2004/125/EC: Commission Decision of 24 June 2003 On an aid scheme "Common guidelines for the use of economic development funds by the Land of Berlin", which Germany wishes to implement (Text with EEA relevance.) (notified under document number C(2003) 1867)
Date: 2003-06-24
Institutions: European Commission
Subjects: Berlin, Germany, State aid, application of EU law, control of State aid, regional aid, small and medium-sized enterprises

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COMMISSION DECISION

of 24 June 2003

On an aid scheme ‘Common guidelines for the use of economic development funds by the Land
of Berlin’, which Germany wishes to implement

(notified under document number C(2003) 1867)

(Only the German text is authentic)

(Text with EEA relevance)

(2004/125/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Com-
munity, and in particular the first subparagraph of Article 88(2)
thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to the provisions cited above (1),

(4)

(5)

Germany submitted its comments by letter dated 17 June
1999. The Commission has received no comments from
interested parties.

As part of its examination of the 28th outline plan for
the joint Federal/Länder scheme for improving regional
economic structures,
the Commission took up the
question of the eligibility of business relocations in
connection with regional aid in a letter dated 26 July
1999, referring to the proceedings which are the subject
of this decision.

Whereas:

1. PROCEDURE

(1)

(2)

(3)

By letter dated 14 December 1998, Germany notified
the Commission under Article 88(3) of the EC Treaty of
a proposed State aid scheme ‘Common guidelines for
the use of economic development funds by the Land of
Berlin’. It submitted further information by letter dated
9 March 1999.

By letter dated 18 May 1999, the Commission informed
Germany of its decision to initiate the procedure laid
down in Article 88(2) of the EC Treaty in respect of that
aid scheme.

The Commission decision to initiate the procedure
was published in the Official
Journal of the European
Communities (2). The Commission invited interested par-
ties to submit their comments on the aid scheme within
one month following publication of the decision.

(6)

Germany explained its position on business relocations
in the context of the present proceedings by letter dated
28 October 1999.

(7) On 27 March 2000, 2 May 2001 and 5 October 2001
representatives of Germany and the Commission held
talks at working level and at political level.

(8) On the basis of the talks held on 2 May 2001, the
Commission asked for further information by letter
dated 10 May 2001.

(9)

Germany replied by letters dated 27 June and 6 July
2001.

(10) By letter dated 9 August 2002, Germany asked for a
final decision to be adopted, citing the time limit laid
down in Article 7(6) of Council Regulation (EC) No 659/
1999 of 22 March 1999 laying down detailed rules for
the application of Article 93 of the EC Treaty (hereinafter
the Procedural Regulation) (3), whereby a final decision
must be taken within 18 months of the opening of the
procedure.

(1) OJ C 340, 27.11.1999, p. 64.
(2) See footnote 1.

(3) OJ L 83, 27.3.1999, p. 1.

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(11) By letter dated 24 February 2003, Germany once again
requested that a final decision be adopted. It argued that,
by its letter dated 9 August 2002, it had already invoked
Article 7(7) of the Procedural Regulation. It also stated
that the letter of 24 February 2003 should be interpreted
as calling upon the institution to act within the meaning
of the second paragraph of Article 232 of the EC Treaty,
thereby preparing the way for an action for failure to act
under that Article.

(12) By letter dated 27 February 2003, the Commission
informed Germany that, because Germany’s letter of
9 August 2002 had merely invoked Article 7(6) of the
Procedural Regulation, it had been understood solely as
a general reference to the 18-month time limit, and not
as a request under Article 7(7) of
the Procedural
Regulation. The Commission also indicated that Ger-
many’s letter of 27 February 2003 would now be
regarded as a request under Article 7(7) of the Procedural
Regulation.

2. DESCRIPTION OF THE PROPOSED AID SCHEME AT THE
TIME THE PROCEDURE WAS INITIATED (4)

2.1. Legal basis, form and budget

(13) The object of the procedure is the common guidelines
for the use of economic development funds in Berlin
(common guidelines), which are based on Sections 23
and 44 of the Landeshaushaltsordnung (Land Budget
Regulation). The aid is to be made available in the form
of grants. The scheme provides for annual payments of
EUR 3 067 751 (5), financed entirely from the budget of
the Land of Berlin.

2.2. Objective, aid recipients and duration

(14)

Section II.3(1) and (2) of the common guidelines stipu-
lates that the Land of Berlin is to carry out public
measures other than urban renewal and development
within the meaning of
the German Baugesetzbuch
(Town and Country Planning Code), i.e. construction
work, the release of land and other urban planning and
development measures. The purpose of the scheme is to
provide incentives to remain in Berlin for firms which,
because of the public measures, have to relocate their
business or make substantial building alterations to their

premises. The aim is to ensure that firms are not forced
by the public measures to close down their business in
Berlin or to leave the city. The common guidelines apply
to firms of any size and in all sectors of the economy
which use for business purposes the land required for
such a measure or the buildings on that land, whether
as owners, persons holding heritable building rights,
tenants or leaseholders. Firms in difficulty are excluded
from receiving aid. The scheme is set to run until the
end of 2008 (6).

