EFTA SURVEILLANCE AUTHORITY DECISION No 124/95/COL of 6 December 1995 on the sixth amendment of the procedural and substantive rules in the field of State aid

THE EFTA SURVEILLANCE AUTHORITY,

has amended the procedural and substantive rules in the field of State aid (1), adopted on 19 January 1994 (2), as last amended on 9 June 1995 (3), as follows:

1. Chapter 6 of the State aid guidelines shall be replaced by the following:

'6. SPECIFICITIES REGARDING AID UNLAWFUL ON PROCEDURAL GROUNDS

1. Apart from special features which are indicated below, the procedure with regard to aid unlawful on procedural grounds follows the same pattern as with notifications.

6.1. Notion of aid unlawful on procedural grounds

1. As the term "unnotified aid" would be too narrow to cover all aid put into effect in a way which infringes the last sentence of Article 1 (3) of Protocol 3 to the Surveillance and Court Agreement, the EFTA Surveillance Authority decided to use the notion of "aid unlawful on procedural grounds" (referred to hereinafter as "unlawful aid").

The term covers:

(a) aid provided without notification;

(b) aid granted by incorrect application of an approved aid scheme (aid "being misused" in the meaning of Article 1 (2) of Protocol 3 to the Surveillance and Court Agreement);

(c) aid that is notified late, i.e. notified after being "put into effect"; and

(d) aid notified beforehand but "put into effect" before the EFTA Surveillance Authority has taken a decision (1).

6.2. Request for information

1. When the EFTA Surveillance Authority becomes aware of a possibly unlawful aid case, it requests the EFTA State concerned to supply full details on the matter normally within 20 working days. This is the same as the usual period allowed for supplying additional information on notified aid cases (see 3.2.4. (2)). A reminder will be sent if necessary.

2. It is recalled that the EFTA Surveillance Authority is empowered to proceed and to take a decision on the basis of the information available (see 5.4.(3)), even in the absence of any submission to it from the EFTA State concerned.

6.2.1. Injunction ("interim measures")

1. The EFTA Surveillance Authority may request by an interim decision the EFTA State to suspend payment of the aid pending the outcome of the investigation (2). The procedure is as follows:

2. Once it has concluded that aid has been granted unlawfully, the EFTA Surveillance Authority must give the EFTA State concerned an opportunity to submit its comments before taking a decision requiring it to suspend immediately the payment of the aid pending the outcome of the investigation (3).

3. (4) The EFTA Surveillance Authority considers that in some cases an order requiring the suspension of aid which has been unlawfully granted will not go far enough: such an order will not always counteract the infringements of the procedural rules which may have been committed, particularly where all or part of the aid has already been paid out. The Authority would therefore inform the EFTA States that in appropriate cases it may - after giving the EFTA State concerned the opportunity to comment and to consider alternatively the granting of rescue aid, as defined in Chapter 16 of these guidelines - adopt a provisional decision ordering the EFTA State to recover any moneys which have been disbursed in infringement of the procedural requirements. The aid would then have to be recovered in accordance with paragraphs 6.2.3 (2) and 6.2.3 (3) of these guidelines.

4. If the EFTA State fails to suspend payment of the aid or to recover the aid, the EFTA Surveillance Authority is entitled, while carrying out the examination on the substance of the matter, to bring the matter directly before the EFTA Court and apply for a declaration that such payment amounts to an infringement of the Agreement (5).

6.2.2. Conduct of proceedings

1. In cases of unlawful aid, the EFTA Surveillance Authority endeavours to take a decision within two months after receiving complete information.

2. If, in unlawful aid cases, the EFTA Surveillance Authority finds that the aid is compatible with the functioning of the EEA Agreement, it must take a positive decision on the merits of the case.

6.2.3. Recovery orders

1. In negative decisions on cases of unlawful aid the EFTA Surveillance Authority orders, as a rule, the EFTA State to reclaim the aid from the recipient (6).

2. The recovery is to be effected in accordance with national law including the provisions concerning interest due for late payment of amounts owing to the government, interest which should normally run from the date of the award of the unlawful aid in question. The relevant provisions of national law must be applied in such a way that recovery is not rendered practically impossible (7).

