1999/718/EC: Commission Decision of 24 February 1999 concerning State aid granted by Spain to Daewoo Electronics Manufacturing España SA (Demesa) (notified under document number C(1999) 498) (Text with EEA relevance) (Only the Spanish text is authentic)
Date: 1999-02-24
Institutions: European Commission
Subjects: Spain, State aid, aid to industry, electrical engineering, land and buildings, tax relief

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 24 February 1999

concerning State aid granted by Spain to Daewoo Electronics Manufacturing Espaæa SA (Demesa)

(notified under document number C(1999) 498)

(Only the Spanish text is authentic)

(Text with EEA relevance)

(1999/718/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular the first subparagraph of Article
93(2) thereof,

Having given notice (1) to interested parties, in accordance with
the above provisions, to submit their comments, and having
taken account of those comments,

Whereas:

and from Associazione Nazionale Industria Elettrotecniche ed
Elettroniche,
Italian federation of manufacturers of
household appliances (referred to below as (cid:145)ANIE(cid:146)).

the

By letter dated 26 June 1996,
Spanish authorities for information.

the Commission asked the

After receiving a reminder sent on 11 September 1996, Spain
provided some information by letter dated 16 September
1996. By letter of 11 February 1997, the Basque regional
authorities
the
additional
Commission.

information

forwarded

to

I. PROCEDURE

from Asociaci(cid:243)n Nacional de

the Commission received a
By letter of 11 June 1996,
complaint
Fabricantes de
ElectrodomØsticos de L(cid:237)nea Blanca, the Spanish federation of
manufacturers of household appliances (referred to below as
stating that Spain had granted aid to Daewoo
(cid:145)ANFEL(cid:146)),
Electronics Manufacturing Espaæa SA (referred to below as
(cid:145)Demesa(cid:146)), a company established at Vitoria-Gasteiz (2) in the
Autonomous Community of the Basque Country (referred to
below as (cid:145)the Basque Country(cid:146)), in the form of grants and tax
exemptions exceeding the ceilings allowed for regional aid in
the Basque Country. The Commission received further
complaints concerning the same aid from a competitor of
Demesa, from the European Committee of Manufacturers of
Electrical Domestic Equipment (referred to below as (cid:145)CECED(cid:146))

(1) OJ C 103, 4.4.1998, p. 3.
(2) Vitoria-Gasteiz is a municipality located in `lava, one of the three
the Basque

provinces forming the Autonomous Community of
Country.

Following further correspondence, the Commission informed
Spain by letter of 16 December 1997 that it had decided to
initiate proceedings under Article 93(2) of
the Treaty in
respect of possible aid received by Demesa, and urged the
Spanish Government
items of
information.

to provide a number of

The Commission’s decision to initiate proceedings was the
subject of a notice (3) published in the Official Journal of the
European Communities,
in which the Commission invited
interested parties to submit their comments on the measures
concerned. Spain submitted its comments by letters dated 23
January 1998 and 6 March 1998.

The Commission forwarded the comments it received from
interested parties
to Spain, offering it an opportunity to
respond, which it did by letter of 20 October 1998.

(3) See footnote 1.

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By letter of 4 June 1998, the Commission informed Spain that
it had decided to extend the proceedings.

The Commission’s decision to extend the proceedings was
published in a notice in the Official
the European
Communities (4). Spain submitted its comments by letters of 22
and 24 July 1998.
the Commission invited
interested parties to submit their comments; it forwarded the
comments received to Spain, offering it an opportunity to
respond, which it did by letter received on 3 December 1998.

In the notice,

Journal of

Two meetings were held in Brussels (29 October 1998) and
Vitoria-Gasteiz (15 December 1998) between Commission staff
and representatives of the Basque regional authorities, during
which the latter reaffirmed their position.

II. DESCRIPTION OF THE AID

(cid:151) a tax credit applied in the form of a 45 % reduction in
Demesa’s
tax
concessions also granted to Demesa under the corporation
tax arrangements of the Province of `lava (8).

corporation tax

and other

liability (7)

II.2. The beneficiary

The beneficiary of the measures is Demesa, established in the
Jœndiz industrial estate at Vitoria-Gasteiz and a wholly owned
subsidiary of Daewoo Electronics Co. Ltd (referred to below as
(cid:145)Daewoo Electronics(cid:146)), one of the companies belonging to the
South Korean multinational group Daewoo.

Daewoo Electronics was created in 1971 and has a global
network of 92 plants (9). It manufactures consumer electronics
products and household electrical appliances (white goods) for
the Korean and world markets. In 1997 its sales totalled USD
2 725 million (10).

II.1. The measures concerned

II.3. The Cooperation Agreement between Demesa and the

Basque regional authorities

The measures in respect of which proceedings under Article
93(2) of the Treaty were initiated and subsequently extended
are the following:

(cid:151) Demesa’s use, free of charge, of a 500 000 m2 plot in the
Jœndiz industrial estate at Vitoria-Gasteiz since 1996 and
its subsequent purchase of the land at less than the market
price,

(cid:151) aid granted to Demesa in connection with the Ekimen
programme (5), in so far as it is not covered by the general
rule laid down in that scheme, which allows an aid
intensity equal to 10 % of the eligible costs corresponding
to the amounts actually (6) invested by Demesa, given that
the project
involve job
is not strategic and does not
creation,

(4) OJ C 266, 25.8.1998, p. 6.
(5) Scheme approved by the Commission by letter SG (96) D/11028
of 13 December 1996 (State aid N 529/96). The Decree of the
Basque Regional Government establishing the scheme (Decree No
289/1996 of 17 December 1996) was published in Official Gazette
of the Basque Country No 246, 23.12.1996, p. 20138).

study

(6) In the light of information submitted by the complainants (who
presented a
company
specialised in the design of refrigerator manufacturing plants), the
Commission decided also to examine whether the cost of Demesa’s
investments had not been artificially increased in order to obtain a
larger grant.

an engineering

conducted by

On 13 March 1996 the Basque regional authorities and
Daewoo Electronics concluded a Cooperation Agreement in
which Daewoo Electronics undertook to establish a refrigerator
manufacturing plant in the Basque Country and the Basque
regional authorities undertook in return to support
the
investment by providing a number of grants. The Agreement
entered into force on the date of its signature.

Point 3 of the Cooperation Agreement made reference to the
grants and other advantages that
the project could receive
from the regional authorities, namely a non-refundable grant

(7)

Sixth additional provision of Provincial Law (Norma Foral)
22/1994 of 20 December 1994 (Official Journal of the Province of
`lava (BOTHA) No 5, 13.1.1995), whose validity was extended
for 1996 by the fifth additional provision of Provincial Law
33/1995 of 20 December 1995 (BOTHA No 4, 10.1.1996) and
for 1997 by point 2.11 of
the single-derogating provision of
Provincial Law 24/1996 of 5 July 1996 (BOTHA No 90,
9.8.1996) in conjunction with the seventh additional provision of
Provincial Law 31/1996 of 18 December 1996 (BOTHA No 148,
30.12.1996). The tax credit may be granted for 1998 pursuant to
the 11th additional provision of Provincial Law 33/1997 of 19
December 1997 (BOTHA No 150, 31.12.1997) and for 1999
pursuant to the seventh additional Provision of Provincial Law
36/1998 of 17 December 1998 (BOTHA No 149, 30.12.1998).
(8)
Provincial Law 24/1996 on corporation tax.
(9) 33 production centres, 33 commercial

subsidiaries and 19

branches.

(10) EUR 2 388 million (EUR 1 = USD 1,1410, Inf(cid:128)uro exchange rate,

February 1999).

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of up to 25 % of investments in fixed assets and of start-up
costs, as well as any other public aid generally available to
operators making investments
in the Basque Country in
environmental protection, R&D and energy saving projects.

period of
granted,

three years from the date when the aid is

(cid:151) the amount of

the investment has to exceed ESP 360

million,

The maximum aid intensity allowed in the Basque Country is
25 % nge (net grant equivalent) (11) (35 % for SMEs).

(cid:151) it must entail the creation of at least 30 jobs,

by

the

regional

approval

authorities was

Under the Agreement, Daewoo Electronics was to set up a
company with its seat in the Basque Country (Demesa). The
new company was immediately to draw up a business plan
an
whose
indispensable condition for implementation of the Agreement.
The business plan, which covered the period 1996 to 2001
and was presented to the regional authorities in September
1996, provided for an investment of ESP 11 835 600 000 (12)
and the creation of 745 jobs. Sales were planned to begin in
1997, mainly on the Spanish market and in France and Italy,
and were to spread to Germany and the United Kingdom in
1998. At the outset, most of the turnover was to be generated
on the domestic market, but exports were to grow each year,
reaching 60 % of the total in three to four years.

II.4. The Ekimen scheme and the non-refundable grant

awarded to Demesa

The non-refundable grant equivalent to 25 % of the investment
in tangible fixed assets was negotiated in the framework of the
abovementioned Cooperation Agreement of 13 March 1996
and granted on 24 December 1996 by decision of the Basque
Government under the Ekimen regional aid scheme approved
by the Commission on 13 December 1996.

Its aims are
The scheme covers the period 1996 to 1998.
regional development and job creation. Aid granted under the
scheme takes
soft
loans (13) for the creation of new production facilities or the
extension or modernisation of existing infrastructure. The
eligible costs include land, buildings and plant.

the form of non-refundable grants or

(cid:151) any fixed assets transferred to third parties or produced by

another company in the same group are not eligible,

(cid:151) at least 30 % of the investment has to be financed from the

beneficiary’s own resources.

in particular,

As regards the conditions in which non-refundable grants are
awarded and,
their variation in intensity in
accordance with specific criteria, the Commission stated the
following in its letter SG(96) D/11029 of 13 December 1996
approving the Ekimen scheme.

(cid:145)The Commission notes that non-refundable grants, which
must not exceed the ceiling of 25 % gge (14), will be awarded in
accordance with the following conditions:
(a) 10 % as the
general rule; (b) an extra 5 % for strategic projects or projects
which create jobs; (c) and extra 5 % for projects located within
priority areas; and (d) an extra 5 % for projects which make a
significant
job
creation(cid:146)

contribution to regional development or

The grant awarded on 24 December 1996 represents an aid
intensity of 25 % gge of the investment and amounts to a total
of ESP 2 958,9 million (15), to be paid in instalments over a
four-year period in accordance with the following schedule
(ESP million):

1996

1997

1998

1999

30 500

1 557 600

759 900

610 900

The beneficiaries are, inter alia, industrial companies or firms
In order to qualify for aid
engaged in extractive activities.
under the Ekimen scheme, investments have to comply with
the following conditions:

The grant represented an aid intensity of 18,76 % nge, which
falls below the ceiling of 25 % nge laid down for the Basque
Country.

(cid:151) the investment project has to be technically, economically
and financially viable and has to be implemented within a

(11) The maximum limit for regional aid in the Basque Country, in
accordance with the Spanish regional aid map (OJ C 25,
31.1.1996, p. 3).
(12) EUR 71 133 388,63.
(13) The interest rate applied can be between two and five points

lower than the nominal interest rate.

