Case C-84/04

Commission of the European Communities

v

Portuguese Republic

(Failure of a Member State to fulfil obligations – Regulation (EEC) No 4253/88 and Article 10 EC – Structural funds – Coordination between activities of the Structural Funds and operations of the EIB – Systematic reduction of amounts paid by way of aid from the Guidance Section of the EAGGF – Charges levied by Ifadap during the programming period 1994-99)

Summary of the Judgment

Economic and social cohesion – Structural assistance – Community financing – Grant of EAGGF financial aid

(Council Regulation No 4253/88, Art. 21(3), second subpara., as amended by Regulation No 2082/93)

The second subparagraph of Article 21(3) of Regulation No 4253/88 laying down provisions for implementing Regulation (EEC) No 2052/88 as regards coordination of the activities of the different Structural Funds between themselves and with the operations of the European Investment Bank and the other existing financial instruments, as amended by Regulation No 2082/93, which provides that payments are to be made to the final beneficiaries without any deduction or retention which could reduce the amount of financial assistance to which they are entitled, prohibits the authorities in the Member States from making a deduction from the payments made or from demanding the payment of administrative fees charged for processing applications and having the effect of reducing the amount of the aid.

That prohibition covers the levying by the authority designated by a Member State as sole national interlocutor of the Guidance Section of the EAGGF of charges on beneficiaries corresponding to a percentage of the total amount of the project financed, and which thus proportionally reduce the amounts received by the beneficiaries by way of assistance granted by the Guidance Section of the EAGGF. The prohibition on any deduction extends to all charges which are directly and inseparably linked to the amounts disbursed to farmers, and not merely deductions which are actually made on the occasion of payments.

(see paras 33, 35-39)

JUDGMENT OF THE COURT (Second Chamber)

5 October 2006 ( )

(Failure of a Member State to fulfil obligations – Regulation (EEC) No 4253/88 and Article 10 EC – Structural funds – Coordination between activities of the Structural Funds and operations of the EIB – Systematic reduction of amounts paid by way of aid from the Guidance Section of the EAGGF – Charges levied by IFADAP during the programming period 1994-99)

In Case C-84/04,

ACTION under Article 226 EC for failure to fulfil obligations, brought on 20 February 2004,

Commission of the European Communities, represented initially by A.M. Alves Vieira, and subsequently by G. Braun, acting as Agents, and by N. Castro Marques and F. Costa Leite, advogados, with an address for service in Luxembourg,

applicant,

v

Portuguese Republic, represented by L. Fernandes, acting as Agent, and by C. Botelho Moniz and E. Maia Cadete, advogados,

defendant,

THE COURT (Second Chamber),

composed of C.W.A. Timmermans, President of the Chamber, J. Makarczyk, P. Kūris, G. Arestis (Rapporteur) and J. Klučka, Judges,

Advocate General: D. Ruiz-Jarabo Colomer,

Registrar: M. Ferreira, Principal Administrator,

having regard to the written procedure and further to the hearing on 12 January 2006,

after hearing the Opinion of the Advocate General at the sitting on 14 February 2006,

gives the following

Judgment

1 By its action, the Commission of the European Communities seeks a declaration that, by permitting the Instituto de Financiamento e Apoio ao Desenvolvimento da Agricultura e Pescas (Financing and Supporting Institute for the Development of Agriculture and Fisheries; ‘IFADAP’) to introduce, and by allowing to remain in force, a procedure for granting financial assistance from the Community Structural Funds that includes essential requirements involving the payment of charges which are neither voluntary nor optional and which do not constitute remuneration for services rendered, but rather serve to finance tasks for which the Portuguese State is responsible, particularly under Community law, the Portuguese Republic has failed to fulfil its obligations under Council Regulation (EEC) No 4253/88 of 19 December 1988 laying down provisions for implementing Regulation (EEC) No 2052/88 as regards coordination of the activities of the different Structural Funds between themselves and with the operations of the European Investment Bank and the other existing financial instruments (OJ 1988 L 374, p. 1), as amended by Council Regulation (EEC) No 2082/93 of 20 July 1993 (OJ 1993 L 193, p. 20) (‘Regulation No 4253/88’), and under Article 10 EC.

