2007/254/EC: Commission Decision of 7 April 2006 on State aid C 25/2005 (ex NN 21/2005) implemented by the Slovak Republic for FRUCONA Košice, a.s. (notified under document number C(2006) 2082) (Text with EEA relevance )
Date: 2006-06-07
Institutions: European Commission
Subjects: Slovakia, State aid, beverage industry, claim, control of State aid, tax debt write-off

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Official Journal of the European Union

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COMMISSION DECISION

of 7 April 2006

on State aid C 25/2005 (ex NN 21/2005) implemented by the Slovak Republic for
FRUCONA Košice, a.s.

(notified under document number C(2006) 2082)

(Only the Slovak version is authentic)

(Text with EEA relevance)

(2007/254/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(3)

By letter of 5 July 2005, the Commission informed Slovakia
that it had decided to initiate the procedure laid down in
Article 88(2) of the EC Treaty in respect of the aid.

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

Having called on interested parties to submit their comments
pursuant to the provision cited above (1) and having regard to
their comments,

(4)

(5)

Whereas:

I.

PROCEDURE

(1)

By letter of 15 October 2004, registered as received on 25
October, the Commission was sent a complaint concerning
alleged unlawful state aid in favour of FRUCONA Košice,
a.s.. The complainant sent additional
information on
3 February 2005. A meeting with the complainant took
place on 24 May 2005.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Union (2).
The Commission invited interested parties to submit their
comments on the measure.

The Slovak authorities submitted their observations by
letter of 10 October 2005, registered as received on
17 October 2005. The Commission received comments
from one interested party (the beneficiary) by letter of
24 October 2005, registered as received on 25 October. It
forwarded them to Slovakia, which was given the
opportunity to react; Slovakia's comments were received
by letter dated 16 December 2005, registered as received on
20 December. A meeting with the beneficiary at which he
was given the opportunity to explain his submission took
place on 28 March 2006. Slovakia submitted additional
information by letter dated 5 May 2006, registered as
received on 8 May.

(2) On the basis of

the

information provided by the
complainant, the Commission asked Slovakia by letter of
6 December 2004 to inform it about the disputed measure.
Slovakia responded by letter of 4 January 2005, registered
as received on 17 January,
informing the Commission
about possible unlawful aid granted to FRUCONA Košice
a.s. and asking it to approve the aid as rescue aid to a
company in financial difficulties. Slovakia
submitted
additional
information by letter of 24 January 2005,
registered as received on 28 January. The Commission
asked for further information by letter of 9 February 2005,
to which it received answers by letter of 4 March 2005,
registered as received on 10 March. A meeting with the
Slovak authorities took place on 12 May 2005.

II.

DETAILED DESCRIPTION OF THE AID

1.

Relevant undertaking

(6)

The recipient of the financial support is FRUCONA Košice
a.s. (hereinafter referred to as ‘the beneficiary’), which, at the
time of the decisive events, was active in the production of
spirit and spirit-based beverages, non-alcoholic beverages,
canned fruit and vegetables, and vinegar. Currently, the
beneficiary no longer produces spirit and spirit-based
beverages. Nevertheless, it is active on the wholesale market
for spirit and spirit-based beverages. The company is
situated in a region eligible for
regional aid under
Article 87(3)(a) of the EC Treaty.

(1) OJ C 233, 22.9.2005, p. 47.

(2) See footnote 1.

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(7) At the time of the decisive events, the beneficiary employed about 200 persons. In his comments on the
decision to open the formal investigation, the beneficiary provided the Commission with data on its
turnover (including excise duties and VAT), which are shown in the following table.

Turnover in different segments of production, including excise duties and VAT [SKK]

Table 1

2002

2003

2004

Vinegar

[…] (*)

Fruit and vegetable production

Cabbage

Carbonated non-alcoholic bev-
erages

Non-carbonated non-alcoholic
beverages

Juices 100 %

Spirit-based beverages

Apple wine

Syrup

Other products/services

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

Total

895 019 980

978 343 230

880 314 960 (3)

(8)

These data differ considerably from the data obtained by
the Commission from the Slovak authorities and given in
the decision to open the formal investigation (4). In their
reaction to the beneficiary's comments after the opening of
the formal
investigation, the Slovak authorities did not
dispute the accuracy of the above figures. According to the
Slovak authorities, the beneficiary fulfils the criteria of a
medium-sized enterprise.

2.

Applicable national legislation

(9)

The disputed measure is a write-off of a tax debt by the
Košice IV tax office (‘tax office’) under what is known as an
arrangement with creditors. This procedure is governed by
Act 328/91 on Bankruptcy and Arrangement with
Creditors (‘Bankruptcy Act’).

situation of indebted companies (5). Under the bankruptcy
procedure, the company ceases to exist and either its assets
are sold to a new owner or the company is liquidated. In
contrast, under the arrangement procedure, the indebted
company continues its business without change of owner-
ship.

(11) The arrangement procedure is initiated by the indebted
company. The aim is to reach an agreement with the
creditors (‘agreement’) whereby the indebted company pays
off part of its debt and the remainder is written off. This
agreement has to be approved by the supervising court.

(10) Arrangement with creditors (‘arrangement’ or ‘arrangement
procedure’) is a court-supervised procedure which, like the
settling the financial
bankruptcy procedure, aims at

(*) Confidential information
(3)

In EUR, the turnover was said to have been EUR 23,6 million in
2002, EU-25,7 million in 2003 and EUR 23 million in 2004. The
exchange rate used in this Decision is EUR 1 = SKK 38.

(4) The total turnover was said to have been SKK 334 million (EUR
8,8 million) in 2002, SKK 360 million (9,5 million) in 2003 and
SKK 720 million (EUR 19 million) in 2004.

(12) Creditors whose receivables are secured, for example by
means of a mortgage, act as separate creditors. For the
the separate
arrangement proposal
creditors have to vote in favour, whereas for other creditors
a qualified majority suffices. Separate creditors vote
individually and have a right to veto the proposal.

to be accepted, all

(5) A company becomes indebted when it has several creditors and is
not able to settle its obligations within thirty days from maturity.

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(13) Separate creditors have a privileged position also in the
bankruptcy procedure. The proceeds from the sale of the
secured assets in the bankruptcy procedure are meant to be
used exclusively to satisfy the claims of
the separate
creditors. If the claims of the separate creditors cannot all
the outstanding amounts are
be met
incorporated into the second group with the claims of
the other creditors. In the second group, the creditors are
satisfied proportionally.

from this sale,

stipulated in the Act. The Slovak authorities submit that the
value of these securities based on the beneficiary's accounts
was SKK 397 476 726 (EU-10,5 million). The beneficiary,
however, claims that
these securities, as
the value of
estimated by experts at
the end of 2003, was SKK
193 940 000 (EUR 5 million). This is, according to the
beneficiary, the value of the secured assets (movables, real
estate and receivables) expressed in so-called expert prices.

(14) Pursuant to the Bankruptcy Act, the company applying for
an arrangement with creditors has to submit
to the
supervising court a list of measures for its reorganisation
and for the ongoing financing of
its activity after the
arrangement.

(15) Under Act 511/92 on the Administration of Taxes and Fees
and Changes to the System of Local Financial Authorities
(‘Tax Administration Act’), a company has the possibility of
asking the tax authorities for deferral of payment of taxes.
Interest is charged on the deferred amount and the deferred
debt has to be secured.

(16) The Tax Administration Act also governs the tax execution
procedure, the aim of which is to satisfy the State's tax
claims through sale of real estate, movable assets or the
firm as a whole.

(18) As of 1 January 2004, the amended Tax Administration Act
limited the possibility to request a tax deferral to only once
a year. The beneficiary used this opportunity for the
December 2003 excise duty payable in January 2004.
However,
it was not able to pay or have deferred the
January 2004 excise duty payable on 25 February 2004. As
a result,
the beneficiary became an indebted company
within the meaning of the Bankruptcy Act. It also lost its
licence for the production and processing of spirit.

(19) On 8 March 2004 the beneficiary applied to the competent
for the arrangement procedure. Having
regional court
determined that all the necessary legal requirements were
met, the regional court decided by a decision of 29 April
2004 to allow the arrangement procedure to go ahead. At
the hearing on 9 July 2004 the creditors voted in favour of
the arrangement proposed by the beneficiary. The arrange-
ment was confirmed on 14 July 2004 by a decision of the
supervising regional court.

3.