Contrary to the forecasts set out in Demesa’s business plan, the
total investment of ESP 11 835,6 million justifying the grant of
the aid was to be carried out during that same period 1996 to
1999 and not over the period from 1996 to 2001. The
Commission expressed doubts, which were
subsequently
dispelled, as to whether the condition that the project was to
the qualifying
be completed within three years, one of

(14) Gross grant equivalent.
(15) EUR 17 783 347,16.

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conditions for the grant, would be fulfilled. The regional
authorities confirmed that payment of the aid was to be made
over a period of three years, although given the date on which
the grant was awarded (24 December 1996) it would be split
into four budget allocations. The regional authorities also
the
confirmed that Demesa’s
creation of 412 jobs during the period 1996 to 1999.

investment would involve

According to information provided by the regional authorities,
updated to June 1998, Demesa has declared investments
corresponding to 44 % of the total amount; 201 jobs had been
created up to that date (16).

II.5. Tax concessions available in the Province of `lava

The tax arrangements in force in the Basque Country are
governed by the Economic Agreement established by Law
12/1981 of 13 May 1981, as last amended by Law 38/1997
of 4 August 1997. Under the Economic Agreement, the `lava
Provincial Council may, under certain conditions, maintain,
establish and regulate the tax system within its territory (17).

Using the powers conferred on it by the Economic Agreement,
the `lava Provincial Council has established the following tax
aid measures:

(a) a tax credit corresponding to 45 % of

these

the period was

the cost of
investments, provided that
exceed ESP 2 500
million. The credit is applied to the amount payable by
way of corporation tax. It was originally valid only for
investments made between 1 January 1995 and 31
December 1995, but
subsequently
extended until 31 December 1997 by successive budgetary
provisions. Any tax credit not used up because it exceeds
the amount of definitive tax liability may be carried
forward and applied in subsequent years. Decisions
granting the credit also lay down the time limits, ceilings
and any other
in each case.
Investments made in the preparatory phase of a project
may be deemed eligible if
so decided by the `lava
Provincial Council. Demesa was granted the benefit of the
tax credit by Decision 737/97 adopted by the `lava
Provincial Council on 21 October 1997;

restrictions

applicable

(b) a reduction (18) of 99 %, 75 %, 50 % and 25 % in the basis
of assessment for corporation tax, applicable, respectively,

(16) According to an article in the Spanish press

(El Pa(cid:237)s, 11.
November 1998),
reporting on trade union action, Demesa
employed 170 workers, 90 % of whom did not have open-ended
employment contracts.

(17) See Article 6 of the Economic Agreement, as amended by Law
38/1997 of 4 August 1997. The Provincial Councils of the other
two provinces of the Basque Country (Vizcaya and Guipœzcoa)
also have powers in the tax field.

(18) See Article 26 of Provincial Law 24/1996.

for four consecutive years running from the first year in
which the basis of assessment is positive. These reductions
are available to companies newly established in the
Province of `lava provided that they invest at least ESP 80
million and create at least 10 jobs;

(c) various reductions in the amount of

tax payable (19),

which may not total more than 40 % of the tax liability.

III. REQUEST FOR INFORMATION AND INITIATION OF
PROCEEDINGS

In the decision which it notified to Spain by letter dated 16
December 1997, the Commission:

(cid:151) urged the Spanish Government

to provide it with the
the
information necessary
non-refundable grant was awarded in accordance with the
Ekimen aid scheme, and whether the investment costs
covered were equivalent to the amounts actually invested,

determining whether

for

(cid:151) initiated proceedings under Article 93(2) of the Treaty in
respect of certain tax measures and with regard to the
free-of-charge use of a plot of land and the subsequent sale
of the land at less than the market price.

III.1. Spain’s reply to the request for information: the grant

awarded under the Ekimen scheme

Spain transmitted the information set out below, which was
provided by the Basque Regional Government.

the grant amounting to 25 % gge of

In so far as
the
investments made during the period 1996 to 1999 was
awarded under a regional aid scheme approved by the
Commission, the regional authorities took the view that there
for
was no obligation to notify it. Following the request
information made by the Commission (which itself was acting
in response to the complaints mentioned above), the Basque
regional authorities nevertheless informed it of the award of
the grant. The regional authorities also stressed that the plan
submitted by Demesa fulfilled all the eligibility conditions laid
down in the Ekimen scheme and that
its economic and
financial viability was ensured.

(19) 15 % of the amount invested in new tangible fixed assets; 10 % of
the accounting result set aside in a reserve for investments; 30 %
of R & D Expenditure; 15 % of
investments in environmental
protection; 25 % of investments made with a view to developing
exports. See Articles 37, 39, 41, 42 and 43 of Provincial Law
24/1996.

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As far as fulfilment of the conditions for the award of the
grant is concerned in particular, the regional authorities made
the points summarised below:

to verify that

times
investments
correspond to the amount of aid disbursed.

the

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actually made

(cid:151) the household-appliances sector is of strategic importance
for the Basque Country. The regional authorities base their
arguments concerning the strategic nature of the sector on
the theory of competitive advantage and clusters (20). They
claim that the household appliances cluster accounts for
6 % of GDP in the region and can consequently be
regarded as strategic; the project is furthermore strategic in
its own right since Demesa’s establishment in the Basque
Country will
competition between
companies in a sector in which there is no strong group of
local competitors in the region,

keener

lead

to

(cid:151) a multinational company was investing in a region severely

affected by economic recession,

(cid:151) the grant awarded to Demesa does not exceed the ceiling
of 25 % gge laid down in the Ekimen aid scheme, which in
turn represents only around 20 % nge. This is less than the
maximum allowed in the Basque Country (25 % nge),

(cid:151) the fact that the investment is not located in a preferential
interest area for the purposes of the Ekimen scheme does
not mean that Demesa cannot be awarded aid up to the
prescribed maximum of 25 % gge: the regional authorities
enjoy wide discretionary powers allowing them to award
grants up to that limit,

(cid:151) there is no objective factual basis for the complainant’s
claim that the real cost of Demesa’s investment is only half
the declared value. The regional authorities nevertheless
decided to carry out an audit on the investments made,

(cid:151) the Ekimen scheme comprises a procedure for checking
and monitoring investments which makes it possible at all

(20) The regional authorities refer in particular to the (cid:145)theory of
competitive advantage developed by Prof. Michael Porter(cid:146). Among
works published by this author, see for example The Competitive
Advantage of Nations, The Free Press, New York, 1990 or, more
recently, (cid:145)Clusters and New Economics of Competition(cid:146), in Harvard
Business Review, Vol. 76, Issue 6, November/December 1998, pp.
79 to 90.
In that article, clusters are defined as (cid:145)geographic
concentrations of interconnected companies and institutions in a
particular field(cid:146) (p. 78).
(cid:145)They include, for example, suppliers of
specialised inputs such as components, machinery, and services,
and providers of specialised infrastructure. Clusters also often
extend downstream to channels and customers and laterally to
manufacturers of complementary products [(cid:133)]. Finally, many
clusters include governmental and other institutions [(cid:133)]
that
provide specialised training, education, information, research, and
technical support.(cid:146) The characteristic feature of this definition is
summed up by the words (cid:145)geographic concentration(cid:146). The author
also states in the article that (cid:145)government policies in developing
formation.
economies often unwittingly work against cluster
Restrictions on industrial
in
distressed areas, for example, can disperse companies artificially(cid:146).

location and subsidies to invest

III.2. Observations submitted by Spain

III.2.1. Free-of-charge use of a 500 000 m2 plot of land
and subsequent sale of the land at less than the
market price

The regional authorities claim that Demesa has never used a
500 000 m2 plot of
land free of charge. With the aid of
the company
they point out
documentary evidence,
that
occupied and subsequently purchased
a plot of only
100 000 m2. In line with specific requirements of property
law, the sale was formalised only after successive divisions and
amalgamations of
the different pre-existing plots had been
completed. The regional authorities have also supplied aerial
photographs demonstrating that Demesa has indeed occupied
only the 100 000 m2 of land it purchased.

A complication nevertheless arose in the course of the sale
transaction owing to the presence on the land of
tenant
farmers who claimed compensation for crops ploughed up as a
result of the construction work. It was only after enforcement
proceedings had been initiated, and subsequently settled out of
court, that the deed of sale was formalised on 30 December
1997. According to the regional authorities, the transfer of
ownership could not take place until the dispute over tenure
of the land had been resolved, since Gazteiko Industria Lurra
SA, the company selling it, felt bound to act in good faith
towards the purchaser. In any event, the regional authorities
stress that the sale took place in accordance with Spanish law
and therefore that there can be no question of aid as far as the
conditions of sale are concerned.

As regards the price at which the land was sold, the average
prices communicated by the complainant (between ESP 6 000
and ESP 7 000 per square metre) are for plots of land (between
1 000 and 10 000 m2) much smaller than that purchased by
Demesa (100 000 m2). It is reasonable to assume that a lower
price per square metre would be charged for a plot of land 10
times larger. In support of this, the regional authorities have
submitted two reports drawn up after
the sale by two
independent experts, according to which the purchase price of
a 100 000 m2 plot of serviced land varies between ESP 4 000
and ESP 5 000 per square metre. The regional authorities
consequently take the view that the price of ESP 4 125 per
square metre of serviced land paid by Demesa is in line with
market conditions.

The documentation submitted also includes a (cid:145)supplementary
accounting report on available plots of
land(cid:146) drawn up,
according to the regional authorities, by the auditors Price

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Waterhouse for 1997. That report gives a unit cost of ESP
4 481 per square metre of serviced land for 50 000 m2 plots
located in the same area as the land occupied by Demesa.

the

take

regional

authorities

Lastly,
the
Commission communication of 10 July 1997 on State aid
elements
public
authorities (21) does not apply to the case in point since the
purchase of the land was decided before the communication
was adopted.

the view that

buildings

sales

land

and

by

of

in

III.2.2. Tax aid

Spain has communicated an extremely detailed report, drawn
up by the Basque regional authorities, on the basis and
workings of the tax arrangements applicable in the Province of
`lava. The report claims that, when it decided to initiate
proceedings, the Commission did not take sufficient account of
the historical, constitutional and legislative bases of
the
Province’s specific legal arrangements.

In the taxation field in particular, the reference framework for
these special arrangements is the Economic Agreement referred
to in point II.5.

Using these legislative powers in the tax field,
the `lava
Provincial Council adopts, among other things, legal provisions
relating to corporation tax.

corporation tax arrangements

The regional authorities consider that these corporation tax
provisions are general measures which should not be examined
in the light of Article 92 of the Treaty since they lay down the
in the
general
Province of `lava. According
regional
authorities, in taking the view that these arrangements could
involve aid, in so far as the tax concessions they provide for
are restricted to companies established in or maintaining
economic links with part of the territory of a Member State,
the Commission is
failing to take into consideration the
specific structure of taxation powers under Spanish law.

applicable
to the Basque

is

the

tax credit

Neither
in particular granted on a
discretionary basis by the `lava Provincial Council. The tax
credit is governed by law and granted automatically to eligible
firms. The regional authorities stress that it is not possible
under Spanish law to apply differentiated tax treatment, except
in cases expressly provided for by law. Indeed, individual tax
In the case of the tax credit, the
measures are prohibited.
Basque authorities do not enjoy any discretionary powers
(Decision
whatsoever. The decision to grant

the tax credit

737/97)
referred to in the legislation concerned merely
the eligibility conditions are
involves a prior check that
fulfilled and is adopted for reasons of legal certainty and sound
financial management. A company merely has to demonstrate
link between the investments made
that
and the
during the preparatory phase of
materialisation of those investments in order to qualify for the
tax credit.

there is a causal

the project

Decision 737/97 granted Demesa a tax credit of this nature
amounting to 45 % of the value of the investments. The tax
credit cannot be combined with any other tax concession
granted in respect of the same investments.