2.3. Conditions for granting aid

(15) According to Section II.3(3) of the common guidelines
the granting of aid is subject to the condition that the
public measure is the only or main cause of interference
with the firm’s commercial activities. It must serve the
sole purpose of developing further and/or preserving a
business operation in Berlin. (Section II.4(1a) of the
common guidelines). Preservation of a business must be
in the general economic interest. (Section II.4(1b) of the
common guidelines). Projects are not eligible for aid if
they are implemented or altered solely or mainly for
operational reasons or if they are laid down by law.
(Section II.4(4) of the common guidelines). Germany has
stated clearly that the aid will be granted only as an
adjunct to any other indemnification claims up to the
amount of damage to be compensated. (Section II.2 of
the common guidelines and Germany’s letter of 9 March
1999).

2.4. Eligible costs

2.4.1. Gross eligible costs

(16) The fact that a firm is affected by a public measure may
lead to two different scenarios, viz. Scenario 1: All the
land used for business operations is required for the
public measure and the firm must move (business and
relocation); and Scenario 2: Part of the land used for
business operations is required for the public measure
and the firm must undertake substantial building alter-
ations (substantial building alterations). On the basis of
this distinction, the following costs are listed as being
eligible under the scheme.

(17)

In the case of business relocation (Scenario 1), the
scheme contains the following exhaustive list:

(a)

cost of dismantling and setting up again operating
equipment and fixtures (Section II.5(2) of
the
common guidelines);

(4) For the later, more detailed picture, see Section 4 of this Decision

(Germany’s comments).

(5) Point 15 of the statement by Germany of 14 December 1998,

(6) The decision to initiate the procedure contains an error since it

which still gave the amount in DEM (DEM 6 million).

states that the scheme will run until ‘the end of 2006’.

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(b)

cost (including insurance) of transporting operating
equipment, fixtures and merchandise stock (Sec-
tion II.5(2) of the common guidelines);

(c)

cost of preparing replacement premises
tion II.5(2) of the common guidelines), i.e.

(Sec-

— necessary building alterations that do not
increase the market value of the premises,
and/or

(b)

any sales proceeds; and/or

(c)

(d)

any investment aid granted under the 1999 Invest-
itionszulagengesetz (Investment Allowance Law);
and/or

any profits from the sale of land (where the land is
sold to a publicly funded investor, the selling price
is higher than the market value and the purchase
price of the new land corresponds to the market
value).

— where new premises are built, the cost of the

building, and/or

2.5.

Intensity and maximum amount of aid

— any external installations required;

(d)

(e)

(f)

costs incurred because previous operating equip-
ment and/or fixtures can no longer be used (Sec-
tion II.5(2) of the common guidelines);

contributions towards administrative fees payable
for departing from building regulations, where this
is absolutely necessary to adapt the new premises
to operational needs (Section III.6 of the common
guidelines);

the authorities may make the granting of a contri-
bution towards the above costs conditional on
external experts being consulted on the planning
and execution of the business relocation and on
the accounting aspects. If the relocation goes ahead,
the cost of the experts’ services is also eligible
(Section II.5(8) and (9) of the common guidelines);

(g)

if grants under the scheme are liable to turnover
tax, compensation equivalent to the amount of
turnover tax charged on the grant may be paid
(Section II.5(10) of the common guidelines);

(18)

In the case of substantial building alterations (Scen-
ario 2), building costs,
including ancillary expenses
(Section II.5(5) of the common guidelines), and the tax
refund described at point (g) above.

2.4.2. Net eligible costs

(19) Germany has stated clearly that the net eligible costs will
be determined by deducting the following items from
gross eligible costs:

(a)

any direct or indirect compensation paid in connec-
tion with a public measure under public or private
law; and/or

(20) The scheme provides for grants of up to 100 % of net
eligible costs (Section II.5(1) of the common guidelines).
If, however, a firm moves and constructs a new building
at its new site (see paragraph 17, Scenario 1(c), second
indent), only up to 20 % of the net costs of the building
are eligible (Section II.5(3)(c) of the common guidelines).

(21) The grant may not exceed 75 % of the average wages
paid out in the last three years before submission of the
application and may be no more than ten times the
amount of wages paid during the last month before the
grant is approved (Section II.5(6).

2.6. Cumulation

(22) The scheme contains no clear provisions on the cumu-

lation of aid.

3. GROUNDS FOR INITIATING THE PROCEDURE

(23)

In its decision initiating the formal investigation pro-
cedure, the Commission came to the provisional con-
clusion that the common guidelines constituted State
aid within the meaning of Article 87(1) of the EC Treaty
and that there were grounds for serious doubts about
their compatibility with the common market.

(24) The Commission provisionally found that, by way of the
compensation to which they were entitled under public
and/or private law, the firms affected by the public
measures in question were already placed in the same
position as any other firm not affected by the measures.
The firms affected are thus already, from a State aid
point of view, on the same footing as other firms
operating in the common market. The Commission’s
provisional view is that
the scheme laid down by
the common guidelines merely provides an additional
incentive for firms already established in Berlin to remain
there, to the detriment of any other firm in the common
market aspiring to set up business in Berlin and unable
to benefit from the scheme.