Disputed measure

(20)

(17) Between November 2002 and November 2003 the
beneficiary benefited from the possibility offered by the
Tax Administration Act to have its obligation to pay excise
duty on spirit deferred (6).
the deferred debt
amounted to SKK 477 015 759 (EU-12,6 million). Before
agreeing to defer these payments, the tax office secured
each of its receivables against the beneficiary's assets, as

In total,

this
In August 2004 the tax office appealed against
confirmatory decision of
the court. By a decision of
25 October 2004, the Supreme Court decided that the
appeal was not admissible and declared the decision of the
regional court approving the arrangement to be valid and
enforceable as of 23 July 2004. The public prosecutor
subsequently appealed against the decision of the regional
court under the extraordinary further appeal procedure.
The procedure is still pending before the Supreme Court.

(21) The creditors, including the tax office, agreed with the beneficiary on the following arrangement: 35 % of
the debt would be repaid by the beneficiary within one month from the validity of the agreement and the
remaining 65 % of the debt would be forgone by the creditors. All the creditors were therefore treated on
identical terms. The actual amounts per creditor are shown in the following table.

Table 2

The state of the debts of the beneficiary before and after the arrangement procedure [SKK]

Creditor

Debt before the arrange-
ment

Debt after the arrange-
ment (*)

Amount written off

Public

Tax office

640 793 831

224 277 841

416 515 990

(6) The excise duty is payable on a monthly basis.

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Creditor

Debt before the arrange-
ment

Debt after the arrange-
ment (*)

Amount written off

Private

Tetra Pak a.s.

MTM-obaly s.r.o.

Merkant družstvo

Vetropack s.r.o.

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

TOTAL

644 591 439 (7)

225 607 029

418 984 410

(*) The amount that the beneficiary is obliged to pay back to its creditors.
(7)

In EUR, the total debt before arrangement was EUR 16,96 million and the total debt remaining after the arrangement EUR
5,93 million.

(22) The claims of the tax office included in the arrangement
procedure amounted to SKK 640 793 831 (EUR 16,86 mil-
lion) and comprised unpaid excise duties for the period May
2003–March 2004, VAT for the period January-April 2004
and added penalties and interest. The claims forgone by the
tax office amounted to SKK 416 515 990 (EUR 11 million).
The arrangement provided the tax office with SKK
224 277 841 (EUR 5,86 million).

(23)

In the arrangement procedure the tax office acted as a
separate creditor and, as such, voted separately in favour of
the arrangement. The privileged position of the tax office
was due to the fact that some of its receivables included in
the arrangement procedure were secured in connection
with the deferral of the beneficiary's tax debt in 2002 and
2003 (see paragraph 17). All the other creditors voted in
favour of the proposed arrangement. Their receivables were
common trade receivables not secured in any manner.

(24)

in accordance with the
In its arrangement proposal,
requirements of the Bankruptcy Act, the beneficiary spelt
out
relating to production,
distribution and the workforce (including redundancies).

reorganisation measures

(25) On the organisational and workforce fronts, the beneficiary
planned the following measures: creation of a universal
production group for all the production activities, reorga-
nisation of its transport facilities by exclusion of vehicles
with the lowest
residual value and reorganisation of
commercial activities. These measures were to be accom-
panied by the redundancy of 50 employees in March-May
2004. Over the same period, a further 50 employees were
to work on 60 % remuneration.

(26)

In the production and technical area, the beneficiary stated
that, since the company had lost
the
production of spirit, the related production facilities would
be rented out as of April 2004. The beneficiary planned to
reduce or cease production of some unprofitable non-

its licence for

alcoholic beverages and stated that any introduction of a
new product in this category would be preceded by an
analysis of its profitability.

(27) The beneficiary also mentions the following measures: the
cost restructuring that should result from lower production
costs following the abandonment of the production of
spirit and from the abolition of part of the company's own
transport and the sale of old equipment for scrap.

(28) The beneficiary also planned to sell an administrative
building, a shop and a recreational facility and mentioned
the possibility of
the vinegar
production facility. In their comments on the decision to
open the formal
the Slovak
authorities confirmed that the sale of the administrative
building, shop and recreational facility had not taken place.

investigation procedure,

letting out

selling or

(29) The beneficiary planned an intensive sale of its stocks of

ready-to-sell products (8).

(30) According to this proposal, the beneficiary was to finance
the arrangement through its own resources (sale of stocks)
of SKK [less than 150] million and through external
financing in the form of a loan from a commercial bank of
SKK 100 million. From the information submitted by the
the formal
beneficiary in response to the opening of
investigation, the outstanding debt was eventually covered
by the revenue from the issue of new shares (SKK
21 million; EUR 0,56 million), the revenue from the sale
of stock (SKK [less than 150] million; EUR [less than 3,9]
million) and a supplier loan from Old Herold s.r.o. (SKK
[70-130] million; EUR [1,8-3,4] million). The maturity of
the invoices of Old Herold s.r.o. was 40 days, which,
according to the beneficiary, was a long period considering
the beneficiary's precarious financial situation. This pro-
longed maturity permitted the beneficiary to accumulate
the necessary cash.

(8)

In view of the loss of the licence for the production of spirits and
derived beverages and according to the information provided by the
complainant, this sale probably concerned mainly spirits.

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(31) The Slovak authorities informed the Commission after the
opening of the formal investigation that the outstanding
debt of the beneficiary towards the tax office amounting to
SKK 224 277 841 was paid on 17 December 2004. They
confirmed that
they had suspended the debt write-off
agreed in the arrangement procedure pending the proce-
dure before the European Commission.

III.

DECISION TO INITIATE PROCEEDINGS UNDER

ARTICLE 88(2) OF THE EC TREATY

(32)

the market economy creditor

In its decision to initiate the formal
investigation, the
Commission raised doubts that the disputed write-off did
not involve state aid. Specifically,
it considered that the
behaviour of the tax office in the arrangement procedure
did not meet
In
particular, it found that the tax office was in a situation
legally different from the other creditors, as it possessed
secured claims and had the possibility to initiate the tax
execution procedure.
the arrangement
procedure led to the best possible outcome for the State,
when compared with the bankruptcy procedure or the tax
execution procedure.

It doubted that

test.

(33) The Commission then raised doubts as to the compatibility
of the disputed aid with the common market. It first raised
doubts that the aid could be considered to be compatible as
rescue aid, as the Slovak authorities had claimed. Rescue aid
can only be liquidity support in the form of loan guarantees
or loans. The disputed measure, however, is a debt write-off,
which corresponds to a non-refundable grant. In addition,
the measure was not granted with the prospect that the
beneficiary would present a restructuring plan or a
liquidation plan or reimburse the aid in full within six
months of authorisation of the rescue measure.

(34) The Commission then considered the compatibility of the
disputed measure as restructuring aid and raised doubts as
to whether two of the main conditions were fulfilled: the
existence of a restructuring plan ensuring the return to
long-term viability within a reasonable time-frame and the
limitation of the aid to the minimum necessary.

review the contested measure because the measure was put
into effect before the date of accession and was not
applicable after accession. The measure is claimed to have
been put into effect before accession because the arrange-
ment procedure was initiated on 8 March 2004 and, as the
beneficiary submits, approved by the court on 29 April
2004, i.e. before the accession of the Slovak Republic to the
European Union. Furthermore, the tax authorities are said
to have signalled their agreement
to the proposed
arrangement in the negotiations preceding the initiation
of the arrangement procedure. A meeting with the Tax
Directorate of the Slovak Republic took place in December
2003, and on 3 February 2004 the local tax office sent the
beneficiary a letter in which it allegedly confirmed the
possibility of proceeding by way of an arrangement.

(38) The beneficiary further

the
Commission found itself competent to act, the contested
measure did not constitute state aid because the market
economy creditor principle was met.

submitted that, even if

(39) First, the beneficiary submits that the comparison of the
arrangement procedure with the tax execution procedure is
misleading because the initiation of the former excludes or
suspends the latter. The tax execution procedure was not,
In addition,
therefore, an option for
according to the beneficiary, had it not voluntarily initiated
the arrangement procedure, after some weeks or months it
would have had a legal obligation to launch the bankruptcy
procedure or an arrangement procedure pursuant to the
insolvency legislation.

the tax office.