The regional authorities have submitted a report stating that
the tax burden is heavier in the Basque Country than in the
rest of Spain, despite a tax rate which is 2,5 percentage points
lower and the tax concessions available only in that region (22).

III.3. Observations submitted by interested parties

of

from the
A number
complainants concerning the initiation of proceedings. These
can be summarised as follows:

observations were

received

(cid:151) the Spanish authorities were deliberately slow in answering
the Commission’s successive letters, pursuing a policy of
fait accompli. The complainants point out
the first
substantial answer to the Commission’s first request for
information, which dated from June 1996 (when it was
still possible to take action to prevent disbursement of the
aid) was not received until 11 February 1997,

that

(cid:151) the household appliances

of

the

leading

capacity.

segment, continues to suffer
Three

sector, and particularly the
from
refrigerators/freezers
European
surplus
(Electrolux, Whirlpool and Fagor) have
manufacturers
announced plant closures and job cuts or restructuring
operations. The complainants stress in this connection that
the Court of
the European Communities
confirmed in Pyrsa (judgment of 14 January 1997 in Case
C-169/95 Spain v Commission) (23) that regional aid should
not give rise to a sectoral overcapacity,

Justice of

(cid:151) the conditions for the award of the grant have not been

fulfilled, since:

(i)

the project will not be completed within three years,

(22)

(cid:145)Los principios y normas de armonizaci(cid:243)n fiscal en el concierto
econ(cid:243)mico(cid:146)
in the
economic agreement), Fundaci(cid:243)n Banco Bilbao Vizcaya, 1997.

(tax harmonisation principles and rules

(21) OJ C 209, 10.7.1997, p. 3.

(23) [1997] ECR I-135.

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(ii) the project

is not

(cid:145)strategic(cid:146), nor will

the
(cid:145)creation of jobs(cid:146). Only a grant of 10 % gge would be
justified in accordance with the criteria laid down for
the Ekimen scheme,

it entail

(cid:151) the tax credit is illegal since it was not notified to the

Commission before it was put into effect,

(cid:151) Demesa is occupying a 500 000 m2 plot of land without
legal title and without paying rent. Free-of-charge use of
the land is worth ESP 100 million per year, and the price
of land in the same area is around ESP 6 000 per square
metre,

(cid:151) the cost of the plant and machinery has been overvalued,
with the result that the amount of the grant corresponds
to 51 % of the real cost of the investments,

(cid:151) Demesa has not complied with the obligation, laid down
by the Ekimen scheme, to finance 30 % of total net assets
from its own resources during its second year in business.

III.4. Comments made by Spain in response to observations

submitted by interested parties

These comments can be summarised as follows:

(cid:151) the regional authorities consider that sufficient information
has been provided to enable the Commission to establish
that the conditions for applying the Ekimen scheme are
complied with. However, as regards the claim that Demesa
has not complied with the obligation to finance 30 % of
total net assets from its own resources during its second
year in business, they point out that, for the purposes of
applying the Ekimen scheme to Demesa’s investment, the
three years should be counted from January 1997, and not
24 December 1996,
the date on which the grant was
awarded. Compliance with this condition should therefore
be checked at the end of 1998 and not at the end of
1997,

(cid:151) the case-law quoted by the complainants (the Court’s
judgment in Pyrsa) cannot be applied to the case in point:
unlike Pyrsa, Demesa’s investment project is not a high-risk
venture, and Demesa is not a firm in difficulty,

(cid:151) the complainants have not provided any proof in support
of their claim that the cost of the plant and machinery has
been overvalued.

IV. EXTENSION OF THE PROCEEDINGS

After receiving Spain’s reply to the request that it provide the
information necessary for examining whether the grant of

25 % gge awarded to Demesa fulfilled the conditions of the
Ekimen scheme, the Commission informed Spain by letter of 4
June 1998 that it had decided to extend the proceedings in
order to examine the part of the grant awarded to Demesa not
covered by the general rule of the Ekimen scheme allowing an
aid intensity of 10 % of the effective eligible costs.

IV.1. Observations submitted by Spain

The regional authorities have reiterated that the conditions for
the award of a grant under the Ekimen scheme to cover 25 %
of the costs of Demesa’s investment at Vitoria-Gasteiz have
been scrupulously observed.

They point out that, when it approved the Ekimen scheme (in
December 1996),
the Commission not only agreed to the
definitions of (cid:145)strategic(cid:146) projects and (cid:145)creation of jobs(cid:146) to be
used for the purposes of implementing the scheme, but also
refrained from formulating any reservations of a sectoral
nature, with the exception of a general reference to the sectors
for which specific guidelines exist, which is not the case of the
household appliances sector.

The Ekimen scheme draws a distinction between (cid:145)strategic
projects(cid:146) and (cid:145)strategic sectors(cid:146),
fulfilment of each of which
criteria entitles the company concerned to an extra 5 % for the
purposes of Article 10 of the Decree approving the Ekimen
scheme.

Any project that fulfils the purely quantitative criteria, which
the Commission accepted when it approved the scheme,
constitutes a (cid:145)strategic(cid:146) project. The Commission is not entitled
to modify these criteria without at the same time infringing
the principles of legitimate expectations and legal certainty.

The regional authorities also argue that it is right to regard the
household appliances sector as (cid:145)strategic(cid:146) since it accounts for
6 % of GDP in the region. The Competitiveness Programme for
the Basque Country classifies the (cid:145)large household appliances(cid:146)
cluster among the clusters whose development
is given
priority. This definition is based on the nature and extent of
the competitive advantage and the contribution which the
companies concerned make to value added and job creation in
the Basque Country.

for

that,

stress

The regional authorities
the purposes of
implementing the scheme, job creation is to be checked on the
basis of objective data and not, as the Commission suggested
in terms of the sectoral
when it extended the proceedings,
impact of Demesa’s investment. This is confirmed, according
to the regional authorities, by the guidelines on national
regional aid, which state that (cid:145)job creation(cid:146) must be checked
solely on the basis of the net number of jobs created in a
particular establishment.

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As far as the sector is concerned, the Commission has not
provided precise figures making it possible to determine which
specific sector is affected by surplus capacity. The statement
that 95 % of sales of appliances are based on replacements
does not indicate either the product or the period of time
concerned. Neither does the claim that the European market
has
specify the
individual sector concerned, nor is any specific period of time
assigned to the figure quoted of a surplus production capacity
of more than 4 million units in the cold range.

shrunk by 5 % over

two years

the last

CECED,

supplied

by ANFEL,

The regional authorities have submitted figures taken partly
the
from information
complainants in these proceedings, and Master Cadena, the
leading distributor on the Spanish market. The latter claims
that turnover in household appliances grew by 3 % in 1997; as
far as refrigerators are concerned,
the growth was 4,4 %.
According to CECED’s figures, the number of units sold on the
Spanish market rose from 1 000 066 in 1996 to 1 133 350 in
1997. The number of units sold has also grown in the other
Member States, with the exception of Austria and Germany.
The number of refrigerators manufactured in Spain rose from
1 308 844 units in 1996 to 1 456 019 in 1997. According to
the regional authorities, forecasts by (cid:145)Consumer Europe(cid:146) point
to a 10 % increase in refrigerator sales (measured in units) on
the European market over the period 1996 to 2001.

(cid:145)Consultant’s estimate(cid:146) gives a price for the land of ESP 500
million (or ESP 5 000 per square metre), whereas the
column (cid:145)Demesa(cid:146) shows a price of ESP 413 million (24) (or
ESP 4 125 per square metre)),

(cid:151) the cost of the buildings and construction work is in line

with prices prevailing in the construction industry,

(cid:151) the total estimated cost of plant and machinery currently
installed therefore amounts to ESP 2 449 000 000 (EUR
14 718 786,44), as against the ESP 2 500 771 550 (EUR
15 029 939,72) calculated by Demesa. The cost estimated
by the consultant is broken down as follows:

Machinery

Plant

ESP 1 565 million (25)

ESP 819 million (26)

Auxiliary machinery

ESP 65 million (27)

(cid:151) there is no justification for claiming ESP 525 million in

installation costs and costs prior to start-up.

The regional authorities also refer to statements made in April
the leading European
1998 by the chairman of Electrolux,
manufacturer of household appliances, to the effect that sales
of these products will increase by 4 % in 1997 and continue to
improve in 1998.

The report also states that current production capacity is
140 000 refrigerator units of between 310 and 370 litres.
There are plans for raising capacity to 600 000 units in future.
To reach that level of output, it would be necessary, according
to the auditor, to add an extra production line and create two
shifts or to build a new factory with the same capacity.

the

artificial overvaluation of

On the question of
the
investment costs incurred by Demesa, the regional authorities
have provided detailed information on the procedures for
checking that the investments have actually been carried out.
They have also confirmed that payment of
is
conditional on actual implementation of the investment. In this
connection,
they have submitted detailed information on
checks carried out during the period from June 1997 to
September 1997.

the grant

raised as

On the doubts
to the real cost of Demesa’s
investment, an audit report drawn up by a consultant who
regularly works for the Commission has been presented, which
makes, inter alia, the following points:

(cid:151) The price of non-serviced land in the Jœndiz industrial
estate (Vitoria-Gasteiz) is ESP 5 000 per square metre; the
final price of ESP 4 125 per square metre paid by Demesa
for serviced land is a market price with a normal discount
given the size of the plot. The report’s findings examine
estimates made by the
the differences between the
column
authorities
regional
and the
consultant

(the

IV.2. Observations submitted by interested parties

The new points made by interested parties in the observations
they submitted can be summarised as follows:

(cid:151) the

argument put

forward by the Basque

regional
to boost
authorities,
competition in the sector,
it is necessary to subsidise a
competitor, is incoherent, contrary to common sense and

according to which,

in order

(24) This amount differs slightly from the figure of ESP 412,5 million
obtained by multiplying the surface area of 100 000 m2 by the
price per square metre.
to
according

information

European

(25) Cost

supplied

by

manufacturers. The cost declared by Demesa is not given.

(26) Cost

to

according

information

European
manufacturers. The plant was purchased from Daewoo Electronics
(Demesa’s sole shareholder) for ESP 718 565 011. Some of this
plant (worth ESP 300 million) is installed on the premises of third
parties.

supplied

by

(27) Cost

according

to

information

supplied

by

European

manufacturers.

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Official Journal of the European Communities

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does not make the project at all strategic. Competition
does exist on the Spanish market. This argument would
make sense only if the relevant geographic market were
the market of the Basque Country, and if that market were
protected; however, the relevant geographic market is the
European market,

to

distort

threatens
certain
competition
undertakings or the production of certain goods is, in so far as
it affects trade between Member States, incompatible with the
common market.

favouring

by

(cid:151) the jobs created are insecure and extremely low-paid (28),

V.1. The refrigerator sector in Europe

(cid:151) if the forecasts are fulfilled, Demesa will place an extra
thereby
the surplus capacity

600 000
contributing to an aggravation of
estimated at 5 million units.

