2007/581/EC: Commission Decision of 24 April 2007 on State aid C 26/2006 (ex N 110/2006), temporary defensive mechanism to shipbuilding — Portugal (notified under document number C(2007) 1756) (Text with EEA relevance )
Date: 2007-04-24
Institutions: European Commission
Subjects: Portugal, State aid, control of State aid, shipbuilding

24.8.2007

EN

Official Journal of the European Union

L 219/25

COMMISSION DECISION

of 24 April 2007

on State aid C 26/2006 (ex N 110/2006),

temporary defensive mechanism to shipbuilding

— Portugal

(notified under document number C(2007) 1756)

(Only the Portuguese version is authentic)

(Text with EEA relevance)

(2007/581/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(6)

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

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

(7)

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

Whereas:

(1)

(2)

(3)

(4)

I. PROCEDURE

By letter dated 7 February 2006 (registered on 10
February 2006), Portugal notified the Commission of
its intention to grant operating aid to Estaleiros Navais
de Viana do Castelo SA (ENVC). By letter dated 13 March
2006, the Commission requested further clarifications,
which Portugal provided by e-mail dated 28 April 2006.

(8)

(9)

By letter dated 23 June 2006, 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 dated 25 July 2006 (registered on 26 July
2006),
their
comments
abovementioned
procedure.

authorities presented

context of

Portuguese

in the

the

the

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.

II. DETAILED DESCRIPTION OF THE AID MEASURE

(11)

(5)

The aid is intended for Estaleiros Navais de Viana do
Castelo SA (ENVC), a Portuguese shipyard currently
employing some 1 000 people.

On 14 November 2003, ENVC signed a contract with a
French ship owner, Fouquet Sacops SA, for the delivery
of a chemical and oil
for the
contract price of EUR 22 900 000. The vessel was
delivered on 26 April 2005.

tanker (hull No 227),

Portugal proposes to grant ENVC aid for this contract in
the form of a grant of EUR 1 461 702 on the basis of
Council Regulation (EC) No 1177/2002 concerning a
temporary defensive mechanism to shipbuilding (3), as
amended by Council Regulation (EC) No 502/2004 (4)
(the TDM Regulation). The TDM Regulation entered
into force on 3 July 2002 and expired on 31 March
it was no longer in force at the time
2005; therefore,
Portugal notified the aid.

Portugal claims that the contract is nonetheless eligible
for aid under the TDM Regulation, on the following
grounds.

Article 4 of the TDM Regulation states that ‘This Regu-
lation shall be applied to final contracts signed from the
its expiry …’.
entry into force of this Regulation until
in
Portugal
in this
i.e. while
question was signed on 14 November 2003,
the TDM Regulation was still
in force, and therefore
remains eligible for aid.

the contract

respect

states

that

(10)

Portugal further argues that the contract in question was
the subject of lower price offers by Korean shipyards,
thus fulfilling the conditions of Article 2 of the TDM
Regulation and that the aid is thus justified to counter
unfair competition from Korean shipyards.

III. GROUNDS FOR INITIATING THE FORMAL
INVESTIGATION PROCEDURE

The Commission,
in its decision to initiate the formal
investigation procedure in the present case, stated that
it had doubts about the compatibility of the aid with the
common market based on the TDM Regulation for the
following reasons.

(1) OJ C 223, 16.9.2006, p. 4.
(2) See footnote 1 above.

(3) OJ L 172, 2.7.2002, p. 1.
(4) OJ L 81, 19.3.2004, p. 6.

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Official Journal of the European Union

24.8.2007

(12)

(13)

(14)

the Commission had doubts

concerning the
First,
in
incentive effect of the aid. The Commission noted,
this respect,
that Portugal had not provided evidence
that, at the time ENVC signed the contract, there were
any public assurances that the shipyard would obtain the
aid. On the contrary, Portugal did not have a TDM
scheme in place.
In addition, according to the infor-
mation available, the decision by the Portuguese autho-
rities to grant aid to ENVC (conditional on approval by
the Commission) was taken only on 28 December 2005,
i.e. long after the contract had been signed and the ship
delivered.
thus appeared that ENVC had not been
induced by State aid to sign the contract, given that
the aid was not available at the time the project was
concluded.