Legal context

Community legislation

2 Article 4(1) of Council Regulation (EEC) No 2052/88 of 24 June 1988 on the tasks of the Structural Funds and their effectiveness and on coordination of their activities between themselves and with the operations of the European Investment Bank and the other existing financial instruments (OJ 1988 L 185, p. 9), as amended by Council Regulation (EEC) No 2081/93 of 20 July 1993 (OJ 1993 L 193, p. 5) (‘Regulation No 2052/88’), provided:

‘Community operations shall be such as to complement or contribute to corresponding national operations. They shall be established through close consultations between the Commission, the Member State concerned and the competent authorities and bodies – including, within the framework of each Member State’s national rules and current practices, the economic and social partner, designated by the Member State at national, regional, local or other level, with all parties acting as partners in pursuit of a common goal. These consultations shall hereinafter be referred to as the “partnership”. The partnership shall cover the preparation and financing, as well as the ex ante appraisal, monitoring and ex post evaluation of operations.

The partnership will be conducted in full compliance with the respective institutional, legal and financial powers of each of the partners.’

3 Under the heading ‘Payments’, the second subparagraph of Article 21(3) of Regulation No 4253/88 read as follows:

‘The payments shall be made to the final beneficiaries without any deduction or retention which could reduce the amount of financial assistance to which they are entitled.’

4 Under the heading ‘Financial control’, the first subparagraph of Article 23(1) of that regulation provided:

‘In order to guarantee completion of operations carried out by public or private promoters, Member States shall take the necessary measures in implementing the operations:

– to verify on a regular basis that operations financed by the Community have been properly carried out,

– to prevent and to take action against irregularities,

…’.

National legislation

5 Under Article 1 of Decree‑Law No 414/93 (Diário da República I, Series A, No 298, 23 December 1993), IFADAP is a body governed by public law which has legal personality, administrative and budgetary independence, and its own assets.

6 Article 3(2) of Decree‑Law No 414/93 provides:

‘IFADAP is subject to rules of private law in its contractual relations with third parties, unless it is acting under the rights and powers of an authority.’

7 Under Article 5(2) of that Decree‑Law, IFADAP has the following tasks:

‘(a) to cooperate in the study and drawing up of measures of financial policy in the agriculture and fisheries sectors, and of the support measures for undertakings in those sectors;

(b) to ensure the operation of systems of Community and national support and aid to the agriculture and fisheries sectors, by participating in the conception and implementation of the plans and legislation adopted and serving as the sole national interlocutor for the Guidance Section of the European Agricultural Guidance and Guarantee Fund (EAGGF) and for other financial instruments of the Community for the guidance of agriculture and fisheries, namely with regard to applications for advances, refunds, rectifications and settlements of accounts;

…

(d) to pay the national and Community aid intended to finance programmes and projects or subsidise the interest on loans contracted for that purpose by the respective beneficiaries;

(e) to ensure the follow-up, evaluation and monitoring of programmes and projects supported by national or Community aid;

…’.

8 By Joint Decree of 28 May 1996 (Diário da República II, No 136, 14 June 1996), the Minister for Finance and the Minister for Agriculture, Rural Development and Fisheries decided as follows:

‘1. To permit IFADAP to impose a charge of not more than 0.9% of the amount of current projects.

2. If the actions of IFADAP do not involve analysis and decision-making, the abovementioned charge cannot amount to more than 0.45%.

