The Serbian State Aid Control Commission requires alignment of fiscal aid schemes

Serbia’s fiscal state aid schemes have been recurringly designated in the European Commission’s annual Progress Reports on Serbia’s progress in the process of implementing obligations from the Stabilisation and Association Agreement (“SAA”) as incompatible with state aid rules.

Article 73 of the SAA required Serbia to compile a comprehensive list of state aid schemes set up before the establishment of the State Aid Control Commission (“SACC”), and align them with the state aid rules by 1 September 2017. As Serbia missed the deadline, The European Commission reinforced this obligation in the Screening Report for Chapter 8 – Competition Policy, by devoting two out of six opening benchmarks to the alignment of state aid schemes, with the particular focus on fiscal schemes.

The failure of Serbia to comply with the obligation to align its fiscal schemes with the state aid rules caused not only a delay in the negotiation of Chapter 8, but also uncertainty for the companies that received aid under the incompatible schemes. Foreign investors have been particularly concerned with the potential risk of having to repay the aid in case of a hypothetical SACC investigation or following the hypothetical accession of Serbia to the European Union.

SACC terminated its silence on 31 March 2022 when it issued a Notice on the obligation and manner of alignment of state aid schemes within the competence of the Ministry of Finance. It supplemented the Notice on 8 June 2022. The SACC designated the following fiscal schemes as incompatible:

  1. four schemes under the Corporate Income Tax Act (Zakon o porezu na dobit pravnih lica), specifically (i) tax exemption for concession grantors, (ii) tax holiday for large investments, (iii) tax exemption for employment of persons with disability, and (iv) tax credit for risk investment;
  2. wage tax refund under the Personal Income Tax Act (Zakon o porezu na dohodak građana);
  3. refund of social security contributions under the Mandatory Social Security Contributions Act (Zakon o doprinosima za obavezno socijalno osigiranje);
  4. exemption from tax and other duties under the Free Zones Act (Zakon o slobodnim zonama).

and proposed how each incompatible scheme can be aligned with the state aid rules. In general, the SACC found that the state aid under the designated fiscal schemes must be assessed in the context of a particular category of state aid to which it belongs, which is either horizontal or sector specific aid. Alternatively, some of the mentioned state aids may be granted as de minimis, in accordance with the Decree on rules and conditions for granting of de minimis aid (“De Minimis Decree”).

SACC also noted that as an alternative to making the mentioned aid schemes compatible with state aid rules, the government may abolish the schemes altogether.

The Corporate Income Tax Act (CITA)

  • Tax exemptions for concession grantors

Articles 25a(3) and 30a of CITA provide that:

(i) revenues of the concession grantor generated from the transfer of assets without compensation received from the private partner as part of the implementation of the concession agreement (such as BOT agreements), shall not be included in the tax base of the concession grantor in the relevant tax period; and

(ii) capital gains made on the transfer of real estate from  private partner to the concession grantor as part of concession arrangement shall not be included in the tax base of the private partner in the relevant tax period,

In each case provided the estimated value of the concession is above EUR 50 million.

SACC notes that this type of aid instrument cannot be available as such but only if the circumstances of the specific investment make the aid compatible with the provisions of the State Aid Act on the relevant type of aid (e.g. regional aid, aid for energy and environment, etc.) and cumulation of state aid or if the aid qualifies as de minimis.

Alternatively, these measures could be amended to remove the EUR 50 million threshold. This would make the measure general and not selective, and thus the measure would not be considered state aid.

  • Tax exemption for large investments

Article 50a of the CITA provides for a 10-year CIT holiday for any company which invests or ensures an investment in its fixed assets which have not been previously used in Serbia, in the value of more than 1 billion RSD and employs at least 100 persons for indefinite period of time during the investment period. Just like with the aid available in the context of concessions, SSCC noted that the CIT holiday for greenfield investment can be deemed compatible with state aid rules only if it can qualify as regional or other horizontal aid (energy, environment, R&D) and if it does not violate the rules on cumulation.