It

(17)

(18)

Second, the Commission questioned the legal basis for
approving the aid. The Commission pointed out that the
TDM Regulation had expired on 31 March 2005 and was
therefore no longer in force at the time Portugal notified
the aid. Although the TDM Regulation applied to
contracts signed during its period of application, it was
the Commission could still assess the
doubtful
notified measure on the basis of an instrument
that
was no longer part of EU law.

that

the

the Understanding on rules
settlement

In addition, the Commission noted that Korea had chal-
lenged the compatibility of the TDM Regulation with
WTO rules. On 22 April 2005, a WTO Panel had
issued its report concluding that the TDM Regulation
and several national TDM schemes existing at the time
when Korea initiated the WTO dispute were in breach of
and
Article 23.1 of
procedures
disputes
governing
(DSU) (5). On 20 June 2005,
the WTO Dispute
Settlement Body (DSB) had adopted the Panel report
including its
the Community
bring the TDM Regulation and the national TDM
schemes into conformity with its obligations under the
WTO Agreements (6). On 20 July 2005, the Community
had informed the DSB that it had already complied with
the DSB ruling and recommendations since the TDM
Regulation had expired on 31 March 2005 and
Member States could no longer grant operating aid
under it.

recommendation that

of

(15) Authorising the proposed aid would be tantamount to
continuing to apply the TDM Regulation in breach of the
Community’s obligation to comply with the DSB ruling.
The Commission, therefore, did not consider at that stage
that
in conformity with the
aid could be
Community’s international obligations.

the

(16)

Third, concerning the aid intensity,
the Commission
noted that the aid amount appeared to be in excess of
the contract value and thus contrary to the
6 % of

maximum aid intensity allowed by Article 2(3) of the
TDM Regulation.

IV. COMMENTS SUBMITTED BY PORTUGAL

Portugal noted that the aid amount referred to by the
Commission in the decision to initiate the formal inves-
not
tigation
correspond to the notified aid amount (EUR 1 461 702).

(EUR 1 401 702) (7)

procedure

did

Concerning the intensity of the aid, Portugal noted that,
the maximum aid
according to the TDM Regulation,
intensity was 6 % of the contract value before aid (as
opposed to 6 % of the contract value mentioned in the
Commission’s decision to initiate the formal investigation
procedure (8)) and that on this basis the aid intensity
complied with the TDM Regulation.

(19) More generally, Portugal noted that the objective of the
TDM Regulation was to counter unfair competition from
Korea and that all shipyards in the EU were subject to the
same conditions for obtaining aid under the Regulation.
In Portugal’s view, the aid did not therefore affect trade
in the common market and for this reason it was
doubtful that it could qualify as State aid under Article
87(1) of the EC Treaty.

(20)

(21)

Concerning the incentive effect, Portugal provided new
evidence showing that the shipyard had requested the aid
on 25 September 2003, i.e. prior to signing the contract.
In this context, Portugal submitted a copy of the letter
from the Portuguese authorities to the shipyard dated 26
in which the Portuguese authorities
September 2003,
acknowledged receipt of
aid and
request
reminded the shipyard that the aid was conditional on
approval by the Commission. According to Portugal, this
letter was indicative of the Portuguese authorities will-
ingness to grant the aid, provided all
legal conditions
were met.

the

for

Portugal further argued that, based on previous practice,
there was an understanding that requests for aid by the
shipbuilding industry would be supported by Portugal
provided there was a legal basis for doing so (in this
case, the TDM Regulation). The fact that the aid had
been formally approved by Portugal only in December
2005 was due to internal administrative delays. However,
this did not detract from the fact that the shipyard had
expectations of receiving the aid, based on the above
considerations
(see recital 20) and on the general
policy of the Portuguese authorities in this respect. The
shipyard had evidence that lower prices had been offered
by Korean shipyards in relation to the contract and
accepted the contract on the assumption that it would
receive the aid from the Portuguese authorities.