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(25)

In the absence of any claim to the contrary by Germany,
the Commission assumed that the potential aid recipi-
ents operated in commercial sectors in which there
was competition on the common market. It therefore
concluded that their position relative to their competi-
tors would be strengthened, affecting trade and dis-
torting competition. It also took the view that aid which
influences a firm’s choice of location generally distorts
competition (7). It found that the rules on de minimis
aid (8) did not apply and that Germany had not invoked
them.

(26) The Commission therefore came to the provisional
conclusion, in its decision initiating the procedure, that
State aid within the meaning of Article 87(1) of the EC
Treaty was involved.

(27)

In provisionally assessing the compatibility of the com-
mon guidelines with the common market, the Com-
mission examined Article 87(3)(a) and (c) of the EC
Treaty in conjunction with the guidelines on national
regional aid (9) (hereinafter the regional aid guidelines)
and the rules on aid for small and medium-sized
enterprises (SMEs) in force at the time of its decision (10).

(28) Until the end of 1999, west Berlin was an area eligible
for aid under Article 87(3)(c) of the EC Treaty with a
maximum aid intensity of 43 % gross (30 % net) and
east Berlin was an eligible area under Article 87(3)(a) of
the EC Treaty with a maximum aid intensity of 50 %
gross (11). Berlin’s regional-aid status as of 2000 and the
applicable aid ceilings had not yet been finally fixed
when the decision initiating the procedure was taken (12).

(7) Commission Decision 87/573/EEC of 15 July 1987 (OJ L 347,

11.12.1987, p. 64), Section IV, point 1.

(8) At the time the procedure was initiated, the Commission notice

on de minimis aid applied (OJ C 68, 6.3.1996, p. 9).

(9) OJ C 74, 10.3.1998, p. 9.
(10) Commission recommendation concerning the definition of small
and medium-sized enterprises (OJ L 107, 30.4.1996, p. 4) and
Community guidelines on State aid for small and medium-sized
enterprises (OJ C 213, 23.7.1996, p. 4).

(11) See decision in Case N 613/96.
(12) On the basis of the decisions taken in Cases N 195/99, C 47/99
and N 641/2002, the City of Berlin, along with Brandenburg,
which together make up the labour market region of Berlin, is
an eligible area under Article 87(3)(c) for the period 2000-06
with a maximum aid intensity of 20 % net. This may be raised
by 10 percentage points gross for SMEs. For the period from
2007 onwards, the eligible areas and regional-aid ceilings have
not yet been set.

(29)

In its provisional assessment of the common guidelines’
compatibility with the common market,
the Com-
mission distinguished between initial investment aid and
operating aid.

(30)

For aid of up to 20 % of net construction costs as
described in paragraph 17 (Scenario 1), point (c), second
indent, the Commission assumed that this was initial
investment aid. It found that the common guidelines
contained no provisions on compliance with the
regional aid ceilings and that cumulation with other
investment aid was not ruled out. In view of the fact that
the common guidelines applied to firms of all sizes and
to all sectors of the economy, it further concluded that
they did not comply either with the rules on State aid
for SMEs in force at the time of the decision initiating
the procedure or with the special Community aid rules
applicable in specific sectors. It therefore concluded that
there were serious doubts about the compatibility of this
aid with the common market.

(31) The Commission provisionally classified the other
measures under the common guidelines as operating
aid, which, when granted to areas assisted under
Article 87(3)(a) of the EC Treaty, may be declared
compatible with the common market only under certain
exceptional circumstances. To be approved under the
regional aid guidelines, operating aid must be both
limited in time and progressively reduced (13), it must
be justified in terms of its contribution to regional
development and its nature (14), and areas subject to
special State aid rules (known as sensitive sectors) must
be ruled out. Moreover, west Berlin was never an area
assisted under Article 87(3)(a) of the EC Treaty, and east
Berlin ranked as one only until the end of 1999.
Accordingly, the Commission could see no grounds for
declaring these rules compatible with the common
market.

4. COMMENTS FROM GERMANY

(32) Germany argued in its opinion of 17 June 1999 and in
subsequent opinions that the common guidelines did
not constitute State aid within the meaning of
Article 87(1) of the EC Treaty since they did not distort
competition. According to Germany, they merely served
to offset an unforeseeable disadvantage arising from
public intervention and were ancillary to other compen-
sation possibilities. Germany stated that the firms affec-

(13) See point 4.17 of the regional aid guidelines.
(14) See point 4.15 of the regional aid guidelines.

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ted by the public measures were generally not entitled
to any, or at least not to sufficient, public compensation.
The common guidelines were intended to fill this gap.