3. (8) The EFTA Surveillance Authority takes the view that for the purpose of restoring the status quo commercial interest rates provide a relevant measure of the advantage improperly conferred on the aid recipient. The Authority accordingly informs the EFTA States that in any decisions it may adopt ordering the recovery of aid unlawfully granted it will apply the reference rate of interest used in the calculation of the net grant equivalent of regional aid measures (9) as the basis for the commercial rate.

(1) See 3.3. for the interpretation of "put into effect".

(2) ECJ, 14. 2. 1990, Case C-301/87: France v. Commission (1990) ECR I-307 (paragraphs 19-20).

(3) Ibid., 356 (paragraph 19).

(4) This paragraph corresponds to the Commission's letter to the Member States of 30 April 1995 (OJ No C 156, 22. 6. 1995, p. 5).

(5) Ibid., 357 (paragraph 23).

(6) First stated in ECJ, 12. 7. 1973, Case 70/72, Commission v. Germany (1973) ECR 813, 828-829 (paragraphs 10-13); see also ECJ 21. 3. 1990, Case C-142/87, Belgium v. Commission (1990) ECR I-959, 1020 (paragraphs 65-66) and ECJ, 24. 2. 1987, Case 310/85, Deufil v. Commission (1987) ECR 901, 927 (paragraph 24).

(7) See ECJ, 21. 3. 1990, Case C-142/87, Belgium v. Commission (1990) ECR I-959, 1018-1020 (paragraphs 58-63); see also ECJ, 20. 9. 1990, Case 5/89, Commission v. Germany (1990) ECR I-3437, 3456 (paragraph 12); ECJ, 21. 2. 1990, Case C-74/89, Commission v. Belgium (1990) ECR I-491; and ECJ, 2. 2. 1989, Case 94/87, Commission v. Germany (1989) ECR 175, 192 (paragraph 12).

(8) This paragraph corresponds to the Commission's letter to the Member States of 22 February 1995 (SG(95) D/1983).

(9) See paragraph 27 (3) (f) of the present guidelines.`

2. Chapter 18 of the State Aid Guidelines shall be replaced by the following;

'18. AID TO EMPLOYMENT (1)

18.1. Introduction

1. Continued unemployment at unacceptably high levels is still amongst the chief economic and social problems facing most European countries. In the 1980s the EFTA countries enjoyed very low rates of unemployment compared with the rest of Europe (between approximately 1 % and 3 % of the labour force). However, the latest recession brought about sharp increases in unemployment rates in Norway and Iceland, to levels unprecedented for decades, 6 % in Norway in 1993 and 4,7 % in Iceland in 1994. Liechtenstein on the other hand has maintained a very low rate of unemployment throughout.

2. The EFTA States are now in common with much of Europe experiencing economic recovery, after the recession of recent years, and the overall employment situation has somewhat improved, especially in Norway. The unfavourable employment conditions in recent years have nevertheless been characterized by very significant increases in youth and long-term unemployment as well as employment problems of older people. This structural unemployment, although less severe than in most other European countries, is a persistent problem showing little signs of improvement.

3. Experience in the EFTA States and EC Member States generally shows that, once people become unemployed, they can expect to spend a relatively long period looking for a new job because they will have become less employable. This phenomenon is responsible for an unduly high proportion of the long-term unemployed in Europe (over 40 % of total unemployed), the upshot being increasingly widespread social exclusion.

4. With the upturn in economic activity, it is expected that the coming years will see a positive trend in job creation. However, this trend may not be strong enough to reduce the unemployment rate to socially acceptable levels. It is now accepted that structural reasons lie behind the persistently high rates of unemployment in Europe, and this situation calls for specific policies to improve labour-market adaptability.

5. The EC Member States and the EFTA States have drawn up a package of recommendations covering the following five priority areas (2):

- boosting investment in education and training,

- improving internal and external flexibility mechanisms in order to enhance the employment content of growth,

- reducing indirect labour costs, in particular by reducing direct taxation of labour,

- improving the effectiveness of active policies, notably by redirecting public expenditure on passive income support for the unemployed,

- stepping up measures to promote the employment of underprivileged groups in the labour market, such as the long-term unemployed, young people and older workers.

6. Against this background, tax and financial measures can be expected to play an important role in encouraging firms to hire workers experiencing utmost difficulty in entering the labour market. Although they might be less effective because of substitution or windfall effects, grants per job created for the long-term unemployed, for example, and targeted exemptions from social security contributions reduce labour costs at the bottom end and thus offset the difference associated with lower-than-average productivity.

