[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 20.5.2008

COM(2008) 306 final

2008/0103 (CNS)

2008/0104 (CNS)

2008/0105 (CNS)

2008/0106 (CNS)

Proposal for a

COUNCIL REGULATION

establishing common rules for direct support schemes for farmers under the common agricultural policy and establishing certain support schemes for farmers

Proposal for a

COUNCIL REGULATION

on modifications to the common agricultural policy by amending Regulations (EC) No 320/2006, (EC) No 1234/2007, (EC) No 3/2008 and (EC) No […]/2008

Proposal for a

COUNCIL REGULATION

amending Regulation (EC) No 1698/2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD)

Proposal for a

COUNCIL DECISION

amending Decision 2006/144/EC on the Community strategic guidelines for rural development (programming period 2007 to 2013)

(presented by the Commission) {SEC(2008) 1885}{SEC(2008) 1886}

EXPLANATORY MEMORANDUM

1. REASONS AND OBJECTIVES OF THE PROPOSAL

The main objectives set out for the Commission Communication "Preparing the Health Check of the CAP reform" of 20 November 2007 were to assess the implementation of the 2003 CAP reform, and to introduce those adjustments to the reform process that are deemed necessary in order to further simplify the policy, to allow it to grasp new market opportunities and to prepare it for facing new challenges such as climate change, water management and bio-energy.

In recent months, one of the above objectives, that of grasping market opportunities, has taken a new dimension with the sharp rise in the price of many agricultural commodities to exceptional levels. Their steady increase in 2006 and in the first semester of 2007 had already supported the conclusions drawn in the November Communication that any remaining supply controls of the CAP (namely, dairy quotas and set-aside) should be removed. The combination of factors that led to these developments and the best response of the EU to this development are addressed in a separate Commission Communication.

But the main conclusions of the November Health Check Communication about the assessment of the most recent reforms of the CAP remain valid. These reforms marked a new phase in this process by decoupling the majority of direct payments via the Single Payment Scheme (SPS) in 2003 for the sectors of arable crops, beef and sheep, and dairy and in 2004 for olive oil, cotton and tobacco. As part of the 2003 reform, Rural Development (RD) policy was strengthened with additional funds and with the reform of its policy instruments in 2005. Finally, the reform process continued with reforms in sugar (2006) and fruit and vegetables and wine (2007).

The above reforms reflect the significant shift in the orientation of the CAP, which is more capable today to meet its fundamental objectives.

- Producer support is to a large extent (90%) decoupled from production decisions, allowing EU farmers to make their choices in response to market signals, to rely on their farm potential and their preferences when adapting to changes in their economic environment. This is the most efficient way of providing farm income support.

- The shift away from product support, widely viewed as an origin of the surplus problems of the past, and the reduction of EU support prices, brought EU agriculture much closer to world markets, improving market balances and reducing the budgetary costs of intervention stocks or surplus disposal.

- The results of the reform process increased the competitiveness of EU agriculture, which, despite the decline of EU share in most commodity markets, became the largest agricultural exporter, of mainly high value products, while remaining the biggest agricultural importer in the world, remaining by far the largest market for developing countries.

- The CAP increasingly contributes to heading off the risks of environmental degradation and to delivering many of the public goods that our societies expect since producer support now depends on the respect of standards relating to the environment, food safety and quality and animal welfare through cross compliance.

- The strengthened rural development policy supports the protection of the environment and rural landscapes and creates growth, jobs and innovation in rural areas, especially those which are remote, depopulated or heavily dependent on farming.

The above developments indicate a CAP that is today fundamentally different from the one of the past. But the Communication "Preparing the Health Check of the CAP reform" also asserts that, "for the CAP to continue to be a policy of the present and of the future, it needs to be able to evaluate its instruments, to test whether they function as they should, to identify any adjustments needed to meet its stated objectives, and to be able to adapt to new challenges".

In line with the indications given in the Communication, the Commission has prepared legal proposals accompanied by an impact assessment report on the Health Check of the CAP taking on board the result of a wide consultation of stakeholders and the contributions from other European institutions.

Legal proposals are related to three basic Regulations:

- Council Regulation (EC) No 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers,

- Council Regulation (EC) No 1234/2007 of 22 October 2007 establishing a common organisation of agricultural markets and on specific provisions for certain agricultural products (Single CMO Regulation),

- Council Regulation (EC) No 1698/2005 of 20 September 2005 on support for rural development by the European Agricultural Fund for Rural Development.

These proposals, without constituting a fundamental reform, are a contribution to future developments of the CAP that are consistent with the overall goal of the Commission and the requirements of the Treaties to promote a sustainable and market orientated agricultural sector.

2. SINGLE PAYMENT SCHEME (SPS) AND SINGLE AREA PAYMENT SCHEME (SAPS)

2.1. Simplification

Better regulation and simplification are one of the Commission's political priorities for the period 2004–2009. The CAP started the most important path to simplification with its reform of 2003 by shifting most of direct payments for farmers to the Single Payment Scheme and with the adoption of the Single Common Market Organisation in 2007.

On SPS, experience has shown that it has contributed to reduce the administrative burden, to avoid unnecessary public expenditure, to improve public acceptance of the CAP and to improve competitiveness on the CAP. Nevertheless, steps towards more simplification can still be done, especially in cross compliance and in the existing partial coupled support.

Cross compliance

The 2003 CAP reform introduced cross compliance within the single farm payment. This means that such payments are subject to environmental, food safety, and animal welfare legislation, as well as to the maintenance of the farm in good agricultural and environmental conditions.

Practical problems in the implementation of cross compliance have been raised by the Member States, as well as by the Commission itself through its audits for the clearance of accounts. This has led the Commission to examine the scope of cross compliance in order to simplify and improve its targeting. In particular, the proposals aim at withdrawing certain Statutory Mandatory Requirements that are considered not relevant or linked to farmer responsibility, and to introduce into Good Agricultural Environmental Conditions requirements that retain the environmental benefits from set aside and address issues of water management.

Partially coupled support

In 2003 CAP reform, some Member States considered that full decoupling could lead to several risks such as the abandonment of production, the lack of raw material supply for processing industries, or to social and environmental problems in areas with few economic alternatives. This was the reason why it was decided to retain certain levels of coupled support in some sectors.

The experience with decoupling shows that in general this move did not imply dramatic changes in the production structure at the EU level and that it has led farmers to produce what the market demands in a more sustainable way. It has also to be stressed that keeping two systems in parallel (coupled and decoupled support) has not contributed to simplification for national and regional administrations in Member States.

Given this, it is proposed to align them with the 2003 CAP reform principles by removing the remaining coupled support and shifting them to the Single Payment Scheme. Nevertheless, an exception is done with suckler cows, sheep and goatmeat premia. In these cases it is proposed to allow Member States to maintain the coupled support (as it exists currently) in order to sustain economic activity in regions where other economic alternatives are few or do not exist.

Other issues related to simplification

The proposal also includes other measures focused on providing more simplification to the SPS. In particular, more flexibility has been added to the use of the national reserve and to the transfer of payment entitlements, to the choice of modifying the entitlements and to payment dates. The abolition of the set-aside entitlements is also proposed.

2.2. Moving towards a more flat rate of decoupled support

The 2003 reform introduced the decoupled farm support as the key element of the CAP. The main objective was providing a direct payment system that allows farmers to be market oriented, as simple as possible from an administrative point of view and compatible with WTO. Two basic models were provided to Member States to implement the scheme: the historic and the regional:

- historic model: in this model payment entitlements are based on individual historic reference amounts per farmer;

- regional model: in this model flat-rate payment entitlements are based on amounts received by farmers in a region in the reference period.

The current legislation does not allow Member States to change their decision on the implementation of the SPS model. However, experience has shown that certain adjustments in the existing schemes are necessary or desirable. For example, the differences in support levels resulting from implementation of the historic model will become difficult to justify in the future as reference periods for payments become more distant.

On the other hand, the regional model provides more equitable support to farmers, despite some initial redistribution of support.

This is the reason why the Commission has proposed allowing Member States to adjust their SPS model by moving gradually towards flatter payment rates per entitlement to render the SPS more effective, efficient and simple. In parallel, the proposals include a series of simplification measures in the implementation of SPS.

2.3. Extending SAPS

The Single Area Payment Scheme was introduced as a previous step to the inclusion in the SPS in the Member States who joined the EU as from 1 May 2004 to facilitate their adjustment to the EU because of their specific agricultural situation. As a transitional system, SAPS was designed to assist the integration of EU-10 and EU-2 in a smooth manner, given the very significant differences between the level of their general and rural economies and those in the EU-15.

Member States applying SAPS have to move into the SPS in 2011 (2012 for Bulgaria and Romania). It seems appropriate to allow those Member States to extend SAPS until 2013 This option is in line with the decision taken for EU-15 Member States because they are allowed to review their SPS implementation and opt to move towards a more flat-rate model.

2.4. Revised Article 69 of Regulation (EC) No 1782/2003

Based on Article 69 of Regulation (EC) No 1782/2003 on direct support schemes for farmers, Member States applying SPS may retain by sector up to 10% of their national budget ceilings for direct payments in the sector concerned for measures related to the protection or enhancement of the environment or for improving the quality and marketing of agricultural products.