(40) Second, the beneficiary submits that the decision of the
State to avoid bankruptcy and instead to seek a solution
the market
through the arrangement procedure met
economy creditor test. By way of evidence,
it submits
statements from two auditors and one bankruptcy receiver
that the tax office would receive more and would receive it
more quickly under the arrangement procedure than under
the bankruptcy procedure. It also submits further material
and statistics to demonstrate that the bankruptcy procedure
in Slovakia lasts on average 3-7 years and brings only a very
limited return from the sale of assets (9).

IV.

COMMENTS FROM INTERESTED PARTIES

(35)

In addition to the facts described in Part II above, the
beneficiary submitted the following comments.

(41) The beneficiary bases his analysis mainly on a report by the
auditing company EKORDA dated 7 July 2004, which the
tax office allegedly had at its disposal before the creditors'
vote on 9 July 2004. No evidence, however, was submitted
showing that this was indeed the case.

(36) The beneficiary argues that the reason for its financial
difficulties at the beginning of 2004 was the change of the
Tax Administration Act, which restricted the possibility to
request the deferral of taxes to once a year. This was an
important change for the beneficiary, which had, in his own
words, been relying on this possibility in previous years.

(42) According to the report by EKORDA, the revenue from the
sale of assets in the case of bankruptcy would be, at best,
SKK 204 million (EUR 5,3 million), and, after deduction of
various fees of SKK 45 million, only SKK 159 million (EUR
4,2 million). The beneficiary himself corrected the amount
of the fees to be deducted (SKK 36 million) and arrived at

(37) On the merits of

the beneficiary first
the case itself,
submitted that the Commission did not have jurisdiction to

(9) The beneficiary gives an example of a company owning similar assets
and operating in the same sector and some more general statistical
averages for the use of the bankruptcy procedure in Slovakia.

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the figure of SKK 168 million (EUR 4,4 million). Even
though the tax office as the only separate creditor and by far
the largest creditor would receive most of this revenue, it
would still be less than what the tax office received after the
arrangement.

(43) To arrive at this result, EKORDA used as the basis the book
value as at 31 March 2004 of fixed assets, stocks, cash and
short-term receivables after adjustment, reflecting their
unrecoverability and low value. It adjusted the nominal
value of the beneficiary's assets by a so-called liquidation
factor for each component of the assets in the event of sale
under bankruptcy proceedings (45 % for fixed assets, 20 %
for stocks and short-term receivables, and 100 % for cash).

the beneficiary (10) as well as

(44) EKORDA mentions the future tax revenue accruing from
the operation of
the
employment trend in the region and the trend in the
food-processing industry in Slovakia as very important
factors affecting the decision to keep the beneficiary in
business.

(45) The beneficiary also mentions two other reports. The
auditor Marta Kochová concluded that
the maximum
revenue from the sale of the assets, which, however, were
not evaluated, would be SKK 100 million (EUR 2,6 million)
or, after deduction of fees of SKK 22 million, only SKK
78 million (EUR 2 million). No further information on this
report was provided. The receiver Mrs Holovačová is said to
state that, in her opinion, the arrangement procedure is
generally more advantageous for creditors than bankruptcy.
One consideration is the fact that the creditor has an
interest in the continuity of the economic activity of the
debtor (future revenues from trade or from taxes).

(46) Third, the beneficiary submits that long-term considera-
tions should be taken into account, such as future tax
revenue. It is asserted that the case law excluding social-
political considerations from the market economy creditor
test (11) does not apply when the calculation of future tax
revenue is considered by the public authority. According to
the beneficiary, the situation of the public authority here is
analogous to the situation of a market economy creditor
who is a supplier interested in the survival of a client. The
beneficiary then refers to the case law on the market
economy investor principle.

(47) The beneficiary concludes

the market economy
creditor test was met and the disputed measure does not
constitute state aid.

that

office had verified the capacity of its business plan to
restore long-term viability before agreeing to the arrange-
ment. The absence of a formal restructuring plan is,
according to the beneficiary, irrelevant in a situation where
the Commission is assessing the case ex post because the
Commission is now able to see whether the beneficiary in
fact became viable. However, the beneficiary considers that,
in the case of an ex ante assessment, a detailed restructuring
plan is necessary. It then briefly describes the restructuring
measures undertaken: increase of own capital, lay-offs, sale
of stocks. It considers that the halting of the production of
spirit and spirit-based beverages and the renting out of the
production assets to the company Old Herold s.r.o. was
indeed a restructuring measure. Even though the halting of
production was originally imposed on it by the loss of the
licence, the beneficiary did not apply for a new licence after
the arrangement.

(49) According to the beneficiary,

its
contribution to the restructuring should be significant was
also met.

the requirement

that

(50) Finally, the beneficiary submits that the fact that it is active
in an assisted region and is one of the largest regional
employers should be taken into account when applying the
guidelines applicable to restructuring aid.

V.

COMMENTS FROM THE SLOVAK REPUBLIC

(51)

In their reply to the opening of the formal investigation, the
Slovak authorities made some comments on the factual
issues, which have already been mentioned in Part II above.

(52) The Slovak authorities confirmed that the tax office, at the
time of the vote in the arrangement procedure, did not take
into account the state aid aspect. The tax office did not
consider the arrangement as a form of state aid and
therefore the beneficiary was not requested to provide a
restructuring plan, which differs from the business plan
submitted to the court pursuant
to the insolvency
legislation.

(53)

In their response to the comments submitted by the
beneficiary, the Slovak authorities submitted the following
observations.

(48) Should the Commission nevertheless conclude otherwise,
the disputed measure is
that
the beneficiary argues
compatible as restructuring aid. It submits that the tax

(10) From the 2004 figures used by EKORDA in its report it transpires

that 98 % is VAT and excise duties.

(11) The beneficiary refers to C 278-280/92 Spain v Commission [1994]

ECR I-4103.

(54) The Slovak authorities would not find relevant in the
present case the beneficiary's observations on the average
length of the bankruptcy procedure and the average return
from the sale of assets
in a bankruptcy procedure.
According to them, given the low number of creditors
and the existence of assets with a positive liquidation value
which exceeded the amount paid to the State after the
arrangement, the bankruptcy procedure would have been

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Official Journal of the European Union

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completed in a shorter-than-average period and the yield of
the tax office would have been higher than in the case of
the arrangement. The Slovak tax authorities carried out an
on-the-spot inspection at the company on 21 June 2004
and found that, as at 17 June 2004, the beneficiary had
cash amounting to SKK 161,3 million, receivables of SKK
62,8 million, stocks of spirit and spirit-based beverages
with a value of SKK 84 million and fixed assets with a book
value of SKK 200 million.

(55) The Slovak authorities consider that the tax execution
procedure was a genuine alternative for the tax office. They
confirm that the tax office had the possibility of initiating
this procedure prior to the arrangement procedure, as it
could have done even if the court had refused to confirm
the arrangement (because the tax office as separate creditor
would not have voted in its favour).

(56) The Slovak authorities do not agree with the assertion of
the beneficiary that his financial difficulties were due to the
change in the Tax Administration Act. According to them
the financial difficulties of the beneficiary were due to the
financial strategy of using indirect taxes for the running of
the beneficiary should have
its own business.
simply collected the taxes from its clients and transferred
them to the state budget.

Instead,

(57) The Slovak authorities do not agree that the meeting with
the Tax Directorate of the Slovak Republic in December
2003 is evidence of preliminary agreement with the
arrangement on the part of the tax office. They submitted
a letter of 6 July 2004 that had been sent by the Tax
Directorate of the Slovak Republic to the subordinate tax
office,
instructing it not to agree with the arrangement
proposed by the beneficiary because it was unfavourable for
the State. This letter then referred to another, more general,
letter of 15 January 2004 from the Minister of Finance to
the subordinate Tax Directorate, instructing it not to agree
to proposals for arrangements with creditors that would
tax receivables.
involve the tax authorities writing off
Moreover, the Slovak authorities interpreted the letter of
3 February 2004, referred to by the beneficiary (see
paragraph 37), as explicitly disagreeing with the 35 %
arrangement.

(58) The Slovak authorities submit that the beneficiary had not
paid excise duties within the prescribed deferment period
(January 2001 to March 2004) and had had its tax
obligations regularly deferred.

(60) Finally, according to the Slovak authorities, the beneficiary
had not drawn up a viable restructuring plan and the
measures proposed in the context of
the arrangement
procedure could not be considered to be restructuring
measures.

VI.

ASSESSMENT

1.