7. The same type of measures may also give firms an incentive to invest more in vocational training. In such cases, the grant or tax concession must reflect the externalities associated with the worker exploiting the newly acquired knowledge on the labour market.

8. Although the objective of such measures is to improve the situation of workers on the labour market, it must be recognized that firms also benefit in that they are able to reduce their labour costs because of the intermediary role they play in implementing tax and financial measures. That is why steps must be taken to ensure that proliferation of measures to promote employment does not adversely affect the EFTA Surveillance Authority's parallel efforts to reduce artificial distortions of competition under Articles 61 and 62 of the EEA Agreement.

9. These guidelines pursue a number of objectives:

- to clarify the interpretation of Article 61 of the EEA Agreement and Article 1 of Protocol 3 to the Surveillance and Court Agreement with regard to State aid in the field of employment in order to ensure greater transparency of notification decisions under Article 1 of Protocol 3 to the Surveillance and Court Agreement,

- to ensure consistency between the rules of competition and the implementation of the policies used to combat unemployment,

- to make explicit, by defining the different types of aid and their objectives, the approach normally taken by the EFTA Surveillance Authority, namely to give sympathetic consideration to State aid designed to improve the employment situation.

18.2. Scope of Article 61 (1) of the EEA Agreement

1. The guidelines presented here cover only those measures falling within the scope of Article 61 (1) of the EEA Agreement, which stipulates that "any aid granted by EC Member States, EFTA States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Contracting Parties, be incompatible with the functioning of the EEA Agreement". Such State aid measures must be notified in advance to the EFTA Surveillance Authority pursuant to Article 1 (3) of Protocol 3 to the Surveillance and Court Agreement, unless they are within the limits of the de minimis rule. The notification obligation applies to aid schemes as well as to all cases of ad hoc employment aid outside authorized schemes.

2. A number of employment-policy measures are not caught by Article 61 (1) of the EEA Agreement because:

- they constitute aid to individuals that does not favour certain undertakings or the production of certain goods, or

- they do not affect trade between the Contracting Parties, or

- they are "general" measures.

This is clearly the case, in particular, with measures to provide guidance and counselling, general assistance and training for the unemployed (aid to individuals that does not favour certain undertakings or the production of certain goods) and aid designed to improve labour law or to adapt the education system (general measures).

18.2.1. Aid to individuals that does not favour certain undertakings or the production of certain goods

1. Measures to assist individuals the purpose or effect of which is not to favour certain undertakings or the production of certain goods do not constitute State aid within the meaning of Article 61 (1) of the EEA Agreement.

2. In so far as such measures apply automatically to individuals on the basis of objective criteria and without favouring certain undertakings or the production of certain goods, they do not constitute state aid if they are designed:

- to improve the personal situation of workers on the labour market or to make it possible for them to find work or become socially integrated, in particular by way of vocational training or apprenticeships,

- to supplement the income of certain workers,

- to encourage the employment of women in occupations traditionally carried on by men or the employment of individuals from ethnic minorities,

- to foster mobility of workers, the creation of self-employed activities or the recruitment of certain categories of workers having to contend with temporary socio-vocational disadvantages,

- to promote the employment of persons suffering from permanent physical or mental disabilities.

18.2.2. Effect on trade between the Contracting Parties

1. Aid is caught by Article 61 (1) of the EEA Agreement only if it affects trade between the Contracting Parties. Thus, employment aid in respect of activities that do not involve trade between the Contracting Parties (e.g. neighbourhood care services, certain local employment initiatives) does not fall within the scope of Article 61 (1). The EFTA Surveillance Authority considers that this is also the case with "de minimis" aid (3), which encompasses most forms of aid for promoting self-employed activities.

18.2.3. General measure or State aid

1. The distinction between general measures and State aid lies outside the scope of these guidelines.

2. It should be noted that a number of general measures may affect competitive conditions and trade between the Contracting Parties as much as State aid but, since these measures do not constitute State aid within the meaning of Article 61 (1) of the EEA Agreement, the elimination of any distortions of competition that they might cause is not covered by the monitoring of State aid provided for in Articles 61, 62 and 63 of the EEA Agreement.