  • Tax exemption for employment of persons with disability

Article 46 of the CITA provides for corporate income tax exemption for the undertakings that engage in the activity of employment and professional rehabilitation of persons with disability, proportionate to the participation of persons with disability in the total number of employees within the company. SACC assessed this exemption as incompatible with the Decree on the conditions and criteria for compatibility of horizontal state aid (Uredba o uslovima i kriterijumima usklađenosti horizontalne državne pomoći) (“Horizontal Decree”) both in terms of general conditions for compatibility of horizontal state aids, and in terms of specific conditions prescribed for state aid for employment of persons with disability in Articles 50 and 51 of the Horizontal Decree. Most importantly, the aid intensity on the basis of the Horizontal Decree for this category of state aid is 75% of eligible costs (i.e. the costs of salaries of the persons with disability), capped at EUR 10 million annually per undertaking, while CITA does not put any limitation on this aid.

  • Tax credit for risk investment

Article 50j of the CITA provides to incumbent company which makes a capital contribution into an innovative start-up a tax credit for 30% of the investment, capped at RSD 1 million . SACC evaluated this instrument as incompatible with the state aid rules for risk investment set out in the Horizontal Decree, both with respect to general criteria for granting horizontal state aids (such as transparency and incentive effect), and with respect to the specific rules for state aid for financing risk investments (namely the subject-matter of investment, additional conditions for investment, role for financial intermediaries, etc.). The SACC announced guidelines for the assessment of compatibility of state aid for financing of risk investments.

Fiscal aid scheme under the Personal Income Tax Act (PITA)

PITA provides for several types of tax incentives for employers in the form of either partial or full refund of tax paid on wages of newly-hired persons who are not easily employable or have disability.

Specifically, Article 21v of PITA provides for a partial refund to employer of tax paid on wages to newly-hired employees before 31 December 2022, provided that such employment increases the number of employees compared to the number of employees the employer had as of 31 March 2014. The refund depends on the number of new employees hired in the relevant period: if the employer hired up  to nine new employees, 65% of paid wage tax is refunded. If the employer hired in the relevant period 10 to 99 new employees, the refund is 70% of the wage tax paid. Finally, if the employer hired at least 100 new employees in the relevant period, it is entitled to a refund equal to 75% of paid wage tax. Additional rules apply to hiring interns and persons under the age of 30. For the employers to be eligible for the benefits, the newly-hired person must have been unemployed for at least six months (three months in case of interns) immediately prior to being hired.

In accordance with article 21d of PITA, employers who are classified as micro and small enterprises, entrepreneurs, or agricultural workers, are entitled to a refund in the amount of 75% of paid wage tax for any newly-hired employees, provided that they employ at least two persons.

Article 21g of PITA provides for a holiday from wage tax on salaries paid to a person with disability employed for an indefinite period of time. The exemption applies for a period of three years from the commencement of work of the person.

SACC found that the aforementioned PITA incentives are not compatible with the provisions of the Horizontal Aid Decree on employment-aid schemes and with the Guidelines for the assessment of employment state aid (Uputstvo za ocenjivanje usklađenosti državne pomoći za zapošljavanje).

Aid scheme under the Mandatory Social Security Contributions Act (MSSCA)

For the same reason, SACC advised that the provisions of MSSCA that offer full or partial refund of social security contributions (SCC) paid on wages which qualify for wage tax refund under the provisions of PITA, must be aligned with rules on permissible horizontal aid.

Aid scheme under the Free Zones Act

Articles 19 and 29(3) of the Free Zones provide that customs duties and other import duties are not payable for importation of goods intended for the conduct of business activity and construction of facilities in the zone. It noted that the permissibility of this measure depends on the business activity of the beneficiary and the type of investment in a free zone. Accordingly, the aid can be compatible only if granted as regional investment aid, as state aid for R&D, etc.

How are existing beneficiaries affected

SACC did not explicitly propose how the alignment of the fiscal aid schemes will affect the rights of the existing beneficiaries under those schemes. Based on the alignment models presented by SACC, it may be concluded that no grandfathering rights are proposed and that the existing beneficiaries would have to be eligible in accordance with the amended provisions in order to continue to receive state aid. It remains to be seen how and when the government will address SACC notice and whether it will eventually provide for a sunset period during which the existing beneficiaries will enjoy the grandfathering right.

Even though the fiscal aid the beneficiaries have been receiving is now officially declared incompatible by SACC, it is clear that no recovery order by SACC will ensue.