Competence of the Commission

(61) As some of the relevant events in the present case took
place before the accession of the Slovak Republic to the
European Union on 1 May 2004, the Commission first has
to determine whether it is competent to act with regard to
the disputed measure.

(62) Measures that were put into effect before accession and are
no longer applicable after accession cannot be examined by
the Commission either under
so-called interim
mechanism procedure, governed by Annex IV, point 3 of
the Accession Treaty, or under the procedures laid down in
Article 88 of the EC Treaty. Neither the Accession Treaty
nor the EC Treaty requires or empowers the Commission to
review these measures.

the

(63) However, measures put into effect after accession clearly do
fall within the field of competence of the Commission
under the EC Treaty. In order to determine the moment
when a certain measure was put into effect, the relevant
criterion is the legally binding act by which the competent
national authority undertakes to grant aid (12).

(64) The beneficiary claimed in the present case that

the
disputed measure was put into effect before accession and is
not applicable thereafter (see paragraph 37).

(65) The Commission cannot accept the arguments put forward
by the beneficiary. The proposal to initiate the arrangement
procedure is not an act of the granting authority, but an act
of the beneficiary. The decision of the court to commence
the arrangement procedure is likewise not an act of the
granting authority. This decision only permitted the
beneficiary and his creditors to proceed with negotiations
on the arrangement, but clearly did not constitute the
granting event. There is no evidence that
the Tax
Directorate would have expressed its agreement with the
disputed measure at the meeting in December 2003. On
the contrary,
the Slovak authorities denied any such
preliminary agreement. The letter of 3 February 2004 is
explicit in refusing to accept the proposal to settle at the
level of 35 %.

(59) According to the Slovak authorities, significant differences
in the estimates of the two auditors' reports raise doubts as
to the credibility of both reports. They have, in particular,
doubts regarding the liquidation factor assigned to current
assets by EKORDA. This factor should be higher than 20 %.

(66) The decision of the competent authority to write off some
of its claims was taken on 9 July 2004, when the tax office
agreed to the arrangement proposed by the beneficiary.

(12) Case T-109/01 Fleuren Compost v Commission [2004] ECR II-127,

paragraph 74.

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(67) Accordingly,

the question of whether

the measure is

applicable after accession no longer arises.

(68) The Commission therefore concludes that it is competent to
assess the disputed measure pursuant to Article 88 of the
EC Treaty.

2.

State aid within the meaning of Article 87(1) of

the EC Treaty

(69) Article 87(1) of the EC Treaty states that any aid granted by
a Member State or through state resources in any form
whatsoever which distorts or threatens to distort competi-
tion by favouring certain undertakings or the production of
certain goods and affects trade between Member States is
incompatible with the common market.

(70) Writing off a debt towards a public authority such as a tax
office is a form of using state resources. Since it benefits an
individual undertaking, the measure is selective.

distorted or threatened to distort competition by conferring
on the beneficiary an advantage that it would normally not
be able to obtain on the market.
In other words, the
Commission had doubts as to whether the State had
behaved as a market economy creditor in relation to the
beneficiary.

(73)

It was established that the arrangement contained the same
debt arrangement conditions for both the private creditors
and the tax office. The creditors were to be paid 35 % of the
debt within a prescribed period, a requirement with which
the beneficiary complied. The remaining 65 % was written
off.

(74) However, prior to the arrangement, the tax office was in a
legally and economically more advantageous position than
the creditors before the arrangement. It therefore needs to
be examined in detail whether the tax office used all the
means at
to obtain the highest possible
repayment of its receivables, as a market economy creditor
would do.

its disposal

(71) Until the events that triggered the insolvency procedure, the
beneficiary operated in the market for the production of
spirit and spirit-based beverages, non-alcoholic beverages
and canned fruit and vegetables. In 2003 it was the third-
largest producer of spirit and spirit-based beverages in
Slovakia. Since the loss of its licence for the production of
spirit and spirit-based beverages in March 2004, it has been
active on the wholesale market for spirit and spirit-based
beverages produced by another company, Old Herold, s.r.o.,
using the production facilities it rents from the beneficiary.
In all segments in which the beneficiary was active prior to
the arrangement procedure and in which it is active at
present there is trade between Member States.

(75)

(76)

to determine whether

In order
the market economy
creditor test was met, the Commission has to determine
the tax office was better off accepting the
whether
conditions of
the arrangement as proposed by the
beneficiary compared with the possible outcome of a
bankruptcy procedure or a tax execution procedure.

In brief, the Slovak Republic submits that, in its view, the
measure constitutes state aid. It acknowledges that, at the
time of the arrangement, the question of state aid was
simply not considered. Contrary to this, the beneficiary
the measure is free of aid and submits
argues that
documents described above,
in particular reports from
two auditors.

(72)

In the decision to open the formal investigation procedure,
the Commission raised doubts as to whether the measure

(77) On the basis of the information submitted by both the beneficiary and the Slovak authorities, the
Commission established the following facts on the financial situation of the beneficiary in the year in
question to the extent relevant for the application of the market economy creditor test. The figures as at
31 March 2004 provided by the beneficiary and the figures as at 17 June 2004 provided by the Slovak
authorities cannot be verified by the Commission in the beneficiary's accounts. The Commission,
however, has no reason to doubt any of these data.

Table 3

Financial situation of the beneficiary 2003-04 [SKK million]

31. 12. 2003 (13)

31. 3. 2004 (14)

28. 4. 2004 (15)

17. 6. 2004 (16)

31. 12. 2004 (17)

Non-current
assets (18)

208

Stocks

119

205

209

204

176

200

84

200

52

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31. 12. 2003 (13)

31. 3. 2004 (14)

28. 4. 2004 (15)

17. 6. 2004 (16)

31. 12. 2004 (17)

Cash

Short-term
commercial
receivables

3

128

50

98 (19)

94

80

161

63 (20)

27

97

(13) Balance sheet 1 January — 31 December 2003, provided by the beneficiary. All the values are book values.
(14) Source: EKORDA report of 7 July 2004, taking into account the book value, except for the receivables, which are adjusted to their

liquidation value.

(15) Source: Balance sheet 1 January — 28 April 2004, provided by the beneficiary. All the values are book values.
(16)

Information provided by the Slovak authorities and obtained during the on-the-spot check by the tax office at the beneficiary's
premises on 21 June 2004 (see paragraph 54 above).

(17) Source: Annual report 2004, provided by the beneficiary. All the values are book values.
(18) Land, buildings, machinery, intangible assets, financial assets.
(19) According to EKORDA, the book value of short-term receivables of SKK 166 million has to be adjusted to the liquidation value of

(20)

SKK 98 million (see paragraph 86).
It is not clear whether this figure represents the book value or the liquidation value of the short-term receivables. To err on the
side of caution, the Commission took it to be the book value.

(78) The Commission will first examine the evidence submitted
by the beneficiary in support of
the
bankruptcy procedure would leave the tax office worse off
than the arrangement procedure. As neither the Slovak
authorities nor the beneficiary submitted any calculation
with regard to the tax execution procedure, the Commis-
sion will examine what the tax office could have obtained
via this procedure. Finally, it will examine circumstantial

its opinion that

evidence submitted by both the Slovak authorities and the
beneficiary.

2.1. Comparison of the arrangement procedure and bankruptcy

(79) The Commission does not consider the EKORDA report a
reliable basis for comparing the proposed arrangement with
a potential bankruptcy procedure. The Slovak authorities
share these doubts.

(80) At the outset, the Commission notes that, in issuing its report on 7 July 2004 (just two days before the
creditors' meeting), EKORDA used for its calculations the status of the beneficiary's assets as at 31 March
2004. It is clear from Table 3 that the level of the various assets changed considerably after 31 March
2004. In particular, a considerable portion of the stocks was sold, which led to an increase in cash. These
changes are of great importance when applying EKORDA's liquidation factors, ranging from 20 % for
stocks and short-time receivables to 100 % for cash. Assuming that the liquidation factors estimated by
EKORDA are correct and applying the methodology used by EKORDA, the following table shows how
the outcome of EKORDA's calculation would have been different if based on figures from 28 April 2004
and 17 June 2004, i.e. still before the creditors' meeting on 9 July 2004. These figures also show that the
liquidation factors proposed by EKORDA are not realistic.