(33) Germany explained the public compensation situation
as follows: the legal basis for a claim in the event of
expropriation was Sections 93 et seq. of the Federal
Building Code (Baugesetzbuch). In the event of being
forced out of rented or leased property, no claim to
compensation was provided for in the Building Code for
short-term rental or leasing agreements while, for long-
term rental or leasing agreements, claims covered only
the amount of
interest on advance financing. The
ancillary common guidelines were intended to expand
on this rule, applying also to short-term rental or leasing
agreements and allowing full compensation for the
disadvantage suffered. Germany argued that most of the
firms affected by the public construction measures in
Berlin had only short-term rental or leasing agreements
which were though, typically for Berlin, very stable and
would normally be extended time and time again. The
particular risk borne by tenants or lessees, especially in
the case of short-term rental or leasing agreements, and
reflected in the Building Code by their exclusion from
compensation did not,
in principle, exist in Berlin.
Germany did not provide any statistical evidence of
the alleged specific nature of Berlin rental or leasing
contracts. It argued, moreover, that most of the Berlin
firms affected, in view of the above-mentioned stability

of rental agreements, had no reserves to cover a
relocation induced by termination of the agreement,
with the result that the payments provided for by the
Building Code, even if they were granted, would anyway
be insufficient. According to Germany, it therefore had
to be assumed that, although the common guidelines
extended the provisions of the Building Code, this was
justified by the specific circumstances. In Germany’s
view, the common guidelines do not constitute aid
within the meaning of Article 87(1) of the EC Treaty,
with the risk customarily inherent in a rental or leasing
contract being offset by assistance from the State, but
simply provided for loss compensation outside of any
aid scheme.

(34) Germany further stated that the common guidelines did
not apply to firms in areas of Berlin designated by
the Building Code as being for ‘renewal’ or ‘urban
development’. For relocations or substantial alterations
to business premises resulting from public urban renewal
measures in such areas, compensation could be claimed
only under Sections 136 et seq. of the Building Code,
read in conjunction with the Urban Development Pro-
motion Law (Städtebauförderungsgesetz)
and the
implementing rules for the financing of urban develop-
ment measures. Since the common guidelines applied
only to all other areas, they were intended to ensure
uniform treatment of all Berlin-based firms affected by
public measures.

(35) To clarify the various categories of assistance under the common guidelines, Germany provided the

following table by letter of 6 July 2001:

Categories

Legal basis

Proportion of the professionally
established costs eligible for
compensation (%)

Proportion of the professionally
established costs eligible
for aid (%)

Sections 93 et seq. of the Building Code

Common guidelines

1.

Firm owns the property.

100

2.

Firm rents/leases the property
and still has long-term rental/
leasing rights.

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

remaining duration 10 years

100

remaining duration 9 years

remaining duration 8 years

remaining duration 7 years

remaining duration 6 years

remaining duration 5 years

remaining duration 4 years

remaining duration 3 years

remaining duration 2 years

90

80

70

60

50

40

30

20

0

0

10

20

30

40

50

60

70

80

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Categories
Legal basis

Proportion of the professionally
established costs eligible for
compensation (%)
Sections 93 et seq. of the Building Code

Proportion of the professionally
established costs eligible
for aid (%)
Common guidelines

Firm rents/leases the property and

3.
has only short-term rental/leasing rights.

(a)

(b)

remaining duration 1 year

interim interest

rental relationship is ended

0

about 90

100

(36) To clarify the concept of mere compensation for disadvantage suffered, Germany also explained
that firms assisted under the common guidelines were not placed by the aid on a better footing
than their competitors since business expansion and improvements in particular were not eligible
for aid and any other financial advantages gained from the relocation were factored into the aid
calculation.

(37) Were the Commission to maintain its view that aid
within the meaning of Article 87(1) of the EC Treaty was
involved, Germany argued that the common guidelines
were none the less compatible with the common market.
In its letter of 17 June 1999, it ruled out any cumulation
of aid granted under the common guidelines with other
aid if the regional aid ceiling was exceeded. It also again
expressly mentioned that the common guidelines were
ancillary to other sources of finance.

(38)

In response to the Commission’s argument regarding
inadmissible operating aid, Germany referred to the
judgments by the Court of First Instance of the European
Communities of 30 April 1998 in Case T-214/95
(Vlamse Gewest v Commission (15)) and of 8 June
1995 in Case T-459/93 (Siemens v Commission (16)),
according to which operating aid is involved only where
a firm is relieved of
the expenses which it would
normally have had to bear in its day-to-day management
or its usual activities. However, since the common
guidelines were designed to offset unforeseeable losses,
they provided compensation only for costs which the
beneficiary firms would not normally have had to bear.
In particular, any relocation by a firm was not the result
of a freely taken business decision but the inevitable
consequence of public measures designed, inter alia, to
rectify urban development dating from the time of
the
Berlin’s division. Thus, according to Germany,
common guidelines do not grant operating aid.

(39) After initiating the formal investigation procedure, the
Commission also raised the question of whether the
common guidelines were not also designed to prevent
firms from the Berlin region to the
an exodus of

Brandenburg part of the Berlin labour market region,
which had a higher aid intensity until the end of 1999.
In response to the Commission’s argument that this
possible intention was invalid as of 2000, when the aid
ceiling became the same in Berlin and Brandenburg,
Germany argued that the common guidelines were
quite generally designed to counter the loss of sound
businesses in Berlin and the related negative impact on
Berlin as a business location, such as the loss of jobs and
tax revenue. Since Land funds were being used to this
end,
the aid was linked to the firms’ choosing a
replacement location within Berlin.

