62005CC0289_EN
Opinion of the Advocate-General
Opinion of the Advocate-General
I – Introduction
1. In this reference for a preliminary ruling the Court is asked for an interpretation of point 1.7 of Rule No 1 of the Annex to Commission Regulation (EC) No 1685/2000 of 28 July 2000 laying down detailed rules for the implementation of Council Regulation (EC) No 1260/1999 as regards eligibility of expenditure of operations co-financed by the Structural Funds. (2) The Rovaniemen hallinto-oikeus of Finland asks about the conditions under which indirect costs can be partially reimbursed as costs which can be allocated to an operation co-financed by the Structural Funds.
II – Legal framework
2. The dispute stems from Community legislation regarding the Structural Funds. (3) The Structural Funds make available various forms of assistance in order to strengthen economic and social cohesion and in particular, to reduce the disparities between the various regions and the backwardness of the least favoured regions. (4) This assistance is given in the form of co-financing by the Community of various projects selected by the Member States.
3. In broad outline, the legal framework within which the operations financed by the Structural Funds are implemented, is structured as follows:
4. Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds (5) sets three priorities for Community structural policy:
– Objective 1 promotes the development and structural adjustment of regions whose development is lagging behind. The regions covered by this objective have a per capita income of less than 75% of the Community average. The so-called outermost regions (6) and some extremely sparsely populated regions of Finland and Sweden are also covered by this objective.
– Objective 2 covers regions with structural problems whose socio-economic conversion is to be supported. It is concerned in particular with declining rural areas, depressed areas dependent on fisheries and urban areas in difficulty.
– Objective 3 supports the adaptation and modernisation of education and employment policy, directed in particular at combatting long-term unemployment and youth unemployment and at the integration of vulnerable groups in the labour market.
5. Assistance is given in the form of the co-financing of programmes which are implemented in the context of one of the above objectives. In addition, the different Structural Funds finance innovative measures and Community initiatives such as the Interreg programme which is central to the present case. (7)
6. The concrete implementation of the operations co-financed by the Structural Funds takes place according to three principles. The first is the principle of complementarity. The Community contribution is intended to be complementary to, or to contribute to, the action of Member States. (8) This presupposes that the financial contribution of the Community will be supplemented at the national, regional or even local level. (9) The second principle is that of the Community support framework. The designated partners draw up a plan for the region concerned, specifying in detail all the projects with all their possible implications and impacts, on the basis of which financing will then occur. (10) The third principle is that of partnership. Each of the parties involved in the project and the financing of the programme – i.e. the Commission and the competent national, regional or local authorities designated by the Member State – has a specific responsibility and is bound to implement the measures in close consultation and in close cooperation with each other. (11)
7. Regulation No 1260/1999 provides an extensive regulatory system to ensure the effectiveness of the assistance. In addition, the powers of the parties involved in the implementation of the Community budget – the Member States, their executive bodies and the Commission – are clearly defined. It is clear from these provisions that the regulation has a decentralised structure.