…’

Background to the case and pre-litigation procedure

9 IFADAP was established to manage credit lines in support of the agricultural, forestry, livestock and fisheries sectors in Portugal. The Portuguese State having granted to IFADAP, by Decree-Law No 414/93, a number of public-service tasks, amongst which are those of ensuring the functioning of support mechanisms and of Community and national aid to the agricultural and fisheries sectors, IFADAP became the sole national interlocutor for the Guidance Section of the EAGGF and for the other Community financial instruments that support those sectors. When IFADAP performs those tasks, its acts are attributable to the Portuguese State.

10 During an on-site check in 1993, the Commission discovered that IFADAP was imposing on the final beneficiaries of financial contributions granted by the Guidance Section of the EAGGF (‘the beneficiaries’) charges corresponding to a percentage of the contributions. These charges, levied at source, amounted to 1.5% of the total amount of the project financed. The contract governing contributions which was proposed to the beneficiaries expressly imposed an obligation on the latter to pay these charges to IFADAP. Taking the view that the charges were not compatible with Community law, the Commission asked the Portuguese authorities to end this practice of direct recovery and to reimburse to the beneficiaries the sums wrongly paid.

11 In a letter of 20 January 1999 the Portuguese authorities acknowledged that the practice followed by them during the period from 3 August 1993 to 31 December 1994 was incompatible with Community law and undertook to reimburse the amounts charged. In those circumstances, the Commission considered that, regarding the period in question, there was no longer any failure to fulfil obligations.

12 Having renounced its system of levying charges directly on the amounts due to beneficiaries, the Portuguese authorities replaced it, from January 1995, and above all after the promulgation of the Joint Decree of 28 May 1996, by a system under which sums were paid to beneficiaries in full, combined with a procedure for granting aid which included the payment of a charge regarded as consideration for services that were rendered by IFADAP to the beneficiaries and consisted primarily of advice given before the submission of applications for assistance and the following up of those applications. According to information obtained by the Commission from those authorities during 1999 and during an on-site inspection visit carried out in March 2000, this remuneration system works in the following way: at the moment at which a contract granting subsidies is received, the beneficiary is asked to send to IFADAP a form authorising the debit from his account of the amount of the charge to be paid, with the message ‘authorisation in respect of the service rendered by IFADAP in connection with the abovementioned contract’ (that is to say in connection with grant of the subsidy in issue). The optional and voluntary nature of this payment was stated to be explained orally during contact with the beneficiaries.

13 After obtaining that information, the Commission sent a letter of formal notice to the Portuguese Republic on 25 July 2001. In that letter, the Commission took the view that the procedure applied by the Portuguese authorities from 1 January 1995 onwards, which included essential requirements entailing the payment of charges that were neither voluntary nor optional and did not constitute remuneration for services rendered to the beneficiaries, was in fact equivalent to maintaining the levying of a charge similar to that levied prior to that date. The sums taken in this manner, on the basis of a percentage of the value of the investment, constituted an actual compulsory deduction calculated on the basis of a percentage of the amount of the financial contributions granted by the Community funds and corresponded, in reality, to administrative fees to finance the expenditure necessitated by the management tasks that were the responsibility of IFADAP in its role as the authority entrusted with the payment of those contributions. According to the Commission, the charging of such an administrative fee was contrary to Community law, in particular Regulation No 4253/88, Council Regulation (EC) No 1260/99 of 21 June 1999 laying down general provisions on the Structural Funds (OJ 1999 L 161, p. 1) and Article 10 EC.

14 In its letters to the Commission of 5 November 2001 and 13 June 2002 in response to the letter of formal notice, the Portuguese Republic submitted that, as regards the period 1995-99, the payment to IFADAP by beneficiaries of a maximum charge of 0.45% to 0.9%, calculated on the basis of the amount of the subsidised investment, was not contrary to Community law. On the other hand, regarding the period after 1999, corresponding to the third Community support framework governed by Regulation No 1260/99, the Member State pointed out that it had renounced the principle of recovery of a fee by IFADAP as consideration for services rendered by it. In those circumstances, the Commission then decided that, for the period after 1999, there was no longer any failure to fulfil obligations.

