The Romanian Digest

Romanian state aid in a time of crisis 

de Rubin Meyer Doru & Trandafir     The Romanian Digest
Vineri, 23 octombrie 2009, 12:40 English | Business

Introduction
The worldwide financial crisis has hit Romania’s economy rather hard. Banks have become much more reluctant to provide financing and, consequently, companies are experiencing difficulties in accessing credit. The lack of capital blocks business activity which seriously affects the whole economy. In such a context, companies may consider obtaining financing from state aid schemes for which they are qualified.

State aid matters are regulated at the European Union level, and such regulations are directly applicable to Romania as an EU member state. The European Commission recognized that there is a legitimate need for state aid to tackle the current crisis under certain circumstances, and so the Competition Directorate of the European Commission established an Economic Crisis Team. The member states may contact this crisis team with regard to any state aid related measures in order to properly and timely design their national state aid schemes in accordance with the regulations adopted at the EU level, taking into consideration the fact that the aid policy of a state plays an important role in diminishing the harmful effects of the financial crisis in the real economy.

State Aid Concept
General considerations
State aid is defined as an advantage in any form whatsoever conferred on a selective basis to “undertakings” by national public authorities. Because a company that receives government support obtains an advantage over its competitors, the Treaty of the European Communities (the “EC Treaty”) generally prohibits state aid unless it is justified by reasons of general economic development. To ensure that this prohibition is maintained and that the exemptions are applied equally across the EU, the European Commission monitors the compliance of state aid granted at the national level with EU rules.

The European Commission must first determine whether a company has received state aid. This comes into question if the support meets the following criteria: there has been an intervention by the state or through state resources which can take a variety of forms (e.g., grants, interest and tax relief, guarantees, government holdings of all or part of a company, or the provision of goods and services on preferential terms, etc.); the intervention confers an advantage to the recipient on a selective basis, for example to specific companies or sectors of the industry, or to companies located in specific regions; competition has been or may be distorted; and the intervention is likely to affect trade between and among the EU member states. By contrast, general measures are not regarded as state aid because they are not selective and apply to all companies regardless of their size, location or sector, as, for instance, general taxation measures or employment legislation.

In accordance with EU regulations, the following types of aid are considered as compatible with the EU common market: aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; and aid in order to repair the damage caused by natural disasters. Additionally, the following types of support may be considered compatible with the common market: aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment; aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a member state;
 - aid to facilitate the development of certain economic activities or of certain economic areas where such aid does not adversely affect trading conditions to an extent contrary to the common interest of the European Communities;
 - and aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Community to an extent that is contrary to the common interest
.
Generally, state aid becomes more acceptable if it aims at the increase of the innovative capacity and the development of small and medium enterprises, or is intended for the development of human capital (training, job creation etc.). As noted above, the European Commission supervises the compliance of national state aid schemes with the EU regulations. The objective of such state aid control is, as laid down in the EC Treaty, to ensure that government interventions do not distort competition and intra-community trade.

Specific legal provisions in Romania
Government Emergency Ordinance No. 117/2006, as approved by Law 137/2007 (“GEO 117”), is the normative act that regulates the national procedures in the field of state aid. GEO 117 provides, among other things, for the obligations of the Romanian authorities that may grant state aid and the beneficiaries of such state aid schemes, as well as the applicable sanctions in the event of a breach of these obligations. Based on GEO 117, the power to authorize state aid plans was transferred from the Competition Council to the European Commission. The Competition Council now basically represents the contact point in the relations between the European Commission and public authorities and institutions that are state aid grantors, and beneficiaries involved in the state aid procedures.

Unlawful state aid
If the European Commission decides that a state aid measure violates the law, the beneficiary will have to reimburse the equivalent amount of the state aid whose reimbursement was decided by the European Commission. In such a case, the Competition Council has the obligation to transmit immediately to the state aid grantor a copy of the European Commission decision, and the grantor must then transmit immediately to the beneficiary a copy of such decision. Also, the state aid grantor must undertake all necessary measures in order to implement the European Commission decision. If the beneficiary does not reimburse the state for the aid it received, the grantor, based on the European Commission decision, is entitled to submit a claim to the Bucharest Court of Appeal requesting that the court annul the act based upon which state aid was granted in the first place and order the reimbursement of the amount granted as state aid, plus the corresponding interest. A second appeal may be submitted against the decision of the Court of Appeal before the High Court of Cassation and Justice of Romania.

Particular State Aid Schemes
As a matter of principle, the fields of activity and regions for which state aid schemes are to be applied are determined considering the impact that such aid, once provided to certain fields of activity or regions, will have in regional development or in the redress of certain activities. There are particular state aid schemes that may be of substantial interest to companies that, at this point, are searching for financing opportunities in their fields of activity. Below are a few such state aid schemes that might be attractive to potential beneficiaries.

State Aid Scheme for a Sustainable Economical Development
This state aid scheme for a sustainable economical development, approved by the Government Decision No. 1680/2008, is in force since the 1st of January 2009, and has as its purpose regional development by stimulating investments and by creating new jobs in certain areas. The scheme is applicable to the undertakings that are created in accordance with the provisions of Law 31/1990, as further amended and completed (the “Company Law”), and that cumulatively fulfill the following conditions: they perform an initial investment having a value that exceeds the equivalent in lei of €30 million; and they generate at least 300 jobs as a result of such initial investment. The investments and the jobs that are to be created may be in all sectors of activity, except for the ones expressly mentioned in the annex to the aforementioned Government Decision including, among others, commercial fishing, or the manufacturing or trading of agricultural products. This state aid scheme is not applicable to the undertakings that are considered as undertakings in difficulty, or to the undertakings against which a decision of recovery of state aid has been issued by the European Commission, if such decision has not been implemented yet.