To allow more flexibility in Member State responses to the needs stemming from the overall orientation of the CAP, it is proposed that Article 69 be broadened:

- the restriction that linear reductions are taken from and staying in the same sector is removed;

- measures to address disadvantages for farmers in certain regions specialising in the dairy, beef, sheep and goatmeat and rice sectors are covered;

- it also allows the possibility to use the retained amounts to top up entitlements in areas subject to restructuring and/or development programs;

- support for some risk management measures – crop insurance schemes for natural disasters and mutual funds for animal diseases – is also provided under certain conditions;

- measures, which do not with certainty meet the conditions of the WTO Green Box, should be limited to 2,5% of the ceilings;

- finally, Member States applying SAPS will also be allowed to apply this provision.

2.5. Modulation

Modulation is a means of budgetary transfer by which a percentage reduction is applied to farmer direct payments (Pillar I) and the budgetary resources released are reassigned to rural development (Pillar II) measures.

With the 2003 Reform, compulsory modulation for all EU-15 Member states was agreed, starting in 2005 with a rate of 3% and increasing to 4% in 2006 and to 5% from 2007 onwards. A EUR 5 000 franchise was also introduced, below which no reduction of direct payments is applied.

The Communication "Preparing the Health Check of the CAP reform" identified a number of new and ongoing challenges facing the CAP such as climate change, risk management, bio-energy, water management and biodiversity and considers the RD policy as one of the possibilities to deal with these changes.

The measures available under RD are already providing various alternatives to address the new challenges and MS have included related measures already in their RD Programs for the period 2007–2013. Nevertheless, first experiences with the financial up-take of RD resources in 2007 suggest that Member States have budget needs beyond their financial possibilities.

To allow Member States to support the increasing needs to meet new challenges via the set of measures proposed under RD, it is proposed to increase compulsory modulation by 8% and to add an additional progressive element under a new system which is based on the following principles:

- all new receipts from modulation stay within the Member State that generates them;

- in EU-15, basic modulation, applying to all payments above €5 000, increases by 2% annually from 2009 until it reaches an additional 8% (on top of the current 5%) in 2012;

- a progressive element is introduced; whereby payments are reduced by additional steps of 3% in successive thresholds a new system for the financial management of direct aids, establishing net global ceilings per Member State, is proposed;

- The table below shows the total modulation percentages to be applied (existing and additional, respectively):

Thresholds | 2009 | 2010 | 2011 | 2012 |

1 to 5 000 | 0 | 0 | 0 | 0 |

5 000 to 99 999 | 5% + 2% | 5% + 4% | 5% + 6% | 5% + 8% |

100 000 to 199 999 | 5% + 5% | 5% + 7% | 5% + 9% | 5% + 11% |

200 000 to 299 999 | 5% + 8% | 5% + 10% | 5% + 12% | 5% + 14% |

above 300 000 | 5% + 11% | 5% + 13% | 5% + 15% | 5% + 17% |

- EU-10 become also eligible for modulation in 2012, with a basic rate of 3% (instead of 13%). Bulgaria and Romania are exempted, in relation to the phasing-in of direct payments.

2.6. Payments limitations

46,6% of the total direct payment beneficiaries in the EU-25 receive less than €500. This number essentially includes small farmers, but it also includes in certain Member States recipients whose value of payment is below the administrative cost of managing it.

In order to simplify and reduce the costs of administration of direct payments, it is proposed that Member States shall either apply a minimum amount of payments of €250 or apply a minimum size of eligible area per holding of at least 1 hectare or apply both. Nevertheless, special provision is made for those Member States whose agricultural sector is mainly composed of very small holdings.

3. SINGLE COMMON MARKET ORGANISATION

3.1. Intervention market mechanisms

Based on analysis, the Commission has concluded that market supply control should not serve to slow down the ability of EU farmers to respond to market signals but they should be turned into a real safety net. To do so, it is proposed to simplify and harmonise the current provisions on public intervention via the extension of a tendering system.

In the cereal sector, it is proposed to introduce tendering for bread wheat, while for feed grains, the same model as for maize (reduce quantitative ceiling at zero) will apply. For durum wheat, taking into account current and expected market conditions, it is proposed to abolish intervention. For the same reasons, for rice and pig meat it is also proposed to abolish intervention. Tendering provisions for butter and skimmed milk powder will also apply.

3.2. Abolition of set aside

Based on the market outlook situation and the implementation of SPS, it is proposed to abolish set aside as an instrument of supply control. However, under the proposals for cross compliance and RD, Member States are given the appropriate tools to ensure that the present environmental benefits of set aside can be retained.

3.3. Transition to the end of the milk quota

In 1984, quotas were introduced as a response to overproduction. The current market outlook situation indicates that the conditions for which milk quotas were introduced in 1984 are no longer relevant. Since milk quotas expire in 2015, it is appropriate to help the sector with gradual transitional measures to adapt to a market without quotas post 2015. To allow a "soft landing" of the milk sector to the end of quotas, a gradual annual increase is proposed.

In general terms, the phasing-out of milk quotas would expand production, lower prices and increase the competitiveness of the sector. Nevertheless, there are certain regions, especially but not exclusively mountainous regions, which are expected to face difficulties in keeping a minimum level of production. Those problems can be addressed by applying specific measures through Article 68 of the Regulation on direct support schemes.

3.4. Dairy sector specific aids

The abolition of the private storage aid for cheese and the disposal aid for butter for pastry and ice cream and for direct consumption is proposed. These schemes are no longer needed to support the market and should therefore be abolished.

For other products as the private storage aid for butter, the skimmed milk powder feeding stuff and the aid for casein production, for which an obligatory aid is provided by the current regulation, it has been proposed to make such a support optional for the Commission to decide if it should be applied when the market situations requires it.

3.5. Other support regimes

In a series of small support schemes, it is proposed to decouple and shift them to the SPS because it would contribute to improve competitiveness and to provide them with more simplification. For hemp, protein crops, and nuts the transition to the SPS can take place without a transition period. For rice, dried fodder, starch potatoes and long fibre flax, a transitional period for the shifting to full decoupling is proposed in order to help farmers and processing industries to be adapted gradually to the new support scheme. It is also proposed to abolish the energy crop scheme based on current very strong demand for bio-energy.

4. NEW CHALLENGES AND RURAL DEVELOPMENT POLICY

With the ceiling for the overall CAP budget fixed until 2013, additional funding for rural development can only be realised through an increase in compulsory modulation.

The additional funding is needed to reinforce the efforts with regard to the EU priorities in the field of climate change, renewable energy, water management and biodiversity.

- Climate and energy have moved to the top of the agenda, as the EU is taking the lead to build a global low carbon economy. In March 2007, EU leaders endorsed Commission proposals to cut CO2 emissions by at least 20% by 2020 (30% if global targets can be agreed on) and to set a binding 20% target for the use of renewable energy sources, including a 10% share of biofuels in petrol and diesel consumption. Agriculture and forestry can make an important contribution in providing the feed stocks for bio-energy, in carbon sequestration and in further reducing GHG emissions.

- The EU's objectives with regard to water policy are laid down in the Water Framework Directive, which will start to reach full implementation in the period 2010–2012. Agriculture and forestry as a main user of water and water resources have a major role to play in sustainable water management both in terms of quantity and of quality. Water management will be an increasingly important part of the adaptation strategy to deal with already unavoidable climate change.

- Member States have committed themselves to halt biodiversity decline by 2010, a target which increasingly seems unlikely to be met. A large part of Europe's biological diversity is dependent on agriculture and forestry and the efforts to protect biodiversity will have to be increased, particularly in the light of the expected adverse effects of climate change and increasing water demand.

Member States are encouraged to make full use of the additional funding available for the 2010–2013 period and to adapt their strategies and programmes in consequence. In particular support for investments under axis 1 can be targeted towards energy, water and other input saving machinery and equipment and to production of (feed stocks for) renewable energy for on and off farm use. Under axis 2 the agri-environment measure and the forestry measures can be used in particular for biodiversity, water management and climate change mitigation actions. Under axis 3 and 4 local scale renewable energy projects can be supported.

In this context the 7th Research Framework Programme will contribute to addressing the new challenges and provide valuable support to innovations in the farming sector and to policy targeting.

5. BUDGETARY IMPACT

Since the 2003 CAP reform and as applicable from 2007 budget year, the CAP has an in-built mechanism of financial discipline if expected expenditure runs the risk of exceeding the financial ceiling for market expenditure and direct aids. The proposal does not change the principles established with the 2003 reform and as amended with the accession of EU-12 on the application of this mechanism. Most CAP support is now fixed and the market outlook has significantly improved since 2003. As a result, the risk that the financial discipline is applied (i.e. reduction in direct aids) has diminished compared to previous expectations.

Proposals for modulation in the Single Payment Scheme and Rural Development are by design neutral with the respect to the EU budget, as it is a simple compulsory transfer between the second and the first pillar of the CAP. For national budget the increased modulation could lead to additional national expenditure in view of the necessary co-financing needed in Rural Development. This would mean that some Member States have the possibility of returning to the (higher) level of national expenditure originally foreseen before the decision on the Financial Framework 2007–2013. As regards the transfer of measures into the Single Payment Scheme there could be moderate financial consequences for the EU-budget, but most of the transfers are also budgetary neutral.

With respect to market measures, the recent increase in world prices has led to a clear improvement of prospects with respect to expectations when the 2003 reform was decided. The reform of maize intervention has since then resolved part of the previously expected problems in cereals market, and the present proposals on cereals intervention improve further the situation. Some additional expenditure towards the end of the present financial framework is relatively small. In dairy the impact is more one of the timing of expenditure (before or after 2013).

The expiry of the dairy quota will bring additional pressure in butter under all options. The present proposal, by initiating a gradual process of a quota phasing-out, is overall more beneficial not just for the sector, but also for long-term developments of the CAP. However, the need for some limited additional expenditure on butter exports cannot be excluded. Whether this materialises will depend on factors that are at this stage unknown (DDA Agreement, world market developments). Therefore the present proposals include a review clause in 2012 that would allow developments in dairy markets to be assessed to determine if additional measures will be needed to avoid any increase in the budget. Some savings are foreseen as a consequence of abolition of existing measures. However, the biggest budgetary effect of the soft-landing on the milk quota is a loss of budgetary revenue due to the foreseen decrease in milk levy.

2008/0103 (CNS)

Proposal for a

COUNCIL REGULATION

establishing common rules for direct support schemes for farmers under the common agricultural policy and establishing certain support schemes for farmers

THE COUNCIL OF THE EUROPEAN U NION,

Having regard to the Treaty establishing the European Community, and in particular Articles 36, 37 and 299(2) thereof,

Having regard to the Act of Accession of Greece, and in particular paragraph 6 of Protocol No 4 thereto on cotton[1],

Having regard to the proposal from the Commission[2],

Having regard to the opinion of the European Parliament[3],

Having regard to the opinion of the European Economic and Social Committee[4],

Having regard to the opinion of the Committee of the Regions[5],

Whereas:

(1) Experience drawn from the implementation of Council Regulation (EC) No 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers and amending Regulations (EEC) No 2019/93, (EC) No 1452/2001, (EC) No 1453/2001, (EC) No 1454/2001, (EC) No 1868/94, (EC) No 1251/1999, (EC) No 1254/1999, (EC) No 1673/2000, (EEC) No 2358/71 and (EC) No 2529/2001[6] shows that certain elements of the support mechanism need to be adjusted. In particular the decoupling of direct support should be extended and the functioning of the Single Payment Scheme should be simplified. It should also be noted that Regulation (EC) No 1782/2003 has been substantially amended since its entry into force. In the light of these developments and in the interest of clarity it should be repealed and replaced by a new Regulation.

(2) Regulation (EC) No 1782/2003 established the principle that farmers who do not comply with certain requirements in the areas of public, animal and plant health, environment and animal welfare shall be subject to reductions of or the exclusion from direct support. This «cross-compliance» system forms an integral part of Community support under direct payments and should therefore be maintained. However, experience has shown that a number of the requirements under the scope of cross compliance are not sufficiently relevant to the farming activity or the farm land or concern national authorities rather than farmers. It is therefore appropriate to adjust the scope of cross compliance.

(3) Furthermore, in order to avoid the abandonment of agricultural land and ensure that it is maintained in good agricultural and environmental condition, Regulation (EC) No 1782/2003 established a Community framework within which Member States adopt standards taking account of the specific characteristics of the areas concerned, including soil and climatic conditions and existing farming systems (land use, crop rotation, farming practices) and farm structures. The abolition of compulsory set aside within the single payment scheme may in certain cases have adverse effects for the environment, in particular as regards certain landscape features. It is therefore appropriate to reinforce the existing Community provisions aiming at protecting, where appropriate, specified landscape features.

(4) Protection and management of water in the context of the agricultural activity has increasingly become a problem in certain areas. It is therefore appropriate to also reinforce the existing Community framework for good agricultural and environmental condition with the aim to protect water against pollution and run-off and to manage the use of water.

(5) Since permanent pasture has a positive environmental effect, it is appropriate to apply measures to encourage the maintenance of existing permanent pasture to avoid its massive conversion into arable land.

(6) In order to achieve a better balance between policy tools designed to promote sustainable agriculture and those designed to promote rural development, a system of compulsory progressive reduction of direct payments (“modulation”) was introduced by Regulation (EC) No 1782/2003. This system should be maintained including the exemption of payments up to EUR 5 000 from its application.

(7) The savings made through the modulation mechanism introduced by Regulation (EC) No 1782/2003 are used to finance measures under the rural development policy. Since the adoption of that regulation the agricultural sector has been faced with a number of new and demanding challenges such as climate change, the increasing importance of bio-energy, as well as the need for a better water management and a more effective protection of biodiversity. The European Community, as party to the Kyoto Protocol[7], has been called to adapt its policies in the light of the climate change considerations. Furthermore, following serious problems related to water scarcity and droughts, water management issues should be further addressed[8]. Protecting biodiversity remains a major challenge and while important progress has been made, the achievement of the European Community's biodiversity target for 2010 will require additional efforts[9]. The Community acknowledges the need to tackle these new challenges in the framework of its policies. In the area of agriculture, rural development programs adopted under Council Regulation (EC) No 1698/2006 of 20 September 2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD)[10] are an appropriate tool to deal with them. To enable Member States to revise their rural development programmes accordingly without being required to reduce their current rural development activities in other areas, additional funding needs to be made available. However, the financial perspectives for the period 2007 to 2013 do not provide for the financial means to reinforce the Community's rural development policy as necessary. Under these circumstances it is appropriate to mobilise a large part of the financial resources needed by providing for a gradual increase of the reduction of direct payments through modulation.

(8) The distribution of direct income support among farmers is characterised by the allocation of a large share of payments to a rather limited number of large beneficiaries. It is clear that larger beneficiaries do not require the same level of unitary support for the objective of income support to be efficiently attained. Moreover, the potential to adapt makes it easier to larger beneficiaries to operate with lower levels of unitary support. It therefore seems equitable to expect farmers with high amounts of support to make a particular contribution to the financing of rural development measures addressing new challenges. Therefore, it appears appropriate to establish a mechanism providing for an increased reduction of the highest payments the proceeds of which should also be used to deal with new challenges in the framework of rural development. To ensure the proportionality of this mechanism the additional reductions should increase progressively according to the amounts of the payments concerned.

(9) The particular geographical situation of the outermost regions as well as its insularity, small area and mountainous terrain and climate impose additional burdens to their agricultural sectors. In order to mitigate such burdens and constrains it seems appropriate to derogate from the obligation to apply the modulation reduction to farmers in the outermost regions.

(10) The increased rates of compulsory modulation need to be taken into account by those Member States that opted for applying a system of voluntary modulation. Council Regulation (EC) No 378/2007 of 27 March 2007 laying down rules for voluntary modulation of direct payments provided for in Regulation (EC) No 1782/2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers[11] should be amended accordingly.

(11) The amounts resulting from the application of 5 percentage points corresponding to modulation reductions fixed in Regulation (EC) No 1782/2003 should be allocated between Member States according to objective criteria. However, it is appropriate to establish that a certain percentage of the amounts should remain in the Member States where they have been generated. In view of the structural adjustments resulting from the abolition of rye intervention, it is appropriate to provide for specific measures for certain rye production regions financed with part of the amounts generated by modulation. However, the amounts raised by the application of any further modulation reduction should be made available to the Member States where they have been generated.

(12) In order to facilitate the functioning of modulation, notably with regard to the procedures for granting direct payments to farmers, and the transfers to the rural development programs, it is appropriate to fix net ceilings per Member State that limit the payments to be made to farmers after the application of modulation. Council Regulation (EC) No 1290/2005 of 21 June 2005 on the financing of the common agricultural policy [12] should be amended accordingly.

(13) Farmers in the new Member States receive direct payments following a phasing-in mechanism. In order to achieve the proper balance between policy tools designed to promote sustainable agriculture and those designed to promote rural development, the system of modulation should not be applied to farmers in the new Member States until the level of direct payments applicable in those Member States is equal to the level applicable in the other Member States.

(14) Modulation should not reduce the net amount paid to a farmer in a new Member State below the amount to be paid to an equivalent farmer in the other Member States. Once modulation becomes applicable to farmers in the new Member States the rate of reduction should, therefore, be limited to the difference between the level under the phasing-in schedule and the level in the other Member States after the application of modulation. Moreover, farmers in new Member States who are subject to modulation should no longer benefit from complementary national direct payments to avoid that their support level exceeds the level in the other Member States.

(15) With a view to ensuring that the amounts for the financing of the common agricultural policy respect the annual ceilings set in the financial perspectives, it is appropriate to provide for a financial mechanism to adjust, where necessary, the direct payments. An adjustment of direct support should be fixed when the forecasts indicate that the subheading 2, with a security margin of EUR 300 million, is exceeded in a given budget year. Taking into account the levels of direct payments for farmers in the new Member States as a result of phasing-in, it should be provided that in the framework of the application of the phasing-in mechanism to all direct payments granted in the new Member States, the instrument of financial discipline should not apply in the new Member States until the level of direct payments applicable in the new Member States is at least equal to the level applicable in the Member States other than the new Member States.

(16) In order to help farmers to meet the standards of modern, high-quality agriculture, it is necessary that Member States operate a comprehensive system offering advice to commercial farms. The farm advisory system should help farmers to become more aware of material flows and on-farm processes relating to the environment, food safety, animal health and welfare without in any way affecting their obligation and responsibility to respect those standards.

