and 11 of the Authority’s Decision No 195/04/COL of 14 July 2004  (48).

The Norwegian authorities are therefore requested to take the necessary measures to recover any incompatible aid granted on the basis of Article 3 of the VAT Compensation Act and inform the Authority thereof within two months.

The Norwegian authorities shall amend the VAT Compensation Act with immediate effect in order to exclude the granting of State aid. Within two months, they shall inform the Authority of the necessary legislative amendments undertaken,

HAS ADOPTED THIS DECISION: