2007/494/EC: Commission Decision of 7 March 2007 on State aid C 41/2004 (ex N 221/2004) Portugal Investment aid to ORFAMA, Organização Fabril de Malhas S.A. (notified under document number C(2007) 638) (Text with EEA relevance)
Date: 2007-03-07
Institutions: European Commission
Subjects: Poland, Portugal, State aid, clothing industry, control of State aid, investment abroad, investment aid, tax relief, textile industry

L 183/46

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Official Journal of the European Union

13.7.2007

COMMISSION DECISION

of 7 March 2007

on State aid C 41/2004 (ex N 221/2004) Portugal Investment aid to ORFAMA, Organização Fabril
de Malhas S.A.

(notified under document number C(2007) 638)

(Only the Portuguese version is authentic)

(Text with EEA relevance)

(2007/494/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

II. DETAILED DESCRIPTION OF THE AID

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

(5)

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

Having called on interested parties to submit their comments
to those provisions (1) and having regard to their
pursuant
comments,

Whereas:

I. PROCEDURE

(1)

(2)

(3)

(4)

By letter of 5 May 2004 (registered as received on 19
May), Portugal notified the Commission of its intention
to provide aid to Organização Fabril de Malhas S.A.
(hereinafter
to help finance an
investment by the company in Poland. The Commission
requested further information by letter of 15 July 2004,
to which Portugal replied by letter of 30 September
2004 (registered as received on 5 October).

‘ORFAMA’)

in order

By letter of 6 December 2004, the Commission informed
Portugal that it had decided to initiate the procedure laid
down in Article 88(2) of the EC Treaty in respect of the
aid.

By letter of 4 February 2005 (registered as received on 9
the Portuguese authorities presented their
February),
comments
the above-mentioned
in the
procedure.

context of

The Commission decision to initiate the procedure was
published in the Official Journal of the European Union (2).
The Commission called on interested parties to submit
their comments. There were no comments from third
parties.

(6)

(7)

(8)

(9)

The beneficiary

ORFAMA is a producer of fashion knitwear located in
Braga, a region falling under Article 87(3)(a) of the EC
Treaty. It was set up in 1970. It has 655 employees and
an annual turnover of about EUR 25 million. It owns
‘Marrantex’. The
45 % of another garment producer
company sells most of
its products in the European
Union (50 %), the United States and Canada (38 %) and
Japan (5 %) (3).

The project

two textile
The project consists in the acquisition of
companies, Archimode SP and Wartatex SP,
located in
Lodz, Poland. Both companies are involved in clothing
production.

ORFAMA started working with the Polish companies in
1995 under a subcontracting arrangement whereby these
some 30 % of ORFAMA’s
companies accounted for
turnover. ORFAMA then decided to consolidate its
presence in Poland and in Eastern European markets by
acquiring the two Polish companies.

The Portuguese authorities noted that ORFAMA will
maintain the capacity currently installed in Portugal
without relocating activities to Poland. The objective of
the project is to raise the volume of production, to free
up capacity in Portugal for the manufacture of higher-
value-added products and to gain access to the German
and Eastern European markets.

The Portuguese authorities considered that this project
would contribute to strengthening the competitiveness
of
the textile industry in the European Union, given
that both ORFAMA and the Polish companies face
in
mounting
from Asian
particular China. The project was
in
December 1999.

countries,
completed

competition

(1) OJ C 14, 20.1.2005, p. 2.
(2) See footnote 1.

(3) All figures as provided in the notification.

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The aid

(10)

The investment in acquiring both companies amounted
to EUR 9 217 516 (EUR 8 900 205 for Archimode and
EUR 317 311 for Wartatex). ORFAMA financed 97 % of
the investment with bank loans and the remainder with
own capital.

It shuld be noted that, at the
Portuguese companies.
time the project was carried out and the aid applied
for, Poland was not yet a member of
the European
Union. The investment thus qualifies as foreign direct
investment under the relevant Portuguese aid scheme.

(16)

(17)

(11)

Portugal intends to grant ORFAMA a tax credit of EUR
921 752, corresponding to 10 % of
the total eligible
investment costs for the above-mentioned project.

(12)

The measure was notified under a Portuguese scheme for
promoting the modernisation and internationalisation of
economic agents (4). This scheme requires aid to large
companies to be notified on an individual basis.

