2007/204/EC: Commission Decision of 26 September 2006 on State aid C 42/2005 (ex NN 66/2005; ex N 195/2005) implemented by the Slovak Republic for Konas, s.r.o. (notified under document number C(2006) 4205) (Text with EEA relevance )
Date: 2006-09-26
Institutions: European Commission
Subjects: Slovakia, State aid, aid for restructuring, control of State aid, machinery, tax debt write-off

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(Acts adopted under the EC Treaty/Euratom Treaty whose publication is not obligatory)

II

DECISIONS

COMMISSION

COMMISSION DECISION

of 26 September 2006

on State aid C 42/2005 (ex NN 66/2005; ex N 195/2005) implemented by the Slovak Republic for
Konas, s.r.o.

(notified under document number C(2006) 4205)

(Only the Slovak version is authentic)

(Text with EEA relevance)

(2007/204/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

in contravention of Article 88(3) of the EC Treaty. The
aid was therefore classified as unlawful aid and given a
new case number (NN 66/2005).

Having regard to the Treaty
Community,
and in particular
Article 88(2) thereof,

establishing the European
subparagraph of
the

first

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

Whereas:

I. PROCEDURE

(1)

s.r.o.

It provided additional

By letter of 11 April 2005, registered as received on 19
April 2005, Slovakia notified the Commission that it
restructuring aid to the company
intended to grant
Konas,
information by
letters of 30 June 2005, registered as received on 12
July 2005, and of 5 September 2005, registered as
received on 8 September 2005,
replying to the
Commission’s letters of 31 May 2005 and 28 July
2005 respectively.

(2)

In the course of
this Exchange of Letters it became
apparent that the aid in question had been implemented

(3)

(4)

(5)

the Commission
By letter of 9 November 2005,
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.

The Commission decision to initiate the procedure laid
down in Article 88(2) of the EC Treaty was published in
the European Union (2). The
the Official
Commission invited interested parties to submit
their
comments on the measure.

Journal

of

The Slovak authorities submitted their observations by
letter of 13 December 2005, registered as received on
20 December 2005. Slovakia submitted additional infor-
mation by letter of 3 January 2006, registered as received
on 10 January 2006. The Commission received
comments from one interested party (the recipient) by
letter of 30 November 2005, registered as received on 6
December 2005. It forwarded them to Slovakia, which
was given the opportunity to react and did so by sending
its own comments by letter dated 9 March 2006,
registered as received on 15 March 2006.

(1) OJ C 323, 20.12.2005, p. 25.

(2) See footnote 1.

(6)

(7)

(8)

(9)

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II. DETAILED DESCRIPTION OF THE AID

1. Relevant undertaking

The recipient of the financial support is Konas, s.r.o.
(hereinafter Konas), a manufacturer of machinery and
equipment operating principally in four sectors: shaping
and press
single-purpose machines, protection
shields and other mechanical engineering products. The
company is situated in a region eligible for regional aid
under Article 87(3)(a) of the EC Treaty.

tools,

According to the information provided by the Slovak
authorities, a number of domestic competitors and
competitors elsewhere in the European Union operate
in all these sectors. The company sees possibilities for
exports in the shaping tools segment.

Konas employs 37 people.
Its turnover was SKK 19
million (EUR 500 000 (3)) in 2004 and SKK 15 million
(EUR 395 000)
three quarters of 2005.
According to the Slovak authorities, the recipient fulfils
the criteria of a small enterprise.

in the first

(12)

(13)

creditors (agreement) whereby the indebted company
pays off part of its debt and the remainder is written
off. The agreement has to be approved by the supervising
court.

Creditors whose receivables are secured, e.g. by means of
a mortgage, act as separate creditors. For the arrangement
proposal to be accepted, all the separate 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.