3. Employment is also promoted by other measures such as those to promote training and the acquisition of new skills. In this respect, it may be useful to point out that in many cases the subsidies for vocational training/retraining do not constitute State aid caught by Article 61 of the EEA Agreement and Article 1 of Protocol 3 to the Surveillance and Court Agreement and that, where such measures fall within the scope of Article 61 (1) of the Agreement, the EFTA Surveillance Authority usually gives them sympathetic consideration.

4. The same is true of measures to improve working conditions.

18.3. State aid to employment

1. One point needs to be made clear concerning the scope of these guidelines; aid to employment, as covered by these guidelines, is aid not linked to investment.

2. Even where investment aid is calculated per job created or includes premiums for job creation, it does not constitute employment aid as such since it is not directly intended to create or maintain jobs. Its effects in combating unemployment are indirect, through the realization of productive investment to bring about a structural change in the firm. The reference to jobs created is only one criterion for assessing aid to the investment for which the aid is intended. In view of its purpose and its permanent effects on the industrial structure, such aid should be treated just like any other investment aid and should be subject to the normal assessment criteria.

18.3.1. General comments

1. By granting employment aid to certain firms or to the production of certain goods, the authorities are taking over part of those firms' labour costs, which are normal expenditure incurred in their own interest, and conferring a financial advantage that improves their competitive position. In so far as the products or services concerned are in competition with those of firms from other States parties to the EEA Agreement, such aid is likely to distort competition and affect trade between the Contracting Parties; consequently, it is, in principle, incompatible with the functioning of the EEA Agreement. Within the single market, aid granted to reduce labour costs can lead to distortions of intra-EEA competition and deflections in the allocation of resources and mobile investment, to the shifting of unemployment from one country to another, and to relocation.

2. The EFTA Surveillance Authority considers that, without rigorous controls and strict limits, employment aid can have harmful macro-economic effects which cancel out it immediate effects on job creation. If the aid is used to protect firms exposed to intra-EEA competition, it could have the effect of delaying adjustments needed to ensure the competitiveness of European industry. Care must also be taken to ensure that the granting of state aid does not lead to escalating subsidization, making the aid ineffective and wasting public money on all sides. Lastly, the danger is that, if granted in an uncontrolled fashion, this type of aid will simply shift unemployment elsewhere without helping to resolve the employment problem in the territory covered by the EEA Agreement and will therefore distort competition to an extent contrary to the functioning of the EEA Agreement.

3. The EFTA Surveillance Authority has been sympathetic to employment aid, particularly where it is intended to encourage firms to create jobs or to hire individuals who face particular difficulties in finding work. This attitude is justified by the fact that the lower productivity of these workers reduces the financial advantage accruing to the firm and by the fact that the workers also benefit from the measure and are likely to be excluded from the labour market unless employers are offered such incentives. These rules confirm that position.

18.3.2. Forms of aid

1. Employment aid introduced by EC Member States and EFTA States usually takes the form of grants (single or monthly payments) and exemptions for certain firms from employer's social security contributions or from certain taxes. In some cases the different types of aid are combined.

18.3.3. Types of employment aid

1. The concepts of aid to maintain jobs and aid to create jobs need clarification because they are of major relevance to whether the aid is compatible with the functioning of the EEA Agreement.

2. Aid to maintain jobs means support given to a firm to persuade it not to lay off its workers, with the subsidy usually being calculated on the basis of the number of employees at the time the aid is granted.

3. Aid to create jobs, on the other hand, provides employment for workers who have never had a job or who have lost their previous job, and is calculated on the basis of the number of jobs created. It should be made clear that job creation refers to net job creation, i.e. the creation of an additional job in relation to the (average) work force (over a period of time) of the firm concerned. Simply replacing a worker without actually increasing the work force, and hence without creating new jobs, does not constitute genuine job creation.

4. One form of job creation, unusual because there is no increase in the number of hours worked in the firm, is job sharing, i.e. apportionment of the overall amount of available work between a larger number of jobs with a proportionally lower number of hours worked.

18.4. Application of the derogations in Article 61 (2) and (3) of the EEA Agreement

1. Where aid to promote employment is caught by the ban laid down in Article 61 (1) of the EEA Agreement, an examination must be made of whether it qualifies for one of the derogations in Article 61 (2) and (3). Here a distinction must be made between aid that creates new jobs and aid that maintains existing jobs.