(40) Germany also clarified that environmental consider-
the common

the primary aim of

ations were not
guidelines.

5. ASSESSMENT OF THE SCHEME

5.1. Existence of State aid

(41) The Commission has to examine whether the common
guidelines constitute State aid within the meaning of
Article 87(1) of the EC Treaty, which lays down the
following criteria:

(a)

the use of State resources to grant aid of any kind;

(b)

the selection of certain undertakings or certain
branches of production as aid recipients;

(c)

favouring such undertakings by way of the aid;

(15) [1998] ECR II-717.
(16) [1995] ECR II-1675.

(d)

the resulting distortion or threatened distortion of
competition;

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(e)

the fact that the aid affects trade between Member
States.

(42) While,

in Germany’s view, criteria (a) and (b) are
undeniably met in this case, criteria (c) to (e) merit closer
examination.

5.1.1. Advantage conferred on firms

(43) Germany argues that, as regards the public measures,
the common guidelines notified serve merely to offset
an unforeseeable disadvantage. Although such compen-
legislation
sation is already provided for in Federal
(Building Code, Articles 93 et seq.) and under private
law, some situations are not covered. The common
guidelines allow payments in precisely these cases,
which, in Germany’s view, are not covered because of a
gap in Germany’s legal system. Since these payments
merely fill in what was ‘forgotten’ by the Building Code
by private law, Germany considers that the common
guidelines do no more than place the firms affected on
an equal footing with others not affected by the public
measures. It does not believe that the firms concerned
are given any advantage over their competitors.
It
therefore contests the applicability of Article 87(1) of
the EC Treaty.

(44) The Commission considered Germany’s argument in
connection with the question of whether the firms
covered by the common guidelines were favoured within
the meaning of Article 87(1) of
It
concluded that they were.

the EC Treaty.

(45)

In assessing the above question, the Commission is
assuming a situation where the public measures which
are the basis for a payment under the common guidelines
have already taken place and all other usual claims under
public law (Building Code) and private law have been
exhausted.

(46) The common guidelines provide for an additional pay-
ment over and above compensation claims under public
and private law and any private contractual claims (17).
During the investigation, Germany was unable to pro-
vide proof that the measures in Berlin caused greater or
other injury than in similar cases elsewhere in Germany.

(47) The Commission’s assessment

is not weakened by
Germany’s, likewise unproved, argument that short-term
rental or leasing agreements (18) in Berlin were always
particularly secure. The associated injury — either the
disappointed expectation of obtaining a new agreement
or the failure to make provision for the possibility of a
premature cancellation or non-renewal of the agreement
— is a typical consequence of changing economic and
power relationships. In Member States, such injury is, as
a rule, suffered by market participants themselves. Nor
can the Commission accept Germany’s argument that
the payments under the common guidelines are designed
for unforeseeable disadvantages. Termination, prema-
ture cancellation and discharge of a contract of use are
risks inherent in business life and are thus foreseeable.

(48) The Commission’s view that an advantage is conferred
on the firms concerned by the common guidelines is
considerably strengthened by the fact that the common
guidelines make the payment by the State conditional
on the firm’s relocating within Berlin. This makes it clear
that the aim of the common guidelines is to confer an
advantage on certain firms to which other firms are not
entitled, even though they are all affected by the same
measures. The real purpose of the common guidelines
is thus not confined to merely compensating for a
disadvantage. Instead, as a clear regional policy tool,
their purpose is to keep firms in Berlin.

(49)

For all of the above reasons, it follows that the common
guidelines favour certain firms, at least over other Berlin-
based firms which are affected by the same measures but
do not elect to stay in Berlin and over firms outside
Berlin affected by similar measures.

5.1.2. Distortion or threatened distortion of competition

(50) Germany argues that the common guidelines are de-
signed to ensure that the beneficiary firms can continue
to exist in the same form as prior to the public measures
and can operate on the common market. The scheme,
according to Germany, therefore serves to preserve, and
not to distort, competition.

(51) A distortion of competition occurs as soon as firms
which receive an advantage from the State compete with
other firms. Therefore, the only relevant issue is whether
the beneficiary firms can be shown to be operating in a
commercial sector in which there is no competition
between Member States. Germany has never made such

(17) For the public-law claims and further payments under the
common guidelines, see the table provided by Germany and set
out in recital 35.

(18) Rental or leasing agreements with a duration of less than two

years, i.e. category three in the table in recital 35.

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the possibility that

a claim, let alone proved it. The Commission cannot
therefore rule out
the potential
aid recipients are involved in the importation and/or
exportation of goods and/or services and that their
goods and/or services are in direct competition with
other goods and/or services from other Member States.
The payments made by the State under the common
guidelines therefore strengthen the competitive position
of the aid recipients vis-à-vis other firms.

(52)

In its letter of 6 July 2001, Germany stated that
payments under the common guidelines were to act as
an incentive to keep firms in Berlin. They thus allowed
payments only for
firms which relocated within
Berlin (19). The Commission takes the view that pay-
ments by the State favouring a firm which influence that
firm’s choice of
location invariably distort compe-
tition (20).
this occurs to the
detriment of other firms in the common market which
are also located in Berlin or aspire to set up in business
in Berlin.