European market,

units

the

on

For these reasons, and in view of
the
situation, the interested parties requested the Commission to
the aid paid to Demesa,
order the provisional recovery of
pending adoption of the final decision.

the seriousness of

IV.3. Comments made by Spain in response to observations

submitted by interested parties

In the comments it made on the observations submitted by
interested parties, Spain reiterated the arguments it had already
put forward in the course of the proceedings and claimed that
there were no grounds for the Commission to order recovery
of the aid already disbursed.

According to Demesa’s business plan, the `lava plant should,
by 1999 at the latest, have an annual production capacity of
600 000 units, of which 30 % are to be sold on the Spanish
market and 70 % elsewhere (mainly France and the United
Kingdom).
combined
is
refrigerator-freezers equipped with the no-frost system.

produce

plant

The

to

This investment forms part of the overall strategy (29) pursued
by Daewoo Electronics, whose goal is to become, by 2002, the
world’s leading refrigerator manufacturer, holding a share of
around 12 % of the world market in that product, with an
annual production target of 7 million units, of which 5 million
are to be produced at 12 centres located outside South Korea.
The company plans to invest around USD 1 000 million in the
construction of eight new factories with a view to gaining a
share of around 12 % of the world refrigerator market. Up to
2002, the production capacity of the four European plants will
be 1,5 million units (30), i.e. 13 % of total European production
capacity forcast for 2001.

V. ASSESSMENT OF THE AID

Article 92(1) of the Treaty establishes the principle that, save
as otherwise provided in the Treaty, any aid which distorts or

According to the data and information in the Commission’s
possession, demand and production vary according to the
country concerned (31):

(29) Daewoo Electronics had also considered setting up a plant
creating 300 new jobs at Verdun, France. CECED likewise lodged
the French authorities were
a complaint against
intending to grant
In
December 1997 the Commission requested information from the
French authorities, which replied that Daewoo Electronics had
suspended the project.
(cid:145)Aims To
http://www.dwe.daewoo.co.kr/news.

the aid that
in connection with that

Lead Global Refrigerator Market(cid:146),

June 1997,

investment.

(30)

(28) See footnote 16.

(31) Report entitled (cid:145)World Major Household Appliances to 2001(cid:146), The
Freedonia Group Inc., March 1998. See also the article published
in the Financial Times on 2 July 1997, p. 13: (cid:145)Rough and tumble
industry. Domestic appliance groups are adopting varied tactics to
boost market share in Europe’s stagnant market(cid:146), which reports
that the market in refrigerators and ovens has reached saturation
point.

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13.11.1999

Refrigerator and freezer demand and production

(million units), 1987 to 2006

9
8
7
6
5
4
3
2
1
0

1987

1992

1996

2001

2006

Italy demand
France demand
Germany demand
production
production

Spain demand
production

production

UK demand

Others demand
production
production

refrigerators and freezers will

remain
France: Demand for
relatively stagnant at around 2,7 million units per year. France
is not a major producer and some 75 % of demand is covered
by appliances from Germany and Italy. The leading brands on
the French market are Brandt, Electrolux, Whirlpool and
Bosch-Siemens.

refrigerators and freezers will

fall
Germany: Demand for
slightly, from 4,4 million units in 1996 to 4,3 million units in
2001. Output declined from 4,2 million units in 1992 to 3,55
million units in 1996 and is forecast to stand at 4 million
units in 2001. A total of 2,8 million refrigerators were
manufactured in 1996, 40 % of which by Bosch-Siemens.

is

by

The

market

dominated

combined
Italy:
refrigerator-freezers owing to lack of space in the average
home. The overall market in domestic refrigeration equipment
will grow by 0,7 % per year up to 2001. Italy is one of the
main manufacturers of refrigerators and freezers. Output was 8
million units
in 1996, 75 % of which were for export.
Electrolux is the market leader, with over 30 % of the 6,1
million units produced in 1996. Whirlpool is also one of the
main manufacturers and holds a 25 % share of sales.

Spain: Demand for refrigerators declined from 1,84 million
units in 1992 to 1,36 million units in 1996. Demand is
forecast to grow by 3,3 % per year between 1996 and 2001,
reaching 1,60 million units in that year. This growth points to
a market
again
supplementing the installed base. Output will
increase from
1,58 million units in 1996 to 1,7 million units in 2001. Fagor

trend whereby

replacement

sales

are

is one of
representing around 40 % of total output (32).

leading producers, with 700 000 units,

the

United Kingdom: Demand for refrigerators and freezers declined
from 2,46 million units in 1992 to 1,935 million units in
1996. Sales will nevertheless grow by around 3,4 % per year to
reach 2,3 million units in 2001. Output will level out as the
popularity of imported goods increases.

Other west European countries: In the rest of western Europe the
market is mature and static. Demand will keep up at around
4,8 million units, 75 % of which will be covered by imports.
Output has been on a downward slope since 1992 and will
stabilise at around 1,4 million units.

The market in refrigerators and freezers is saturated in western
Europe, where most homes are equipped with a refrigerator
and separate freezer. There is a growing preference among
consumers for combined refrigerator-freezers, but the market

(32) See http://www.fagorelectrodomesticos/mcc.es. Fagor is a company
belonging to the Mondrag(cid:243)n Corporaci(cid:243)n Cooperativa (MCC)
group http://mondragon.mcc.es/spanish(indice.html) headquartered
at Mondrag(cid:243)n (Guipœzcoa, Basque Country). With more than 100
subsidiaries and branches and 29 % of
its turnover generated
outside Spain, MCC is the largest industrial group in the Basque
Country and one of the five leading industrial groups in Spain. In
1997 it generated a turnover of ESP 726 706 million (EUR
(EUR
4 367 591 023,28),
516 870 409,77) was from sales of household appliances, as
compared with a total turnover of ESP 354 247 million in 1992.
The MCC group employs 34 397 people and has assets valued at
ESP 1 541 621 million (EUR 9 265 328 813,72). It has four plants
in Asia, four in Latin America and two in Africa (including two
factories producing refrigerators in Argentina and Morocco).

86 000 million

of which

ESP

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Official Journal of the European Communities

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is not expected to show signs of growth as households tend to
replace refrigerators and separate freezers with combined
refrigerator-freezers. Demand is therefore expected to grow by
only 0,6 % per year to 2001 (up to 18 million units), with
replacements accounting for approximately 94 % of sales (33).

Electrolux (Sweden) is the largest manufacturer of refrigerators
and freezers in western Europe, followed by Bosch-Siemens
(Germany). Whirlpool
(Italy) are
also major producers. Fagor ElectrodomØsticos is the market
leader in Spain (34).

(United States) and Merloni

several of Electrolux’s production facilities

Surplus refrigerator production capacity has been estimated at
some 5 million units in 1997 (35). Spain has not supplied any
figures concerning excess capacity. The state of the market has
caused the sector to undergo extensive restructuring which has
given rise to capacity reductions or relocations of production
with heavy job losses. These trends are confirmed by the
information mentioned earlier and illustrated, inter alia, by the
closure of
in
Europe:
(County
refrigerator production at Spennymoor
Durham, United Kingdom), which has a capacity of 320 000
units, is to be abandoned in the summer of 1999, with the
loss of 650 jobs; Electrolux has also announced the closure of
its plant at Luton (United Kingdom), with the loss of a further
650 jobs; production of refrigerators at Pori (Finland) is to be
transferred to other plants in Europe, resulting in 200 job
losses; and a plant producing chest-type freezers has been
closed in Hungary, with the loss of 200 jobs (36) (37). In its
1995 annual report, Whirlpool also announced severe job
losses in western Europe, amounting to around 15 % of its
workforce; in September 1997, it announced 4 700 job cuts,
most of which are in western Europe (38). Whirlpool employs
11 000 people in Europe (mid-1997 figures) at 11 plants, of
which those located at Cassinetta (Italy) (39), Calw (Germany)
and Trento (Italy) produce refrigerators. The MCC group,
which owns Fagor, abandoned refrigerator production at
Basauri (Basque Country) in 1998, with the loss of 180 jobs.
Merloni also indicates in its 1997 annual report (40) that the
recovery of the household appliances market has not led to
firmer prices, since the industry has employed unused capacity.

above

The
extensive
intra-Community trade in the sector, a fact confirmed by

analysis also shows

there

that

is

(33) See footnote 31.
(34) See footnote 32.
(35) Information provided by CECED in the

context of

these

(36)

(37)

proceedings.
(cid:145)Electrolux to phase out production at
October 1997, http://www.electrolux.se/corporate/pressnotes.
(cid:145)Electrolux intends to move production from refrigerator factory in
Finland(cid:146), 27 October 1997, http://www.electrolux.se/corporate/
pressnotes.

two UK factories(cid:146), 14

(38) See http://www2.whirlpool.com/htm/corp/investor.
(39) The Whirlpool group’s largest factory in western Europe.
(40) See http://www.merloni.it/fr_azi.htm.

Eurostat
necessarily affect intra-Community trade and competition.

data (41). Consequently,

aid measure will

any

V.2. Aid elements established

The procedure provided for in Article 93(2) of the Treaty has
the
enabled the Commission to establish the existence of
following aid measures within the meaning of Article 92(1).

V.2.1. Free-of-charge use of a 100 000 m2 plot of land

The Commission has taken note of the explanations given by
the Basque regional authorities concerning the difficulties due
to the presence of
farmers on the land where Daewoo
Electronics intended to build its plant and the fact that the sale
could not be formalised until the divisions and amalgamations
of the different pre-existing plots had been completed on the
land register.

Nevertheless, no proof has been given that Demesa incurred
any cost during the period in which it occupied the land for
the purpose of building the plant, from the time the purchase
agreement was signed (in October 1996) until the purchase
price was actually paid. Neither has the precise date on which
Demesa paid for the land been communicated.

According to the information provided, construction works
began in January 1997. On 13 January 1997 the farmers, via
their lawyer, addressed a complaint to the property company
selling the land, Gasteizko Industria Lurra SA (42), on account
of the destruction of their crops by the construction works for
Demesa’s plant.

the land was not paid for before September
Furthermore,
1997. A document
authorities
the
concerning the investments made by Demesa and following an
inspection covering a period ending on 10 September 1997

issued by

regional

(41) Intra-Community trade in household refrigerators

(CN codes
8418 21, 8418 22 and 8418 29) amounted to EUR 677 692 000
in 1996 and EUR 732 189 000 in 1997; 6,91 % (1996) and
7,67 % (1997) of
these sales involved products originating in
Spain, while 8,23 % (1996) and 7,41 % (1997) corresponded to
goods introduced into the Spanish market from other Member
States.
Intra-Community trade in combined refrigerator-freezers
and refrigerator-freezers fitted with separate external doors (other
than for use in civil aircraft)
(CN codes 8418 10 91 and
8418 10 99) amounted to EUR 484 470 000 in 1996 and EUR
555 665 000 in 1997; 19,41 % (1996) and 17,72 % (1997) of
these sales involved products originating in Spain, while 10 %
(1996) and 9,42 % (1997) corresponded to goods introduced into
the Spanish market from other Member States.