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
be met
the outstanding amounts are
incorporated into the second group with the claims of
the other creditors. In the second group, the creditors are
satisfied proportionally.

from this sale,

2. Applicable national legislation

The measure in question comprises a write-off of a tax
debt by the Lučenec Tax Office (tax office) under what is
known as an arrangement with creditors. This procedure
is governed by Act No 328/91 on Bankruptcy and
Arrangements with Creditors (Bankruptcy Act).

is a court-supervised procedure which,

(10) Arrangement with creditors (arrangement or arrangement
like
procedure)
the bankruptcy procedure, aims at settling the financial
indebted companies (4). Under the bank-
situation of
the company ceases to exist and
ruptcy procedure,
the
either
the
company
is
arrangement
company
continues its business without change of ownership.

its assets are sold to a new owner or
In
under
the

liquidated.
procedure,

indebted

contrast,

(11)

The arrangement procedure is initiated by the indebted
company. The aim is to reach an agreement with the

(3) The exchange rate used is only approximate (EUR 1 = SKK 38) and
the figures in euro are included only for information purposes.
(4) A company becomes indebted when it has several creditors and is
not able to settle its obligations within 30 days from maturity.

(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) Act No 511/92 on the Administration of Taxes and Fees
and Changes to the System of Local Financial Authorities
(Tax Administration Act) governs
the tax execution
procedure, the aim of which is to satisfy the State’s tax
claims through direct sale of real estate, movable assets
or the firm as a whole.

3. Disputed measure

(16)

Konas requested the supervising court to commence an
arrangement procedure on 15 July 2003, which the court
did by a decision of 25 March 2004. The creditors met
on 8 June 2004 and agreed to the restructuring of their
claims as proposed by Konas. The court confirmed the
creditors’ agreement by a decision of 25 June 2004,
which entered into force on 2 August 2004. The court
formally ended the arrangement procedure by a decision
of 20 October 2004. It should, however, be noted that
the tax office has suspended the write-off pending the
procedure before the Commission.

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(17)

The creditors agreed with Konas on the following arrangement: 13,3 % of the debt would be repaid
by Konas within 90 days of the entry into force of the creditors’ agreement and the remaining 86,7 %
of the debt would be forgone by the creditors. The claims of all the creditors were treated on equal
terms. The claims of the tax office included in the arrangement procedure amounted to SKK
11 223 459 (EUR 295 000) and comprised VAT accrued over the period between the third
quarter of 1995 and the end of 1997 and in respect of several months in 1998 and 1999. The
tax office, as the sole public creditor, agreed to write off SKK 9 730 739 (EUR 256 000). The actual
amounts per creditor are shown in the following table:

Table 1

Konas debt arrangement (in SKK)

Creditor

Tax office

4 creditors

Public

Other

Debt before the
arrangement

Debt after the
arrangement (*)

Amount written off

11 223 459

827 437

1 492 720

110 049

9 730 739

717 388

Total

12 050 896

1 602 769

10 448 127

(*) The amount that Konas is obliged to pay back to its creditors.

(18)

(19)

confirmed that, under

The Slovak authorities
the
in respect of both its public and its
arrangement
private creditors, Konas had fulfilled its obligations
laid down in the creditors’
within the time limit
agreement.

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 its receivables included
in the arrangement procedure, which amounted to SKK
10 147 939 (EUR 267 051), were secured by means of a
mortgage on the assets of Konas. All the other creditors
voted in favour of the proposed arrangement. Their re-
ceivables were common trade receivables not secured in
any manner.

(22)

especially for

organisational measures as follows: creation of reserves
for an amount equal to the debt still to be paid under the
arrangement; management of cash flow during the
arrangement procedure so as to avoid inefficient expen-
diture,
regular
payment of taxes and other public obligations; intensifi-
increase of sales to the
cation of marketing activities;
limitation
most profitable customers; workforce review;
of
the
social
arrangement procedure; better use of existing plant; and
energy consumption and cost reductions.

energy and materials;

expenditure

purposes

during

for

financial

costs of

restructuring

amounted to
The
SKK 12 050 896 (EUR 317 000), the debt that Konas
restructured through the arrangement. In its plan Konas
proposed
of
the
SKK 1 602 769 (EUR 42 000) through short-term recei-
vables (SKK 1 323 259 or EUR 35 000) and available
cash (SKK 2 246 419 or EUR 59 000).

remaining

finance

debt

to

4. Restructuring

(20) With its request for the arrangement procedure addressed
to the supervising court, Konas also submitted a two-part
plan comprising: (a) a financial analysis of the company
and organisational measures, and (b) measures to restore
the company’s financial stability.

(23) According to the Slovak authorities, between 1998 and
2000 the tax office issued eight execution orders in
its powers under the Tax Administration
exercise of
In April 2004 the tax office issued a list of
Act.
Konas’s debts outstanding at the time of the arrangement
procedure.