Table 4

Comparison of the probable yield from the sale of the beneficiary's assets in a bankruptcy procedure
[SKK million]

31.3.2004

Situation on:

28.4.2004

17.6.2004

Liquidation
factor [ %]

Book value

Yield

Book value

Yield

Book value

Yield

Non-current assets

45

205

92

204

92

200

90

Stocks

Short-term receiva-
bles

20

20

209

42

176

35

84

17

98 (21)

20

86 (22)

17

37 (23)

7

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31.3.2004

Situation on:

28.4.2004

17.6.2004

Liquidation
factor [ %]

Book value

Yield

Book value

Yield

Book value

Yield

Cash

100

50

Total

94

50

204

161

94

238

161

275

(21) This is the book value (SKK 166 million) adjusted by EKORDA to reflect the liquidation value of the receivables.
(22) This is an approximation of the liquidation value that the Commission obtained by adjusting the book value of the short-term

receivables (SKK 147 million) by the same ratio as EKORDA used in its analysis (see footnote 19).

(23) This is an approximation of the liquidation value that the Commission obtained by adjusting the book value of the short-term
receivables (SKK 63 million; see also footnote 20) by the same ratio as EKORDA used in its analysis (see footnote 19). The
Commission, however, notes that, judging from the information provided by the Slovak authorities, the receivables of SKK
63 million were enforceable receivables. It is therefore very doubtful whether any adjustment of their book value is actually
necessary. If SKK 63 million were the liquidation value of these receivables, the total yield in a bankruptcy procedure as at 17 June
2004 would have been SKK 331 million (EUR 8,7 million).

(81)

(82)

It must be noted that the business plan submitted by the
beneficiary to the court forecast the sale of stocks at [less
than SKK 150] million over the period March-May 2004.
EKORDA must have therefore been aware that the assets of
the beneficiary would be subject to significant changes after
31 March 2004 and did not take this into account.

the conclusion that

If EKORDA had taken into account the book value of the
beneficiary's assets from 28 April 2004,
it would have
the yield obtained in
arrived at
bankruptcy would have been higher (SKK 238 million;
EU-6,3 million) than what the beneficiary proposed in the
arrangement (SKK 225 million; EUR 5,93 million (24). This
conclusion would have been even stronger if the analysis
had been made in June 2004 (SKK 275 million; EUR
7,2 million), still well in time for the tax office to exercise its
right of veto and reject the proposal, with the effect of
terminating the arrangement procedure. Again, it is noted
that these results were obtained using EKORDA's assump-
tions and methodology.

(83) The Commission, however,

is unable to accept

the
methodology used by EKORDA and does not find the
its analysis credible. This conclusion is
assumptions of
reinforced by the doubts of
the Slovak authorities as
described in paragraphs 55 and 60.

(84) To start with, in its report EKORDA does not explain how it
determined the three liquidation factors. The Slovak
authorities stated that the liquidation factor for the stocks
should be higher than 20 %.

(85) The Commission observes that in 2004 the beneficiary was
able to generate SKK [less than 150] million from the sale
of its stocks (see paragraph 30). This is more that [40-50] %
of the book value of stocks on which EKORDA based its
assessment. This strongly suggests that
the liquidation
factor of 20 % was too low. The changes in the balance
this
sheet

in 2004 with regard to stocks

supports

conclusion. In addition, the beneficiary itself in its business
plan estimated the yield from the sale of stocks over the
period March-May 2004 to be SKK [less than 110] million
(see paragraph 30). EKORDA ignored this estimate. Finally,
from the nature of the beneficiary's activities it can be
assumed that the stocks comprised final products that
could have been easily sold direct
to distributors or
consumers, rather than semi-finished products requiring
further processing.

(86) Furthermore, EKORDA used double adjusting with regard
to the short-term commercial receivables. First, it adjusted
their book value by 40 % (the book value being SKK
166 million and the value that EKORDA used in its
calculations being SKK 98 million) and then applied the
low liquidation factor of 20 %. This methodology is
questionable. It is acceptable to adjust the book value of
receivables to reflect their actual value at a given time.
However, EKORDA does not provide any clarification as to
why the yield in the bankruptcy/liquidation would be only
one fifth (SKK 20 million) of what the beneficiary itself
believed it would be able to obtain from its debtors (SKK
98 million).

(87) Furthermore, the liquidation factor of 45 % for non-current
assets seems to be too low. According to the beneficiary, the
value of its assets pledged in favour of the tax office was
SKK 194 million (25). This value is, according to the
beneficiary, expressed in prices estimated by independent
experts at around the end of 2003/beginning of 2004. In
the Commission's view, such an ‘expert price’ should
normally reflect the general price of the asset, expressing
the price at which the asset could be sold at the time.
EKORDA does not provide any clarification as to why the
yield from the bankruptcy sale of the non-current assets
would generate only 45 % of their book value of SKK
205 million (26) whereas the beneficiary himself valued
these assets much higher.

(25) This figure is disputed by the Slovak authorities, as will be explained

below.

(24) Including both the tax office and the private creditors.

(26) Including both pledged and non-pledged non-current assets.

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(88) As to the argument of the beneficiary that it would be
difficult to find a buyer because most of
the pledged
machinery was confined to the production of spirit and
spirit-based beverages, non-alcoholic beverages or canned
products, the Commission has the following two comments
it is noted that the ‘expert price’ of the
to make. First,
pledged real estate was SKK 105 million, which in itself is
higher than the total yield forecast by EKORDA (SKK
the actual developments in the
92 million). Second,
company show that some of
these production assets
quickly found a user, Old Herold, s.r.o., once the beneficiary
had lost
its licence to produce spirit and spirit-based
beverages. It seems therefore that there was an imminent
interest from a competitor for these production assets.

(89)

In addition, the credibility of EKORDA's report is also
affected by the manner of calculating the various fees
involved in a bankruptcy procedure that were to be
subtracted from the total yield from the sale of the assets.
Whereas EKORDA deducted SKK 45 million in fees, the
beneficiary in its submission gave the figure of SKK
36 million and the estimate of the auditor Ms Kochová is
SKK 22 million at most. Such discrepancies raise doubts as
to the accuracy of EKORDA's assumptions regarding the
level of the fees and, therefore, also the level of the yield
that could have been obtained in a bankruptcy procedure. It
is noted, nevertheless, that, considering the beneficiary's
situation on 17 June 2004, even with fees of SKK
36 million,
the yield in bankruptcy would have been
higher than with the proposed arrangement.

(90) Finally, the Commission notes that the Slovak authorities
do not support the beneficiary's claim that the tax office
would have had EKORDA's report at its disposal prior to
the creditors' meeting on 9 July 2004.

the conclusions of

(91) As to the report by Ms Kochová, the Commission cannot
assess it because it does not have a copy of it. From the
information submitted it is not clear when and for what
purpose this report was drawn up or on what assumptions
and data it was based. The Commission, however, observes
that
this auditor are significantly
different from the conclusions of EKORDA. The report of
the receiver Ms Holovačová states only that, in general, the
arrangement procedure is more advantageous for creditors
than bankruptcy. The Commission cannot accept either of
these two reports as evidence in support of or against the
beneficiary's assertion that the market economy creditor
test was met.

(92) On the basis of the evidence available, the Commission
therefore concludes that
the assets in a
bankruptcy procedure would, in all probability, have led
to a higher yield for the beneficiary's creditors. Considering
that the tax office would be satisfied in the first group as a
separate creditor and, in addition, obtain most of the yield

the sale of

distributed in the second group (owing to the size of its
claims when compared to other creditors), the Commission
concludes that almost the entire yield obtained in the
bankruptcy would accrue to the tax office.

2.2. Comparison of the arrangement procedure and tax execution

the

arrangement procedure

(93) The tax office, unlike the private creditors, was entitled to
initiate on its own initiative the tax execution through the
sale of real estate, machinery or the firm as a whole. The
Commission finds irrelevant the argument of the bene-
ficiary that
the
company from the tax execution procedure. As confirmed
by the Slovak authorities, the tax execution procedure was
indeed an option for the tax office, either prior to the
launch of
the arrangement procedure or after the tax
office's veto on the proposed arrangement. This possibility
therefore needs to be considered when applying the market
economy creditor test. The beneficiary does not compare
the proposed arrangement with the possible outcome of tax
execution.

shelters

(94)

In its analysis the Commission relies on the data provided
by both the beneficiary and the Slovak authorities. In this
context it is noted that the Slovak authorities confirmed
that the pledge in favour of the tax office equalled SKK
397 million, as stated in the decision to open the formal
investigation procedure. This value is said to have been
obtained from the beneficiary's accounts. The beneficiary,
for its part, submits that the value of the pledged assets
expressed in ‘expert prices’
is SKK 194 million (see
paragraph 17). While the Commission does not need to
determine which figure is correct, the following conclusions
can nevertheless be made.