2. The EFTA Surveillance Authority is generally sympathetic to aid intended to create jobs. Despite the risks involved for intra-EEA competition, such aid improves the employment content of growth. Consequently, taking due account of the application of the specific sets of rules governing certain branches of industry, and in so far as the amount of aid per worker is justified and does not represent too high a proportion of the firm's production costs, it may be concluded that, when a firm makes this type of effort, the aid it receives for the purpose generally qualifies for the derogation in Article 61 (3) (c) in that it is intended to facilitate the development of certain activities, provided that it does not adversely affect trading conditions to an extent contrary to the functioning of the EEA Agreement.

3. In assessing employment aid, the EFTA Surveillance Authority will apply the following criteria:

- it will be favourably disposed towards aid to create new jobs in SMEs (4) and in regions eligible for regional aid (5). Outside these two categories, it will also look favourably upon aid to encourage firms to take on certain groups of workers experiencing particular difficulties entering or re-entering the labour market. In the latter case, there is no need for net job creation, provided that the post falls vacant following voluntary departure and not redundancy,

- it will also be sympathetic towards aid to promote job sharing, which allows the overall amount of work available to be distributed among a larger number of posts with shorter working hours, thereby offering the possibility of (part-time) work to a greater number of people,

- for aid in the preceding categories to be viewed favourably, the EFTA Surveillance Authority will also scrutinize the terms of the employment contract, in particular compliance with the obligation to hire workers for an indefinite period and to maintain newly created jobs for a minimum period, conditions which ensure that the job created is a stable one. Any other guarantee of the permanence of new jobs, particularly the arrangements for payment of the aid, will also be taken into account,

- the EFTA Surveillance Authority will make sure that the level of aid does not exceed that which is necessary to provide an incentive to create jobs, taking account, where appropriate, of any difficulties facing SMEs and/or disadvantages affecting the region concerned. The aid must be temporary,

- if the creation of jobs for which aid is granted is combined with the training or retraining of the workers concerned, this will make a particularly positive contribution to a favourable assessment by the EFTA Surveillance Authority.

4. Aid to maintain jobs, which is similar to operating aid, will be authorized only under the following conditions:

- such aid may be authorized where, in accordance with Article 61 (2) (b) of the EEA Agreement, it is intended to make good the damage caused by natural disasters or exceptional occurrences. Under certain conditions, aid to maintain jobs may also be authorized in regions eligible for the derogation under Article 61 (3) (a) the EEA Agreement concerning the economic development of areas where the standard of living is abnormally low or where there is serious underemployment (6),

- where aid to maintain jobs is granted as part of a rescue, restructuring or conversion plan for an ailing firm, it will have to be notified and will be assessed applying the relevant EFTA Surveillance Authority guidelines (7).

Naturally, these considerations concern solely aid to maintain jobs and the EFTA States are free to take any appropriate measures to ensure that employment is maintained by general measures, such as a general reduction in taxes and social security contributions paid by firms.

5. Aid to create jobs that is limited to one or more sensitive sectors experiencing overcapacity or in crisis is also generally viewed less favourably than aid to create new jobs that is available to the economy as a whole.

6. Such sectoral aid constitutes an advantage for the sector(s) concerned which improves their competitive position in relation to firms from other EFTA States and EC Member States. Aid that reduces wage costs throughout one or more productive sectors reduces production costs in those sectors, and this enables them to improve their market share to the detriment of their EEA competitors both within the EFTA State or EC Member State concerned and for exports inside and outside the territory covered by the EEA Agreement, with all the attendant implications in terms of a worsening of the employment situation in those sectors in other EFTA States or EC Member States. Consequently, the protective effect of such aid for the sector(s) in question, in particular those in crisis, and its adverse effects on employment in competing sectors in other EFTA States or EC Member States generally outweigh the common interest involved in active measures to reduce unemployment; the EFTA Surveillance Authority will usually consider such aid to be incompatible with the functioning of the EEA Agreement. However, where such aid is granted in a region affected by serious underemployment, the EFTA Surveillance Authority will take this fact into account.

7. The EFTA Surveillance Authority will, however, be more favourably disposed towards aid to create new jobs where the jobs are in growth niche markets or sub-sectors that hold out the prospect of considerable job creation.

18.5. Conclusion

1. If the EFTA Surveillance Authority concludes, after examining employment aid schemes planned by the EFTA States and subject to notification, that the arrangements and conditions conform to these guidelines, it may regard them as compatible with the functioning of the EEA Agreement by virtue of the derogation in Article 61 (3) (c), which applies to aid to facilitate the development of certain activities without adversely affecting trading conditions to an extent contrary to the common interest.