(21)

the company first described its financial
In the plan,
indebted,
situation, claiming that, although it was still
its financial situation had been stabilised in the years
preceding the request
then
concluded that
short-term receivables and cash
would be sufficient to cover the debt remaining to be
paid under the arrangement. The company described its

for an arrangement.

its

It

(24)

The Slovak authorities confirmed that, pending the
procedure before the European Commission, they had
suspended
the
arrangement procedure.

debt write-off

agreed

under

the

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III. DECISION TO INITIATE THE PROCEDURE OF
ARTICLE 88(2) OF THE EC TREATY

(30)

The recipient claimed that the tax office’s assessment of
Konas’s situation went beyond what was included in the
plan submitted to the
arrangement
procedure.

in the

court

(25)

the disputed write-off had no State

In its decision to initiate the procedure of Article 88(2) of
the EC Treaty,
the Commission raised doubts as to
aid
whether
element. Specifically, it considered that the behaviour of
the tax office in the arrangement procedure did not meet
the market economy creditor test. 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. It
doubted that the arrangement procedure led to the best
possible outcome for the State as a creditor of Konas
when compared with the bankruptcy procedure or the
tax execution procedure.

(26)

The Commission then raised doubts as to the com-
patibility with the common market of the disputed aid
the two main
as restructuring aid.
conditions were fulfilled: existence of a restructuring
plan ensuring a return to long-term viability within a
reasonable timeframe and limitation of the aid to the
minimum necessary.

It doubted that

IV. COMMENTS FROM INTERESTED PARTIES

(27) On the facts of the case, the recipient submitted that the
book value of the assets pledged in favour of the tax
office was SKK 3 254 000 on 31 December 2003 and
SKK 3 001 000 on 31 December 2004. The assets in
question were the only real estate owned by the
recipient; all production was carried out in this building.

(28)

In its comments the recipient submitted that, according
the
to the Slovak legislation in force at the time of
arrangement, the present measure was not a State aid
measure but an act of voluntary agreement with the
creditors. Should the Commission conclude otherwise,
Konas would be discriminated against, when compared
with other cases where companies had applied for an
arrangement before the accession of Slovakia to the EU
and the resulting debt write-off had not been deemed to
be State aid. The recipient adds that, even after accession,
the national legislation was not in line with EU law and
therefore, however diligent it had been, it could not have
known that reaching an arrangement with its creditors
required additional conditions to be fulfilled.

V. COMMENTS FROM THE SLOVAK REPUBLIC

(31)

In their reply to the opening of the formal investigation,
the Slovak authorities submitted that State aid would be
granted only if the tax receivable were written off in the
State’s accounts.

(32)

the tax office,
The Slovak authorities submitted that
when agreeing to the arrangement proposed by Konas,
had taken into account the following factors, some of
which, it is suggested, would also be borne in mind by a
market economy creditor. First, the book value of the
pledged real estate was, at the time of the arrangement,
only SKK 3,2 million, although the secured receivables
amounted to SKK 10,1 million. Second, the bankruptcy
procedure tends to be rather lengthy and the sale of
assets in the region in question is very problematic. As
regards the statistics, the yield obtained from bankruptcy
by the tax authorities between 1997 and 2005 is claimed
to average only 7 %. Third,
the tax office took into
the liquidation of Konas on
account
the impact of
the time of
(around 40 % at
regional unemployment
the arrangement), bearing in mind not only redundancies
at Konas but also at another company in the region
which is dependent on Konas and employs some 400
people. Finally,
the
expected future tax revenue.

the tax office took into account

(33) As to the tax execution procedure, the Slovak authorities
confirmed that between 1998 and 2000 the tax office
and
issued eight
decreased
SKK
8 106 672,42 to SKK 11 223 459, which was included
in the arrangement procedure in 2004. Since 2001,
Konas has paid all its taxes regularly and on time.

execution orders
company’s

against Konas

debt

the

tax

by

(34)

The Slovak authorities do not dispute that the present
measure constitutes State aid. Their claim is that this aid
is compatible with the common market as restructuring
aid.

(29)

The recipient further submitted that the accrued tax debt
resulted mainly from unclear legislation.