8. The Member States guarantee the sound management of the Community funds. They are primarily responsible for sound financial implementation through:
– the managing authority, which is responsible for the efficiency and correctness of the management of the relevant programme; (12)
– the paying authority, which certifies the expenditure (13) and which is responsible for drawing up and submitting payment applications and receiving payments from the Commission; (14)
– application of the relevant national rules to eligible expenditure when there are no Community rules. (15)
9. In addition, Member States are responsible in the first instance for the financial control of assistance. (16) They must vouch for the quality of the financial management and control arrangements and for the manner in which the funds placed at their disposal are spent. (17) The Member States must cooperate with the Commission to ensure that Community funds are used in accordance with the principles of sound financial management. (18)
10. The Commission exercises its responsibility for the implementation of the Community budget by exercising control over the proper execution of the tasks allocated to the Member States. To this end the Commission shall:
– take the necessary decisions to determine the contributions of the Structural Funds, provided that the legal requirements are fulfilled; (19)
– ensure that Member States have smoothly functioning management and control systems so that Community funds are efficiently and correctly used; (20)
– carry out on-the-spot checks and audits, especially by means of investigations, and make financial corrections when irregularities and shortcomings have been identified and the Member State has not carried out the required financial corrections. (21)
11. In order to discharge its task properly the Commission can lay down the minimum conditions for the control systems. Such Community rules may be laid down by the Commission where they are clearly needed for the uniform and equitable implementation of the Structural Funds across the Community. (22) The detailed implementation rules which the Commission has laid down in this regard are, on the one hand, a collection of rules which makes it possible for the Commission to ascertain that the management and control systems of the Member States comply with the regulations, (23) and, on the other hand, a collection of rules laying down the conditions governing the eligibility of expenditure relating to operations co-financed by the Structural Funds. (24)
12. Against this background the following rules are important:
13. Rule No 1 of the Annex to Regulation No 1685/2000 provides as follows:
‘Rule No 1: expenditure actually paid out
1. Payments by final beneficiaries
1.1. Payments effected by final beneficiaries within the meaning of the third subparagraph of Article 32(1) of Regulation (EC) No 1260/1999 (hereinafter “the General Regulation”) shall be in the form of cash subject to the exceptions indicated in point 1.4.
…
1.4. Under the conditions set out in points 1.5 to 1.7, depreciation, contributions in kind and overheads can also form part of the payments referred to in point 1.1. However, the Structural Funds’ co-financing of an operation shall not exceed the total eligible expenditure, excluding contributions in kind, at the end of the operation.
…
1.7. Overheads are eligible expenditure provided that they are based on real costs which relate to the implementation of the operation co-financed by the Structural Funds and are allocated pro rata to the operation, according to a duly justified fair and equitable method.
1.8. The provisions of points 1.4 to 1.7 are applicable to individual recipients referred to in point 1.2 in the case of aid schemes under Article 87 of the Treaty and aid granted by bodies designated by Member States.
1.9. Member States may apply stricter national rules for determining eligible expenditure under points 1.5 to 1.7.
2. Proof of expenditure
As a rule, payments by final beneficiaries shall be supported by receipted invoices. Where this cannot be done, payments shall be supported by accounting documents of equivalent probative value.’
III – The main proceedings
14. The applicant in the main proceedings, Länsstyrelsen i Norrbottens län, (25) applied in October 2002 to the defendant in the main proceedings, Lapin liitto, (26) for support for the indirect costs of technical support under a Community initiative – the Interreg III A North programme – a total of SEK 95 880.72 for the year 2001. (27)
15. The defendant, referring to Regulation No 1685/2000, refused the application. The indirect costs claimed had not been allocated to the project in a duly justified fair and equitable manner. Furthermore, the indirect costs were not based on real costs and the payments made were not proven by receipts.
16. In September 2003 Länsstyrelsen i Norrbottens län applied for a second time for support for the indirect costs for the year 2001, a total of SEK 56 854, and for the year 2002, a total of SEK 186 982. (28) In calculating the costs the applicant had used a new model according to which the proportion of indirect costs corresponding to the working time of each person working on the Community project had been calculated.
17. In a decision of 24 November 2003 Lapin liitto rejected the application on the ground that the applicant had failed to show the connection between the other indirect costs and the Community project. (29)
18. Länsstyrelsen i Norrbottens län then lodged an objection with Lapin liitto.
19. The latter, by decision of 6 February 2004, rejected the objection on the ground that the applicant had not shown on the basis of sufficiently precise data the proportion of the costs of technical support pertaining to the project.
20. The applicant sought an order from the Hallinto-oikeus for the payment of the indirect costs. Being of the opinion that in order to decide the case pending before it it was necessary to obtain an interpretation of point 1.7 of Rule No 1 of the Annex to Regulation No 1685/2000, the referring court decided on 15 July 2005 to stay the proceedings and asked the Court for a preliminary ruling.
IV – Appraisal
21. In this reference for a preliminary ruling the referring court is in essence enquiring as to the conditions under which, in Community law, indirect costs (overheads) could qualify for assistance.