If

the value of

In these circumstances,

(95) First, the pledge was the countervalue of the deferred tax
debt of the beneficiary, required by the Tax Administration
Act.
the beneficiary's assets actually
amounted to only half of the pledge, as suggested by the
then the
expert opinion submitted by the beneficiary,
securities required by the State for those deferrals were
insufficient.
the tax deferrals
permitted by the tax office between November 2002 and
November 2003 for a total amount of SKK 477 million
therefore in all probability did not meet
the market
economy creditor test. As these tax deferrals were put in
effect before the date of accession and are not applicable
thereafter, the Commission is not competent to assess the
compatibility of those measures with the common market.
For the purpose of this case, it is also unnecessary for the
Commission to determine whether those measures con-
stituted state aid. However, if the earlier deferrals already
constituted state aid, the market economy creditor principle
can no longer be referred to when the deferred debts are
later (partly) written off.

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(96) Second, even if

the lower

figure submitted by the
beneficiary were used in the calculation of the proceeds
from a tax execution procedure, a market economy creditor
would, had he had the possibility, have favoured this
procedure over the arrangement procedure.

(97)

the arrangement,

In a tax execution procedure the tax authority can sell the
debtor's assets
(receivables and other current assets,
movable assets, real estate) directly. At the time when the
tax office voted in favour of
the
beneficiary had stocks worth SKK 84 million, enforceable
receivables of SKK 63 million and cash of SKK 161 million
(see paragraph 54). It should be noted that the value of the
current assets alone (SKK 308 million; EUR 8,1 million)
would exceed the yield obtained under the arrangement
the
(SKK 225 million; EUR 5,93 million). Even if
receivables were wholly deducted (27), the value of
the
current assets alone (SKK 245; EU-6,4 million) would still
In
exceed the yield obtained under
addition, the beneficiary had other assets, the value of
which was at least SKK 194 million.

the arrangement.

(98) Furthermore, tax execution would not involve adminis-
trative fees as in the case of bankruptcy proceedings. It is a
procedure that
is initiated and controlled by the tax
authority itself, so it can be assumed that it would be
conducted in a speedy manner.

(102) In addition, the Commission notes that the tax office itself
had appealed against this arrangement as early as 2 August
2004, i.e. not even one month after the arrangement was
agreed upon.

to the arrangement even prior

(103) The beneficiary submitted that the tax office had signalled
its agreement
to the
beneficiary launching the procedure. The Commission
considers that the evidence submitted by the beneficiary
indicates quite the opposite. In his letter of 3 February
2004 to the beneficiary, the director of the tax office writes
that, although in principle he is not against the use of the
arrangement procedure, he does not agree with the
beneficiary's proposal for an arrangement featuring 35 %
repayment of the debt.

(104) On the basis of this evidence, the Commission cannot but
conclude that the Slovak authorities were opposed to the
arrangement proposed by the beneficiary and were
opposed to it before the launching of the arrangement
procedure on 8 March 2004, before the creditors' vote on
9 July 2004 and also after
the court approved the
arrangement.

(99) The Commission therefore concludes that tax execution
against the beneficiary's assets would have led to a higher
return than the arrangement.

(105) The beneficiary submitted that long-term effects, such as
the continuity of the tax revenue for the State, should be
taken into account (see paragraph 46).

2.3 Other evidence

(100) The Commission takes particular note of

the letter
submitted by the Slovak authorities from the director of
the Tax Director to his subordinate, the director of the tax
office in question (see paragraph 57). The letter is clear
proof that the Tax Directorate (which had had prior direct
contacts with the beneficiary) opposed the proposed
arrangement and gave the local tax office a clear instruction
not to vote in favour of the arrangement. The reason
mentioned in the letter was that the proposed arrangement
was ‘not advantageous’ for the State.

(101) It was also shown by the Slovak authorities that there was a
clear policy instruction given by the Ministry of Finance at
the beginning of 2004 to tax offices to the effect that they
should not accept arrangements that propose writing off
tax offices' receivables (28). This instruction was given in
connection with the amendment of the Tax Administration
Act as of 1 January 2004,
in an effort to strengthen
discipline in tax collection.

(27) It is not entirely clear whether SKK 63 million is the book value or
the liquidation value of the short-term receivables on 17 June 2004
(see footnotes 20 and 23). Nor it is clear whether the book value
does not in fact also correspond to the liquidation value.

(28) It can be deduced from the letter that the Ministry agreed with
arrangements consisting in deferrals of payment of not more than
two months for VAT and excise duties and of six months for other
taxes.

(106) First,

it needs to be stressed that the market economy
creditor test differs from the market economy investor test.
Whereas a market economy investor is in a position to
decide whether
to enter into a relationship with the
company in question and will be driven by the long-term
strategic prospect of obtaining an appropriate return from
his investment (29), a ‘market economy creditor’, who is
already in a commercial or public law relationship with the
insolvent company, will aim to obtain the repayment of
sums already due to him (30) on conditions as advantageous
as possible in terms of the degree of repayment and the
time-frame. The motivations of the hypothetical market
economy creditor and the market economy investor will
therefore be different. Accordingly, the case law has defined
separate tests for the two situations.

(107) Second, as to the analogy with the creditor-supplier, it is
important to note that the nature of his receivables and the
nature of those of the State are fundamentally different.
Because the relations of the supplier to the insolvent firm
have an exclusively contractual basis, he might genuinely
suffer from the loss of a business partner. If the insolvent
company is liquidated or sold off, the supplier would need
to find a new client or contract with the new owner. The

(29) Case T-152/99 Hamsa, p. 126.
(30) See, for example, Case C-342/96 Spain v Commission (‘Tubacex’),

p. 46.

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risk is higher when his dependency on the insolvent firm is
considerable. Such a creditor will
indeed consider the
future.
In contrast, the relations of the State with the
insolvent firm are based on public law and therefore are
not dependent on the will of the parties. Any new owner
the liquidated firm would
taking over
automatically be obliged to pay taxes. Moreover, the State
is never dependent on one taxpayer. Finally and most
importantly, the State is not profit-driven when levying
taxes and does not act in a commercial manner or with
commercial considerations when doing so. The above
analogy is therefore not well founded.

the assets of

(108) The Commission concludes that the situation of the State
in the present case cannot be compared to the situation of a
hypothetical market economy investor or to the situation
of a hypothetical dependent market economy creditor. The
loss of future taxes cannot therefore be taken into account
when applying the market economy creditor principle.

(109) Finally,

from the overview of

taxes submitted by the
beneficiary it is noted that a large majority of the taxes paid
by the beneficiary since 1995 have been indirect taxes
(excise duties and VAT). As these taxes are paid by final
consumers, the liquidation of the beneficiary would have
no impact on their collection as long as consumers
continued to purchase the taxed products (in this case,
mainly spirit and spirit-based beverages)
from other
producers. The beneficiary's argument regarding consider-
able future tax loss is therefore not credible.

2.4 Conclusion

(110) On the basis of

the Commission
the above evidence,
concludes that in the present case the market economy
creditor test was not met and that the State conferred on
the beneficiary an advantage that it would not have been
able to obtain from the market.

(111) The Commission therefore concludes that the disputed
measure constitutes state aid within the meaning of
Article 87(1) of the EC Treaty.

(112) The state aid granted to the beneficiary is equal to the
amount of debt written off by the tax office in the
arrangement procedure, viz. SKK 416 515 990.

3.

Compatibility of aid: Derogation under
Article 87(3) of the EC Treaty

(113) The primary objective of

the measure is to assist a
company in difficulty. In such cases, it is possible to apply
the exemption of Article 87(3)(c) of the EC Treaty, which
allows state aid that facilitates the development of certain

economic activities where such aid does not adversely
affect
trading conditions to an extent contrary to the
common interest and where the relevant conditions are
met.

(114) In view of

the beneficiary's production portfolio,

the
Commission assessed whether the special rules applicable
to agriculture apply in the present case. Basing itself on the
information on the beneficiary's turnover submitted by the
Slovak authorities, the Commission in its decision to open
the formal investigation arrived at the conclusion that most
of beneficiary's products are not products falling under
Annex I to the EC Treaty and that, therefore, the general
state aid rules apply.