(35)

The Slovak authorities do not dispute the Commission’s
conclusion that
the debt under the
arrangement procedure was not made conditional upon
the implementation of the plan submitted by Konas to

the write-off of

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the supervising court pursuant to the Bankruptcy Act.
They have, however,
to the Commission a
sent
from January 2005 entitled ‘Evaluation of
document
the company on the date of
(the
evaluation), which had been prepared by Konas and
submitted to the tax office. The Slovak authorities
contend that
the company would
allow the Commission to assess whether the aid had
been limited to the strict minimum necessary.

the arrangement’

this evaluation of

(38)

(36)

The evaluation first describes the activity of Konas since
it was set up in 1992 and includes information on
turnover and operating results between 1993 and 2003.

(37) According to the evaluation, the reason for Konas’s diffi-
culties was high credit exposure linked to production
start-up in 1993 which the volume of production was
not able to cover. Between 1994 and 1996 Konas ac-
in particular towards the tax office,
cumulated debt,
then partly collected by execution and
which was

partly carried over until it was eventually partly repaid
and partly written off under the arrangement procedure.

products.

The evaluation then includes a short market analysis
where it examines the competitive environment in all
the sectors in which Konas is active (5). It describes the
position and prospects of Konas in each of these sectors
and concludes that there is particular growth potential in
tools, protection shields and other
the production of
mechanical
it
In
engineering
contrast,
proposes cutting back production of
single-purpose
machinery and small-scale made-to-order production
emergency
(production of unavailable
repairs). The prospects
the
company’s products lie in the development of the auto-
mobile industry in Slovakia and in the clear signs of
greater interest on the part of EU companies, bolstered
by Slovakia’s EU accession. Konas sees itself competitive
with its know-how in respect of technologies that have
development potential.

for greater demand for

spare parts,

(39)

The evaluation further describes Konas’s capacity as being under-utilised, a problem that should be
addressed by investment in a computerised milling machine. The measures to be adopted between
together with the financial restructuring
2004 and 2008 are set out
undertaken.

in the following table,

Table 2

Restructuring measures according to the evaluation (in SKK)

Measure

Implemen-
tation

Cost

Financing

Marketing

Development of
technologies

Wire cutting

NC milling

Sparking

NC lathing

Organisation

Client management IT
system

Training of young workers

Financial restructuring

Repayment of debt

Write-off

— by the State

2005

2004

2006

2007

2008

2005

2007

2004

2004

500 000

Konas resources

1 500 000

Konas resources

4 000 000

Loan

2 500 000

Loan

1 500 000

Loan

500 000

Konas resources

500 000

Konas resources

1 602 769

Konas resources, cash

9 730 739

State resources

— by other creditors

717 388

External resources

Total

23 050 896

(5) The Commission had already been provided with this information
by the Slovak authorities before it adopted the decision to open the
investigation procedure (see paragraph 4 of that decision).
formal

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(40)

results

the evaluation contains a forecast of Konas’s
Finally,
operating
the period 2005 to 2009,
showing that the above measures should contribute to
higher profitability. Turnover should grow by 10 % a
year as of 2005.

for

(41) According to the Slovak authorities, the evaluation dates
from January 2005. It is clear that the evaluation was
the
prepared
before
arrangement and to analyse its prospects after
the
arrangement.

assess Konas’s

situation

to

(42) As to the question of whether the aid was limited to the
minimum necessary,
the Slovak authorities confirmed
that on 31 March 2004 Konas had SKK 3,9 million in
cash, which was needed to cover wages (SKK 730 000),
the obligations towards the creditors participating in the
arrangement
(SKK 1 602 769) and the arrangement
procedure fees (SKK 140 000).

VI. ASSESSMENT

1. Competence of the Commission

(43) 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.

(44) Measures that were put into effect before accession and
are no longer applicable after accession cannot be
examined by the Commission either under what
is
known as the interim mechanism procedure, governed
the Accession Treaty, or
by Annex IV, point 3 of
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
such measures.

(45) However, measures put into effect after accession 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 (6).

(47) Accordingly,

the question of whether the measure is

applicable after accession no longer arises.

(48)

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

(49) 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
competition by favouring certain undertakings or the
production of certain goods and affects trade between
Member States is incompatible with the common market.