The aid is actually represented by the award from the state budget of non-refundable amounts of money. A beneficiary can receive, based on this scheme, the equivalent in lei of a maximum amount of €28.125 million, if it intends to perform the initial investment and create jobs in any region of Romania, except for a region in the Bucharest-Ilfov area, where the maximum amount is the equivalent of €22.5 million. State aid is actually granted if the project has a stimulating effect, by complying with one or more of the following criteria: a substantial increase of the dimensions of the project as a result of the award of state aid; a substantial increase in the finalization of the project; or if the project would not have been accomplished in that region without such state aid.

In order to ensure the compatibility of this scheme with other regional state aid schemes, the undertakings cannot benefit from the state aid provided based on the scheme if they have already received, in order to cover the same costs, other state aid or de minimis aid from other state aid grantors. This state aid scheme is available for the period 2009-2013, and the Ministry of Economy and Commerce (“MEC”), which is the grantor of this scheme, must publish on its website the budget for each year and the date from when the undertakings may apply for the award of state aid. In case the beneficiaries fail to comply with any obligation undertaken as a pre-requisite to the awarding of state aid or with any condition set by the grantor within the state aid scheme, the beneficiaries will have to face the sanctions to be applied by such grantor, leading to reimbursement of such state aid.

State Aid Scheme for Regional Development by Stimulating Investments
This state aid scheme, approved by the Government Decision No. 753/2008, is applicable to large undertakings that are set up in accordance with the provisions of the Company Law and that cumulatively fulfill the following conditions: they perform an initial investment having a value exceeding the equivalent in lei of the amount of €100 million, and the value of the eligible costs exceeds the equivalent in lei of the amount of €50 million; and they generate at least 500 jobs as a result of this initial investment. As previously noted, this state aid scheme is applicable to “large undertakings”, actually representing the undertakings that are not included in the definition of “small and medium enterprises” (“SMEs”) set forth in Law 364/2004. According to this law, SMEs are the undertakings that cumulatively fulfill the following conditions: they have an annual median number of employees smaller than 250; they accomplish a net turnover of up to €50 million, in its equivalent in lei, or they hold assets that do not exceed the equivalent in lei of €43 million, according to the last approved financial situation of the company. Just as the previously mentioned scheme, this state aid scheme is not applicable to the undertakings that are considered as undertakings in difficulty, or to the undertakings against which a decision of recovery of the state aid has been issued, if such decision has not yet been implemented. This scheme is available for the period 2008-2012.  

“De Minimis” State Aid Scheme for the Development or Modernization of Undertakings
The beneficiaries of this de minimis state aid, approved by the Government Decision No. 1164/2007, may be undertakings that cumulatively fulfill the following conditions: they are set up in accordance with the provisions of the Company Law; they are headquartered and perform their activity in Romania; they perform activities in one of the areas mentioned in the annex to the Government Decision, such as the manufacturing of clothing, wood products, glass, glass products or furniture, printing activities, or administrative services; for a period of 3 fiscal consecutive years before the date of the request; have not received any de minimis aid or, if received, the cumulated amount of such aid did not exceed the equivalent in lei of €200,000; at the moment of requesting the state aid they present an investment plan that reflects the manner in which the amounts will be used; they do not have debts; they are not subject to any enforcement, judicial reorganization, dissolution, or bankruptcy procedure; they are not considered undertakings in difficulty; no decision of reimbursement of state aid has been issued by the European Commission against them or, if issued, such decision has already been implemented. This scheme is available until 2011.

Potential State Aid in the Electricity and Gas Field
The Competition Council has approved a state aid scheme of €28.4 million for the support of investments in the extension and modernization of distribution networks for gas and electricity. The Competition Council has transmitted the notice to the European Commission and, if approved by the European Commission, the scheme will be implemented. According to this scheme, investment projects may be developed in any region of Romania, and will have to be maintained in that respective area for at least 3 years in the case of SMEs, and for 5 years in the case of large enterprises. The projects must be co-financed, the maximum value to be granted as state aid being 50%, except for the Bucharest-Ilfov region where the value is a maximum of 40% of the eligible costs of the investment. Applicants must not be economical distressed, they must not be under a procedure of reimbursement of state aid considered unlawful or abusively used, and they must prove their capability to co-finance the project. They may not have any debts to the local or central budget and they must have the necessary human resources in order to develop the projects. If approved by the European Commission, this scheme will be available until 2013.

Conclusions
By stimulating investments in specific regions and, consequently, the creation of new jobs, state aid measures actually support both the business environment and the economy itself. In times of financial crisis, when the lack of financing has already had a disastrous impact on companies that have seen their projects buried, the support coming from state aid schemes may be just the solution to keep the economy afloat, prevent the further increase of unemployment, and provide the requisite incentive to new investment.

However, since the award of state aid is regulated in much detail, and the infringement of the regulations has severe consequences for the beneficiary -- including the obligation to reimburse the entire amount granted as state aid together with the interest -- it is important for the undertakings intending to apply for state aid schemes to obtain qualified legal advice before and during the application procedure, as well as during the implementation of the project developed based on such state aid support.

The article was published based upon approval of:
Rubin Meyer Doru & Trandafir
SOCIETATE CIVILA DE AVOCATI / LAWYERS PROFESSIONAL CORPORATION
IN ASOCIERE CU / AFFILIATED WITH HERZFELD & RUBIN, P.C.
http://www.hr.ro


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