22. The arrangements under the third subparagraph of Article 32(1) of Regulation No 1260/1999 and under Rule No 1 of the Annex to Regulation No 1685/2000 (30) are evidently based on the principle of the payment of costs. This means that payments effected by final beneficiaries must be in the form of cash and that payments must relate to expenditure actually paid out. In certain specific cases depreciation, contributions in kind and overheads can also form part of these payments. (31) The payment of indirect costs as eligible expenditure is indeed an exception and must therefore be interpreted strictly both with regard to its scope and with regard to its method of application (the manner of allocation, the written evidence which supports the allocation).
23. Before investigating the circumstances in which this exception is applicable, I would like to point out that Member States may apply stricter national rules for determining whether indirect costs can be regarded as eligible expenditure. This competence is given to Member States under point 1.9 of Rule No 1 of the Annex to Regulation No 1685/2000. (32) This means that recourse can only be had to point 1.7 of Rule No 1 in cases where Member States have not laid down stricter national rules for determining eligible expenditure under point 1.9.
24. In other words, Regulations No 1260/1999, No 438/2001 and No 1685/2000, as described above in paragraphs 2 to 13, lay down the minimum conditions that must be satisfied in order for certain costs to be considered for financial assistance. If these conditions are met the expenditure concerned can be considered for payment under Community law. This does not affect the fact that under relevant national law the conditions for assistance for indirect costs may be stricter.
25. To answer the question as to the circumstances in which indirect costs (overheads) could be considered to be eligible expenditure under Community law, it will be necessary to examine the wording of point 1.7 of Rule No 1 and the system underlying the abovementioned regulations. According to this rule indirect costs (overheads) must:
– be based on real costs;
– relate to the implementation of the operation co-financed by the Structural Funds;
– be allocated pro rata to the operation according to a duly justified fair and equitable method.
26. As regards the first point, it suffices to refer to the first and third subparagraphs of Article 32(1) of Regulation No 1260/1999 which provide that:
‘… Interim payments and payments of the balance shall relate to expenditure actually paid out, which must correspond to payments effected by the final beneficiaries, supported by receipted invoices or accounting documents of equivalent probative value.’ (33)
As the Commission has correctly remarked, theoretical costs cannot therefore be considered for payment.
27. As regards the second point, the Finnish Government has remarked that with regard to eligible expenditure, the principle of causality should be respected. This implies, according to the Finnish Government, that only supplementary costs which truly flow from the Community operation could be considered to be eligible expenditure. Costs which are not connected to the operation should not be paid.
28. According to the Commission those responsible for the implementation of the relevant Community project must be able to demonstrate that the indirect costs were essential to the realisation of the project.
29. Article 30 of Regulation No 1260/1999 provides that expenditure in respect of operations shall be eligible for a contribution from the Funds only if these operations form part of the assistance concerned. In other words, the expenditure must have occurred in the context of the project financed by the European Union. It must be able to be demonstrated that the costs actually related to the implementation of the project, and was not expenditure incurred in the course of ordinary activities and unconnected to the implementation of the project.
30. The third point is especially relevant in the present case. In particular, the issue here is whether a method such as the one used by the applicant in the main proceedings to calculate indirect costs, satisfies the requirement of point 1.7, namely, that the indirect costs (overheads) are to be allocated pro rata to the operation, according to a duly justified fair and equitable method.
31. The applicant in the main proceedings referred to the method it had used in which the overheads were divided up according to the average number of staff of the whole organisation during the year in question, so that the average indirect costs could be calculated per person per year and month. Based on this average calculation, the costs of the working time of each person involved in the project were classified as costs of the project. The applicant is of the opinion that this method is compatible with point 1.7.