In this specific case,

(53) The Commission notes that the common guidelines
contain no provisions on de minimis aid and that
Germany did not invoke the de minimis rule. Since
2 February 2001 de minimis aid has been governed by
Regulation (EC) No 69/2001 (21).

(54) The Commission accordingly concludes that payments
by the State under the common guidelines at least
threaten to distort competition between Member States
within the meaning of Article 87(1) of the EC Treaty.

5.1.3.

Effect on trade

(55) The Commission notes that, in principle, any payment
by the State to a specific category of commercial firm
which threatens to distort competition between Member
States to a certain extent also affects trade between
Member States.

5.2. Lawfulness of the aid

(62)

(56) The Commission finds that Germany has fulfilled its
notification obligation under Article 88(3) of the EC
Treaty and has informed the Commission of its plan to
grant aid.

5.3. Compatibility of the aid with the common market

(57)

In this section the Commission will verify whether the
aid is compatible with the common market under
Article 87(2) or (3) of the EC Treaty.

5.3.1. Verification of the exemption in Article 87(2)(c) of

the EC Treaty

(58) Under this provision, aid granted to the economy of
certain areas of the Federal Republic of Germany affected
by the division of Germany, in so far as such aid is
required in order to compensate for the economic
disadvantages caused by that division,
is compatible
with the common market. Germany claimed that the
public measures to which the common guidelines
applied were intended to rectify the urban development
that took place in Berlin while it was partitioned.

(59) The Commission finds

exemption in
Article 87(2)(c) of the EC Treaty does not cover aid
granted by reason of the unification of Germany, as in
the present case (22).

that

the

5.3.2. Verification under the provisions on regional aid

(60)

Since the common guidelines have a clear regional
policy objective, i.e. keeping businesses in Berlin, the
derogations for regional aid, i.e. Article 87(3)(a) and (c)
of the EC Treaty, read in conjunction with the regional
aid guidelines, may be applicable.

(61) The regional aid guidelines lay down various conditions
that must be met for regional aid granted by a State to
be considered compatible with the common market.

5.3.2.1.

S c o p e o f t h e r e g i o n a l a i d g u i d e -
l i n e s

First of all, the Commission finds that, since no evidence
to the contrary has been adduced, the common guide-
lines apply to firms in all sectors. It follows that Germany
has failed to comply with Section 2 of the regional aid
guidelines concerning the exclusion of certain sectors.
In fact, the Commission must conclude from Germany’s
letter of 9 March 1999 that even agricultural enterprises

(19) See recital 39.
(20) See footnote 7.
(21) OJ L 10, 13.1.2002, p. 30.

(22) See the judgment by the Court of First Instance of 15 December
1999 in Joined Cases T-132/96 and T-143/96 Freistaat Sachsen,
Volkswagen AG and Volkswagen Sachsen GmbH v Commission
[1999] ECR II-3663.

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would be eligible under the common guidelines (con-
trary inference to be made from the second paragraph
under the heading ‘Point 2’ in the letter). In addition,
special sectoral rules apply to some of the industries
covered by the regional aid guidelines (23). Germany has
failed to exclude those sectors from the common
guidelines or to adapt the latter to the sectoral rules.

5.3.2.2. N a t u r e , l e v e l a n d d u r a t i o n o f a i d
a i d g u i d e -

r e g i o n a l

t h e

u n d e r
l i n e s

(63)

Point 4.1 of the regional aid guidelines lays down that
the object of regional aid is to secure either initial
investment or job creation which is linked to investment.
The term ‘initial investment’ is defined in greater detail
at point 4.4 of the regional aid guidelines as comprising,
among other things, investment in fixed capital relating
to the setting-up of a new establishment or the starting-
up of an activity involving a fundamental change in the
product or production process of an existing establish-
ment through rationalisation, diversification or modern-
isation. The common guidelines refer to various eligible
costs that meet the criteria for granting aid for initial
investment within the meaning of point 4.4 of the
regional aid guidelines because in that case, in contrast
to the relevant situation following public construction
measures, new production capacity is created and the
aid thus contributes to regional development. Such costs
include:

a)

b)

all costs of preparing replacement premises listed
in paragraph 17(c) (Scenario 1),

the contributions specified in paragraph 17(e)
(Scenario 1) towards administrative fees payable
for departing from building regulations, where this
is absolutely necessary to adapt the new premises
to operational needs,

c)

the building costs,
specified in paragraph 18 (Scenario 2).

including ancillary expenses,

The Commission further finds that the common guide-
lines do not make provision for the payment of any aid
that has as its objective the investment-linked creation
of jobs as defined in point 4.12 of the regional aid
guidelines.