(5) See EC — Measures affecting trade in commercial vessels, WT/DS301/R,

paragraphs 7.184-7.222 and 8.1(d).
(6) See WTO document WT/DS301/6.

(7) Paragraphs 4 and 21 of that decision.
(8) Paragraphs 10 and 21 of that decision.

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Official Journal of the European Union

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(22)

Concerning the legal basis for approving the aid, Portugal
reiterated its comments in the notification to the effect
that the TDM Regulation was the appropriate basis for
approving the aid because the contract had been signed
while the TDM Regulation was still in force and, indeed,
prior to the TDM Regulation being condemned by the
DSB. Portugal noted that the situation was therefore no
different from that of aid measures granted by other
for contracts
Member States
(under TDM schemes)
in force. It
signed while the TDM Regulation was still
was the moment when the contracts were signed that
determined the eligibility of the contracts for aid, and
not the moment when the aid was notified or granted.
Portugal
the beneficiary
shipyards had been requested to reimburse the aid
following the WTO panel report. Failing to improve
the aid to ENVC would,
thus, be contrary to the
general principle of equal treatment.

also noted that none of

V. ASSESSMENT

(23) According to 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 competition by favouring certain undertakings or
in so far as it affects
the production of certain goods,
trade between Member States, is incompatible with the
common market.

(24)

The Commission considers that the proposed measure
constitutes State aid within the meaning of Article
87(1) of the EC Treaty:
it takes the form of a grant
financed by State resources; even if the TDM Regulation
applied in all Member States, as argued by Portugal, the
measure is selective as it is limited to ENVC; this selective
grant is likely to distort competition by providing ENVC
with an advantage over other competitors not receiving
aid.
activity
involving extensive trade between Member States. As
such, the measure affects trade between Member States.

an economic

shipbuilding

Finally,

is

6 % of the contract value before aid (9). The Commission
concludes
to the
maximum aid intensity allowed by the TDM Regulation.

the notified aid conforms

that

The incentive effect

(27) As a general principle, State aid may be considered
is
it
compatible with the common market only if
necessary to induce the recipient
in a
firm to act
manner which assists
the objectives
attainment of
envisaged by the relevant derogation (10).

(28)

(29)

the TDM Regulation was

The Commission notes in this respect that the objective
to ‘effectively enable
of
Community shipyards to overcome unfair competition
from Korea’ (see recital 6). Direct aid up to 6 % of the
contract value before aid could thus be authorised
provided there had been competition for
the same
contract
from a shipyard in Korea offering a lower
price (Article 2).

for Industry)

The new evidence supplied by Portugal shows that the
aid was requested by the shipyard prior to signing the
contract. In addition, Portugal provided a copy of a letter
from the relevant Portuguese authorities (Directorate-
to ENVC, dated 26 September
General
for aid,
the request
2003, acknowledging receipt of
requesting evidence of compliance with Article 2(1) of
the TDM Regulation (i.e. evidence that there was compe-
tition for the contract from a Korean shipyard offering a
lower price – this evidence was subsequently submitted
by the shipyard) and reminding the shipyard that the
granting of aid was subject to prior notification to and
approval by the Commission. The Commission considers
that the above facts were indicative of the willingness of
the Portuguese authorities to grant the aid, provided all
conditions were met. As the conditions for eligibility
these facts were
appeared to be met
bound to create
the
expectations on the part of
it would receive the aid (11). On this
shipyard that
the incentive
basis,
effect of the aid are allayed.

the Commission's doubts about

in this case,

(25)

the notified aid
The Commission thus confirms that
measure falls within the scope of Article 87(1) of the
EC Treaty.