32. In the first place a comment is required about the different language versions of point 1.7 of Rule 1 of the Annex to Regulation No 1685/2000. There is a significant difference between the text of the Finnish language version and that of the other language versions. The French, English, Danish, Spanish, Portuguese and Italian language versions use the concept ‘pro rata’ as does the Swedish version, in which the word ‘proportionellt’ is used and ‘pro rata’ is added in brackets. The Dutch version uses the term ‘verhoudingsgewijs’ (‘proportionally’) and the German version ‘anteilig’ (‘proportional’). In the Finnish language version there is no reference whatsoever to this concept. (34)
33. When there are differences between the various language versions of a Community text the relevant texts should not be considered in isolation, but should rather, in cases of doubt, be interpreted and applied in the light of other authentic language versions. (35) In any case a single language version cannot override other language versions when the latter all support a certain interpretation. (36)
34. As all the other language versions – albeit not with exactly the same wording – mention the concept ‘pro rata’ or at least ‘proportionally’ in point 1.7 of Rule 1 of the Annex to Regulation No 1685/2000, this provision must be interpreted in the light of these versions of the wording.
35. This leads me to deduce that, in calculating indirect costs, a percentage of the total indirect costs can be used, provided it can be demonstrated that the percentage is fair and equitable and is in proportion to the size of the Community project. Such a view is confirmed by the second condition of Article 7 in Annex I to Regulation No 438/2001, which provides as follows:
‘For items of expenditure relating only partly to the co-financed operation, the accuracy of the allocation of the expenditure between the operation co-financed and other operations is demonstrated. The same applies to types of expenditure that are considered eligible only within certain limits or in proportion to other costs.’
36. The equitableness of the allocation of indirect costs to the Community project can be demonstrated on the basis of additional expenditure on salaries and other additional expenditure such as accommodation costs which can reasonably be allocated to the project. The percentage of the indirect costs can be determined on this basis. As the Commission rightly points out, when calculating the indirect costs on the basis of additional expenditure on salaries, the following points must be taken into account: (a) the number of persons working on the project; (b) the number of hours worked on the project; (c) the salaries paid in connection with the project; (d) the average number of persons working in the organisation; (e) the number of hours they have worked; (f) the average amount paid on salaries. If the calculation of the indirect costs is based on salaries paid, then it has to be done on the basis of actual salaries and not average salaries.
37. Furthermore, this is not the only possible equitable method. It is already apparent from the wording – according to a duly justified fair and equitable method (37) – that a variety of methods can be used to calculate indirect costs and to allocate them to a Community project.
38. It is the task of the national court to determine whether the conditions set out in point 1.7 of Rule No 1 of the Annex to Regulation No 1685/2000 were satisfied in the main proceedings.
V – Conclusion
39. I propose that the question referred for a preliminary ruling by the referring court be answered as follows:
– Point 1.7 of Rule No 1 of the Annex to Commission Regulation (EC) No 1685/2000 of 28 July 2000 laying down detailed rules for the implementation of Council Regulation (EC) No 1260/1999 as regards eligibility of expenditure of operations co-financed by the Structural Funds must be interpreted in such a way that for the calculation of indirect costs (overheads) it is permissible to use a percentage of the total indirect costs provided that it can be demonstrated that the percentage used is fair and equitable and is proportional to the size of the Community project.
– The equitableness of the allocation of the indirect costs to the Community project can be demonstrated inter alia on the basis of additional expenditure on salaries and other additional expenditure such as accommodation costs which can reasonably be allocated to the project. The percentage of the indirect costs can be determined on this basis.
– It is the task of the national court to determine whether the conditions set out in point 1.7 of Rule No 1 of the Annex to Regulation No 1685/2000 were satisfied in the main proceedings.
(1) .
(2)
–	OJ 2000 L 193, p. 39.
(3)
–	The four Structural Funds are the European Regional Development Fund (ERDF), the European Social Fund (ESF), the European Agricultural Guidance and Guarantee Fund (EAGGF), Guidance Section, and the Financial Instrument for Fisheries Guidance (FIFG).
(4)
–	Article 158 EC.
(5)
–	OJ 1999 L 161, p. 1.
(6)
–	The French overseas departments, the Azores, Madeira and the Canary Islands.
(7)
–	Article 9(e) of Regulation No 1260/1999.
(8)
–	Recital 27 in the preamble to Regulation No 1260/1999.
(9)  –	Article 8(1) in conjunction with Article 29 of Regulation No 1260/1999.
(10)
–	Article 9(d) of Regulation No 1260/1999.
(11)
–	Article 8 of Regulation No 1260/1999.