(64) According to the first sentence of point 4.2 of the
regional aid guidelines, the recipient’s contribution to
the financing of an initial investment must be at least
25 %. The Commission finds that this condition has
been met only in the case of aid for initial investment
under the second indent of paragraph 17(c) (cost of
in that case, aid not
building new premises) since,

(23) See footnote 5 to the regional aid guidelines. The synthetic fibres,
motor vehicle and steel industries are currently regulated by the
multisectoral framework on regional aid for large investment
projects (OJ C 70, 19.3.2002, p. 8). Shipbuilding will remain
regulated by Council Regulation (EC) No 1540/98 (OJ L 202,
18.7.1998, p. 1) until 31 December 2003.

exceeding 20 % of the eligible net costs is granted. The
regional aid guidelines provide for aid of up to 100 % of
eligible net costs for all other forms of initial investment
specified in paragraph 63. Consequently, firms do not
have to make any contribution at all in such cases.

(65) According to the third sentence of point 4.2 of the
regional aid guidelines, aid schemes must lay down that
an application for aid must be submitted before work is
started on projects. The Commission finds that this
requirement has been met (Section I.1(2) of the common
guidelines.

(66) Under point 4.5 of the regional aid guidelines, aid for
initial investment is calculated as a percentage of the
investment’s value. The aid intensity, in terms of the net
grant equivalent, must not exceed the regional aid ceiling
for the assisted area in question (points 4.7 and 4.8 of
the regional aid guidelines). In addition, the prohibition
on cumulation of aid in point 4.18 of the regional aid
guidelines must be complied with. Germany, in its letter
of 17 June 1999, gave an assurance that the relevant
regional aid ceilings were complied with, even in cases
of cumulation with other aid. The Commission finds
that, in spite of the assurance given by Germany, the
regional aid ceilings applicable for Berlin have been
complied with only as regards the costs of building new
premises, which are eligible with a net intensity of 20 %.
For all other aid for initial investment, the common
guidelines allow the relevant regional aid ceilings to be
exceeded since aid of up to 100 % of eligible net costs
can be granted.

(67) Under point 4.10 of the regional aid guidelines, aid for
initial investment must be made conditional, through its
method of payment or through the conditions associated
with its acquisition, on the maintenance of the invest-
ment in question for a minimum period of five years.
The Commission finds that the common guidelines do
not meet this requirement.

(68) The City of Berlin and the adjacent parts of Brandenburg
attached to the City, which together comprise the Berlin
labour market region, constitute an area eligible under
Article 87(3)(c) of the EC Treaty, read in conjunction
with the regional aid guidelines (24), but only until the
end of 2006. The common guidelines are to apply after
2006 and until the end of 2008. The Commission finds
investment under the common
that aid for initial
guidelines that is to be granted for 2007 and 2008
cannot at present be declared compatible with the
common market pursuant
the
EC Treaty, read in conjunction with the regional aid
guidelines.

to Article 87(3) of

(24) See footnote 12.

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(69) Under point 4.15 of

the regional aid guidelines,
operating aid, that is to say, aid which is intended to
relieve an undertaking of the expenses which it would
normally (25) have had to bear in its day-to-day manage-
ment or its usual activities, is in principle prohibited. In
the present case, the ‘normal’ and thus relevant situation
is that which is already distorted by the public measure.
In such a situation all competitors must normally bear
the corresponding financial burden if their claims for
damages under private or public law are exhausted.
However, the common guidelines relieve eligible firms
of the financial disadvantages that constitute normal
current expenses for other firms that are affected by
public measures and have exhausted all their claims for
damages. The Commission finds that all aid classified as
aid for initial
in accordance with para-
graph 63 displays the characteristics of operating aid.

investment

(70)

Exceptionally, operating aid can be permitted under
point 4.15 of the regional aid guidelines for regions
eligible under Article 87(3)(a) of the EC Treaty. The
Commission finds that this requirement has not been
met because, since 1 January 2000, Berlin has consti-
tuted an area eligible under Article 87(3)(c).

5.3.3. Verification under the provisions applicable to small

and medium-sized enterprises (SMEs)

(71) The provisions on exemptions for aid to SMEs,

i.e.
Commission Regulation (EC) No 70/2001 of 12 January
2001 on the application of Articles 87 and 88 of the
EC Treaty to State aid to small and medium-sized
enterprises (26) (the SME Regulation), might apply.

(72) The Commission finds that the common guidelines were
not applied solely to SMEs as defined in Annex I to
the SME Regulation but were instead applied to all
enterprises, irrespective of size and sector. This does not
rule out the possibility that the common guidelines also
apply to SMEs and that, to this extent, the requirements
of the SME Regulation might be met.

5.3.3.1.

S c o p e o f t h e S M E R e g u l a t i o n

(73) Under Article 1(2)(a) of

the SME Regulation,

that
Regulation does not apply to activities linked to the
production, processing or marketing of products listed
in Annex I to the Treaty. The Commission finds that
application to those activities was not expressly excluded

by the common guidelines; indeed, it concludes from
Germany’s letter of 9 March 1999 that even agricultural
enterprises could benefit under the common guidelines
(cf. paragraph 62).

(74) Article 1(1) of the SME Regulation lays down that
it applies without prejudice to special Community
regulations or directives under the EC Treaty governing
the granting of State aid in specific sectors, whether
more or less restrictive than the SME Regulation. Certain
sectors are regulated by more restrictive sectoral
rules (27). The Commission finds that Germany has not
excluded those sectors from the common guidelines or
adapted the common guidelines to those sectoral rules.