(17) Member States have, in accordance with Article 9 of Regulation (EC) No 1290/2005, to take the measures necessary to satisfy themselves that transactions financed by the European Agricultural Guarantee Fund (EAGF) are actually carried out and are executed correctly, and prevent and deal with irregularities. To this end they shall operate an integrated administration and control system for direct payments. In order to improve effectiveness and control of Community support the Member States should be authorised to avail themselves of the integrated system also in the case of Community schemes not covered by this Regulation.

(18) The main elements of the integrated administration and control system should be laid down, and in particular, the provisions concerning a computerised data base, an identification system for agricultural parcels, aid applications from farmers, a harmonised control system and, in the single payment scheme, a system for the identification and recording of payment entitlements.

(19) The management of small amounts is a burdensome task for the competent authorities of the Member States. To avoid excessive administrative burden it is appropriate for Member States to refrain from granting direct payments where the payment would be lower than the Community average support for one hectare or the eligible area of the holding for which support is claimed would relate to less than one hectare. Special provision should be made for those Member States whose farm structure differs significantly from the average Community one. Member States should be given discretion to opt for the implementation of one of the two criteria taking account of the particularities of the structures of their agricultural economies. As special payment entitlements were allocated to farmers with so-called "landless" holdings the application of the hectare-based threshold would be ineffective. Such farmers should therefore be subject to the averages support-based minimum amount.

(20) The experience with the application of the single payment scheme shows that decoupled income support was in a number of cases granted to beneficiaries other than natural persons whose business purpose is not or only marginally targeted at exercising an agricultural activity. To prevent agricultural income support from being allocated to such companies and firms, and to ensure that the Community support is entirely used to ensure a fair standard of living to the agricultural community, it is appropriate to empower Member States, where such allocation occurs, to refrain from granting them direct payments under this Regulation.

(21) Payments provided for under Community support schemes should be made by the competent national authorities to beneficiaries in full, subject to any reductions provided for in this Regulation, and within prescribed periods. In order to render the management of direct payments more flexible, Member States should be allowed to pay direct payments in two instalments per year.

(22) The support schemes under the common agricultural policy provide for direct income support in particular with a view to ensuring a fair standard of living for the agricultural community. This objective is closely related to the maintenance of rural areas. In order to avoid misallocations of Community funds, no support payments should be made to farmers who have artificially created the conditions required to obtain such payments.

(23) In order to achieve the objectives of the common agricultural policy, common support schemes have to be adapted to changing developments, if necessary within short time limits. Beneficiaries cannot, therefore, rely on support conditions remaining unchanged and should be prepared for a possible review of schemes in particular in the light of economic developments or the budgetary situation.

(24) Regulation (EC) No 1782/2003 established a single payment scheme that combined the existing various support mechanisms into a single scheme of de-coupled direct payments. Experience with the application of the single payment scheme shows that certain of its elements can be simplified to the benefit of farmers and administrations. Furthermore, given that the single payment scheme has in the meantime been implemented by all Member States that were required to do so, a number of provisions that were linked to its initial implementation have become obsolete and should therefore be adjusted. In this context, a significant under use of payment entitlements has been detected in some cases. To avoid such situation and taking into account that farmers are already familiar with the functioning of the single payment scheme, the period initially fixed for reverting unused payment entitlements to the national reserve should be reduced to two years.

(25) The main elements of the single payment scheme should be maintained. In particular the fixing of national ceilings should ensure that the total level of support and entitlements does not exceed current budgetary constraints. Member States should also operate a national reserve that may be used to facilitate the participation of new farmers in the scheme or to take account of specific needs in certain regions. Rules on transfer and use of payment entitlements should be laid down to avoid the speculative transfer and accumulation of payment entitlements without a corresponding agricultural basis.

(26) The progressive integration of new sectors in the single payment scheme makes it necessary to review the definition of the land eligible to benefit from the scheme or for the activation of payment entitlements. However, provision should be made for excluding support for areas cultivated with fruit and vegetables in case Member States have opted for a deferred integration of this sector in the single payment scheme. Besides, specific measures should be laid down for hemp to prevent the granting of support for illegal crops.

(27) Compulsory set aside of arable land was introduced as a supply control mechanism. Market developments in the arable crops sector together with the introduction of decoupled aids no longer justify the need for maintaining this instrument, which therefore should be abolished. Set-aside entitlements established in accordance with Articles 53 and 63(2) of Regulation (EC) No 1782/2003 shall therefore be activated on hectares subject to the same eligibility conditions that any other entitlement.

(28) Further to the integration of formerly coupled market support into the single payment scheme, the value of payment entitlements was, in those Member States opting for a historic implementation, based on the individual level of past support. With a growing number of years elapsing since the introduction of the single payment scheme and following the successive integration of further sectors into the single payment scheme, it becomes increasingly harder to justify the legitimacy of significant individual differences in the support level which are only based on past support. For this reason Member States that chose the historic implementation model should be allowed under certain conditions to review the allocated payment entitlements with a view to approximating their unit value while respecting the general principles of community law and the objectives of the Common Agricultural Policy. In this context Member States may take into account the specificities of geographical areas when fixing closer values. The levelling of payment entitlements should take place during an adequate transition period and within a limited range of reductions in order to allow farmers to reasonably adapt to the changing levels of support.

(29) Under the 2003 reform Member States had the option to apply the single payment scheme by way of historic or regional implementation. Since then Member States have had the opportunity to evaluate the effects of their choices as regards both their economic and administrative appropriateness. Member States should therefore be given the opportunity to review their initial choice in the light of their experience. For this reason, in addition to the possibility of levelling the value of payment entitlements, Member States that applied the historic model should be authorised to change over to the regional model. Furthermore, Member States that chose to apply the regional model should be given the option to review their decisions under certain conditions with the aim to approximate the value of payment entitlements according to pre-established steps, while respecting the general principles of community law and the objectives of the Common Agricultural Policy. Such changes should take place during an adequate transition period and within a limited range of reductions in order to allow farmers to reasonably adapt to changing levels of support

(30) Regulation (EC) No 1782/2003, while introducing a decoupled single payment scheme allowed Member States to exclude certain payments from that scheme. At the same time Article 64(3) of that Regulation provided for the revision of the options provided for in Sections 2 and 3 of Chapter 5 of its Title III, in the light of market and structural developments. An analysis of the relevant experience shows that decoupling introduces flexibility in the choice of producers, enabling them to take their production decisions on the basis of profitability and market response. This is particularly the case for the arable crops, hops and seeds sectors, and to a certain extent, also the beef sector. Therefore, the partially coupled payments in these sectors should be integrated into the single payment scheme. In order for farmers in the beef sector to gradually adjust to the new support arrangements provision should be made for a phasing-in of the integration of the special premium for male animals and the slaughter premium. Since the partially coupled payments in the fruit and vegetable sectors were only recently introduced, and only as a transitional measure, no review of such schemes is necessary.

(31) However, as regards the suckler cow and sheep and goat sector it appears that maintaining a minimum level of agricultural production may still be necessary for the agricultural economies in certain regions and, in particular, where farmers cannot have recourse to other economic alternatives. Against this background, Member States should have the option to maintain coupled support at the current level or, for suckler cows, at a lower level. In that case, special provision should be made for the respect of the identification and registration requirements provided for by Regulation (EC) No 1760/2000 of the European Parliament and of the Council[13] and Council Regulation (EC) No 21/2004[14], in particular with a view to secure the traceability of animals.

(32) Member States should be allowed to use up to 10% of their ceilings for granting specific support in clearly defined cases. Such support should allow Member States to address environmental issues and improve the quality and marketing of agricultural products. Specific support should also be available to buffer the consequences of the phasing-out of milk quotas and the decoupling of support in particularly sensitive sectors. Given the growing importance of an effective management of risks Member States should be given the option to financially contribute to the premiums farmers pay for crop insurance as well as to the financing of financial compensation of certain economic losses in case of animal or plant diseases. With a view to respect the Community’s international obligations the resources that could be used for any coupled support measures should be limited at an appropriate level. The conditions applicable to the financial contributions to crop insurance and animal or plant disease related compensation should be established accordingly.

(33) Direct payments under the single payment scheme were based on reference amounts of direct payments that were received in the past or on regionalised per hectare amounts. Farmers in the new Member States did not receive Community direct payments and had no historical references for the calendar years 2000, 2001 and 2002. Therefore, provision was made under Regulation (EC) No 1782/2003 for the single payment scheme in the new Member States to be based on regionalised per hectare amounts. Several years after the accession of the new Member States to the Community, however, the use of reference periods could be considered for those new Member States that did not yet move to the single payment scheme. With a view to facilitating the transition to the single payment scheme and, in particular, to avoiding speculative applications it is therefore appropriate to authorise the new Member States to take account of the areas for which historically support under the single area payment scheme was granted for the calculation of the payment entitlements under the single payment scheme.

(34) Under the regionalised option for the single payment scheme the new Member States should have the possibility to adjust the value of entitlements per hectare on the basis of objective criteria in order to ensure equal treatment between farmers and to avoid market distortions.

(35) The new Member States should have the same possibilities as the other Member States to partially implement the single payment scheme.