(42) According to information provided by the regional authorities, the
shareholders in Gasteizko Industria Lurra SA are the Municipal
Council of Vitoria-Gasteiz (58,22 %) and Sprilur SA (41,78 %).
Sprilur SA is in turn controlled by the Basque Government, which
holds 95,52 % of its capital.

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Official Journal of the European Communities

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makes it clear that only the building, and not the land, was
considered to be a completed investment qualifying for
payment of the aid. Another document mentions the payment
of ESP 413 million for the land in a column relating to
November to December 1997 (see Annex III to the letter of 24
July 1998).

In view of the above, and in the light of the information
provided by the regional authorities, there are grounds for
concluding that Demesa occupied, at least between February
1997 and October 1997, a plot of
land with the aim of
building or commissioning the construction of a plant on it,
without paying the purchase price of the land or incurring any
cost whatsoever in connection with its use.

The regional authorities argue that the sale of the land could
not be formalised until 30 December 1997 as a result of a
dispute concerning tenure of the land. They refer to the rights
enjoyed by the tenants under Spanish law and the principle of
transferring
good faith, which rule out
ownership of land where there is a dispute concerning tenure.
These were the reasons why formalisation of the sale was
delayed
these
requirements result from application of the principles and rules
of civil law, the regional authorities conclude that they must
be regarded as a general measure which falls outside the scope
of Article 92(1) of the Treaty.

the possibility of

dispute was

resolved.

Since

until

the

completing

that neither

in any event,

The Commission notes,
the
principles of good faith alluded to nor the presence of the
tenant farmers on the land prevented Demesa from beginning,
plant
continuing
construction
and
throughout
the whole of 1997. During the same period,
Demesa made payments for the works carried out and did not
refrain from requesting payment of the grant corresponding to
25 % of the cost of the buildings erected. The absence of a
formal deed of sale in no way detracts from the fact that
Demesa used the land without having to pay the consideration
that the company selling it was entitled to demand.

the

of

If, despite the precautions taken by the regional authorities,
Demesa had not occupied the land and had not begun building
the plant in accordance with the timetable laid down in the
investment plan approved by those authorities, payment of the
grant would have been seriously jeopardised. Demesa therefore
had an obvious interest in beginning the construction work
without delay.

to the price of

that could be gained from investing for nine months an
the land, corrected as
amount equivalent
indicated at the end of point V.2.2. The interest rate to be
applied is the reference rate for 1997 (43). The economic
advantage
to EUR
184 075,79 (44)
(ESP 30 627 635) and constitutes state aid
within the meaning of Article 92(1) of the Treaty.

calculated in this manner

amounts

V.2.2. Sale of a plot of land at less than the market price

The regional authorities argue that the communication of 10
July 1997 (45) cannot be applied in this case. The Commission
would point out that the communication does not impose any
obligation on the Member States and is restricted to defining,
on the basis of
the
circumstances in which it may be presumed that no aid is
present.

established administrative practice,

the

that

initiated the
The Commission notes, as it stated when it
proceedings,
in its
communication of 10 July 1997 were not fulfilled when the
land was sold to Demesa. The sale of the land to Demesa
consequently does not qualify for a presumption that no aid,
as provided for in that communication, was in evidence.

criteria which it

set out

The Commission therefore has to examine, on the basis of the
information in its possession, whether
the price paid by
Demesa corresponds to a market price, bearing in mind that
two valuations and an audit report carried out after the event
cannot carry the same weight as a valuation carried out before
the sale.

The two valuations carried out on 13 January 1998 and 6
February 1998 by two different real estate valuers (see Annex
IX to the letter of 6 March 1998) quote a unit price for
serviced land of approximately ESP 6 120 per square metre.

However, the first valuation stated that the selling price of a
serviced plot of over 10 000 m2 should be between ESP 4 000
and ESP 4 500 per square metre. The second valuation, based
on real data (cid:151) that is to say the selling prices of serviced plots
with similar characteristics
sold in previous months (cid:151)
established a price of ESP 5 000 per square metre for two
much larger plots of approximately 33 000 m2; and 50 000
m2, and concluded that there were no price indicators on the
market for serviced plots of 100 000 m2; however, a price of

The Commission accordingly takes the view that Demesa
enjoyed an advantage equivalent to postponement of payment
of the price of the land for a period of nine months, running
from the time it first occupied the land for the purpose of
carrying out the construction work (February 1997) until the
date on which it paid the price (not before November 1997).
In the absence of other comparative or calculation data, that
advantage can be estimated as being equivalent to the interest

(43) The reference rate is 10,56 % for the period 1 January to 31 July

1997 and 6,22 % for the period 1 August to 31 December 1997.

(44) This is the sum of the two amounts obtained by applying on a
pro rata basis the reference rates established for the two periods in
1997 (January to July and August to December) to the respective
number of months (six and three) during which the land was used
in each of those two periods).

(45) See footnote 21.

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Official Journal of the European Communities

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between ESP 4 000 and ESP 4 800 per square metre appeared
justified in the circumstances, given the costs that could be
incurred in servicing large plots. It stressed at the same time
the political dimension of sales of this type, which were bound
to be influenced by non-economic considerations.

Under Article 10 of Basque Government Decree No 289/1996,
a non-refundable grant of up to 25 % gge is to be awarded in
accordance with the following conditions:

(cid:145)1. A grant of 10 % of investment costs deemed eligible shall

be awarded as a general measure.

The audit report drawn up in July 1998 (see Annex IV to the
letter of 24 July 1998) quoted the price of a non-serviced plot
in the same area at around ESP 5 000 per square metre. It
stated that the price paid by Demesa could be justified by a
discount offered on account of
the plot.
Nevertheless, in his conclusions, the auditor maintains a price
of ESP 5 000 per square metre and points to the difference
between his estimate and the price of ESP 4 125 per square
metre set by the regional authorities.

size of

the

2. Furthermore,

in the case of

strategic projects (46) and
investment projects
job creation
which create at least 50 jobs and entail investments worth
at least ESP 750 million, the above percentage shall be
increased by five points.

involving significant

The Commission notes that the average of these estimates does
not differ substantially from the average unit price of ESP
4 481 per square metre of serviced land calculated in January
1997 by Price Waterhouse, which includes development costs.

In the light of the foregoing, the Commission considers that
this price of ESP 4 481 per square metre is the market price
for the sale of plots similar to the one occupied by Demesa in
the Jœndiz industrial estate. Given that Demesa paid only ESP
4 125 per square metre for the land, it enjoyed an advantage
that must be calculated as the difference between the two
figures, namely ESP 356 per square metre, making a total of
EUR 213 960,31 (ESP 35 600 000). This price difference
constitutes state aid within the meaning of Article 92(1) of the
Treaty.

3. Similarly, businesses whose project

in a
preferential interest area as provided for in Article 4 of this
Decree shall receive an additional grant of 5 % of
the
investment costs deemed eligible.

is carried out

4. Lastly, the percentage may be further increased by up to

five points according to the following criteria:

(cid:151) the extent to which the project is integrated into the

Basque Country’s industrial base;

(cid:151) whether

the investment
Country’s strategic sectors;

is

in one of

the Basque

V.2.3. Aid elements not covered by the Ekimen scheme

(cid:151) the number of jobs created by the project.(cid:146)

Amount of the grant

The information provided by Spain in accordance with the
procedure under Article 93(2) of the Treaty has enabled the
Commission to examine whether
the regional authorities
complied with the conditions of the Ekimen scheme when
they awarded a non-refundable grant corresponding to 25 % of
the cost of Demesa’s investments in tangible fixed assets at
Vitoria-Gasteiz.

The examination also established that some of the investments
in respect of which the grant was awarded are covered by
Ekimen, while the remainder fall outside the scope of that
scheme.

As was mentioned in point II. 4, the Commission stated the
following in its decision to approve the Ekimen scheme,
notified by letter dated 13 December 1996:

(cid:145)The Commission notes that non-refundable grants, which
must not exceed the ceiling of 25 % gge, will be awarded in
accordance with the following conditions:
(a) 10 % as the
general rule; (b) an extra 5 % for strategic projects or projects
which create jobs; (c) an extra 5 % for projects located within
priority areas; and (d) an extra 5 % for projects which make a
significant
job
creation.(cid:146)

contribution to regional development or

Consequently,
if an investment project is to benefit from a
non-refundable grant under Ekimen and within the scope of
that scheme, the grant must be awarded in accordance with

The Commission takes the view that, in the case in point, a
proper application of the rules governing the Ekimen scheme
should have led to the award of a maximum non-refundable
grant amounting to 20 % gge of the total eligible costs.

(46) Article 6(1)(a) of the Decree defines strategic projects as projects
which involve an investment of not less than ESP 10 000 million
or the creation of at least 300 jobs. Certain projects (cid:145)with complex
financing arrangements(cid:146) may also be deemed strategic.

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the detailed conditions and criteria governing the scheme as
approved by the Commission.

The Basque regional authorities made the following statement
on page 8 of their letter of 23 January 1998:

(cid:145)In accordance with the former (criteria determining the level
of the grant), all projects have to receive a grant equivalent to
at least 10 % of the eligible investment costs (see criterion (a),
i.e. Article 10(1) of Decree No 289/1996; in addition, where
the project fulfils the conditions laid down in the second and
third paragraphs of the Article (criteria (b) and (c), i.e. those
set out in Article 10(2) and (3) of the Decree), that percentage
to be increased by an extra five percentage points
is
respectively. Therefore, a project which fulfils all
those
conditions must receive a grant amounting to 20 % gross.(cid:146)

The Commission considers that Demesa’s investment project
fulfils the criteria laid down in Article 10(1) of the Decree (the
10 % awarded to all eligible projects) and in Article 10(4) (an
extra 5 %).

the municipality

is not a (cid:145)preferential

As far as the criterion laid down in Article 10(3) is concerned,
in which Demesa’s
Vitoria-Gasteiz,
investment is located,
in
accordance with the provisions
the Ekimen
scheme (47). The argument put
forward by the regional
authorities at the meeting of 15 December 1998, to the effect
that the beneficial effects of (cid:145)strategic(cid:146) projects which were not
located in (cid:145)preferential interest areas(cid:146) extended to the latter, is
not sufficient to justify awarding an extra 5 % under Article
10(3) to Demesa’s investment.

interest area(cid:146)

governing

the Commission’s

As regards the criterion laid down in Article 10(2) of the
Decree, the Commission considers that the award of two 5 %
supplements under that provision constitutes an incorrect
application of
the rules governing the Ekimen scheme as
approved by the Commission in its letter of 13 December
1996, in view of the fact that each of paragraphs 2, 3 and 4
of Article 10 of the Decree (or each of items (b), (c) and (d) in
the above paragraph of
letter of 13
December 1996) makes it possible to award a 5 % supplement
up to the maximum of 25 % gge laid down for grants falling
outside the scope of the Ekimen scheme. Furthermore, the
(cid:145)preferential
interest area(cid:146) criterion was introduced for the
purpose, which was expressly recognised in the preamble to
and laid down in Article 4 of the Decree, of practising positive
geographical discrimination in favour of specific areas of the
Basque Country that suffer from particularly serious economic
or development problems, an objective which is in line with
the principle (cid:151) confirmed by the Guidelines on national
regional aid (48) (cid:151) of varying the intensity of regional aid
(within the maximum ceilings permitted) according to the
seriousness of the regional problems to be tackled.