(75) According to recital 13 to the SME Regulation, that
Regulation does not apply to operating aid. The Com-
mission finds that all aid under the common guidelines
that is not classified as aid for initial
investment in
paragraph 63 ranks as operating aid (28) and so does not
fall within the scope of the SME Regulation.

5.3.3.2. N a t u r e , l e v e l a n d d u r a t i o n o f a i d
e x e m p t e d b y t h e S M E R e g u l a t i o n

(76) Under Article 4 of the SME Regulation, aid for invest-
ment may be compatible with the common market and
exempt
in
Article 88(3) of the EC Treaty. Under Article 2(c) of the
SME Regulation, that aid must constitute aid for initial
investment.

requirement

notification

from the

(77) Under Article 4(2) of the SME Regulation, the general
gross intensity of such aid must not exceed 15 % in the
case of small enterprises and 7,5 % in the case of
medium-sized enterprises. The prohibition on cumu-
lation in Article 8(2) of the SME Regulation must be
complied with here. Although Germany stated in its
letter of 17 June 1999 that it had complied with the
prohibition, the Commission finds that the maximum
aid intensities were exceeded in the case of all assistance
classified as aid for initial investment in paragraph 63.

(78)

In assisted areas under Article 87(3)(c) of the EC Treaty,
the admissible net intensity for aid for initial investment
under Article 4(3)(a) of the SME Regulation is 30 %
in accordance with the second
of eligible costs if,
subparagraph of Article 4(3) of the SME Regulation, the
aid is granted under the condition that the investment is
maintained in the recipient region for at least five years
and the beneficiary’s contribution to its financing is

(25) See the judgments referred to in recital 38.
(26) OJ L 10, 13.1.2001, p. 33.

(27) See footnote 23.
(28) See recital 69.

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investment

at least 25 %. The prohibition of cumulation under
Article 8(2) of the SME Regulation must also be complied
with in this case. The Commission finds that none of the
assistance classified as aid for initial
in
paragraph 63 meets all the conditions in indent (a) of
the first subparagraph of Article 4(3) and in the second
subparagraph of Article 4(3) of the SME Regulation. In
the case of aid towards the costs of preparing replace-
ment premises amounting to 20 % of eligible net costs,
the requirement of maintenance in the recipient’s region
for at least five years has not been met while, in the case
of the other aid for which assistance of up to 100 % of
eligible net costs is available, such aid is rendered
unlawful by the excessively high aid intensity alone.

(79) The second subparagraph of Article 10(1) of the SME
Regulation lays down that that Regulation is to remain
in force until 31 December 2006, with the aid schemes
exempted under it remaining exempted for a further
period of six months, i.e. until 30 June 2007, under
Article 10(2). The common guidelines are to remain
in force beyond 2006, until the end of 2008. The
Commission finds that aid for initial investment under
the common guidelines which is granted for 2007 and
2008, cannot currently be declared compatible with the
common market on the basis of the SME Regulation
applicable.

6. CONCLUSIONS

(80) The common guidelines, which were duly notified under
Article 88(3) of the EC Treaty, constitute aid within the
meaning of Article 87(1) of the EC Treaty.

(81)

(82)

In so far as that aid constitutes operating aid as specified
in recital 69, it does not meet the relevant conditions for
granting a derogation under Article 87(3)(a) of the
EC Treaty, read in conjunction with the regional aid
guidelines. In this respect, the common guidelines are
incompatible with the common market.

it does not meet

In so far as that aid constitutes aid for initial investment
as specified in recital 63,
the
relevant conditions for granting a derogation under
Article 87(3)(c) of the EC Treaty, read in conjunction
with Commission Regulation (EC) No 70/2001. Accord-
ingly,
the
common guidelines are compatible with the common
investment only if
market as regards aid for initial
Germany complies with all the conditions in the regional
aid guidelines and in Commission Regulation (EC)
No 70/2001 that are applicable,

the decision in this case must

find that

HAS ADOPTED THIS DECISION:

Article 1

The common guidelines for the use of economic development
funds by the Land of Berlin (hereinafter the common guide-
lines), which Germany wishes to implement, constitute State
aid within the meaning of Article 87(1) of the EC Treaty.

Article 2

In so far as the aid provided for in the common guidelines
constitutes operating aid, it is incompatible with the common
market.

Accordingly, this aid shall not be granted.

Article 3

In so far as the aid provided for in the common guidelines
constitutes aid for initial investment, it is compatible with the
common market until 31 December 2006 provided that the
conditions in the second paragraph are met.

Germany shall comply with the rules of the regional aid
guidelines and of Commission Regulation (EC) No 70/2001
regarding aid intensity, cumulation of aid, exclusion of sensi-
tive sectors, beneficiaries’ own contributions and maintenance
of the investment for five years.

Article 4

Germany shall inform the Commission, within two months of
notification of this Decision, of the measures taken to comply
with it.

Article 5

This Decision is addressed to the Federal Republic of Germany.

Done at Brussels, 24 June 2003.

For the Commission

Mario MONTI

Member of the Commission