(12)
–	Article 34(1) of Regulation No 1260/1999. The managing authority is also responsible for acting in response to any observations or requests by the Commission for measures to correct the management, monitoring and control system, for the compatibility of the operations with Community policy and for
gathering the information and compiling the reports required by the Commission for monitoring the programme.
(13)
–	Article 32(3) of Regulation No 1260/1999.
(14)
–	Article 9(o) of Regulation No 1260/1999. The paying authority must also ensure that final beneficiaries receive payment of their contribution from the Funds as quickly as possible and in full. Fifth subparagraph of Article 32(1) of Regulation No 1260/1999.
(15)
–	Article 30(3) of Regulation No 1260/1999. See also Recital 41 in the preamble to Regulation No 1260/1999.
(16)
–	Article 38(1) of Regulation No 1260/1999.
(17)
–	Article 38(1)(a), (c), (d) and (f) of Regulation No 1260/1999.
(18)
–	Article 8(4) and Article 38(1)(g) of Regulation No 1260/1999.
(19)
–	Article 28 of Regulation No 1260/1999.
(20)
–	Member States shall, for each assistance, inform the Commission of the management and control systems in place, including the procedures by which claims for reimbursement of expenditure are received, verified, and validated, and by which payments to beneficiaries are authorised, executed and accounted for. The Commission must then, in cooperation with the Member State, satisfy itself that the management and control systems presented to them meet the standards required by Regulation No 1260/1999 and Regulation (EC) No 438/2001. Articles 4, 5 and 6 of Commission Regulation (EC) No 438/2001 of 2 March 2001 laying down detailed rules for the implementation of Council Regulation (EC) No 1260/1999 as regards the management and control systems for assistance granted under the Structural Funds (OJ 2001 L 63, p. 21).
(21)
–	Articles 38 and 39 of Regulation No 1260/1999.
(22)
–	Article 30(3) of Regulation No 1260/1999. See also Recital 41 of the preamble to Regulation No 1260/1999.
(23)
–	Regulation No 438/2001.
(24)
–	Regulation No 1685/2000.
(25)
–	The Norrbotten County Administrative Board.
(26)
–	Lapland Regional Council.
(27)
–	The amount was based on the proportion of the indirect wage and other costs to the direct wage costs arising from the County Administrative Board’s ordinary activities.
(28)
–	These were costs in respect of information technology and personnel administration, postal and other similar costs and costs relating to financial management and accommodation.
(29)
–	Lapin Liitto eventually paid a total of SEK 6 558.98 for 2001 and SEK 22 203.30 for 2002 for the accommodation costs of the participants in the project, but rejected the other applications.
(30)
–	See point 1.1 of Rule No 1.
(31)
–	See points 1.5 to 1.7 inclusive of Rule No 1.
(32)
–	I do not know whether the Finnish and Swedish Governments who, pursuant to Article 19 of Regulation No 438/2001, concluded a protocol specifying common arrangements to ensure sound financial management, have included therein rules with regard to the eligibility of indirect costs (overheads) as expenditure. The order for reference is silent on this point. Finland and Sweden concluded the aforementioned protocol containing the common arrangements on 24 and 31 October 2002. The title of the protocol is: ‘Memorandum of Understanding för genomförande av programmet för gemenskapsinitiativet Interreg III A Nord’.
(33)
– See also point 2 of Rule No 1 of Regulation No 1685/2000.
(34)
–	The Finnish language version reads as follows: ‘1.7 Yleiskustannukset ovat tukikelpoisia, jos ne perustuvat rakennerahastoista yhteisrahoitetun toimen kustannuksiin ja ne kohdennetaan toimeen perustellulla oikeudenmukaisella ja tasapuolisella tavalla.’
(35)
–	Case 19/67 Van der Vecht
[1967] ECR 345, and Case 283/81 CILFIT
[1982] ECR 3415, paragraph 18.
(36)
–	Case C-219/95 Ferriere Nord
v Commission
[1997] ECR I-4411, paragraph 15, and the case-law cited therein.
(37)
–	Point 1.7 of Rule No 1 of the Annex to Regulation No 1685/2000.