(36) The de-coupling of direct support and the introduction of the single payment scheme were essential elements in the process of reforming the common agricultural policy. However several reasons called in 2003 for maintaining specific support for a number of crops. Experience gained through the implementation of Regulation (EC) No 1782/2003 together with the evolution of the market situation indicates that schemes that were kept outside the single payment scheme in 2003 can now be integrated into that scheme to promote a more market-oriented and sustainable agriculture. This is the case in particular for the olive oil sector, where only marginal coupling was applied. It is also the case for the durum wheat, protein crops, rice, potato starch, and nuts payments, where the decreasing effectiveness of remaining coupled payments, supports the decoupling option. In the case of flax it is also appropriate to abolish the support for processing and to integrate the relevant amounts into the single payment scheme. As regards rice, dried fodder, potato starch and flax a transitional period should be provided for in order to ensure their shift to decoupled support to be as smooth as possible. As regards nuts, Member States should be allowed to continue to pay the national part of the aid in a coupled way in order to cushion the effects of decoupling.

(37) As a consequence of the integration of new schemes into the single payment scheme, provision should be made for the calculation of the new level of individual income support under that scheme. In the case of nuts, potato starch, flax and dried fodder, such increase should be granted on the basis of the support farmers received in most recent years. However, in the case of the integration of payments that were so far partially excluded from the single payment scheme, Member states should be given the option to use the original reference periods.

(38) Regulation (EC) No 1782/2003 established specific support for energy crops with a view to assisting the sector to develop. Due to the recent developments in the bio-energy sector and, in particular, to the strong demand for such products on international markets and the introduction of binding targets for the share of bio-energy in total fuel by 2020 there is no longer sufficient reason to grant specific support for energy crops.

(39) On the occasion of the integration of the cotton sector into the single payment scheme, it was deemed necessary that part of the support should continue to be linked to the cultivation of cotton through a crop specific payment per eligible hectare to avoid the risk of production disruption to the regions of cotton production. This choice should be maintained in accordance with the objectives, set out in Protocol 4 on cotton annexed to the Act of Accession of Greece.

(40) To buffer the effects of the restructuring process in Member States which have granted the restructuring aid provided for in Council Regulation (EC) No 320/2006 of 20 February 2006 establishing a temporary scheme for the restructuring of the sugar industry in the Community[15] sugar beet and cane producers should be granted an aid for a maximum of five consecutive years.

(41) The Act of Accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia and the Act of Accession of Bulgaria and Romania provided that the farmers in the new Member States will receive direct payments, following a phasing-in mechanism.

(42) Furthermore, those Acts of Accession provided for a transitional simplified support mechanism for granting direct payments in the new Member States based on area. The main elements of that mechanism should be laid down. The single area payment scheme has proved to be an efficient and simple system of granting income support to farmers. For the sake of simplification it is appropriate to allow the new Member States to continue applying it until the end of year 2013.

(43) Further to the reform of the sugar and fruit and vegetable sectors and their integration into the single payment scheme, Member States that opted for applying the single area payment scheme should be enabled to grant income support to growers of sugar beet, cane and chicory and producers of certain fruit and vegetable in the form of separate payments. Likewise, the same Member States should be allowed to pay separate specific support under similar conditions as applicable to the other Member States.

(44) As a consequence of the phasing in of direct payments in the new Member States the Acts of Accession provided for a framework to allow new Member States to pay complementary national direct payments. The conditions for granting such payments should be laid down.

(45) In the initial allocation of payment entitlements by the Member States certain errors led to particularly high payments for farmer. This non-compliance has normally to be followed up by financial correction until corrective measures are taken. However, for Member States, taking into account the time elapsed from the first allocation of entitlements, the adoption of the necessary correction would lead to disproportionate legal and administrative constraints. It is therefore appropriate in the interest of legal certainty to regularise the allocation of such payments.

(46) In accordance with Article 70(1) of Regulation (EC) No 1782/2003, Spain, France and Portugal decided to exclude from the single payment scheme the direct payments made in the French overseas departments, the Azores and Madeira and the Canary Islands and grant them under the conditions established in Title IV of that Regulation. Some of the aids provided for in that Title have been completely integrated into the single payment scheme. For the sake of simplification and to take into account the specific circumstances of the outermost regions, it seems appropriate to manage such aid within the support programmes established by Regulation (EC) No 247/2006. To this end the relevant funds should be transferred from the national ceilings for direct payments to the financial amount set out in Article 23(2) of that Regulation. Regulating (EC) No 247/2006 should be amended accordingly.

(47) It is appropriate to provide that provisions of this Regulation, which could give rise to behaviour of a Member State possibly constitutive of a State aid, should, save as otherwise provided, be excluded from the application of the state aid rules given that the provisions concerned contain appropriate conditions for the granting of support, or foresee the adoption of such conditions by the Commission, to prevent undue distortion of competition.

(48) The measures necessary for the implementation of this Regulation should be adopted in accordance with Council Decision 1999/468/EC[16] of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission,

(49) Regulation (EC) No 1782/2003 should be repealed.

(50) Member States should be given sufficient time to implement the provisions allowing further decoupling of direct payments and those allowing them to review the decisions adopted in the context of the 2003 reform. For this reason the relevant provisions should only apply from 2010. Regulation (EC) No 1782/2003 should therefore apply during the year 2009 for those aid schemes that will only be integrated into the single payment scheme from 2010,

HAS ADOPTED THIS REGULATION:

TITLE I SCOPE AND DEFINITIONS

Article 1 Scope

This Regulation establishes:

(a) common rules on direct payments;

(b) an income support scheme for farmers (hereinafter referred to as the "single payment scheme");

(c) a transitional simplified income support scheme for farmers in the new Member States (hereinafter referred to as the «single area payment scheme»);

(d) support schemes for farmers producing rice, starch potatoes, cotton, sugar, fruit and vegetables, sheep meat and goat meat and beef and veal;

(e) a framework for the complementing of direct payments by new Member States.

Article 2 Definitions

For the purposes of this Regulation, the following definitions shall apply:

(a) "farmer" means a natural or legal person, or a group of natural or legal persons, whatever legal status is granted to the group and its members by national law, whose holding is situated within Community territory, as referred to in Article 299 of the Treaty, and who exercises an agricultural activity;

(b) "holding" means all the production units managed by a farmer situated within the territory of the same Member State;

(c) "agricultural activity" means the production, rearing or growing of agricultural products including harvesting, milking, breeding animals and keeping animals for farming purposes, or maintaining the land in good agricultural and environmental condition as established under Article 6 to this Regulation;

(d) "direct payment" means a payment granted directly to farmers under a support scheme listed in Annex I to this Regulation;

(e) "payments in a given calendar year" or "payments in the representative period" means the payments granted or to be granted in respect of the year/years concerned, including all payments in respect of other periods starting in that calendar year/years;

(f) "agricultural products" means the products listed in Annex I to the Treaty, including cotton, but with the exception of fishery products;

(g) “new Member States” means Bulgaria, the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Romania, Slovenia and Slovakia;

(h) "agricultural area" means any area taken up by arable land, permanent pasture and permanent crops.

Article 3 (ex-32) Financing of direct payments

The support schemes listed in Annex I to this Regulation shall be financed in accordance with Article 3(1)(c) of Regulation (EC) No 1290/2005.

TITLE II GENERAL PROVISIONS ON DIRECT PAYMENTS

CHAPTER 1 CROSS COMPLIANCE

Article 4 Main requirements

1. A farmer receiving direct payments shall respect the statutory management requirements listed in Annex II, and the good agricultural and environmental condition established under Article 6.

2. The competent national authority shall provide the farmer with the list of statutory management requirements and good agricultural and environmental condition to be respected.

Article 5 Statutory management requirements

1. The statutory management requirements listed in Annex II shall be established by Community legislation in the following areas:

(a) public, animal and plant health,

(b) environment,

(c) animal welfare.

2. The acts referred to in Annex II shall apply within the framework of this Regulation in the version as amended from time to time and, in case of Directives, as implemented by the Member States.

Article 6 Good agricultural and environmental condition

1. Member States shall ensure that all agricultural land, especially land which is no longer used for production purposes, is maintained in good agricultural and environmental condition. Member States shall define, at national or regional level, minimum requirements for good agricultural and environmental condition on the basis of the framework set up in Annex III, taking into account the specific characteristics of the areas concerned, including soil and climatic condition, existing farming systems, land use, crop rotation, farming practices, and farm structures.

2. Member States other than the new Member States shall ensure that land which was under permanent pasture at the date provided for the area aid applications for 2003 is maintained under permanent pasture. The new Member States shall ensure that land which was under permanent pasture on 1 May 2004 is maintained under permanent pasture. However, Bulgaria and Romania shall ensure that land which was under permanent pasture on 1 January 2007 is maintained under permanent pasture.

However a Member State may, in duly justified circumstances, derogate from the first subparagraph, provided that it takes action to prevent any significant decrease in its total permanent pasture area.

The first subparagraph shall not apply to land under permanent pasture to be afforested, if such afforestation is compatible with the environment and with the exclusion of plantations of Christmas trees and fast growing species cultivated in the short term.

CHAPTER 2 MODULATION AND FINANCIAL DISCIPLINE

Article 7 Modulation

1. Any amount of direct payments to be granted in a given calendar year to a farmer that exceeds EUR 5 000 shall be reduced for each year until 2012 by the following percentages:

(a) 2009: 7%,

(b) 2010: 9%,

(c) 2011: 11%,

(d) 2012: 13%.

2. The reductions referred to in paragraph 1 shall be increased for the:

(a) amounts between EUR 100 000 and 199 999, by 3 percentage points,

(b) amounts between EUR 200 000 and 299 999, by 6 percentage points,

(c) amounts of EUR 300 000 or more, by 9 percentage points.