15 Since the Commission did not agree with the arguments put forward by the Portuguese Republic as regards the period from 1995 to 1999, it sent a reasoned opinion to the latter on 13 November 2002 in which it reiterated the arguments contained in the letter of formal notice and called on the Member State to take the measures necessary to comply with that opinion within two months of its notification.

16 As it was not any more satisfied by the response, dated 17 January 2003, of the Portuguese Republic to the reasoned opinion, in which the Member State maintained its previous position, the Commission brought the present action seeking a declaration that Regulation No 4253/88 and Article 10 EC had been infringed from 1 January 1995 as regards the programming period 1994-99, which corresponds to the second Community support framework.

Forms of order sought

17 The Commission submits that the Court should:

– declare that, by permitting IFADAP to introduce, and by allowing to remain in force, a procedure for granting financial assistance from the Community Structural Funds that includes essential requirements involving the payment of charges which are neither voluntary nor optional and which do not constitute remuneration for services rendered, but rather serve to finance tasks for which the Portuguese State is responsible, particularly under Community law, the Portuguese Republic has failed to fulfil its obligations under Regulation No 4253/88 and Article 10 EC;

– order the Portuguese Republic to pay the costs.

18 The Portuguese Republic contends that the action should be dismissed as unfounded and that the Commission should be ordered to pay the costs.

The action

Arguments of the parties

19 According to the Commission, it follows implicitly from the wording of the second subparagraph of Article 21(3) of Regulation No 4253/88 that this provision constitutes a ‘full payment’ clause. It clearly imposes on the Member State concerned the obligation to ensure that the beneficiaries receive the full amount of the financial assistance to which they are entitled, the Member State having to abstain from making any deduction or retention from these amounts. The operations covered by the terms ‘retention’ and ‘deduction’ are to be construed broadly, particularly in light of the effect which such operations have on the beneficiaries.

20 In that regard, the Commission submits that the aim of this type of provision is to prevent Member States from using part of the Community funds intended to implement various Community policies to pay for the administrative costs generated by such implementation. As regards structural policies, provisions of this kind are explained by the Community legislature’s wish to make sure that Community contributions are properly used to achieve the aims laid down in the EC Treaty for those policies.

21 Regarding the Portuguese Republic’s argument that the sums were paid by the beneficiaries in return for services rendered by IFADAP, to the provision of which they agreed voluntarily under a contract governed by private law, and that IFADAP was not acting under its rights and powers as an authority, in accordance with Article 3(2) of Decree‑Law No 414/93, the Commission counters by saying that the system of remuneration practised by IFADAP does not allow one to distinguish between the tasks that are IFADAP’s responsibility as a management and supervisory authority, and those that are undertaken by it as an entity providing services.

22 Finally, the Commission points out that, in the present instance, the principle of partnership laid down in Article 4(1) of Regulation No 2052/88 is a specific form of the general principle of cooperation in good faith set out in Article 10 EC. It follows that the first of those provisions must be interpreted and applied in the light of this general principle, a fact which means that Member States are obliged to ensure that the obligations arising from Regulation No 2052/88 are complied with properly and, consequently, to take the appropriate measures to guarantee the application and effectiveness of Community law.

23 According to the Portuguese Republic, apart from the performance of its public-service task as sole national interlocutor of the Guidance Section of the EAGGF, IFADAP provides to candidates for, and beneficiaries of, programmes financed by the EAGGF a range of advisory services of an economic nature which go much further than the mere accomplishment of that task. These services, which can be provided by other economic operators, are not to be confused with those that IFADAP must provide by reason of its public-service task under Article 5 of Decree-Law No 414/93 and Article 23 of Regulation No 4253/88 or to be equated with such services. That Member State also states that the provision of these services is intended to guarantee that the beneficiaries genuinely have access to the programmes of the Guidance Section of the EAGGF.