Compatibility with the common market

The aid amount and aid intensity

(26)

Following the comments submitted by Portugal,
the
Commission confirms that the notified aid amount is
EUR 1 461 702. On the basis of Article 2(3) of
the
TDM Regulation, the maximum aid intensity allowed is

(9) Article 1(f) of Regulation (EC) No 1540/98 (OJ L 202, 18.7.1998,
p. 3), to which Article 2(6) of the TDM Regulation refers, states that
‘contract value before aid shall mean the price laid down in the
contract plus any aid granted directly to the yard’. On this basis, the
aid amount (EUR 1 461 702) corresponds to 6 % of the ‘contract
value before aid’
(EUR 22 900 000 + EUR 1 461 702) and
complies with the maximum intensity allowed.

(10) See judgment in Case 730/79 Philip Morris v Commission [1980]

ECR 2671, paragraphs 16 and 17.

(11) See, by analogy, Article 38 of the Guidelines on National Regional
Aid for 2007-13: ‘aid may only be granted … if the beneficiary has
submitted an application for aid and the authority responsible for
administering the scheme has subsequently confirmed in writing
that subject to detailed verification, the project in principle meets
the conditions of eligibility (…) before the start of the work on the
project’. In the case of aid subject to individual notification to and
approval by the Commission, confirmation of eligibility must be
made conditional on the Commission decision approving the aid
(OJ C 54, 4.3.2006, p. 13).

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The legal basis

(30)

In the decision to initiate the formal
investigation
procedure, the Commission noted that the TDM Regu-
lation had expired on 31 March 2005 and was therefore
no longer in force at the time when Portugal notified the
aid. Although the TDM Regulation applied to contracts
signed during its period of application, it was doubtful
the notified
that
the Commission could still assess
that was no
measure on the basis of an instrument
longer part of EU law.

(31)

following the
The comments
decision to initiate the formal
investigation procedure
have not allayed the Commission’s doubts on this issue.

submitted by Portugal

(32)

(33)

the time of

The Commission notes that, with regard to notified aid,
its practice is to base its assessment on the laws in force
the assessment (12), unless otherwise
at
internally
specified in the law in force itself. Portugal
approved
the
by
approval
Commission) and notified it to the Commission long
after the TDM Regulation had expired.

(subject

the

aid

to

Portugal maintains, in this respect, that the TDM Regu-
lation is applicable to the contract in question based on
Article 4 of the Regulation, which states that ‘This Regu-
lation shall be applied to final contracts signed from the
its expiry …’.
entry into force of this Regulation until
Portugal argues that
the contract was signed on 14
i.e. while the TDM Regulation was
November 2003,
still in force, and therefore remains eligible for aid.

(34) However, the Commission considers that Article 4 as
quoted above does not define the application in time
of the TDM Regulation. Rather, the temporal application
of the Regulation is defined in Article 5 (13), which states
that it ‘shall expire on 31 March 2005’.

(35)

In contrast, Article 4 establishes additional conditions for
the compatibility of the aid. This is also confirmed by the
second part of Article 4, which provides that the TDM
Regulation shall not apply to ‘final contracts signed
before the Community gives notice in the Official
Journal of the European Communities that it has initiated
dispute settlement proceedings against Korea (…) and
final contracts signed one month or more after the
Commission gives notice in the Official
the
settlement
European Communities
proceedings are resolved or suspended’.

these dispute

Journal of

that

(12) See case N 122/2005 ‘Unless otherwise specified, the Commission
the time of

applies to notified projects the rules in force at
assessment of their compatibility’.

(13) As amended by Council Regulation (EC) No 502/2004.

(36)

From the above, it is clear that the TDM Regulation was
only to be applied as long as there was a pending dispute
with Korea (14) and in any event, no later than 31 March
2005.

(37)

(38)

(39)

(40)

This interpretation is supported by the very objective of
the TDM Regulation: it was designed ‘as an exceptional
in order to assist Community
and temporary measure,
shipyards in those segments that have suffered adverse
effects
injury and serious
prejudice caused by unfair Korean competition, … [and
was to apply] for limited market segments and for a
short period only’ (15) (recital 3).

in the form of material

The fact that the Council did not renew this Regulation
following its expiry is a clear indication that it did not
intend to continue to authorise the Commission to
approve
is
compatible with the fact that the Community informed
the DSB that the Member States could no longer grant
operating aid under the Regulation.

the TDM Regulation. This

aid under

The Commission notes, in this context, that the interpre-
tation of the TDM Regulation must also be seen in the
the Community’s
international obligations.
light of
the Court of
According to the settled case law of
Justice, Community legislation must, as far as possible,
be interpreted in a manner that is consistent with inter-
national law, including the EC’s WTO obligations (16).