(50) Writing off a debt towards a public authority such as a
tax office involves State resources. Since it benefits an
the measure is selective. The
individual undertaking,
company is active in the production of
industrial
machinery and equipment, a sector
in which trade
exists between Member States.

(51)

(52)

In the decision to initiate the procedure of Article 88(2)
of the EC Treaty, the Commission raised doubts as to
whether the measure distorted or threatened to distort
competition by conferring on the recipient 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 Konas.

conditions

arrangement

It was established that the agreement contained the same
debt
for both the private
creditors and the tax office: 13,3 % of the debt was to
be paid to the creditors within a prescribed period, a
requirement with which the recipient complied. The
remaining 86,7 % was written off.

(46)

The decision of the competent authority to write off
some of the claims was taken on 8 June 2004, when
the tax office agreed with the arrangement proposed by
Konas, i.e. after accession.

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

paragraph 74.

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

It

(54)

(55)

(56)

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in their view, the
The Slovak authorities submit that,
measure constitutes State aid. They acknowledge that,
at the time of the arrangement, the question of State
aid was simply not considered. The recipient,
for its
the measure is an act of voluntary
part, argues that
agreement between creditors and not State aid.

tax office suspended tax execution with regard to Konas’s
pre-2001 debt. This debt
from previous years was
eventually included in the arrangement procedure in
2003.

The Commission cannot accept the argument that the
arrangement procedure and the procedure for granting
State aid cannot overlap (7). It is not the purpose or the
form of the action on the part of the State but its result
that determines whether a given action involving State
resources confers on a company an advantage that it
otherwise would not obtain on the market.

(60) Moreover, the Commission notes that, according to the
information provided by the Slovak authorities in their
comments on the decision to initiate the procedure of
Article 88(2) of the EC Treaty, the book value of the
pledged real estate (SKK 3,2 million) did not correspond
to the level of the receivables secured by this pledge
(SKK 10,1 million). This means
the securities
required by the State were insufficient.

that

it had been,

that, however diligent

Similarly, the Commission cannot accept the recipient’s
argument
the
company could not have known that
the write-off
might constitute State aid. The EU rules on State aid
were applicable in Slovakia in the form of State Aid
reply to the recipient’s
Act No 231/1999.
the Slovak authorities rightly pointed out
comments,
in question
the measure
that
constituted State aid was not a matter
the tax
for
office but fell within the remit of the State Aid Office
before accession and within that of the Commission after
accession.

assessing whether

In their

(57)

The Commission’s doubts set out
in the decision to
initiate the procedure of Article 88(2) of the EC Treaty
as to whether the market economy creditor test was met
have not been allayed.

(58)

First,
the tax office, unlike the private creditors, was
entitled to initiate tax execution on its own initiative
through the sale of real estate, machinery or the firm
as a whole.

(59)

the tax office had recourse to this

legal
In fact,
instrument on a number of occasions to enforce its
claims against Konas (see recital 33), and Konas’s debt
towards the tax office was considerably reduced between
1998 and 2000. In their reply to the decision to initiate
the procedure of Article 88(2) of the EC Treaty, the
Slovak authorities submitted that the tax office did not
issue any further execution orders after 2001 because
Konas was complying with its tax obligations regularly
and on time. It is not clear, however, for what reason the

(7) Case T-152/99 Hamsa v Commission, p. 158: Article 87(1) of the
EC Treaty does not distinguish between State intervention measures
by reference to their causes or aims, but defines them in relation to
their effects.

(61)

It is established case-law that a continuous absence of
enforcement on the part of
the State of obligations
arising from tax and social security legislation might in
itself create an advantage by mitigating the burden that
the recipient should normally bear (8). It indeed appears
that the tax office’s non-enforcement of Konas’s tax obli-
gations, combined with manifestly insufficient security
for the State’s receivables over a period of two years
(2001 to 2002), constituted State aid. As these events
took place before the date of accession and were not
applicable thereafter, the Commission is not competent
to assess the compatibility of the action in question with
the earlier non-
the common market. However,
enforcement already constituted State aid,
the market
economy creditor principle can no longer be referred
to once the debt is later (partly) written off.

if

the arrangement,

(62) Under the tax execution procedure, a tax office can
directly sell
the assets (receivables and other current
assets, movable assets, real estate) of the debtor. At the
time of
the recipient had cash of
SKK 3,9 million (9). The value of the recipient’s cash
alone would have exceeded the tax office’s yield from
the arrangement
the
(SKK 1,5 million).
recipient had short-term receivables with a book value
of SKK 1,4 million and real estate with a book value of
SKK 3 million.