that

The regional authorities argued, at the meetings of 29 October
the Commission’s
1998 and 15 December 1998,
decisions to initiate and to extend the proceedings were not
based on such an interpretation of that aspect of the Ekimen
scheme. The Commission considers that the wording of those
two decisions cannot be construed in such a way as to enable
the
compliance with the
conditions for implementing the scheme as laid down in its
letter of 13 December 1996.
In their letter of 23 January
1998,
the Basque regional authorities moreover confirmed
that an investment fulfilling the criteria set out in items (b)
and (c) qualified for two 5 % supplements respectively,
in
addition to the general rate of 10 %.

authorities

to evade

regional

the view that

When it initiated and subsequently extended the proceedings,
the Commission already raised serious doubts as
to the
strategic nature of Demesa’s investment project and as to the
jobs. Those doubts have not been
effective creation of
dispelled. The Commission maintains
the
existence of surplus capacity in the sector, as described in
point V.1., and the presence in the Basque Country of Spain’s
leading refrigerator manufacturer, Fagor (49) (a member of the
MCC group), which holds a 25 % share of a domestic market
that is not protected by trade or other barriers, makes the
alleged strategic nature of the project more than doubtful. The
MCC industrial group is constantly building up its presence on
the Community and world markets (50). The Commission also
continues to believe that there is a very real risk that the aided
investment will
in Spain,
particularly in the Basque Country, and in other areas of the
Community, as can be seen from the current restructuring
operations decided by Electrolux and Whirlpool.

in capacity reductions

result

it

fulfils

certain quantitative

However, as regards classification of the investment project as
(cid:145)strategic(cid:146) because
criteria
(investment exceeding ESP 10 000 million, creation of more
than 300 jobs), when the Commission approved the Ekimen
scheme it did not express any reservations on the grounds of
possible sectoral problems, either in the household appliances
sector or elsewhere, except for the usual reservations with
regard to sectors covered by specific state aid guidelines or
rules. It would therefore be contrary to the principles of legal
certainty and legitimate expectations to modify that overall
approval where the Basque regional authorities have observed
the criteria for deeming a project to be strategic.

In view of the foregoing, the amount of the grant may not
exceed 20 % of the eligible costs. The remaining 5 %, which
was granted under the (cid:145)preferential interest area(cid:146) criterion, is
not covered by the scheme and therefore constitutes state aid
within the meaning of Article 92(1) of the Treaty and, since it
is not covered by a previously approved scheme, must be
deemed to be new aid whose compatibility must be assessed
the
directly in the
Commission had already stated in its letter of 4 June 1998.

the Treaty provisions,

light of

as

(47) The list of (cid:145)preferential interest areas(cid:146) is set out in Annex I to the

Decree.

(48) OJ C 74, 10.3.1998, p. 9.

(49) See footnote 32.
(50) MCC has carried out an extensive internationalisation programme
affecting both its industrial plants and its commercial presence.

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Costs eligible under the Ekimen scheme

V.2.4.1. The 45 % tax credit

investment

The report submitted by the complainants, which was drawn
up by a subsidiary of one of CECED’s members, alleges that
the
artificially overvalued. The
Commission notes that the report is not based on the same
assumptions regarding production capacity and product type
as Demesa’s investment.

costs were

The audit report submitted by the Basque Government, which
furthermore
was drawn up by an independent
confirms the reality and conformity of
the costs actually
incurred by Demesa, with the exception of ESP 525 million in
installation costs prior to start-up. The regional authorities also
rejected these
checks on
implementation of the project.

in the course of

expert,

costs

their

far as

As
the regional
the eligible costs are concerned,
authorities have provided sufficient proof that internal auditing
procedures prevent the payment of a grant under the Ekimen
scheme if there is no tangible evidence that the investment has
been carried out. The same procedures enable the regional
authorities to check compliance with the obligation on the
company to finance 30 % of total net assets from its own
resources during its second year in business (Article 5(b) of the
Decree). As indicated in point II.4, the Commission considers
that, for the purposes of that requirement, the second year is
1998 and not 1997.

However, the fact that the costs have been genuinely incurred
and are in line with market prices does not necessarily mean
that they are eligible.

in this connection that,

The Commission points out
in
accordance with Article 7 of the Decree governing the Ekimen
scheme, fixed assets that have been transferred to third parties
are not eligible. According to the audit report, some of the
production plant acquired by Demesa (at a cost of ESP
300 000 000, or EUR 1 803 036,31) has been installed on the
premises of other companies. This plant is consequently not
eligible for aid under the Ekimen scheme, and its financing
also constitutes aid within the meaning of Article 92(1) of the
Treaty.

The tax credit is governed by the Sixth Additional Provision of
Provincial Law 22/1994 on the implementation of the budget
of the Province of `lava for 1995, which reads as follows:

(cid:145)Investments in new tangible fixed assets carried out between 1
January 1995 and 31 December 1995 and exceeding ESP
the `lava Provincial
2 500 million shall, by decision of
Council, qualify for a tax credit equivalent
to 45 % of the
amount of
the investment, as determined by the `lava
Provincial Council, to be offset against the amount of personal
tax liability.

Any tax credit not used up because it exceeds the amount of
tax liability may be carried forward and used for up to nine
the `lava
years following that
Provincial Council is taken.

in which the decision of

lay down
The decision of the `lava Provincial Council shall
the time-limits and restrictions applicable in each individual
case.

Benefits granted under this provision shall be incompatible
with any other
same
concessions
investments may be eligible.

for which the

tax

The `lava Provincial Council shall also decide on the duration
the investment process, which may include investments
of
made during the preparatory phase of
the project which
generates the investments.(cid:146)

This measure was kept in force in 1996 by the finance act for
that year (Provincial Law 33/1995), as amended by the new
corporation tax act (Provincial Law 24/1996, which deleted
the reference to the period of nine years in the second
paragraph) and in 1997 by the finance act
for that year
(Provincial Law 31/1996). The tax credit equivalent to 45 % of
the amount of investments was maintained, with amendments
in 1998 and 1999 by
to the wording of
Provincial Laws 33/1997 and 36/1998 respectively.

the provisions,

The principle that state aid is incompatible with the common
market and the exceptions provided for by the Treaty apply to
aid (cid:145)in any form whatsoever(cid:146) and, in particular, to certain tax
measures.

V.2.4. Tax credit equivalent to 45 % of the cost of

investments and reduction in the tax base for
newly created businesses

If it is to be classed as aid, a measure has to satisfy each of the
four criteria mentioned in Article 92 and spelled out below.

In this Decision,
to
the Commission has
examining in the light of Article 92 of the Treaty the 45 % tax
credit and the reduction in the tax base for newly created
businesses, and not the other tax concessions.

restricted itself

First, the measure must afford the beneficiaries an advantage
that reduces the costs they normally have to bear in the
their business. The advantage may be granted
course of
types of reduction in the company’s tax
through different
burden and,
through an exemption from or
reduction in tax liability.

in particular,

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in question undoubtedly fulfils

The 45 % tax credit
this
criterion since, thanks to the credit, Demesa enjoys a reduction
in its tax burden equivalent to 45 % of the amount of the
investment as determined by the `lava Provincial Council. The
tax credit can, however, be used without any time-limit,
starting in the first year in which the company makes a profit.
The Spanish authorities have furthermore confirmed (51) that
Demesa will be able to choose, in respect of each tax year, the
most favourable methods of deduction or reduction, which
makes it impossible in practice to determine the intensity of
the aid over the whole period in which it is being received.

Second,
the advantage must be granted by the State or
through State resources. A loss of tax revenue is equivalent to
the use of state resources in the form of tax expenditure. This
criterion also applies to aid granted by regional or local bodies
in the Member States (judgment of the Court of Justice of 14
October 1987 in Case 248/84 Germany v Commission (52)). The
State aid may furthermore be granted by way of tax measures
laid down by law, regulation or administrative practice or by
way of decisions taken by the tax administration.

The tax credit granted to Demesa derives from the combined
effect of a budgetary measure and an individual decision
(Decision 737/97), both taken by a public authority.

Third, the measure must affect competition and trade between
Member States. This criterion presupposes that the beneficiary
of the measure carries on an economic activity, irrespective of
its legal status or method of financing. The Court of Justice
has repeatedly ruled,
interpreting this
condition, that intra-Community trade is to be deemed to be
affected from the moment the beneficiary firm carries on an
economic activity which is the subject of
trade between
Member States.

for the purposes of

It has already been demonstrated that Demesa carries on an
economic activity which is the subject of
trade between
member States, in a sector that is highly competitive.

it

Fourth, the measure must be specific or selective in the sense
favours (cid:145)certain undertakings or the production of
that
certain goods(cid:146). The advantage may be selective because it is
granted either as an exception to general tax arrangements
established by law, regulation or administrative practice, or at
the discretion of the tax administration. In the present case,
the advantage is selective chiefly on account of the discretion
enjoyed by the administration in granting it.

With regard to this condition, the Court of Justice held in
Kimberly Clark Sopalin (judgment of 26 September 1996 in

(51) See p. 42 of the letter of 6 March 1998.
(52) [1987] ECR 4013.

Case C-241/94 France v Commission (53) that, where the entity
latitude which
granting an advantage enjoys a degree of
enables it to vary its financial assistance having regard to a
number of considerations such as, in particular, the choice of
beneficiaries, the amount of the financial assistance and the
time-limits and other conditions under which it is provided, as
well as to decide on whether or not to renew the measures
concerned from one year to the next according to criteria
unknown to the Commission, the conditions in which such
assistance is granted are liable to place certain firms in a more
the
favourable situation than others and thus
conditions for classification as aid within the meaning of
Article 92(1) of the Treaty.

to meet

When it adopted Decision 737/97,
the `lava Provincial
Council enjoyed, pursuant to the abovementioned provisions,
discretionary powers for determining which investments in
tangible fixed assets amounting to more than ESP 2 500
million qualified for the tax credit, deciding to which part of
the investments the 45 % reduction could be applied, and
establishing the time-limits and maximum ceilings applicable
in each case.

the tax credit (54). However,

The Spanish authorities have not communicated the text of
to Demesa. The
Decision 737/97 granting the tax credit
Commission consequently does not know the precise amount
it must be between ESP
of
1 125 000 000 and ESP 5 326 020 000, which correspond
respectively to 45 % of ESP 2 500 000 000 (the minimum
credit) and 45 % of ESP
the
investment qualifying for
11 835 600 000 (the amount officially invested by Demesa).
Given that there is no time-limit on the use of the tax credit, it
is impossible to calculate precisely its intensity. The intensity
may be up to 45 % nge. On the basis of the profit forecasts set
out in Demesa’s business plan, the aid intensity of the tax
credit is 34 % nge.

for it

Secondly, although the discretionary nature of the tax credit is
to be classed as a specific measure, and
sufficient
therefore as state aid,
the
the Commission considers that
minimum investment required (ESP 2 500 million) to qualify
is high enough to restrict its application in
for the credit
practice to investments which involve the raising of
large
amounts of capital, and that it is not justified by the nature or
overall structure of the tax system to which an exception is
made. The fact that only large investors can qualify for the tax
credit makes it a specific measure, which in turn classifies it as
state aid within the meaning of Article 92(1) of the Treaty.