24 In the alternative, the Portuguese Republic states that the levying of the charges by IFADAP does not involve a retention of, or deduction from, Community funds by that agency. First, in so far as the programmes of the Guidance Section of the EAGGF are financed, in general, in a proportion of 75 to 85% by Community funds, and in a proportion ranging from 15 to 25% by funds from the Portuguese State, the charges in issue, which never constitute more than 0.9% of the amount of the project financed, never affect Community contributions. Second, there is no infringement of the second subparagraph of Article 21(3) of Regulation No 4253/88 because the beneficiary receives the entirety of the Community funds to which he is entitled.

25 Also in the alternative, the Portuguese Republic submits that the judgments in Joined Cases C‑36/97 and C‑37/97 Kellinghusenand Ketelsen [1998] ECR I‑6337 and in Case C‑247/98 Greece v Commission [2001] ECR I‑1 do not apply to the charges levied by IFADAP. There are many legal and factual differences between the present proceedings and the cases giving rise to those judgments.

26 By contrast, the Member State argues for the application of the case-law found in the judgments in Case 31/78 Bussone [1978] ECR 2429, Case 233/81 Denkavit Futtermittel [1982] ECR 2933 and Case 297/82 Samvirkende danske Landboforeninger [1983] ECR 3299, which were delivered in relation to the Guarantee Section of the EAGGF. It submits that, even in the context of the management of the common organisation of the markets, the Court has accepted that supervisory measures taken by national authorities can justify the imposition of a pecuniary charge on the undertakings concerned.

Findings of the Court

27 It is undisputed, as is apparent from the case-file, that, during the programming period 1994-99, the Portuguese Republic authorised IFADAP to levy charges on beneficiaries corresponding to a percentage of the total amount of the project financed, and which thus proportionally reduce the amounts received by the beneficiaries by way of assistance granted by the Guidance Section of the EAGGF.

28 For the purpose of assessing the merits of the Commission’s action, it must be determined whether such a charge complies with Community law.

29 Under the second subparagraph of Article 21(3) of Regulation No 4253/88, ‘[t]he payments shall be made to the final beneficiaries without any deduction or retention which could reduce the amount of financial assistance to which they are entitled’.

30 It follows ineluctably from the wording of this provision that it permits no levy on subsidies granted to beneficiaries.

31 It must be recalled that the Court of Justice has ruled previously on the provisions regarding the Guarantee Section of the EAGGF which, like the second subparagraph of Article 21(3) of Regulation No 4253/88, require aid to be paid in full. In particular, the Court has had the opportunity to interpret Article 15(3) of Council Regulation (EEC) No 1765/92 of 30 June 1992 establishing a support system for producers of certain arable crops (OJ 1992 L 181, p. 12) and Article 30a of Regulation (EEC) No 805/68 of the Council of 27 June 1968 on the common organisation of the market in beef and veal (OJ, English Special Edition 1968 (I), p. 187), as amended by Council Regulation (EEC) No 2066/92 of 30 June 1992 (OJ 1992 L 215, p. 49) (‘Regulation No 805/68’).

32 Notwithstanding the existence of certain differences between the Guarantee and Guidance Sections of the EAGGF, the principles that derive from the Court’s case-law on the provisions of the regulations governing the Guarantee Section of the EAGGF, which require aid to be paid in full, are, as the Advocate General has observed at points 67 to 70 of his Opinion, applicable to the present case since the specific features of both of these sections are of secondary importance when compared with their shared feature, namely the fact that they are funded by the Community budget, allowing them to grant financial assistance in the form of subsidies for actions in their respective spheres of competence. Such assistance, which has the same single financial source, is subject in each case to the same rules for payment, such as the rule which requires that the amount received by the beneficiary must be the same as the one granted to him.

33 Thus, concerning the Guarantee Section of the EAGGF, the Court of Justice has held that Article 15(3) of Regulation No 1765/92 and Article 30a of Regulation No 805/68 prohibit the authorities in the Member States from making a deduction from the payments made or from demanding the payment of administrative fees charged for processing applications and having the effect of reducing the amount of the aid (Kellinghusenand Ketelsen, paragraph 21).