In addition,

(63)

involve administrative fees. Since it

Lastly, unlike bankruptcy proceedings,
would not
procedure that
office itself,
conducted in a speedy manner.

tax execution
is a
is initiated and controlled by the tax
it would be

it can be assumed that

(8) Case C-256/97, DM Transport.
(9) Balance sheet on 24 March 2004, one day before the supervisory
the

issued the decision permitting

initiation of

the

court
arrangement procedure.

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(64)

The Commission does not have sufficient information to
be able to assess what the yield would be from the sale
of the assets under bankruptcy proceedings in the event
of the recipient being liquidated. To the Commission’s
knowledge, neither Konas nor the tax office considered
the option of bankruptcy, which is why no further calcu-
lations were made in this respect.

(69)

The Commission therefore concludes that the measure in
question constitutes State aid within the meaning of
Article 87(1) of the EC Treaty.

(65)

The Commission therefore concludes that, if nothing else,
tax execution against the recipient’s assets would have
produced a higher yield than the arrangement.

(70)

The State aid granted to the recipient comprises the
amount of the debt written off by the tax office under
the arrangement procedure, which is SKK 9 730 739
(EUR 256 000).

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

(66)

(67)

cannot be

tax revenue,

compared to a

and expected future

Finally, the Commission notes that it is established case-
law (10)
that socio-economic factors, such as regional
employment
are
excluded from the market economy creditor test. The
commercial
tax office
partner, such as a supplier who is a creditor of
the
recipient. It is important to note that the receivables of
a supplier and those of
the State are fundamentally
different in nature. Since the relationship between the
supplier and the insolvent firm has a contractual basis,
exceptionally the supplier may genuinely suffer from the
loss of the business partner. If the insolvent company
were liquidated, the supplier would have to find a new
client or conclude a contract with the new owner. The
the supplier’s dependency on the insolvent
greater
company, the higher the risk involved. In contrast, the
relationship between the State and the insolvent firm is
based on public law and is, therefore, not dependent on
the will of the parties. Any new owner who took over
the assets of the liquidated firm would automatically be
obliged to pay taxes. Furthermore,
the State is never
dependent on a single taxpayer. Finally and most im-
portantly, when levying taxes, the State is not profit-
driven and does not act on a commercial basis or on
commercial considerations. The analogy with a business
partner is therefore not well-founded.

The Commission therefore concludes that
future
applying the market economy creditor principle.

the loss of
taken into account when

cannot be

taxes

(71)

In such cases,

the measure is to assist a
The primary objective of
company in difficulty.
it is possible to
apply the exemption laid down in Article 87(3)(c) of
the EC Treaty provided that the relevant conditions are
met; under the exemption, State aid may be granted to
facilitate the development of certain economic activities
provided that
trading
conditions to an extent contrary to the common interest.

it does not adversely affect

(72)

Rescue and restructuring aid to ailing companies is
currently governed by the Community guidelines on
State
in
rescuing and restructuring firms
difficulty (11)
(the New Guidelines), which replaced the
previous text adopted in 1999 (12) (the 1999 Guidelines).

aid for

(73) Under their transitional provisions, the New Guidelines
apply to the assessment of any rescue or restructuring aid
granted without
the authorisation of the Commission
(unlawful aid) where 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, first subparagraph). Aid unlawfully granted
before 1 October 2004 is to be assessed on the basis of
the guidelines applicable at the time when it was granted
(point 104, second subparagraph).

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

(74)

The Commission notes that the tax office’s approval of
the arrangement was issued on 8 June 2004 and took
effect on 2 August 2004. Therefore,
the aid was
unlawfully granted before 1 October 2004. This means
that the applicable guidelines are the 1999 Guidelines in
force at the time when the aid was granted.

(10) See mutatis mutandis Cases C-278/92, C-279/92 and C-280/92
Spain v Commission, pp. 21 and 22; Case T-198/01 Technische
Glaswerke Ilmenau GmbH, pp. 106 to 108.