Thirdly, the Commission takes the view that the temporary
(annual) nature of the measure in fact allows the authorities

(53) [1996] ECR I-4551.
(54) In their reply to the Commission’s notification of its decision to
initiate proceedings,
the Spanish authorities merely stated that
(cid:145)Demesa was granted, by means of Decision 737/97 of 21
October 1997,
the tax concessions provided for in the Sixth
Additional Provision of Provincial Law 22/1994 (tax credit
equivalent to 45 % of investments) for its investment project(cid:146).

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discretion to grant the tax credit to certain firms only, namely
those initiating their investment processes during the period
covered by the measure. The Commission notes that
the
measure does not appear in general tax legislation, only in the
annual finance acts, which confirms its temporary nature and
enables it to be used for specific projects.

Companies

1.
activity shall be
starting their business
entitled to a reduction of 99 %, 75 %, 50 % and 25 %
respectively in the positive basis of assessment deriving from
their economic activity, before this is offset by any negative
bases of assessment arising in previous periods, for the four
consecutive tax periods running from the first period in which,
within four years of starting their business activity,
they
generate a positive basis of assessment.

the Commission underlines the close similarities
Fourthly,
between this measure and the Ekimen scheme, both in terms
of the objectives pursued (the financing of new investments in
both cases) and as regards their geographical scope (regional
in the case of Ekimen, provincial in the case of the tax credit);
Ekimen was, however, regarded as a regional aid scheme by
the Spanish authorities and was notified as such. The only
difference between the two, which is that the Ekimen scheme
supports only industrial
is more of a formal
distinction, since the minimum investment (ESP 2 500 million)
required to qualify for the tax credit effectively limits the
possible beneficiaries to industrial firms.

investments,

Consequently, the tax credit granted to Demesa, corresponding
to 45 % of the amount of the investment as determined by the
`lava Provincial Council, constitutes
state aid within the
meaning of Article 92(1) of the Treaty.

In its letter to Member States SG(89)D/5521 of 29 April 1989
the Commission stated that it (cid:145)considers that a Member State
has failed to fulfil its obligation to notify it where the process
of putting aid into effect has been initiated. By (cid:147)putting into
effect(cid:148) it means not the action of granting aid to the recipient
but rather the prior action of instituting or implementing the
aid at a legislative level according to the constitutional rules of
the Member State concerned. Aid is therefore deemed to have
been put
into effect as soon as the legislative machinery
enabling it to be granted without further formality has been
set up(cid:146) (55). This is undoubtedly the case with this measure,
which has been carried out unlawfully in breach of
the
provisions of Article 93(3) of the Treaty.

V.2.4.2. Reduction in the tax base for newly created businesses

[(cid:133)].

To qualify for this reduction, businesses shall fulfil the

2.
following conditions:

(a) They shall start their business activity with a minimum

paid-up capital of ESP 20 million.

(b)

[(cid:133)].

(c)

[(cid:133)].

(d) The new activity shall not have been carried on
previously, either directly or indirectly, under different
ownership.

(e) The new business activity shall be performed on premises
or in an establishment where no other activity is carried
on by any natural or legal person.

(f) They shall during the first two years of their activity invest
at
least ESP 80 million in tangible fixed assets, all of
which assets shall be assigned to the activity and shall not
be hired out or transferred for use by third parties. For the
purposes of this requirement, goods acquired by leasing
shall also be deemed to be investments in tangible fixed
assets, provided that the business undertakes to exercise
the purchase option.

(g) They shall create at least 10 jobs within six months of
starting their business activity and shall maintain the
annual average workforce at that level from that point and
until the year in which their entitlement to the reduction
in the basis of assessment expires.

The reduction in the tax base for newly created businesses is
laid down in Article 26 of Provincial Law 24/1996, which
reads as follows: (56)

(h)

[(cid:133)].

(cid:145)Article 26 (cid:151) Reductions in the tax base: Newly created
businesses

least five years.

(i) They shall have a business plan covering a period of at

(55) See Competition law in the European Communities, Volume IIA: Rules
the

to state aid, Office for Official Publications of

applicable
European Communities, Luxembourg, 1995, p. 62.

(56) Only the provisions which are relevant

for the purposes of

assessing the state aid elements are quoted here.

3.

[(cid:133)].

The minimum amount of

4.
referred to in
subparagraph (f) and the minimum number of jobs created

investment

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referred to in subparagraph (g) of paragraph 2 above shall be
incompatible with any other tax concession established for the
same investment or job creation.

is granted by virtue, not of investments but of the creation of
a new business. The reduction in the tax base consequently
does not fall within the scope of the ban on combination with
other tax concessions.

The reduction provided for

5.
in this Article shall be
requested by means of an application lodged with the tax
administration, which,
initial
requirements are satisfied, shall where appropriate notify the
to be
applicant company of
formally adopted by decision of the `lava Provincial Council.

its provisional authorisation,

checking

after

that

the

[(cid:133)].(cid:146)

the regional authorities
In their letter of 6 March 1998,
maintain that the benefit of this measure cannot be combined
with that of the tax credit.

Before examining whether
the reduction in the tax base
provided for by Article 26 of Provincial Law 24/1996 contains
elements of state aid within the meaning of Article 92(1) of
the Treaty, the Commission has to determine whether, as was
claimed by the regional authorities, the tax credit cannot be
used where the company concerned decides to apply the
reduction in the tax base for which it qualifies under the
above provision. The wording of Article 24(6) and the overall
structure of the system do not confirm such an interpretation.

The Commission notes in the first place that the qualifying
conditions for each of the tax concessions are different.

In the case of the tax credit (see point V.2.4.1), the qualifying
condition is investment in new tangible fixed assets exceeding
ESP 2 500 million.

This is confirmed by the wording of Article 26(4) of Provincial
Law 24/1996, which provides that the minimum amount of
investment (ESP 80 million) referred to in subparagraph (f)
and the minimum number of jobs created (10) referred to in
subparagraph (g) of Article 26(2) are incompatible with any
other tax concession established for the same investment or
job creation. In reality, only tax concessions granted by reason
of an investment of ESP 80 million (or the creation of 10 jobs)
cannot be combined with the reduction in the tax base. In
accordance with this principle, ESP 80 million of the ESP
11 835 600 000 invested by Demesa should not be taken into
consideration in calculating the 45 % of investments eligible
for the tax credit.

tax payable (that

Neither is the combination of tax concessions ruled out in the
administration of the tax, in so far as the tax credit is applied
to the amount of personal
is, after all
deductions and reductions in the tax base have been made),
whereas the reduction in the tax base takes place at an earlier
stage in the calculation of the tax. Consequently, once there is
the business will apply the
a positive basis of assessment,
reduction in the
the
corresponding authorisation. Once the reduction has been
made, the amount of tax payable will be calculated. To the
latter, Demesa will apply the 45 % tax credit that has been
previously calculated on the basis of the total amount of the
investments minus ESP 80 million.

tax base provided that

it has

Having established that the two measures (the reduction in the
tax base and the tax credit granted to Demesa) are liable to be
combined,
the
reduction in the tax base constitutes state aid within the
meaning of Article 92(1) of the Treaty.

the Commission has

to examine whether

For the reduction in the tax base, the qualifying condition is,
on the other hand, the creation of a new business.

If it is to be classed as aid, the reduction in the tax base has to
satisfy each of the four criteria mentioned in Article 92 and
examined below.

Consequently, a newly created business could be entitled to
the reduction in the tax base without investing ESP 2 500
million and, conversely, an existing company investing more
than ESP 2 500 million could qualify for the tax credit without
being entitled to the reduction in the tax base. In this case,
however, Demesa is a newly created business and has invested
more than ESP 2 500 million in the Province of `lava.

Firstly,
the reduction in the tax base affords Demesa an
advantage that reduces the costs it would normally have to
bear in the course of its business.

Secondly, the reduction in the tax base involves a loss of tax
revenue equivalent to the use of state resources in the form of
tax expenditure.

According to the provision governing the tax credit (see point
V.2.4.1), the advantages granted under that provision cannot
be combined with any other tax concessions available by
virtue of the same investments. The reduction in the tax base

Thirdly, the reduction in the tax base affects competition and
trade between Member States since Demesa carries on an

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economic activity which is the subject of trade between the
Member States, in a sector that is highly competitive.

it

Lastly, the measure must be specific or selective in the sense
that
favours (cid:145)certain undertakings or the production of
certain goods(cid:146). In this case, the reduction in the tax base is
selective chiefly because only newly created businesses can
qualify for it. Article 26 of Provincial Law 24/1996 makes it
possible to afford newly created businesses more favourable
tax treatment than that applied to other businesses already
present on the market. This circumstance is sufficient
to
demonstrate the specific nature of the measure, on the basis of
which the Commission classifies the reduction in the tax base
granted to Demesa as State aid within the meaning of Article
92(1) of the Treaty. The specific nature of the measure is
strengthened by the fact that only businesses investing ESP 80
million and creating 10 jobs qualify for the reduction in the
tax base.

the tax system,

instrument enumerates another

The specific nature of the measure is also strengthened by its
purpose, as set out in Provincial Law 24/1996 establishing it.
the
After listing the general objectives of
set of
preamble to that
objectives that have more to do with industrial policy, among
which it specifically mentions the aim of
(cid:145)stimulating the
creation of new business initiatives(cid:146), an objective pursued in
the instrument by measures aimed at the specific category of
newly created businesses (see point (g) of the preamble), which
are granted a reduction in the tax base during the first four
years of operation in which they make a profit. This stated
objective, which confirms that the measure constitutes start-up
aid for newly created businesses, does not enable it to be
considered compatible with the nature or general scheme of
the tax system in question. Neither did the regional authorities
indicate or demonstrate in their response to the decision to
initiate proceedings that the selective nature of the measure is
justified by the (cid:145)nature or general scheme(cid:146) of the tax system
concerned (see the judgment of the Court of Justice of 2 July
1974 in Case 173/73 Italy v Commission (57)).

The measure in question clearly constitutes operating aid.
Since any profits will be generated in the future and are
essentially uncertain, it is not possible to calculate precisely the
aid intensity involved in the reduction in the tax base.

constitutional rules of the Member State concerned. Aid is
therefore deemed to have been put into effect as soon as the
legislative machinery enabling it to be granted without further
formality has been set up(cid:146) (58). This is undoubtedly the case
with this measure, which has been carried out unlawfully in
breach of the provisions of Article 93(3) of the Treaty.

As regards the nature of the aid granted to Demesa in the
light of Community law, with the exception of that granted by
the Basque authorities in accordance with the criteria of the
the aid was not granted under schemes
Ekimen scheme,
approved by the Commission but pursuant
to national
measures that had not been approved by the Commission and
should have been notified to it at
the planning stage in
accordance with Article 93(3) of
the Treaty. This aid is
consequently illegal under Community law.

Article 92(1) of
the Treaty provides that aid meeting the
criteria laid down therein shall normally be incompatible with
the common market.