3. Paragraphs 1 and 2 shall not apply to direct payments granted to farmers in the French overseas departments, in the Azores and Madeira, in the Canary and Aegean islands.

Article 8 Net ceilings

1. Without prejudice to Article 11, the total net amounts of direct payments which may be granted in a Member State in respect of a calendar year after application of Articles 7 and 10 of this Regulation and Article 1 of Regulation (EC) No 378/2007 shall not be higher than the ceilings set out in Annex IV to this Regulation. Where necessary, Member States shall proceed to a linear reduction of direct payments in order to respect the ceilings set out in that Annex IV.

2. The Commission, in accordance with the procedure referred to in Article 128(2) shall review the ceilings set out in Annex IV in order to take account of:

(a) modifications to maximum amounts that may be granted in accordance with the direct payments,

(b) modifications to the voluntary modulation referred to in Regulation (EC) No 378/2007,

(c) structural changes of the holdings.

Article 9 Amounts resulting from modulation

1. The amounts resulting from application of the reductions provided for in Article 7, in any Member State other than the new Member States, shall be available as additional Community support for measures under rural development programming financed under the European Agricultural Fund for Rural Development (EAFRD) as specified in Regulation (EC) No 1698/2005, according to the conditions set out in the following paragraphs

2. The amounts corresponding to the reduction by 5 percentage points shall be allocated to the Member States concerned in accordance with the procedure referred to in Article 128(2) on the basis of the following criteria:

(a) agricultural area,

(b) agricultural employment,

(c) gross domestic product (GDP) per capita in purchasing power.

However, any Member State concerned shall receive at least 80% of the total amounts which modulation has generated in that Member State.

3 By way of derogation from the second subparagraph of paragraph 2, if in a Member State the proportion of rye as part of its total cereal production exceeded 5% on average during the period 2000–2002 and its proportion of the total Community production of rye exceeded 50% during the same period, at least 90% of the amounts which the modulation generated in the Member State concerned shall be reallocated to that Member State, until 2013 included.

In such a case, without prejudice to the possibility provided for by Article 58, at least 10% of the amount allocated to the Member State concerned shall be available for measures referred to in paragraph 2 of this Article in rye producing regions.

For the purpose of this paragraph, "cereal" means the products listed in point I of Annex V.

4. The remaining amount resulting from the application of Article 7(1) and the amounts resulting from the application of Article 7(2) shall be allocated to the Member State where the corresponding amounts have been generated, in accordance with the procedure referred to in Article 128(2). They shall be used in accordance with Article 69(5 a ) of Regulation (EC) No 1698/2005.

Article 10 Special rules for modulation in the new Member States

1. Article 7 shall only apply to farmers in a new Member State in any given calendar year if the level of direct payments applicable in that Member State for that calendar year under Article 110 is no less than the level in Member States other than the new Member States, taking into account any reductions applied under Article 7(1).

2. If Article 7 applies to farmers in a new Member State, the percentage applicable under Article 7(1) shall be limited to the difference between the level of direct payments applicable to it under Article 110 and the level in Member States other than the new Member States, taking into account any reductions applied under Article 7(1).

3. Where reductions referred to in Article 7 apply to farmers in a new Member State no complementary national direct payments as referred to in Article 120 shall be granted to the farmer concerned.

4. Any amount resulting from the application of Article 7(1) and (2) shall be allocated to the new Member State where the corresponding amounts have been generated in accordance with the procedure referred to in Article 128(2). They shall be used in accordance with Article 69(5 a ) of Regulation (EC) No 1698/2005.

Article 11 Financial discipline

1. An adjustment of the direct payments shall be fixed when the forecasts for the financing of the aforementioned measures under heading 2 of Annex I of the Inter Institutional Agreement[17] on budgetary discipline and sound financial management for a given budget year, increased by the amounts given in Articles 122 and 123 of this Regulation and before application of modulation provided for in Article 7 and 10 of this Regulation and Article 1(1) of Regulation (EC) No 378/2007, indicate that the abovementioned annual ceiling, taking into account a margin of EUR 300 million below that ceiling, will be exceeded.

2. The Council, on a Commission's proposal presented not later than 31 March of the calendar year in respect of which the adjustments referred to in paragraph 1 apply, shall fix these adjustments at latest by 30 June of the calendar year in respect of which the adjustments apply.

3. In the framework of the application of the schedule of increments provided for in Article 110 to all direct payments granted in the new Member States, paragraph 1 shall not apply to the new Member States until the beginning of the calendar year, in respect of which the level of direct payments applicable in the new Member States is at least equal to the then applicable level of such payments in the Member States other than the new Member States.

CHAPTER 3 FARM ADVISORY SYSTEM

Article 12 Farm advisory system

1. Member States shall operate a system of advising farmers on land and farm management (hereinafter referred to as the "farm advisory system") operated by one or more designated authorities or by private bodies.

2. The advisory activity shall cover at least the statutory management requirements and the good agricultural and environmental condition referred to in Chapter 1.

Article 13 Conditions

1. Farmers may participate in the farm advisory system on a voluntary basis.

2. Member States shall give priority to the farmers who receive more that EUR 15 000 of direct payments per year.

Article 14 Obligations of approved private bodies and designated authorities

Without prejudice to national legislation concerning public access to documents, Member States shall ensure that private bodies and designated authorities referred to in Article 12 do not disclose personal or individual information and data they obtain in their advisory activity to persons other than the farmer managing the holding concerned, except any irregularity or infringement found during their activity which is covered by an obligation laid down in Community or national law to inform a public authority, in particular in case of criminal offences.

Article 15 Review

By 31 December 2010 at the latest, the Commission shall submit a report on the application of the farm advisory system, accompanied, if necessary, by appropriate proposals with a view of rendering it compulsory.

CHAPTER 4 INTEGRATED ADMINISTRATION AND CONTROL SYSTEM

Article 16 Scope

Each Member State shall set up and operate an integrated administration and control system, hereinafter referred to as the "integrated system".

The integrated system shall apply to the support schemes listed in Annex I.

To the extent necessary, it shall also apply to the administration and control of the rules laid down in Chapters 1 and 2.

Article 17 Elements of the integrated system

1. The integrated system shall comprise the following elements:

(a) a computerised data base;

(b) an identification system for agricultural parcels;

(c) a system for the identification and registration of payment entitlements as referred to in Article 20:

(d) aid applications;

(e) an integrated control system;

(f) a single system to record the identity of each farmer who submits an aid application.

2. Where Articles 55 and 56 of this Regulation apply, the integrated system shall incorporate a system for the identification and registration of animals set up in accordance, with Regulation (EC) No 1760/2000 of the European Parliament and of the Council and Council Regulation (EC) No 21/2004.

3. Where appropriate the identification system for agricultural parcels may include a geographical information system for olive cultivation.

Article 18 Computerised data base

1. The computerised data base shall record, for each agricultural holding, the data obtained from aid applications.

This data base shall, in particular, allow direct and immediate consultation, through the competent authority of the Member State, of the data relating to the calendar and/or marketing years starting from the year 2000.

2. The Member States may set up decentralised data bases on condition that these, and the administrative procedures for recording and accessing data, are designed homogeneously throughout the territory of the Member State and are compatible with one another in order to allow cross-checks.

Article 19 Identification system for agricultural parcels

The identification system for agricultural parcels shall be established on the basis of maps or land registry documents or other cartographic references. Use shall be made of computerised geographical information system techniques including preferably aerial or spatial orthoimagery, with a homogenous standard guaranteeing accuracy at least equivalent to cartography at a scale of 1:10000.

Article20 System for the identification and registration of payment entitlements

1. The system for the identification and registration of payment entitlements shall be set up allowing verification of entitlements and cross-checks with the aid applications and the identification system for agricultural parcels.

2. This system shall allow direct and immediate consultation, through the competent authority of the Member State, of the data relating to at least the previous three consecutive calendar and/or marketing years.

Article 21 Aid applications

1. Each year, a farmer shall submit an application for direct payments indicating, where applicable:

(a) all agricultural parcels of the holding, and where the Member State is applying Article 17(3), the number of olive trees and their positioning in the parcel,

(b) the number and amount of payment entitlements declared for activation,

(c) any other information provided for by this Regulation or by the Member State concerned.

2. A Member State may decide that the aid application needs to contain only changes with respect to the aid application submitted the previous year. A Member State shall distribute pre-printed forms based on the areas determined in the previous year and supply graphic material indicating the location of those areas and, where appropriate, the positioning of olive trees.

3. A Member State may decide that a single aid application shall cover several or all support schemes listed in Annex I or other support schemes

Article 22 Control of eligibility conditions

1. Member States shall carry out administrative controls on the aid applications to verify the eligibility conditions for the aid.

2. Administrative controls shall be supplemented by a system of on-the-spot checks to verify eligibility for the aid. For this purpose, Member States shall draw up a sampling plan of agricultural holdings.

Member States may use remote sensing and Global Navigation Satellite System (GNSS) techniques as a mean to carry out on-the-spot controls on agricultural parcels.

3. Each Member State shall designate an authority responsible for coordinating the controls provided for in this chapter.

Where the Member State provides for the delegation of some aspects of the work to be carried out under this chapter to specialised agencies or firms, the designated authority shall retain control over, and responsibility for, that work.