(11) OJ C 244, 1.10.2004, p. 2.
(12) OJ C 288, 9.10.1999, p. 2.

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(75)

The Commission takes note that the recipient is a small
enterprise within the meaning of Commission 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 (13).

3.1.

Eligibility of the firm

(76) Under point 5(c) of

the 1999 Guidelines, a firm is
regarded as being in difficulty where it
the
criteria under domestic law for being the subject of
collective insolvency proceedings.

fulfils

to the supervising court

conditional on implementation of a restructuring plan of
the type described in paragraph 80. These doubts have
not been allayed. Formally speaking, the tax office as the
granting authority did not have any obligation or
competence to evaluate the list of measures addressed
by Konas
(see recital 20)
under the arrangement procedure or to make the write-
off of
its receivables conditional on duly monitored
implementation of these measures. There is no direct
link between the granting of the aid by the tax office
recipient. The
and the measures proposed by the
Commission therefore concludes that
formal
condition was not met.

the first

(77)

The recipient was a party to an arrangement procedure,
insolvent
which is one of
companies under the Bankruptcy Act. The recipient is
therefore eligible for restructuring aid.

the options available for

(82) However, after the opening of the formal

investigation
procedure, the Slovak authorities submitted an evaluation
of the company as described in recital 35. The evaluation
clearly addresses the situation of Konas at the time of the
arrangement with its creditors. It describes the circum-
stances that led to the recipient’s difficulties and identifies
measures to address these difficulties.

3.2.

Restructuring aid

(78)

In its decision to initiate the procedure of Article 88(2) of
the EC Treaty,
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.

(83)

The restructuring is not limited to debt restructuring. The
recipient plans to undertake investments in new tech-
forward-looking
nologies and IT and to implement
measures in the area of
training and marketing. The
evaluation analyses the position and prospects of Konas
on the specific market segments in which it is active.

3.2.1. 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

(79) According to the 1999 Guidelines,

the granting of
restructuring aid must be tied 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 this plan, which must
be
the
the Commission.
company to implement the plan is regarded as misuse
of aid.

endorsed by

Failure by

(80)

In substance, the restructuring plan must be such as to
enable the recipient
to restore its long-term viability
within a reasonable timescale and on the basis of
realistic assumptions as to future operating conditions.
It should describe the circumstances that led to the re-
cipient’s difficulties and identify appropriate measures to
address these difficulties. The restructuring measures may
not be limited to financial aid designed to make good
debts and past losses without tackling the underlying
reasons for the difficulties.

(81)

In its decision to initiate the procedure of Article 88(2) of
the EC Treaty, the Commission expressed doubts that the
tax office had made its decision to write off Konas’s debt

(13) OJ L 10, 13.1.2001, p. 33. Regulation as last amended by Regu-

lation (EC) No 1976/2006 (OJ L 368, 23.12.2006, p. 85).

(84) Unlike the list of measures submitted to the court under
the arrangement procedure, the evaluation contains the
elements required for a restructuring plan under the
the
1999 Guidelines. The Commission considers
evaluation to be essentially a restructuring plan for the
period 2004 to 2008; it is designed to restore the long-
term viability of Konas and is appropriate in view of the
size of the recipient. The financial restructuring in the
form of the arrangement with the creditors is the first
step in this restructuring. Konas’s main problem was the
debt incurred in the second half of the 1990s. Since
2001, Konas has been paying its current
liabilities
under public law correctly and in due time. The
Commission has no reason to doubt Konas’s ability to
restore its long-term viability after the measures included
in the evaluation,
including the debt restructuring, are
implemented.

(85)

it

formally speaking,

The Commission notes
the
that,
evaluation was not produced until after the arrangement
is
with creditors had been secured. Nevertheless,
obvious that the evaluation was directly linked to the
It was submitted to the tax
arrangement procedure.
office before the notification of
the measure to the
Commission, at a time when the Slovak authorities
believed that it would constitute State aid only if the
from the State’s
tax receivables were written off
accounts. It nonetheless remains the case that the aid
was not formally made conditional on implementation
of the plan by the tax office as the granting authority.