(13)

The Portuguese authorities explained that the request for
aid was presented on 31 March 2000. The project was
carried out just before this date for strategic reasons, on
the assumption that it would be eligible for aid under the
relevant Portuguese legislation. Internal delays meant that
the Portuguese authorities notified the aid only in January
2004.

effects

against possible negative

In these cases the Commission normally weighs the
benefits of the measure, in terms of its contribution to
the EU industry
the international competitiveness of
concerned,
in the
Community, such as the risks of relocation and any
adverse impact on employment. The Commission also
takes into account the necessity of the aid by reference
to the risks associated with the project in the country
concerned as well as to the deficiencies of the company,
such as those faced by SMEs. One other criterion relates
to a possible positive
the
Commission excludes any aid to export-related activities.

impact. Lastly,

regional

In this connection the Commission noted that, as the
investment was taking place in a Member State of the
European Union,
aid on the
Community market was likely to be greater than in the
case of aid for a project in a third country.

impact of

the

the

(14)

(15)

III. GROUNDS FOR INITIATING THE PROCEDURE

the present case, stated that

The Commission, in its decision to initiate the procedure
it would
in respect of
examine the measure in the light of
the derogation
the EC Treaty in order to
under Article 87(3)(c) of
determine whether the aid could be considered as faci-
litating the development of a certain economic activity
without adversely affecting trading conditions to an
extent contrary to the common interest.

The Commission also stated that it would examine the
measure on the basis of the criteria normally used for
foreign direct
assessing aid to large companies
this
investment
case to cases of investment aid outside the European
Union. The measure was notified under a Portuguese
internationalisation of
the
scheme

(FDI) projects, given the similarity of

for promoting

for

(4) N 96/99 (OJ C 375, 24.12.1999, p. 4).

(18)

The Commission also questioned what the impact would
be on employment and other factors for the regions
concerned or indeed for the relevant industries in both
Member States, as well as whether the same project
would receive aid from Poland.

(19)

It was also doubtful whether the aid was necessary
and/or provided any incentive for the applicant to carry
out the investment since the project had been completed
even before ORFAMA applied for State aid. Lastly, the
could
Commission questioned whether
qualify as ‘initial investment’ within the meaning of the
It
Commission national
regional
requested Portugal
to submit comments and provide
any information that might help with the assessment
of the case.

aid guidelines (5).

the project

(5) See point 4.4 of the Guidelines on national regional aid (OJ C 74,
10.3.1998, p. 9). According to these guidelines, initial investment is
investment in fixed capital relating to the setting-up of a new estab-
lishment, the extension of an existing establishment or the starting-
up of an activity involving a fundamental change in the product or
production process of an existing establishment (through rationali-
sation, diversification or modernisation). Initial investment is defined
by reference to a set of eligible items of expenditure (land, buildings
and plant/machinery, intangible assets and/or wage costs).

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(20)

(21)

(22)

(23)

IV. COMMENTS SUBMITTED BY THE PORTUGUESE
AUTHORITIES

economic

and Wartatex were

took place within the European Union,

The Portuguese authorities noted that, although the
investment
it
links with
contributed to strengthening
Eastern European markets. They stated that ORFAMA,
located in assisted
Archimode
rates. The textile
regions with high unemployment
in Poland and
industry accounts
95 446 jobs
in the
in Portugal. Employment
industry declined by 15 percentage points between
2000 and 2003 in Portugal. The Portuguese authorities
in this context, ORFAMA’s investment
considered that,
in both the
contributed to maintaining employment
source and the host country and would have a positive
impact on the regions concerned.

for 331 000 jobs

rates

investment project by ORFAMA.

The Portuguese authorities considered that the necessity
of the aid was justified by the fact that this was the first
It
foreign direct
required
EUR
9 217 516, of which EUR 8 978 362 was financed by
bank loans and the remainder by the company’s own
capital. The aid would compensate ORFAMA for part
of this effort.

significant

financial

effort

of

a

The project also aims to modernize production and
information technologies in the Polish companies with
a view to increasing productivity and improving product
quality and energy efficiency. ORFAMA intended to
the
replace industrial equipment.
Portuguese authorities, the project thus contributes to
facilitating the development of an economic activity
within the meaning of Article 87(3)(c) of the EC Treaty.

In the opinion of

a pre-existing

Lastly,
the aid
the Portuguese authorities argued that
would not have a negative impact on intra-Community
in question concerned simply
trade. The investment
consolidates
relationship,
from a subcontracting situation to one of ownership.
In support of this argument, the Portuguese authorities
provided statistics showing that between 1999 (when the
investment took place) and 2003 ORFAMA’s sales in
Poland remained stable. In the same period ORFAMA’s
overall sales in the EU actually declined.

commercial

(24)

Similarly, Poland’s own exports to the EU of the products
concerned also declined during this period.