34 In the present case, the Portuguese Republic none the less claims that the charges levied by IFADAP were not intended to cover the administrative costs borne by it, but were payment for services rendered by it to the beneficiaries, which consisted primarily of advice given before the submission of applications for assistance and the following up of those applications.

35 That line of argument cannot be accepted. The prohibition on deductions cannot be interpreted in a purely formal manner as covering only deductions which are actually made on the occasion of payments. Thus the prohibition on any deduction must of necessity extend to all charges which are directly and inseparably linked to the amounts disbursed (see by analogy, concerning the Guarantee Section of the EAGGF, Case C‑312/02 Sweden v Commission [2004] ECR I‑9247, paragraph 22).

36 The Portuguese Republic admits that the charges levied, which were intended as payment for services rendered by IFADAP, were payable as a result of the submission of applications for aid and corresponded to a percentage of the amount of the project financed in the context of assistance granted by the Guidance Section of the EAGGF.

37 The Portuguese Republic cannot claim that the charges in issue, first, constituted payment for services rendered by IFADAP and, second, were paid voluntarily by the beneficiaries. If those charges are regarded as remuneration, their amount should be determined by reference to the service supplied and not as a percentage of the amount of the project financed. Likewise, if it were conceded that the charges are voluntary, the cost of services rendered to all the beneficiaries would therefore be borne only by those who pay the charges, which would be contrary to their remunerative function.

38 In those circumstances, it is clear, first, that there was a direct link between the applications for aid submitted by the beneficiaries and the levying of the charges and, second, that the charges had the effect of reducing the amount of aid actually received by the beneficiaries.

39 It follows that the levying of charges such as those introduced by the Joint Decree of 28 May 1996 is incompatible with the second subparagraph of Article 21(3) of Regulation No 4253/88 and, therefore, that the Portuguese Republic failed to comply with the terms of that provision; in that regard, the infringement is established.

40 There are no grounds for holding that there has been a failure to fulfil the general obligations contained in Article 10 EC which is separate from the failures, previously noted, to fulfil the more specific Community obligations which bound the Portuguese Republic under Regulation No 4253/88.

41 In light of all the foregoing, the Commission’s action must be held to be well founded.

42 Consequently, it must be held that, by permitting IFADAP to introduce, and by allowing to remain in force, a procedure for granting financial assistance from the Community Structural Funds that includes essential requirements involving the payment of charges which are neither voluntary nor optional and which do not constitute remuneration for services rendered, but rather serve to finance tasks for which the Portuguese State is responsible, particularly under Community law, the Portuguese Republic has failed to fulfil its obligations under Regulation No 4253/88.

Costs

43 Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since the Commission has applied for costs and the Portuguese Republic has been unsuccessful, the Portuguese Republic must be ordered to pay the costs.

On those grounds, the Court (Second Chamber) hereby:

1. Declares that, by permitting the Instituto de Financiamento e Apoio ao Desenvolvimento da Agricultura e Pescas (Financing and Supporting Institute for the Development of Agriculture and Fisheries) to introduce, and by allowing to remain in force, a procedure for granting financial assistance from the Community Structural Funds that includes essential requirements involving the payment of charges which are neither voluntary nor optional and which do not constitute remuneration for services rendered, but rather serve to finance tasks for which the Portuguese State is responsible, particularly under Community law, the Portuguese Republic has failed to fulfil its obligations under Council Regulation (EEC) No 4253/88 of 19 December 1988 laying down provisions for implementing Regulation (EEC) No 2052/88 as regards coordination of the activities of the different Structural Funds between themselves and with the operations of the European Investment Bank and the other existing financial instruments, as amended by Council Regulation (EEC) No 2082/93 of 20 July 1993;

2. Orders the Portuguese Republic to pay the costs.

[Signatures]