Article 23 Reductions and exclusions in case of non-compliance with eligibility rules

1. Without prejudice to reductions and exclusions provided for in Article 25, where it is found that the farmer does not comply with the eligibility conditions relevant to the granting of the aid as provided for in this Regulation, the payment or part of the payment granted or to be granted for which the conditions of eligibility have been meet shall be subject to reductions and exclusions to be laid down in accordance with the procedure referred to in Article 128(2).

2. The percentage of reduction shall be graduated according to the severity, extent, permanence and repetition of the non-compliance found and may go as far as total exclusion from one or several aid schemes for one or more calendar years.

Article 24 Controls on cross compliance

1. Member States shall carry out on-the-spot-checks to verify whether the farmer complies with the obligations referred to in Chapter 1.

2. Member States may make use of their existing administration and control systems to ensure compliance with the statutory management requirements and good agricultural and environmental condition referred to in Chapter 1.

These systems, and notably the system for identification and registration of animals set up in accordance Regulations (EC) No 1760/2000 and (EC) No 21/2004, shall be compatible with the integrated system, as provided for in Article 28(1) of this Regulation.

Article 25 Reduction or exclusion from payments in case of non compliance with cross-compliance rules

1. Where the statutory management requirements or good agricultural and environmental conditions are not complied with at any time in a given calendar year (hereinafter 'the calendar year concerned'), and the non-compliance in question is the result of an act or omission directly attributable to the farmer who submitted the aid application in the calendar year concerned, the total amount of direct payments to be granted, after application of Articles 7, 10 and 11 to that farmer shall be reduced or excluded in accordance with the detailed rules laid down in Article 26.

The first subparagraph shall also apply where, the non-compliance in question is the result of an act or omission directly attributable to the person to whom or from whom the agricultural land was transferred.

For the purpose of this paragraph "transfer" means any type of transaction whereby the agricultural land ceases to be at the disposal of the transferor.

2. The reductions or exclusions referred to in paragraph 1 shall only apply if the non-compliance relates to:

(a) an agricultural activity, or

(b) the agricultural area of the holding.

3. Notwithstanding paragraph 1 and in accordance with the conditions laid down in the detailed rules referred to in Article 26(1), Member States may decide not to apply a reduction or exclusion amounting to EUR 100 or less per farmer and per calendar year, and which includes any reduction or exclusion applied to payments under Article 51(1) of Regulation (EC) No 1698/2005.

Where a Member State decides to make use of the option provided for in the first subparagraph, in the following year the competent authority shall take the actions required to ensure that the farmer remedies the findings of non-compliance concerned. The finding and the remedial action to be taken shall be notified to the farmer.

Article 26 Detailed rules on reductions and exclusion in case of non compliance with cross-compliance rules

1. Detailed rules for the reductions and exclusions referred to in Article 25 shall be laid down in accordance with the procedure referred to in Article 128(2). In this context, account shall be taken of the severity, extent, permanence and repetition of the non-compliance found as well as of the criteria set out in paragraphs 2, 3 and 4 of this Article.

2. In case of negligence, the percentage of reduction shall not exceed 5% and, in case of repeated non-compliance, 15%.

In duly justified cases Member States may decide that no reduction shall be applied where, given its severity, extent and permanence, a case of non-compliance is to be considered as minor. Cases of non-compliance which constitute a direct risk to public or animal health shall however not be considered as minor.

Unless the farmer has taken immediate remedial action putting an end to the non-compliance found, the competent authority shall take the actions required that may, where appropriate, be limited to an administrative control, to ensure that the farmer remedies the findings of non-compliance concerned. The finding of minor non-compliance and the remedial action to be taken shall be notified to the farmer.

3. In case of intentional non-compliance, the percentage of reduction shall not in principle be less than 20% and may go as far as total exclusion from one or several aid schemes and apply for one or more calendar years.

4. In any case, the total amount of reductions and exclusions for one calendar year shall not be more than the total amount referred to in Article 25(1).

Article 27 Amounts resulting from cross compliance

The amounts resulting from the application of the reductions and exclusions in case of non compliance with Chapter 1 shall be credited to the EAGF. Member States may retain 25% of those amounts.

Article 28 Compatibility with the integrated system

1. For the purpose of applying the support schemes listed in Annex VI, Member States shall ensure that the administration and control procedures applied to these schemes are compatible with the integrated system in the following respects:

(a) the computerised data base;

(b) the identification systems for agricultural parcels;

(c) administrative checks.

To this end, these systems shall be set up so as to allow, without any problems or conflicts, a common functioning of, or the exchange of data between, them.

2. Member States may, for the purposes of applying Community or national support schemes other than those listed in Annex VI, incorporate in their administration and control procedures one or more components of the integrated system.

Article 29 Information and control

1. The Commission shall be kept regularly informed of the application of the integrated system.

It shall organise exchanges of views on this subject with the Member States.

2. In accordance with Article 37 of Regulation (EC) No 1290/2005, after informing the competent authorities concerned in good time, authorised representatives appointed by the Commission may carry out:

(a) any examination or control relating to the measures taken in order to establish and to implement the integrated system,

(b) controls at the specialised agencies and firms referred to in Article 22(3).

3. Without prejudice to the responsibilities of the Member States for the implementation and application of the integrated system, the Commission may seek the assistance of specialised bodies or persons in order to facilitate the establishment, monitoring and utilisation of the integrated system, in particular with a view to providing the competent authorities of the Member States with technical advice, should they request it.

CHAPTER 5 OTHER GENERAL PROVISIONS

Article 30 Minimum requirements for receiving direct payments

1. Member States shall not grant direct payments to a farmer in one the following cases:

(a) where the total amount of direct payments claimed or due to be granted in a given calendar year does not exceed EUR 250, or

(b) where the eligible area of the holding for which direct payments are claimed or due to be granted does not exceed one hectare. However, Cyprus may set a minimum eligible area of 0.3 hectares and Malta of 0.1 hectares.

However, farmers holding special entitlements referred to in Article 45(1) shall be subject to the condition referred to in point (a).

2. Member States may decide in an objective and non-discriminatory manner not to grant direct payments to companies or firms within the meaning of the second paragraph of Article 48 of the Treaty whose principal company's objects do not consist of exercising an agricultural activity.

Article 31 Payment

1. Save as otherwise provided for in this Regulation, payments under support schemes listed in Annex I shall be made in full to the beneficiaries.

2. Payments shall be made up to twice a year within the period from 1 December to 30 June of the following calendar year.

3. Payments under support schemes listed in Annex I shall not be made before the controls with regard to eligibility conditions, to be carried out by the Member State pursuant to Article 22, have been finalised.

4. By way of derogation from paragraph 2 of this Article and in accordance with the procedure referred to in Article 128(2), the Commission may:

(a) provide for advances;

(b) authorise the Member States, subject to the budgetary situation, to pay prior to 1 December advances in regions where, due to exceptional conditions, farmers face severe financial difficulties:

(i) of up to 50% of the payments,

or

(ii) of up to 80% of the payments in case advances have already been provided for.

Article 32 Circumvention clause

Without prejudice to any specific provisions in individual support schemes, no payment shall be made in favour of beneficiaries for whom it is established that they artificially created the conditions required for obtaining such payments with a view to obtaining an advantage contrary to the objectives of that support scheme.

Article 33 Review

Support schemes listed in Annex I shall apply without prejudice to possible review at any moment in the light of economic developments and the budgetary situation.

TITLE III SINGLE PAYMENT SCHEME

CHAPTER 1 GENERAL IMPLEMENTATION

Article 34 Payment entitlements

1. Support under the single payment scheme shall be available to farmers if they:

(a) hold payment entitlements which they have obtained in accordance with Regulation (EC) No 1782/2003;

(b) obtain payment entitlements under this Regulation:

(i) by transfer,

(ii) from the national reserve,

(iii) pursuant to Annex VII,

(iv) pursuant to Article 68(4)(c) and to the third subparagraph of Article 65(2).

2. For the purpose of this title, farmers holding payment entitlements shall mean farmers having been allocated or definitively transferred payment entitlements.

Article 35 Activation of payment entitlements per eligible hectare

1. Support under the single payment scheme shall be granted to farmers upon activation of a payment entitlement per eligible hectare. Activated payment entitlements shall give right to the payment of the amounts fixed therein.

2. "Eligible hectare" shall mean

(a) any agricultural area of the holding, including the areas planted with short rotation coppice (CN code ex 0602 90 41), that is used for an agricultural activity or, in case areas are used as well for non agricultural activities, predominantly used for agricultural activities. The Commission, in accordance with the procedure referred to in Article 128(2) of this Regulation, shall lay down detailed rules on the use for non agricultural activities to be allowed on eligible hectares .

(b) any areas which have been eligible in 2007 and which

(i) do not comply anymore with the definition of eligible as a result of the implementation of Council Directive 79/409/EEC[18] and of Directive 2000/60/EC of the European Parliament and of the Council[19] or

(ii) for the duration of the relevant scheme, are afforested pursuant to Article 31 of Council Regulation (EC) No 1257/1999 or to Article 43 of Regulation (EC) No 1698/2005.

Hectares shall comply with the eligibility condition at any time during a calendar year.

Article 36 Declaration of eligible hectares

1. The farmer shall declare the parcels corresponding to the eligible hectare accompanying any payment entitlement. Except in case of force majeure or exceptional circumstances, these parcels shall be at the farmer's disposal on a date fixed by the Member State which shall be no later than the date fixed in that Member State for amending the aid application.