(25)

There were no comments from third parties.

V. ASSESSMENT

Presence of aid within the meaning of Article 87(1)
of the EC Treaty

(26) Under Article 87(1) of the EC Treaty, ‘any aid granted by
a Member State or through state resources in any form
whatsoever which distorts or threatens to distort compe-
tition
the
certain
production of certain goods shall, in so far as it affects
trade between Member States, be incompatible with the
common market’.

undertakings

favouring

by

or

(27)

(28)

(29)

an investment

The Commission, in its decision of 6 December 2004,
concluded that the aid fell within the scope of Article
87(1) of the EC Treaty for the following reasons: by
helping ORFAMA to carry out
in
Poland, the notified measure favours a certain under-
taking or the production of certain goods; the industry
trade
concerned (textiles)
within the European Union and the aid may thus
distort competition there; and the aid is
financed
through state resources. These conclusions have not
been contested by the Portuguese authorities and are
hereby confirmed.

is the subject of substantial

Compatibility of the aid with the EC Treaty

it would assess the
The Commission indicated that
compatibility of the aid with the EC Treaty in the light
of the derogation under Article 87(3)(c) of the Treaty,
which authorises aid ‘to facilitate the development of
certain economic activities’ where such aid does not
adversely affect trading conditions to an extent contrary
to the common interest.
therefore, assess
whether the aid will contribute to the development of
fashion knitwear and clothing production and/or other
in the European Union without
economic activities
adversely affecting trading conditions between Member
States.

It must,

In the decision to initiate the procedure, the Commission
also noted that it would take into account certain criteria
which it had applied in previous cases of aid to large
companies for outward foreign direct investment projects
(see paragraph 16) with a view to striking a balance
between the benefits of the measure in terms of contri-
buting to the international competitiveness of the EU
industry concerned (e.g. whether the aid is necessary by
reference to the risks associated with the project in the
country of investment) and its possible negative effects
on the EU market.

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The necessity of the aid

(30) As a general principle of State aid legislation, in order for
aid to be compatible with the common market, it must
be demonstrated that
the aid leads to an additional
activity by the beneficiary which would not be carried
out without the aid. Otherwise, the aid would simply
distort without having any positive counter-effect.

(34)

(31)

The Commission doubted already in the decision to
initiate the procedure that
the aid was necessary for
ORFAMA to carry out this investment.

context of an existing commercial relationship, rather
than a first substantive foreign investment (6).

The Commission also emphasises that ORFAMA applied
for the aid only after the project had been completed and
so did not comply with the ‘incentive effect’ criterion
normally required by the Community rules on national
that ORFAMA was
also notes
regional
apparently able to finance the investment out of own
loans
resources
obtained even before it applied for the aid.

to commercial

resorting

and by

aid (7).

It

(32) According to the information available, ORFAMA is a
well-established producer in the EU market, producing
for well-known brands as well as under its own brand.
The Portuguese authorities argued here that this was the
first foreign direct investment project of ORFAMA and
that the project involved risks relating to structural and
cyclical aspects of the Polish market (namely the fact that
Poland was in the process of negotiating accession to the
European Union) and to conditions inherent
in the
structural factors of the promoter and of the country
of origin. However, they did not specify the exact form
that such risks took.

(35) Accordingly, the Commission concludes that Portugal has
failed to demonstrate that the proposed aid is necessary
to compensate for any specific risks associated with the
project.

The impact of the aid on the Community market

(36)

The Commission has maintained in previous cases that
aid for foreign direct investment is likely to strengthen
the beneficiary’s overall financial and strategic position
and thus affect its relative position with regard to compe-
titors on the EU market (8).