The Panel report and the DSB ruling adopting that report
condemned the TDM Regulation per
se for being in
breach of WTO rules and required the Community to
stop applying the TDM Regulation. The obligation of
the Community to implement
the DSB ruling also
covers future decisions to grant new aid in application
the TDM Regulation (17). The Community, by
of
informing the DSB that it had already complied with
the DSB ruling and recommendations given that
the
TDM Regulation had expired on 31 March 2005 and
Member States could no longer grant operating aid
under it, undertook not to authorise new aid under the
Regulation. Accordingly, approving the present aid would
the Community’s international
result
commitments.

in a breach of

(14) Recital 7 confirms

this assessment:

‘the temporary defensive
mechanism should only be authorised after
the Community
initiates dispute settlement proceedings against Korea (…) and
may no longer be authorised if these dispute settlement proceedings
are resolved or suspended (…)’.

(15) Our underlining.
(16) Case C-53/96 Hermès

International v FHT Marketing Choice BV
[1998] ECR I-3603, paragraph 28; Case C-76/00 P, Petrotub SA
and Republica SA v Council of
the European Union [2003] ECR
I-79, paragraph 57.

(17) See EC — Measures affecting trade in commercial vessels, WT/DS301/R,

paragraph 7.21.

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(41)

(42)

(43)

reasonable

it should also be noted that Portugal did not
Finally,
submit
time.
its notification within a
Portugal notified the measure only on 7 January 2006,
i.e. about 27 months after the shipyard had filed the
application for aid, 10 months after the TDM Regulation
had expired and 6 months after the Community had
informed the DSB that
the Member States could no
longer grant operating aid under the TDM Regulation.
Given the exceptional and temporary nature of the Regu-
lation, as well as the EC’s WTO commitments, of which
Portugal was aware, Portugal could not expect
the
mechanism to continue being applied beyond the date
of its expiry.

The Commission further notes that even if ENVC had
expectations of receiving the aid,
this did not entitle
the shipyard to receive the aid, which was dependent
not only on approval by Portugal but also on notification
to and approval by the Commission.

Similarly, and contrary to Portugal’s argument,
the
principle of equal treatment is not in question in the
present case. Shipyards in Member States which had a
TDM scheme in place were entitled to receive aid on the
basis of schemes that were approved by the Commission
before 30 March 2005, but the Commission has taken
no further decisions approving new aid under the TDM
Regulation since that date. Also, the Commission notes
that pursuant to the DSB ruling, the obligation to no
longer grant new aid under
the TDM Regulation
applies both to aid under approved schemes as well as
to ad hoc aid, thus making no distinction between aid to
shipyards covered by a scheme or, as in the case at hand,
ad hoc aid outside of a scheme (see paragraph 14 above:
the DSB ruling recommended that the Community bring
not only the TDM Regulation but also the national TDM

schemes into conformity with its obligations under the
WTO Agreements).

(44) On the basis of the above, the Commission concludes
that the notified aid cannot be approved under the TDM
Regulation. Since no other exemption clause under
Article 87(2) or (3) of the EC Treaty applies, the aid is
thus incompatible with the common market,

HAS ADOPTED THIS DECISION:

Article 1

The notified aid of EUR 1 461 702 that Portugal planned to
grant to Estaleiros Navais de Viana do Castelo SA in relation to
a contract signed by the latter cannot be authorised under
Council Regulation (EC) No 1177/2002 concerning
a
temporary defensive mechanism to shipbuilding, as amended
by Council Regulation (EC) No 502/2004, and is therefore
incompatible with the common market. The aid must not be
implemented.

Article 2

This Decision is addressed to Portugal.

Done at Brussels, 24 April 2007.

For the Commission

Neelie KROES
Member of the Commission