In this particular case the exceptions provided for in Article
92(2) of the Treaty are not applicable since the aid does not
pursue the objectives listed in that paragraph. Nor indeed have
the Spanish authorities attempted to rely on those exceptions.

Compatibility of the investment aid (points V.2.1, V.2.2, V.2.3 and
V.2.4.1)

Article 92(3) of the Treaty lists the types of aid that may be
considered to be compatible with the common market.
Compatibility must be determined with reference to the
Community as a whole, and not with reference to one
Member State (cid:151) or region thereof (cid:151) taken individually. To
ensure that the common market functions normally and given
the
the principle established in Article 3(g) of
exceptions listed in Article 92(3) should be construed strictly
when it comes to examining any aid scheme or individual aid
measure. In particular, the exceptions may be relied on only
where it can be demonstrated that, without the aid, market
forces would not be sufficient on their own to induce the
beneficiaries to act
the
objectives mentioned in the exceptions to be achieved.

in such way as to enable one of

the Treaty,

In its letter to Member States SG(89) D/5521 of 29 April
1989 the Commission stated that it (cid:145)considers that a Member
State has failed to fulfil its obligation to notify it where the
process of putting aid into effect has been initiated. By
(cid:147)putting into effect(cid:148) it means not the action of granting aid to
the recipient but rather the prior action of
instituting or
implementing the aid at a legislative level according to the

Under Article 92(3)(a), an exception may be made in the case
of aid to promote the economic development of areas where
the standard of living is abnormally low or where there is
serious underemployment. The municipality of Vitoria-Gasteiz
is not located in an area qualifying for regional aid under
Article 92(3)(a) of the Treaty.

(57) [1974] ECR 709.

(58) See footnote 55.

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the aid in question is not

As regards the exceptions provided for in Article 92(3)(b) and
intended to promote the
(d),
execution of an important project of common European
interest or to remedy a serious disturbance in the Spanish
economy, nor does it display the features of projects of that
intended to promote culture or heritage
kind. Nor
conservation.

is it

awarded outside the Ekimen scheme and other regional aid
schemes approved by the Commission, contributes to a further
deterioration in the situation and runs counter to the process
embarked on by the company’s main competitors.

As far as the exception provided for in Article 92(3)(c) of the
Treaty is concerned, Vitoria-Gasteiz is located in an area which
qualifies for regional aid in accordance with that provision.
The maximum aid intensity allowed in the Basque Country is
25 % nge (59) (35 % in the case of SMEs). Given the difference
between this and the intensity of aid granted to Demesa in
accordance with the Ekimen scheme
the
Commission has to check whether the aid granted within that
limit can be considered compatible by way of regional aid
within the meaning of that exception.

(20 % gross),

The aid in question was not awarded under regional aid
schemes approved by the Commission, but granted by means
of individual decisions taken by the competent authorities. In
such cases, the impact of the aid has to be examined in the
context of the Community as a whole. The Court of Justice
confirmed this
interpretation in Hytasa (judgment of 14
September 1994 in Joined Cases C-278/92, C-279/92 and
C-280/92 Spain v Commission (60) and Pyrsa (61). The (cid:145)cluster(cid:146)
approach based on the concept of (cid:145)geographic concentration(cid:146),
whose appropriateness as part of the industrial policy pursued
by the regional authorities is not addressed in this Decision,
cannot justify analysing the impact of the aid without taking
the Community context into account.

An individual aid measure may be classed as regional aid
compatible with the common market where it effectively
contributes to the long-term development of the area and does
not have effects that are detrimental to the common interest
and competitive conditions in the Community. The aid can
accordingly be considered to be compatible with the common
market where it does not adversely affect trading conditions to
an extent contrary to the common interest.

As already stated and according to information obtained by
the Commission in the course of the proceedings under Article
93(2) of the Treaty, the company receiving the aid is operating
in a sector which is suffering from problems of surplus
capacity at Community level, as illustrated by an extensive
restructuring process that has given rise to capacity reductions
or production relocations involving heavy job losses within
the Community. The aid under examination, which was

(59) See footnote 11.
(60) [1994] ECR I-4103.
(61) See footnote 23.

result

The award of aid in a highly competitive sector subjected to
nearly constant
restructuring and on a market which is
stagnant will not result in net job creation in the Community,
in Spain or even in the Basque Country, nor will it bring other
economic benefits. The aid will
in distortion of
competition that will force certain competitors to withdraw
from the market or will cause production capacities or jobs to
be shifted from one competitor to another or from one region
to another, something that should be regarded as contrary to
the common interest. The fact
in
demand was observed on the Community market in 1998 in
no way detracts
the industry is still
installed production capacity in the
adjusting to surplus
Community by making very heavy job cuts, far in excess of
the number of
jobs which Demesa expects to create at
Vitoria-Gasteiz. This situation is illustrated by the MCC group’s
decision to discontinue refrigerator production at Basauri,
involving a loss of 180 jobs, authorised by the Basque
Government, precisely on the grounds of the poor market
conditions in the sector. It is difficult not to see a link between
jobs in refrigerator production at Basauri and
the loss of
the
Demesa’s announcement, at around the same time, of
creation of 200 jobs at Vitoria-Gasteiz.

that some improvement

from the fact

that

is

the

the compatibility of

from the annual reports of

Neither can an assessment of
the aid
overlook the information and forecasts concerning market
prospects available at the time when the decision to grant aid
to Demesa was taken, a period when the main European
producers were deciding to undertake
adjustments
demanded by the state of the sector. The sector was at that
time experiencing great difficulties (cid:151) as
immediately
the main European
apparent
abovementioned
manufacturers (cid:151) which prompted the
restructuring decisions.
the
speech given by the chairman of Electrolux on 29 April 1998,
quoted by the regional authorities
their
argument that the refrigerators and freezers segment had been
experiencing an upturn since 1997, refers in the first place to
(cid:145)restructuring programme(cid:146) announced in 1996,
the major
involving,
in the
the closure of
inter alia,
Community, with the aim of (cid:145)improving capacity utilisation(cid:146).
The relative improvement observed in 1997 and mentioned by
the chairman of Electrolux concerns the household appliances
sector in general and not the refrigerators segment, which
continues to undergo extensive restructuring.

is worth stressing here that

in support of

three plants

It

It must consequently be concluded that
the aid under
examination adversely affects trading conditions to an extent
contrary to the common interest and therefore cannot be
deemed compatible with Article 92(3)(c) of the Treaty. The
investment aid in question does not qualify for any of the
in the Treaty. The Commission
exceptions provided for
accordingly concludes
incompatible with the
common market.

that

is

it

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Operating aid: reduction in the tax base (point V.2.4.2)

(d)

the grant of a tax credit corresponding to 45 % of the cost
of the investment as determined by the `lava Provincial
Council in Decision 737/1997 of 21 October 1997;

Regional aid intended to reduce businesses’ running costs
(operating aid) is normally prohibited. This type of aid may
nevertheless be granted exceptionally in areas qualifying for
the derogation provided for in Article 92(3)(a) of the Treaty
where it
its nature and
contribution to regional development and where the amount
of the aid is in proportion to the disadvantages which it is
intended to mitigate. The Commission notes that the Basque
Country is not one of the areas covered by Article 92(3)(a) of
the Treaty.

justified on the grounds of

is

It consequently has to be concluded that, since the operating
aid in question does not qualify for any of the exceptions
provided for
incompatible with the
common market.

in the Treaty,

is

it

This Decision relates only to those tax measures explicitly
examined herein and does not pass judgment on the other
measures provided for by the specific tax arrangements
adopted in the Province of `lava. The Commission reserves
the right to examine any such measures that might constitute
aid, either as general schemes, or in so far as they might be
applied to Demesa.

VI. CONCLUSIONS

The Commission finds that Spain has acted illegally and in
breach of Article 93(3) of the Treaty in granting the following
aid:

(a)

the advantage equivalent to postponement of payment of
the price of a plot of land in the Jœndiz industrial estate at
Vitoria-Gasteiz for a period of nine months, running from
the time at which Demesa first occupied the land for the
purpose of carrying out construction work (February
1997) until the date on which it paid the price (no earlier
than November 1997), the amount of which is calculated
at EUR 184 075,79 (ESP 30 627 635);

(b)

the advantage equivalent to the difference between the
market price and the price paid by Demesa for a plot of
land in the Jœndiz industrial estate, the amount of which
is calculated at EUR 213 960,31 (ESP 35 600 000);

(c)

the amount corresponding to the five percentage points
that exceed the maximum permissible grant of 20 % of
eligible costs under the Ekimen aid scheme, namely the
plant valued at EUR 1 803 036,31 in the audit report
submitted by the regional authorities as an annex to
Spain’s letter of 24 July 1998;

(e)

the reduction in the tax base for newly created businesses
provided for by Article 26 of Provincial Law 24/1996.

This aid has to be deemed incompatible with the common
market. Consequently,
in order to re-establish the economic
conditions with which the company would have had to
contend if it had not been granted incompatible aid, Spain
must
from the
beneficiary,

the necessary steps to recover it

take all

HAS ADOPTED THIS DECISION:

Article 1

The State aid granted by Spain to Daewoo Electronics
Manufacturing Espaæa SA in the form of:

(a)

the advantage equivalent to postponement of payment of
the price of a plot of land in the Jœndiz industrial estate at
Vitoria-Gasteiz for a period of nine months, running from
the time Daewoo Electronics Manufacturing Espaæa SA
first occupied the land for the purpose of carrying out
construction work until the date on which it paid the
price, amounting to EUR 184 075,79;

(b) the advantage equivalent

to the difference between the
market price and the price paid by Daewoo Electronics
Manufacturing Espaæa SA for a plot of land in the Jœndiz
industrial estate, amounting to EUR 213 960,31;

(c)

the amount corresponding to the five percentage points
that exceed the maximum permissible grant of 20 % of
eligible costs under the Ekimen aid scheme, i.e. the plant
valued at EUR 1 803 036,31 in the audit report submitted
by the regional authorities as an annex to Spain’s letter of
24 July 1998;

(d) the grant of a tax credit corresponding to 45 % of the cost
of the investment as determined by the `lava Provincial
Council in Decision 737/1997 of 21 October 1997;

(e)

the reduction in the tax base for newly created businesses
provided for by Article 26 of Provincial Law 24/1996,

is incompatible with the common market.

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Article 2

Article 3

1.

Spain shall take the necessary measures to:

(a)

recover from the beneficiary company the aid referred to
in Article 1(a),
(b) and (c), which was granted to it
illegally;

(b) withdraw from the beneficiary company the benefits
deriving from the aid referred to in Article 1(d) and (e),
which was granted to it illegally.

2.
The aid shall be recovered in accordance with the
procedures and provisions laid down in Spanish law. The
include the interest which has
sums to be recovered shall
accrued between the granting of
the aid and the date on
which it is actually repaid. The interest shall be calculated on
the basis of the reference rate used to calculate the grant
equivalent of regional aid in Spain.

Spain shall
inform the Commission within a period of two
months from the date of notification of this Decision of the
measures taken to comply therewith.

Article 4

This Decision is addressed to the Kingdom of Spain.

Done at Brussels, 24 February 1999.

For the Commission

Karel VAN MIERT

Member of the Commission