(33)

a

accounted for

arrangements with

subcontracting
In 1995 these

these companies before carrying out

The Portuguese authorities considered that the necessity
of the aid was justified by the fact that this was the first
investment project of ORFAMA. The
foreign direct
that ORFAMA’s
Commission, however, notes here
business relations with Archimode and Wartatex started
in the 1990s, when ORFAMA began producing garments
under
these
two Polish companies
companies.
some 30 % of ORFAMA’s
already
turnover. ORFAMA was therefore familiar with the func-
the
tioning of
project and thus has experience of both the Polish and
international markets. Indeed, the beneficiary’s objective
of expanding production and gaining access to the Polish
and neighbouring markets was already partly met even
prior to acquiring these companies or applying for aid.
Portugal itself seemed to confirm this assessment when it
stated in the notification that ORFAMA’s decision to
the
in Poland was determined partly by
invest
the
the beneficiary already had of
knowledge that
Polish market
acquired,
the
and of
thereby limiting the risks associated with the investment.
The Commission, therefore, considers that the investment
in question was essentially a financial operation for
concerned in the
acquiring the Polish companies

companies

it

(37)

is

and

Portuguese

investment

to increase productivity by

Portugal has argued in this respect that the objective of
the
to allow ORFAMA to expand
production, which has reached its capacity limits in
Portugal,
taking
lower costs and a generally skilled and
advantage of
younger workforce in Poland. However, according to
the
also
contribute
to strengthening the European industry
concerned by increasing the supply of products of EU
origin and by promoting EU brands in the face of
increasing competition from imports. For Portugal,
such as ORFAMA (and,
granting aid to companies
indirectly, Archimode and Wartatex)
to
ensuring that the EU textile industry remains competitive
on EU and international markets.

this project will

is essential

authorities,

(6) A similar concept to that applied in point 4.4 of the Guidelines on
see

regional aid, which relates

investment’;

to ‘initial

national
footnote 5.

(7) See point 4.2 of the Guidelines on national regional aid, which states
that an application for aid must be submitted before work on the
project is started in order to ensure that the required incentive effect
exists (OJ C 74, 10.3.1998, p. 13).

(8) See Commission Decision 1999/365/EC in Case C 77/97 (Austrian

LiftGmbH – Doppelmayr).

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(38)

(39)

(40)

that

the present
The Commission notes, however,
investment is located in a country (Poland) that is now
a member of
the EU. The aid would affect a sector
(textiles) which is presently under considerable pressure
from the liberalisation of imports in January 2005. Other
EU companies may be interested in reorganising them-
selves along similar lines to ORFAMA and the aid would
thus give ORFAMA an advantage in comparison with
companies that do not benefit from such aid.

the

also stressed that

aid would benefit
Portugal
employment
in both the Portuguese and the Polish
regions concerned (Braga and Lodz respectively), which
are assisted regions with high unemployment rates (see
paragraph 20), but did not specify the way in which the
aid could have an impact on employment
in those
regions.

Lastly, the Commission notes that, even if the investment
by ORFAMA could have a positive impact on the regions
concerned (which was not demonstrated), this cannot, in
principle, be attributable to the aid since, as explained
above, the aid has no incentive effect in this case as the
project was concluded prior to ORFAMA’s requesting the
aid and was not necessary to carry out the investment.

(41) When assessing the compatibility of aid, the Commission
takes a close look at the balance between its positive and
negative effects and determines whether its beneficial
effects for the Community outweigh its negative effects
on competition and trade on the Community market. On
the basis of the above, it is not convinced that granting
aid to ORFAMA in respect of its investment in Poland
would help to improve the competitiveness of
the
European industry or would have a positive impact on
the EU regions concerned. On the contrary,
the aid
would be likely to strengthen the position of the bene-
ficiary to the detriment of its competitors not receiving
State aid in a market that is characterised by intensive
competition and trade. Therefore,
the Commission
the aid does not have any positive
considers

that

the Community that would outweigh its
effects for
negative impact on competition and trade on the
Community market.

VI. CONCLUSION

(42) On the basis of the above, the Commission concludes
that the Portuguese authorities have failed to demonstrate
that the aid is necessary for ORFAMA to carry out the
investment concerned. The aid would thus simply have a
distorting effect on competition in the common market
without contributing to any additional activity on the
part of the beneficiary. On this basis, the aid cannot be
considered to facilitate the development of an economic
activity within the meaning of Article 87(3)(c) of the EC
Treaty without adversely affecting trading conditions to
an extent contrary to the common interest and is
therefore incompatible with the common market,

HAS ADOPTED THIS DECISION:

Article 1

The tax incentive of EUR 921 752 proposed by Portugal for
ORFAMA (Organização Fabril de Malhas S.A.) for its investment
in Poland is incompatible with the common market since it
does not meet the criteria under Article 87(3)(c) of the EC
Treaty and must not therefore be implemented.

Article 2

This Decision is addressed to the Portuguese Republic.

Done at Brussels, 7 March 2007.

For the Commission

Neelie KROES
Member of the Commission