Force majeure or exceptional circumstances shall be recognised by the competent authority in cases such as, for example:

(a) the death of the farmer;

(b) long-term professional incapacity of the farmer;

(c) a severe natural disaster gravely affecting the holding's agricultural land;

(d) the accidental destruction of livestock buildings on the holding;

(e) an epizootic affecting part or all of the farmer's livestock.

2. Member States may, in duly justified circumstances, authorise the farmer to modify his declaration on condition that he respects the number of hectares corresponding to his payment entitlements and the conditions for granting the single payment for the area concerned.

Article 37 Modification of payment entitlements

The payment entitlements per hectare shall not be modified save as otherwise provided.

The Commission, in accordance with the procedure referred to in Article 128(2) of this Regulation, shall lay down detailed rules for the modification of payment entitlements in particular in case of fractions of entitlements.

Article 38 Multiple claims

The area corresponding to the number of eligible hectares in respect of which a single payment application is submitted may be the subject of an application for any other direct payment as well as for any other aid not covered by this Regulation, save as otherwise provided.

Article 39 Use of land in case of the deferred integration of fruit and vegetables

Where a Member State has made use of the option provided for in the second subparagraph of Article 51 of Regulation (EC) No 1782/2003 (hereinafter referred to as "deferred integration of the fruit and vegetable sector into the single payment scheme"), the parcels in the regions concerned by the decision, up to a date not later than 31 December 2010 may not be eligible if used for:

(a) the production fruit and vegetables,

(b) the production of ware potatoes, and/or

(c) nurseries.

In case of the deferred integration referred to in the first subparagraph, Member States may decide to allow secondary crops to be cultivated on the eligible hectares during a maximum period of three months starting each year on 15 August. However, at the request of a Member State, this date may be modified in accordance with the procedure referred to in Article 128(2) for regions where cereals are normally harvested earlier for climatic reasons.

Article 40 Use of land for the production of hemp

1. Areas used for the production of hemp shall only be eligible if the varieties used have a tetrahydrocannabinol content not exceeding 0,2%. Member States shall establish a system for verifying the tetrahydrocannabinol content of the crops grown on at least 30% of the areas on hemp. However, if a Member State introduces a system of prior approval for such cultivation, the minimum shall be 20%.

2. In accordance with the procedure referred to in Article 128(2), the granting of payments shall be made subject to the use of certified seeds of certain varieties.

Article 41 Ceiling

1. For each Member State, the total value of all payment entitlements shall not be higher than the national ceiling referred to in Annex VIII.

In the case of allocation of payment entitlements to wine growers and taking account of the latest data made available to it by the Member States in accordance with [Articles 4a and 92(6)] of Regulation (EC) No [ the wine Regulation ], the Commission shall, in accordance with the procedure referred to in Article 128(2) of this Regulation, adapt the national ceilings set out in Annex VIII to this Regulation. By 1 December of the year preceding the adaptation of the national ceilings Member States shall communicate to the Commission the regional average of the value of entitlements referred to in point B of Annex VII of this Regulation.

2. Where necessary, a Member State shall proceed to a linear reduction of the value of entitlements in order to ensure respect of its ceiling.

Article 42 National reserve

1. Member States shall operate a national reserve that contains the difference between the ceiling fixed in Annex VIII and the total value of all allocated payment entitlements.

2. Member States may use the national reserve to grant, in priority and according to objective criteria, payment entitlements to farmers who commence their agricultural activity and in such a way as to ensure equal treatment between farmers and to avoid market and competition distortions.

3. Member States that do not apply Article 68(1)(c) may use the national reserve for the purpose of establishing, according to objective criteria and in such a way as to ensure equal treatment between farmers and to avoid market and competition distortions, payment entitlements for farmers in areas subject to restructuring and/or development programs relating to one or the other form of public intervention in order to avoid abandoning of land and/or in order to compensate specific disadvantages for farmers in those areas.

4. In application of this article Member States may increase the unit value and/or the number of entitlements allocated to farmers.

Article 43 Unused payment entitlements

Any payment entitlement which has not been activated for a period of 2 years shall be allocated to the national reserve, except in case of force majeure and exceptional circumstances within the meaning of Article 36(1).

Article 44 Transfer of payment entitlements

1. Payment entitlements may only be transferred to another farmer established within the same Member State except in case of transfer by actual or anticipated inheritance.

However, even in the case of actual or anticipated inheritance, payment entitlements may only be used in the Member State where the payment entitlements were established.

A Member State may decide that payment entitlements may only be transferred or used within one and the same region.

2. Payment entitlements may be transferred by sale or any other definitive transfer with or without land. In contrast, lease or similar types of transactions shall be allowed only if the payment entitlements transferred are accompanied by the transfer of an equivalent number of eligible hectares.

3. In case of sale of payment entitlements, with or without land, Member States may, acting in compliance with the general principles of Community law, decide that part of the payment entitlements sold revert to the national reserve or that their unit value is reduced in favour of the national reserve, according to criteria to be fixed by the Commission in accordance with the procedure referred to in Article 128(2).

Article 45 Conditions for special entitlements

1. Save as otherwise provided, payment entitlements establis hed under Section 2 of Chapter 3 of Title III and Article 71 m of Regulation (EC) No 1782/2003, hereinafter referred to as "special entitlements", shall be subject to the conditions set up in paragraphs 2 and 3 of this article.

2. By way of derogation from Article 35(1) a farmer who has special entitlements shall be authorised by the Member State to derogate from the requirement to activate entitlements by an equivalent number of eligible hectares provided that he maintains at least 50% of the agricultural activity exercised in calendar years 2000, 2001 and 2002 expressed in livestock units (LU).

The condition referred to in the first subparagraph shall not apply to Malta

The special entitlements shall not be modified.

3. In case of a transfer of the special entitlements, the transferee shall not benefit from the derogation of paragraph 2 except in case of inheritance or anticipated inheritance.

Article 46 Revision of payment entitlements

In duly justified cases, Member States may decide, by 1 August 2009 at the latest, and acting in compliance with the general principles of Community law, to move as from 2010 towards approximating the value of payment entitlements established under Chapter I to IV of Title III of Regulation (EC) No 1782/2003. To this end payment entitlements may be made subject to progressive modifications according to at least three pre-established annual steps and objective and non-discriminatory criteria.

The reduction of the value of any payment entitlement shall in none of these annual steps be more than 50% of the difference between its starting value and that applicable upon implementation of the final annual step.

Member States may decide to apply the preceding subparagraphs at the appropriate geographical level which shall be determined according to objective and non-discriminatory criteria such as their institutional or administrative structure and/or the regional agricultural potential.

CHAPTER 2 REGIONAL AND PARTIAL IMPLEMENTATION

SECTION 1 REGIONAL IMPLEMENTATION

Article 47 Regional allocation of the ceiling referred to in Article 41

1. A Member State having introduced the single payment scheme in accordance with Chapters 1 to 4 of Title III of Regulation (EC) No 1782/2003 may decide, by 1 August 2009 at the latest, to apply the single payment scheme from 2010 at regional level under the conditions laid down in this section.

2. Member States shall define the regions according to objective and non.-discriminatory criteria such as their institutional or administrative structure and/or the regional agricultural potential.

Member States with less than three million eligible hectares may be considered as one single region.

3. Member States shall subdivide the ceiling referred to in Article 41 between the regions according to objective and non-discriminatory criteria.

Article 48 Regionalisation of the single payment scheme

1. In duly justified cases, Member States may decide to divide no more than 50% of the regional ceiling established under Article 47 between all the farmers whose holdings are located in the region concerned, including those who do not hold payment entitlements.

2. Farmers shall receive payment entitlements whose unit value shall be calculated by dividing the corresponding part of the regional ceiling established under Article 48 by the number of eligible hectares, within the meaning of Article 35(2), established at regional level.

The value of these payment entitlements shall be increased in cases where a farmer holds by 15 May 2010 payment entitlements governed by Chapters 1 to 4 of Title III of Regulation (EC) No 1782/2003. To this end, the regional unit value of each of his payment entitlements shall be increased by an amount calculated on the basis of the total value of the payment entitlements which he held by 15 May 2010. These increases shall be calculated within the limits of the remaining part of the regional ceiling after application of paragraph 1 of this Article.

3. The number of entitlements per farmer shall be equal to the number of hectares the farmer declares in 2010, in accordance with Article 35(2), except in case of force majeure or exceptional circumstances within the meaning of Article 36(1).

4. Payment entitlements held by farmers before the division referred to in paragraphs 1 and 2 shall be cancelled and replaced by the new entitlements referred in paragraph 3.

Article 49 Revision of payment entitlements

1. In duly justified cases Member States applying Article 48 of this Regulation may decide, by 1 August 2009 at the latest, and acting in compliance with the general principles of Community law, to move as from 2011 towards approximating the value of payment entitlements established under this section or under Section 1 of Chapter 5 of Title III of Regulation (EC) No 1782/2003. To this end they may make such payment entitlements subject to progressive modifications according to at least two pre-established annual steps and objective and non-discriminatory criteria.

2. In duly justified cases Member States having introduced the single payment scheme in accordance with Section 1 of Chapter 5 of Title III of Regulation (EC) No 1782/2003 may decide, by 1 August 2009 at the latest, and