(115) In its comments on the decision to open the formal
investigation, the beneficiary disputed the turnover data
previously provided by the Slovak authorities (see Table 1)
but not the Commission's decision to base its assessment
state aid rules. Without wishing to
on the general
determine whether the figures provided by the beneficiary
are accurate (31), the Commission verified whether its above
It
conclusion would hold up against
concludes that most of
is
generated by products not falling under Annex I to the
EC Treaty. The general, and not the sector-specific, state aid
rules thus apply.

the new data.
the beneficiary's turnover

(116) Rescue and restructuring aid to ailing companies

is
currently governed by the Community guidelines on state
aid for rescuing and restructuring firms in difficulty (32)
(‘new guidelines’), which replaced the previous text adopted
in 1999 (33) (‘1999 guidelines’).

(117) The transitional provisions of the new guidelines stipulate
that they will apply for the assessment of any rescue or
restructuring aid granted without the authorisation of the
Commission (unlawful aid) if some or all of the aid is
granted after 1 October 2004, the date of publication of
the new guidelines in the Official Journal of the European
Union (point 104). Should, however, the aid be unlawfully
granted before 1 October 2004, the examination is to be
conducted on the basis of the guidelines applicable at the
time the aid was granted (point 104).

(118) The Commission notes that the tax office's approval of the
arrangement was issued on 9 July 2004 and took effect as
of 23 July 2004. This means that the aid was unlawfully
granted before 1 October 2004. The 1999 guidelines,
which were applicable at the time the aid was granted,
therefore apply.

(31) These figures do not seem to be supported by the annual accounts

submitted by the beneficiary.

(32) OJ C 244, 1.10.2004, p. 2.
(33) OJ C 288, 9.10.1999, p. 2.

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(119) The Commission concludes that

the beneficiary is a
medium-sized company within the meaning of Commis-
sion Regulation (EC) No 70/2001 on the application of
Articles 87 and 88 of the EC Treaty to state aid to small
and medium-sized enterprises (34).

3.1 Eligibility of the firm

(120) According to point 5(c) of the 1999 guidelines, a firm is
regarded as being in difficulty where it fulfils the criteria
under domestic law for being the subject of collective
insolvency proceedings.

(121) The beneficiary was party to the arrangement procedure,
which is applicable to insolvent companies as defined in
the Bankruptcy Act. It is therefore eligible for rescue and
restructuring aid.

3.2 Rescue aid

(122) The disputed measure was initially described by the Slovak
authorities as rescue aid. Pursuant to the 1999 guidelines,
the Commission raised doubts as to the compatibility of
the aid as rescue aid on the grounds described in Part III
above.

(123) Neither the Slovak authorities nor the beneficiary com-
mented on these doubts. No new facts have been presented
to the Commission in this respect.

(124) Since the above doubts have not been allayed,

the
Commission concludes that the aid is not compatible as
rescue aid within the meaning of the 1999 guidelines.

3.3 Restructuring aid

(125) The Commission raised doubts as to whether the aid was
compatible as restructuring aid within the meaning of the
1999 guidelines on the grounds described in Part III above.

(126) The Commission notes that the Slovak authorities, with
whom lies the burden of proof to show that the state aid is
compatible with the common market, have not submitted
any new facts in support of this conclusion. It took due
note of the comments submitted by the beneficiary.

3.3.1 R e t u r n t o l o n g - t e r m v i a b i l i t y

(127) According to the 1999 guidelines,

the granting of
restructuring aid must be linked to and conditional on
implementation of a feasible and coherent restructuring
plan to restore the firm's long-term viability. The Member
State commits itself to the plan, which must be endorsed
by the Commission. Failure by the company to implement
the plan is regarded as misuse of aid.

(34) OJ L 10, 13.1.2001, p. 33. Commission Regulation (EC)
No 70/2001 was amended by Commission Regulation (EC)
No 364/2004 of 25 February 2004 as regards the extension of its
(OJ L 63,
scope to include aid for research and development
28.2.2004, p. 22).

(128) The restructuring plan must be such as to enable the
beneficiary to restore its long-term viability within a
reasonable timescale and on the basis of realistic assump-
tions as to the future operating conditions. The plan should
describe the circumstances that led to the beneficiary's
difficulties and identify appropriate measures to address
these difficulties. Restructuring operations cannot be
limited to financial aid designed to make good debts and
past losses without tackling the reasons for difficulties.

(129) For companies situated in assisted areas and for small and
medium-sized companies, the 1999 guidelines stipulate
that the conditions for authorising aid may be less stringent
as regards the implementation of compensatory measures
and the content of monitoring reports. Nonetheless, these
factors do not exempt such companies from the require-
ment to draw up a restructuring plan or the Member States
from the obligation to make
the
restructuring aid conditional upon implementation of a
restructuring plan.

the granting of

(130) After the opening of the formal investigation, the Slovak
the
authorities confirmed that
beneficiary was obliged to produce as a condition for the
launching of the arrangement procedure was considered
only by the competent court,
i.e. not by the granting
authority, and that neither the court nor the tax office
monitored the implementation of the plan.

the business plan that

(131) Contrary to this confirmation, the beneficiary submitted
that the tax office had studied the ability of the business
plan to restore long-term viability prior to its approval of
the arrangement, but it did not produce any evidence to
support this claim.

(132) The beneficiary further argued that the absence of a formal
restructuring plan is irrelevant
in the case of ex post
assessment of aid by the Commission, as the Commission
is then in a position to assess whether the beneficiary
actually became viable. According to the beneficiary, a
formal restructuring plan can be required only in the case
of ex ante assessment, the only sort of assessment to which
the 1999 guidelines apply.

(133) This line of argument is not correct. The 1999 guidelines
apply to the compatibility assessment of both notified and
unlawful aid. Whenever the assessment takes place, the
condition that
to the
establishment of a viable restructuring plan is valid. The
Commission has to conduct its assessment on the basis of
the information available at the time the aid was granted.

the restructuring aid be subject

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(134) It may be concluded that the tax office as the granting
authority did not have any opportunity to evaluate a
restructuring plan and to make the writing-off of
its
receivables subject to implementation of a restructuring
plan that would be duly monitored. It follows that the first
formal condition, which is fully applicable also to ex post
assessment, was not met.

(135) As to the substance of

the business plan,

the Slovak
authorities have not submitted any information that would
allay the Commission's doubt as to whether the plan
represents a genuine restructuring plan as required by the
1999 guidelines.

(136) The Commission cannot but stand by the conclusion it
gave in the decision to open the formal investigation. The
business plan submitted is merely a plan dealing with the
beneficiary's acute problem of mounting debt to the State.
The plan does not analyse in any way the circumstances
that led to the beneficiary's difficulties or the financial
situation of the company at that time or its financial
prospects. Since this analysis was missing, the beneficiary
did not propose any concrete steps addressing the
individual reasons that led to the difficulties. The only
is the proposed financial
measure described in detail
restructuring through the arrangement with the creditors.

(137) The plan does not mention at all the increase in the
beneficiary's own capital, mentioned by the beneficiary as
one of the restructuring measures. There is nothing in the
file to show that the capital increase by Hydree Slovakia
the
should be considered as a measure ensuring that
beneficiary would not in the long term repeat its strategy of
financing its production through VAT and excise duty debt,
which is what eventually led to its difficulties. The Slovak
authorities themselves confirmed that the capital increase
does not in any way decrease the risk of the financial
problems being repeated. These doubts are all the stronger
when it is considered that the capital increase amounted to
SKK 21 million, while the restructured debt was SKK
644 million.

(138) The capital increase in itself is no proof of the market's
belief in the beneficiary's return to long-term viability. The
Commission notes that the beneficiary did not manage to
obtain any loan from a private bank, despite its active
efforts.

finalised but did not do so. The Commission, however,
observes that the beneficiary continues to sell the products
produced by Old Herold using the beneficiary's facilities
and does so under its own brand name and even plans to
increase these sales, as stated in the annual report for the
period 29 April-30 December 2004. The letting of these
production assets therefore cannot be considered as a
restructuring measure because, on the basis of all the
evidence available, there was no need for restructuring of
this part of production.

(140) As to the remaining measures proposed in the business
plan, the Commission's doubts have not been allayed.
These measures are simply activities in the normal run of
business rather than rationalisation measures (sale of old
equipment or vehicles). The two proposed structural
measures (abandonment of the production of non-profit-
able non-alcoholic products and the sale of some real
estate) were described very vaguely without any indication
of
the precise products or a timetable. The Slovak
authorities confirmed that as of 10 October 2005 the real
estate intended for sale (an administrative building, a shop
and a recreational facility) had not been sold, i.e. that this
planned measure had not been implemented as announced.