2. However, where aid to employment concerns certain sectors, firms or categories of aid which are governed by specific rules, it may be regarded as compatible with the functioning of the EEA Agreement only if it complies with the conditions laid down in those rules applicable in the context of the EEA Agreement.

3. A report on the application of these guidelines will be submitted and, if necessary, the guidelines will be reviewed five years after they enter into force.

(1) This chapter corresponds to the Guidelines on aid to employment adopted by the Commission on 19 July 1995 (OJ No C 334, 12. 12. 1995).

(2) See the guidelines and recommendations relating to the white paper on growth, competitiveness and employment adopted at the European Council meeting in Essen in 1994 as well as the joint communiqué of the presidencies of the joint meeting of EU and EFTA Ministers of Finance and Economy on 18 September 1995.

(3) See Chapter 12 of these guidelines, the application and implementation of the "de minimis" rule.

(4) For definition of SMEs see Chapter 10 of these guidelines on state aid to small and mediumsized enterprises.

(5) See Part VI of these guidelines.

(6) See Part VI, in particular Chapter 28, of these guidelines.

(7) See Chapter 15 of these guidelines.'

3. The following text shall be inserted in the State Aid Guidelines as Chapter 30:

'30. AID TO THE AVIATION SECTOR

In the autumn of 1994 the EC Commission adopted guidelines concerning application of the State aid provisions of the EC Treaty and the EEA Agreement in the aviation sector (1).

The EFTA Surveillance Authority has not been notified of any aid by the EFTA States to enterprises in the aviation sector. However, should the occasion arise to assess such aid, the Authority will apply criteria corresponding to those found in the Commission guidelines referred to above.

(1) Application of Articles 92 and 93 of the EC Treaty and Article 61 of the EEA Agreement to State aids in the aviation sector (OJ No C 350, 10. 12. 1994).`

4. The following text shall be inserted in the State Aid Guidelines as Chapter 31:

'31. AID TO SHIPBUILDING GRANTED AS DEVELOPMENT ASSISTANCE TO A DEVELOPING COUNTRY (1)

1. Article 4 (7) of the Act referred to in point 1b of Annex XV to the EEA Agreement on aid to shipbuilding (2) establishes that aid to shipbuilding and ship conversion granted as development assistance to a developing country shall not be subject to the prevailing maximum production aid ceiling, set by the EFTA Surveillance Authority in accordance with Article 4 (2) of the Directive.

2. Such aid may be deemed compatible with the functioning of the EEA Agreement provided that it complies with the terms laid down for that purpose by OECD Working Party No 6 in its agreement concerning the interpretation of Articles 6 to 8 of the OECD Council resolution of 3 August 1981 (Understanding on export credits for ships).

3. Any such individual proposal is subject to prior notification to the EFTA Surveillance Authority. On the basis of the notification, the Authority shall verify the particular development content of the proposed aid and satisfy itself that it falls within the scope of the Understanding.

4. As regards the latter point, the EFTA Surveillance Authority ensures that the proposed aid complies with the criteria laid down in OECD document C/WP6(84)3 of 18 January 1984 concerning the interpretation of Article 6 of the Understanding on export credits for ships (3).

5. Accordingly, the following criteria must be adhered to by the EFTA States granting development aid:

1. The aid may not be granted for construction of ships which will be operated under a flag of convenience.

2. In the event that the aid cannot be classified as public development aid in the framework of OECD the donor must confirm that the aid is part of an inter-governmental agreement.

3. The donor must give appropriate assurances that the real owner is resident in the beneficiary country and that the beneficiary company is not a non-operational subsidiary of a foreign company.

4. The beneficiary must give undertakings not to sell the ship without prior government approval.

Furthermore the aid granted must contain a grant element of a least 25 % in accordance with the OECD method of calculation, see OECD document C/WP6(85)62 of 21 October 1985.

