A Protocol on Mutual Relations recently signed between the Republic of Serbia and the Serbian car manufacturer Fiat automobili Srbija has polarizedthe professional and business community. According to the Protocol, the Serbian Government undertook to extend to Fiat financial support in the total amount of 14 million euros (6 million euros by the end of 2013 and 8 million euros by the end of 2014) under condition that Fiat employs a certain number of people within the said period, offers a 3000 euros discount to the resale price of its new car model “Nacionale 500L” on the domestic market and ensures that commercial banks and leasing companies offer to Serbian buyers financing for the purchase of the said vehicle with interest not exceeding a 3% annual rate on loans or leasing granted in euros. In parallel with the signing of the Protocol, and obviously with the aim of implementing it, the Government of Serbia adopted the Decree on the Conditions for Incentivizing Production of and Demand for Passenger Vehicles Produced in the Republic of Serbia in 2013, which came into force on 23 March 2013. The decree envisages incentives in the amount of 6 million euros to be granted until the end of 2013 to domestic manufacturers of passenger vehicles under the same conditions as those spelled out in the Protocol, with the only difference being that the decree does not refer to job creation as the underlying reason for the aid.
The Serbian Association of Importers of Cars and Spare Parts considers that the measure favors Fiat to the detriment of importers. On the other hand, the Government has retorted that the support is given to Fiat for job creation, while Fiat has decided to redirect the proceeds of the grant towards price reduction on the new model 500L. The European Commission intervened with a statement that the decision of the Government of Serbia is not in line with state aid provisions of the Interim Trade Agreement signed between Serbian and the European Community.
This case provides a good opportunity to consider Serbian rules on state aid.
The objective of State aid control is to ensure that government intervention does not distort competition on the relevant market.
The Law on State Aid Control defines State aid as “any actual or potential public expenditure or reduction of public revenues by which the beneficiary of state aid acquires more favorable position on the market in comparison to its competitors, which distorts or threatens to distort competition.” State aid can take the form of aid scheme if beneficiaries are not known in advance, or individual aid, if it is targeted at specific beneficiaries. State aid that distorts or threatens to distort competition is prohibited, unless otherwise specified by the Law on State Aid Control.
The Law on State Aid refers to aid which is deemed allowed (social aid and disaster aid) and aid which “may be allowed”. The Decree on the Rules for Grating of State Aid further elaborates on the conditions for the latter category, which includes various forms of regional, sectoral and horizontal aid, including de minimis aid. According to the Decree, horizontal aid for hiring disadvantaged workers, which includes workers who have been out of permanent employment for a period of six months or more, is allowed provided it does not exceed certain level of gross wage cost of newly hired employees.
Given that Serbia is importer of passenger vehicles manufactured in the EU, it is also relevant in this case to consult Article 38 of the Interim Trade Agreement concluded between Serbia and the European Community. This provision declares incompatible with the Agreement any state aid which distorts or threatens to distort the competition by favoring certain undertakings or certain products, in so far as this may affect trade between Serbia and the EU. Serbia undertook to assess such measures based on the criteria contained in the EU legal instruments (Article 107 Treaty on the Functioning of the European Union and secondary legislation).
Unlike the relevant rules in the EU which exempt certain categories of aid from the notification obligation, Serbian regulations do not declare any group exemptions. Even de minimis aid neeeds to be notified to the Commission for Control of State Aid. In practice, however, the Commission’s involvement is reduced to pro forma control since the Commission is not an independent public agency but a commission estabished by the Government.
The case of Fiat
As mentioned above, state aid for job creation can be permitted under the conditions prescribed by the Decree on the Rules for Granting State Aid. However, it is far from obvious that the aid earmarked for Fiat can be subsumed under this category. Although Article 3 of the Protocol makes the state support conditional upon job creation, the actual amount of financial support is calculated not based on wage cost but on the number of vehicles offered at discount. Moreover, the Decree on the Conditions for Incentivizing Production of and Demand for Passenger Vehicles Produced in the Republic of Serbia in 2013 does not referat all to job creation but conditions the government grant to car manufacturers upon them offering a discount on resale price of passenger vehicles and securing favorable terms for financing of the purchases by domestic buyers.
Even though the disputed Decree formulates the aid foreseen therein in terms of an aid scheme, it is clear that the aid is in fact targeted at Fiat as the only domestic manufacturer of passenger vehicles. Even if there were several Serbian producers, before the aid is granted, it would have to be analyzed under the relevant legal framework whether the aid distorts or threatens to distort competition on the Serbian market by favoring domestic manufacturers over importers and consequentlyover producers from the EU.