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(86)

(87)

that

The Commission considers that, by way of an exception
in this specific case, this formal defect can be remedied.
This exception is justified firstly in accordance with point
55 of
the
the 1999 Guidelines, which states
conditions for granting aid for restructuring may be
applied less strictly in the case of small businesses,
such as the recipient. Second, the exception is permissible
because, even though the aid had already been granted, it
had not yet been paid out to the recipient (debt write-off
requires an additional administrative act on the part of
the
in
accordance with Article 7(4) of Council Regulation (EC)
No 659/1999 of 22 March 1999 laying down detailed
rules
the EC
the application of Article 93 of
Treaty (14), the Commission has decided to attach the
following conditions to this Decision.

recital 16). Consequently,

tax office;

see

for

the Slovak authorities are to ensure that

Firstly,
the
evaluation is properly implemented. Secondly, they are
to inform the Commission as to how they will ensure
that the evaluation is implemented. Finally, they are not
to disburse the aid (i.e. write off the receivables in the tax
office’s
the
Commission of
the
evaluation is implemented and how they intend to do so.

their undertaking to ensure that

accounts)

notified

until

have

they

3.2.2. 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

(88) Under point 40 of the 1999 Guidelines, the amount and
the aid must be limited to the strict
intensity of
minimum needed
to be
undertaken in light of the existing financial resources
of the recipient. The recipient is expected to make a
significant contribution to the restructuring from its
own resources.

restructuring

to enable

turing of Konas (described as resources of Konas in the
evaluation, see Table 2 in recital 39) constitute a real and
actual contribution to the restructuring costs.

(91)

The 1999 Guidelines did not contain any thresholds
indicating when the own contribution of the recipient
is considered to be significant.

(92)

In view of its practice in applying the 1999 Guidelines
and the change in its policy in this respect towards the
introduction of thresholds under the New Guidelines (15),
the Commission considers that the contribution of 42 %
can be termed significant and that the aid was limited to
the minimum necessary.

(93)

(94)

3.2.3. L i m i t a t i o n o f u n d u e d i s t o r t i o n o f

c o m p e t i t i o n

For the sake of completeness, the Commission notes that,
in accordance with point 55 of the 1999 Guidelines, the
granting of restructuring aid to small enterprises is not
usually linked to compensatory measures. The distortion
of competition caused by the aid at issue is limited and
compensatory measures are, therefore, not required.

VII. CONCLUSION

the

The Commission finds
Slovak Republic
that
unlawfully granted the write-off of Konas’s tax debt in
breach of Article 88(3) of the EC Treaty. This aid is
nevertheless compatible with the common market as
is made
restructuring aid, provided that
conditional on the implementation of the restructuring
plan,

its payment

(89)

In its decision to initiate the procedure of Article 88(2) of
the EC Treaty, the Commission expressed doubts as to
whether this criterion was met. These doubts have been
allayed in view of the information on the restructuring of
the recipient contained in the evaluation.

(90) According to the evaluation,

the restructuring costs
amount
to SKK 23 050 896. The restructuring was
financed partly through a cash contribution by Konas
(payment of
the debt of SKK 1 602 769 outstanding
after the arrangement) and partly through bank loans
with no State aid element
totalling SKK 8 million.
These contributions clearly constitute own resources of
the recipient and external resources with no State aid
the restructuring
element and cover about 42 % of
costs. The Commission does not need to determine
whether the other sources of financing for the restruc-

HAS ADOPTED THIS DECISION:

Article 1

The State aid which the Slovak Republic has implemented for
Konas, amounting to SKK 9 730 739, is compatible with the
common market, subject to the conditions set out in Article 2.

Article 2

1.
The Slovak Republic shall take all necessary measures to
ensure that Konas’s restructuring plan is properly implemented.

The Slovak authorities shall

2.
inform the Commission on
how they will ensure that the restructuring plan is implemented.

(14) OJ L 83, 27.3.1999, p. 1. Regulation as last amended by Regulation

(15) The threshold for small enterprises under the New Guidelines is at

(EC) No 1791/2006 (OJ L 363, 20.12.2006, p. 1).

least 25 %.

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They shall not grant the aid until they have informed the Commission of their undertaking to ensure

3.
that the restructuring plan is implemented and how they will do so.

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

Article 3

This Decision is addressed to the Slovak Republic.

Article 4

Done at Brussels, 26 September 2006.

For the Commission

Neelie KROES
Member of the Commission