(141) The combination of the absence of a formal restructuring
plan and of a genuine analysis of
the difficulties, the
measures necessary to address these difficulties and the
market conditions and prospects leads the Commission to
the conclusion that the business plan submitted by the
beneficiary is not a genuine restructuring plan as required
by the 1999 guidelines (35). The Commission's doubts that
the beneficiary would restore long-term viability have
therefore not been allayed.

3.3.2 A i d l i m i t e d t o t h e s t r i c t m i n i m u m

(142) Although its conclusion that, in the absence of a genuine
restructuring plan, its doubts as to the long-term viability
persist is in itself sufficient to conclude that the aid is not
compatible with the common market, the Commission will
also analyse the other central criterion of
the 1999
guidelines, i.e. that the aid is limited to the strict minimum
necessary.

(143) Pursuant to point 40 of the 1999 guidelines, the amount
and intensity of the aid must be limited to the strict
minimum needed to enable restructuring to be undertaken
in light of the existing financial resources of the beneficiary.
The beneficiary is expected to make a significant contribu-
tion to the restructuring from its own resources.

(139) The Commission further notes that the renting out of the
production facilities to the beneficiary's competitor Old
Herold s.r.o. was clearly motivated by the fact that the
beneficiary had lost its licence to produce spirit and spirit-
based products and not by the fact that the production
would have been loss-making and thus
in need of
restructuring. It is true that the beneficiary itself could
have requested a new licence after the arrangement was

(144) The costs of restructuring amounted to SKK 644 591 440
(EUR 16,96 million), the total amount of debt restructured
through the arrangement. The beneficiary paid 35 % of this
amount, i.e. SKK 225 607 028 (EUR 5,93 million).

(35) See also judgment of the Court of 22 March 2001 in Case C

17/1999 French Republic v Commission.

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(145) The Slovak authorities did not provide any further
explanation in respect of the doubts expressed by the
Commission in this connection. The beneficiary explained
how he financed payment of the debt remaining after the
arrangement
(see paragraph 30). According to the
beneficiary, its own contribution amounted to SKK [less
than 300] million (EUR [less than 7,9] million).

(146) First, the Commission notes that the resources available to
the beneficiary exceeded the amount of debt remaining
after the arrangement. This suggests that the aid was not
limited to the minimum necessary.

(147) More importantly,

the Commission considers that

the
credit provided by Old Herold does not qualify as an own
contribution by the beneficiary within the meaning of the
1999 guidelines. Payables constitute a permanent source of
financing of the operation of the firm. They are short-term
loans, which, however, have to be paid back. It is only if
suppliers agree to a payment maturity longer than is
normal
resources are available to the
company for restructuring; such deferral constitutes a sign
that the market believes in the feasibility of the return to
viability.

that additional

(148) The beneficiary did not in any way demonstrate that the
deferral of payment by Old Herold went considerably
beyond what is normal commercial practice between the
beneficiary and its suppliers. The maturity of 40 days seems
to be standard practice, especially in view of the fact that it
was granted to the beneficiary after the arrangement. The
beneficiary was therefore no longer in financial difficulties.
The very purpose of the arrangement was precisely to help
the beneficiary out of its financial problems.

(149) The Commission therefore concludes that this prolonged
maturity cannot be considered as a contribution to
restructuring from external resources.

(150) Without

this deferral,

the own contribution of

the
beneficiary within the meaning of the 1999 guidelines
amounts to SKK [less than 170] million (EUR [less than
4,5] million) and thus corresponds to [less than 27] % of
the restructuring costs.

(151) Unlike the new guidelines, the 1999 guidelines did not
contain any thresholds indicating when the own contribu-
tion of the beneficiary is considered to be significant.

an assisted area and to what extent the sources of financing
reflect the belief of the market, other than the beneficiary
itself and its shareholders, in the long-term viability of the
company or other specific features of the case.

(153) In the light of the above, the Commission cannot accept in
the present case that the contribution of the beneficiary is
significant. It concludes that its doubts as to whether the
own contribution of the beneficiary was significant and
whether the aid is limited to the minimum necessary have
not been allayed.

3.4 Compatibility of aid: conclusion

(154) The Commission concludes that the aid is not compatible
with the common market as rescue or restructuring aid. In
addition, no other derogation laid down in the EC Treaty is
applicable to the present case.

VII.

CONCLUSION

(155) The Commission finds that

the Slovak Republic has
unlawfully granted the write-off of tax debt in favour of
FRUCONA Košice a.s. in breach of Article 88(3) of the EC
Treaty. This aid is not compatible with the common market
under any derogation laid down in the EC Treaty.

(156) Even though the implementation of the write-off by the tax
office has been suspended pending the present procedure
before it, the Commission finds that the advantage for the
beneficiary was created at the point at which the tax office
decided to forgo part of its claims and thus put the aid at
the disposal of the beneficiary. This moment was the entry
into force of the creditors' agreement on 23 July 2004. The
advantage over the beneficiary's competitors resided in the
fact that the tax office had not enforced its tax claims.

(157) To restore the status ex ante, the state aid must be recovered,

HAS ADOPTED THIS DECISION:

Article 1

The state aid which the Slovak Republic has implemented for
FRUCONA Košice, a.s., amounting to SKK 416 515 990,
is
incompatible with the common market.

Article 2

(152) Considering the practice of the Commission in applying
the 1999 guidelines and the trend in Commission policy in
this respect towards the introduction of thresholds under
the 2004 guidelines (36), the Commission considers the
contribution of [less than 27] % to be rather low. Such a
contribution might be accepted under the 1999 guidelines
only if all the other conditions for approving the aid were
fulfilled, and the Commission would have to take into
account such criteria as whether the company is active in

(36) The threshold for medium-sized enterprises under

the 2004

guidelines is at least 40 %.

1. The Slovak Republic shall take all necessary measures to
recover from the beneficiary the unlawfully granted aid referred
to in Article 1.

2. Recovery shall be effected without delay and in accordance
with the procedures of national law provided that they allow the
immediate and effective execution of this decision.

3. The sum to be recovered shall bear interest throughout the
period running from the date on which it was put at the disposal
of FRUCONA Košice, a.s. until its actual recovery.

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4. The interest shall be calculated in accordance with the
provisions laid down in Chapter V of Commission Regulation
(EC) No 794/2004 of 21 April 2004 implementing Council
Regulation (EC) No 659/1999 laying down detailed rules for the
application of Article 93 of the EC Treaty (37). The interest rate
shall be applied on a compound basis throughout the entire
period referred to in paragraph 3.

comply with it.
questionnaire attached in Annex I to this Decision.

It shall provide this information using the

Article 4

This Decision is addressed to the Slovak Republic.

Article 3

The Slovak Republic shall inform the Commission, within two
months of notification of this Decision, of the measures taken to

For the Commission

Neelie KROES

Member of the Commission

Done at Brussels, 7 June 2006.

(37) OJ L 140, 30.4.2004, p. 1.

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Information regarding the implementation of the Commission Decision on state aid measure C 25/2005
(ex NN 21/2005) implemented by the Slovak Republic for FRUCONA Košice a.s.

ANNEX I

1.

Calculation of the amount to be recovered

1.1. Please provide the following details on the amount of unlawful state aid that has been put at the disposal of the

beneficiary:

Date(s) (o)

Amount of aid (*)

Currency

(o) Date or dates on which aid or individual instalments of aid were put at the disposal of the beneficiary.
(*) Amount of aid put at the disposal of the beneficiary, in gross aid equivalent.

Comments:

1.2. Please explain in detail how the interest payable on the amount to be recovered will be calculated.

2.

Recovery measures planned and already taken

2.1. Please describe in detail what measures have been taken and what measures are planned to bring about the immediate
and effective recovery of the aid. Where relevant, please indicate the legal basis for the measures taken or planned.

2.2. What is the timetable for the recovery process? By what date will the recovery of the aid be completed?

3.

Recovery already effected

3.1. Please provide the following details on the amounts of aid that have been recovered from the beneficiary:

Date(s) (o)

Amount of aid repaid

Currency

(o) Date or dates on which the aid was repaid.

3.2. Please attach supporting documents for the repayments shown in the table at point 3.1.