6. The Understanding does not, on the other hand, provide for any criteria applicable to the classification of countries eligible for development aid. The EFTA Surveillance Authority has decided, taking into account the practice of the EC Commission, to consider compatible with the functioning of the EEA Agreement the granting of development aid to the following countries under the terms of Article 4 (7) of the Directive:

(a) ACP States (4)

(b) Overseas countries and territories of EC Member States (5)

(c) All countries not included in (a) or (b) above which are classified on the OECD DAC-list as least-developed countries (LLDC), low-income countries (LIC) or lower middle-income countries (LMIC). These countries are the following:

- Afghanistan (LLDC),

- Bangladesh (LLDC),

- Bhutan (LLDC),

- Bolivia (LIC),

- Burma (LLDC),

- China (LIC),

- Cook Island (LMIC),

- Costa Rica (LMIC),

- Cuba (LMIC),

- Dominican Republic (LMIC),

- Ecuador (LMIC),

- Egypt (LIC),

- El Salvador (LMIC),

- Guatemala (LMIC),

- Haiti (LLDC),

- Honduras (LIC,)

- India (LIC),

- Indonesia (LIC),

- Kampuchea, Democratic (LIC),

- Korea, Democratic People's Republic of (LMIC),

- Laos (LLDC),

- Lebanon (LMIC),

- Maldives (LLDC),

- Mongolia (LIC),

- Morocco (LMIC),

- Nepal (LLDC),

- Nicaragua (LIC),

- Pakistan (LIC),

- Paraguay (LMIC),

- Peru (LMIC),

- Philippines (LMIC),

- Sri Lanka (LIC),

- Thailand (LMIC),

- Tunisia (LMIC),

- Turkey (LMIC),

- Vietnam (LIC),

- Yemen (LLDC),

- Yemen, Democratic (LLDC).

7. Countries appearing in the upper middle-income countries (UMIC) classification will not be considered eligible.

8. In order to safeguard the EFTA States' shipbuilding interests the EFTA Surveillance Authority would, however, allow the EFTA States to grant development aid to countries not falling under the above categories provided it can be substantiated by the EFTA States that a third country participant to the OECD Understanding is planning to grant development aid for a particular contract. In this event the EFTA Surveillance Authority may deem compatible with the functioning of the EEA Agreement development aid to be granted for this contract up to the same level as that planned by a third country participant to the OECD Understanding in terms of OECD grant element.

9. In order to tighten up the application of Article 4 (7) of the Directive and ensure compliance with the criteria referred to in paragraph (5) above, the EFTA States are required to formally engage in each individual notification of development projects under Article 4 (7) of the Directive that these criteria are adhered to. They will also be expected to give the relevant details of the contract in order to determine how the contract price relates to market prices of comparable vessels.

10. The EFTA States are advised that as regards the criterion of flag of convenience (point 1 in paragraph 5. above) the EFTA Surveillance Authority will consider the following countries as having a flag of convenience:

- Antigua,

- Bahamas,

- Bermuda,

- Cayman Isles,

- Cyprus,

- Gibraltar,

- Lebanon,

- Liberia,

- Malta,

- Panama,

- St Vincent,

- Vanuatu.

11. The provisions of this chapter will be valid until the expiry of the Act referred to in point 1b of Annex XV to the EEA Agreement.

(1) This chapter corresponds to the Commission letter to Member States SG(89) D/311 dated 3 January 1989.

(2) Council Directive No 90/684/EEC as amended by Council Directive No 93/115/EC and Directive No 94/73/EC. These Council Directives, as adapted for the purpose of the EEA Agreement by the EEA Joint Committee Decision No 21 of 5 April 1995, will hereinafter be referred to as the Shipbuilding Directive.

(3) Working Party No 6 of the Council: revision of the definitions and administrative procedures concerning the understanding on export credits for ships.

(4) See Decision of the Council and the Commission of 24 March 1986 on the conclusion of the third ACP-EEC Convention (OJ No L 86, 31. 3. 1986).

(5) See Council Decision 86/283/EEC of 30 June 1986 on the association of the overseas countries and territories with the European Economic Community (OJ No L 175, 1. 7. 1986, p. 46).`

5. The present Chapter 30 of the State Aid Guidelines 'Standardized annual reporting`, and Chapter 31, 'Other specific provisions`, shall accordingly be renumbered as Chapter 32 and 33, respectively.

Done at Brussels, 6 December 1995.

For the EFTA Surveillance Authority

Knut ALMESTAD

The President

(1) Hereinafter referred to as the State aid guidelines.

(2) OJ No L 231, 3. 9. 1994, p. 1.

(3) OJ No L 175, 27. 7. 1995, p. 59.