Debt write-off for Slovak alcohol producer Frucona Košice found incompatible with EU state aid rules by the the European Commission

Brussels, Belgium, 18-10-2013 — /EuropaWire/ — Following a judgment by the EU Court of Justice (ECJ) (case C-73/11 P) on its previous decision (case C25/2005), the European Commission has adopted a new decision confirming that a Slovak SKK 416.5 million (€11 million) write-off of tax debt in favour of Frucona Košice, a.s. was incompatible with EU state aid rules. The non-payment of taxes that its competitors had to bear has given Frucona Košice an undue economic advantage. In order to redress the distortion of competition caused by the debt write-off, the company has to pay the due amounts with interest.

Frucona Košice was a producer of spirit and spirit-based beverages in Slovakia and currently operates as a distributor. In 2004, Frucona was in financial difficulty, with accumulated tax debts of SKK 641 million (€16.9 million), and the company asked its creditors for an arrangement under the applicable insolvency legislation. In July 2004, the tax office agreed to write off 65% of its debt. Frucona Košice contends that the state acted as any private creditor would have done, in order to recover at least part of the debt, and that bankruptcy proceedings would have been less advantageous.

In June 2006, the Commission concluded that the tax office would have obtained a higher repayment of its claims through a bankruptcy procedure or the tax execution procedure. As a result, the debt write-off gave an advantage to Frucona Košice as compared to its competitors and therefore involved state aid.

Aid to a company in difficulty may be found compatible with the internal market if the company has realistic prospects for becoming profitable again and takes measures to offset the distortions of competition triggered by the state aid. However, Frucona Košice did not present any genuine restructuring plan. The Commission therefore ordered Slovakia to recover the undue advantage Frucona Košice had received through the debt write-off from the company.

Frucona Košice sought annulment of the Commission’s decision before the EU General Court (GC), who dismissed the action (case T-11/07). The company appealed to the Court of Justice, which set aside the judgment of the GC. The Court of Justice in particular ruled that the Commission had made a manifest error of assessment by failing to take into account the duration of the bankruptcy proceedings and thus did not set out sufficient reasons for its decision. The Court of Justice referred the case back to the GC where it is currently pending.

In view of the findings of the Court of Justice, the Commission has now adopted a new decision, replacing its 2006 decision, which addresses the shortcomings identified by the Court. The new decision reaches the same conclusion: the debt write-off in favour of Frucona constituted an illegal and incompatible aid which must be recovered from Frucona.

Background

Public interventions in companies that carry out economic activities can be considered free of state aid in the meaning of EU rules when they are made on terms that a private operator would have accepted under market conditions (the market economy investor principle – MEIP). If the MEIP is not respected, the public interventions constitutes state aid in the meaning of the EU rules (Article 107 of the Treaty on the Functioning of the European Union – TFEU), because it procures an economic advantage to the beneficiary that its competitors do not have. The Commission then proceeds to assess, whether such aid can be found compatible with the common EU rules that allow certain categories of aid.

When the aid concerns a company in financial difficulty, the EU guidelines on rescuing and restructuring firms in difficulty apply (see IP/04/856 end MEMO/04/172). This was the case for Frucona.

Rescue and restructuring aid is highly distortive of competition as it artificially keeps companies in the market that, without such aid, would not have been able to remain there. The EU Rescue and Restructuring Guidelines therefore set out a number of criteria to ensure that such aid goes only to companies that have a realistic prospect of viability and that take measures to alleviate the distortions of competition brought about by the state support.

In particular, the guidelines require a sound restructuring plan that enables the beneficiary to become viable in the long-term on the basis of realistic assumptions, so that it does not have to continue to ask for public support rather than competing on its own merits. As public funding (either actively through the injection of money or passively through the renouncement of due taxes or duties) gives a company an economic advantage that its competitors do not have, the plan must include measures to reduce the distortions of competition caused by the state support, such as the reduction of capacity or market share. Furthermore, the beneficiary must make a significant own contribution to the costs of restructuring. Finally, restructuring aid may be granted only once over a period of ten years (‘one time, last time’ principle).

A non-confidential version of today’s decision will be made available under case number SA.18211 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the Internet and in the Official Journal are listed in the State Aid Weekly e-News.

Contacts

Antoine Colombani (+32 2 297 45 13, Twitter: @ECspokesAntoine )
Maria Madrid Pina (+32 2 295 45 30)