Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement on State aid with regard to the tax benefits for certain cooperative societies in Norway
Date: 2008-04-17
Institutions: EFTA Surveillance Authority
Subjects: EFTA, Norway, State aid, control of State aid, cooperative, exchange of information, tax relief

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Official Journal of the European Union

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Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance
and Court Agreement on State aid with regard to the tax benefits for certain cooperative societies
in Norway

(2008/C 96/06)

By means of Decision No 719/07/COL of 19 December 2007, reproduced in the authentic language on the
pages following this summary, the EFTA Surveillance Authority initiated proceedings pursuant to Article 1(2)
in Part I of Protocol 3 of the Agreement between the EFTA States on the Establishment of a Surveillance
Authority and a Court of Justice (Surveillance and Court Agreement). The Norwegian authorities have been
informed by means of a copy of the decision.

The EFTA Surveillance Authority hereby gives the EFTA States, EU Member States and interested parties
notice to submit their comments on the measure in question within one month from the publication of this
notice to:

EFTA Surveillance Authority
Registry
Rue Belliard 35
B-1040 Brussels

The comments will be communicated to the Norwegian authorities. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

SUMMARY

PROCEDURE

By letter dated 28 June 2007, the Norwegian authorities notified the Authority of a planned amendment to
the Tax Act, pursuant to Article 1(3) in Part I of Protocol 3 to the Surveillance and Court Agreement. The
Norwegian authorities intended to amend the Tax Act in order to re-introduce a favourable treatment of
certain cooperative societies with regard to income tax. According to the notification, these cooperatives will
be entitled to deduct allocations to equity capital from their income, thereby reducing the basis for the
income tax.

After correspondence with the Norwegian authorities, the Authority has decided to open a formal investiga-
tion procedure with regard to tax deduction for cooperatives.

ASSESSMENT OF THE MEASURE

The general income tax for undertakings in Norway is 28 % and also applies when the income is added to
the company's equity capital. However, share deposits are not taxable income for the receiving company, as
they are deemed to be taxed at the hands of the contributor. Thus, undertakings organised as limited compa-
nies, etc. may increase their equity capital by receiving non-taxable share deposits from their shareholders or
from the public. Cooperatives, however, do not have this possibility as they cannot, according to the
Norwegian law on cooperatives, issue shares to the public or issue other capital certificates or securities.
Furthermore, it is considered that the principle of open membership limits the size of capital contributions
that the cooperatives can claim from their members.

In the State Budget for 2007, the Norwegian authorities proposed to introduce a scheme concerning special
tax deductions for cooperatives. According to the scheme, cooperatives within the agricultural, forestry and
fisheries sectors as well as consumer cooperatives and cooperative building societies will be entitled to
corporate tax deductions on the basis of allocations to equity capital. The deduction is limited to a
maximum of 15 % of the annual net income, and done solely from the part of the income deriving from
trade with the members of the cooperative. The aim of the scheme is to grant a fiscal advantage to the coop-
eratives on the basis that the cooperatives are considered to have a more difficult access to equity capital
than other undertakings.

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In the preliminary view of the Authority, based on the information submitted by the Norwegian authorities,
the Authority cannot exclude the possibility that the deductions, with regard to income tax, constitute aid
within the meaning of Article 61(1) of the EEA Agreement.

The Norwegian authorities claim that the proposed scheme does not confer an advantage on the coopera-
tives, as it only offsets disadvantages imposed on them by law. In the view of the Norwegian authorities, the
tax benefit for the cooperatives is aimed at covering the extra costs caused by the prohibition for coopera-
tives to issue shares or other capital certificates or securities. Furthermore, the aid proposed to be granted to
the cooperatives does not exceed, according to the Norwegian authorities, the intangible benefit for the
State involved. In this regard, the Norwegian authorities refer to the Communication from the Commission
to the Council and the European Parliament, the European Economic and Social Committee and the
Committee of Regions on the promotion of cooperative societies in Europe, COM(2004) 18 of 23 February
2004. The Authority notes that the Norwegian authorities, at this stage of the proceedings, have not been
able to justify that the aid simply offsets the disadvantages suffered by the cooperatives. On this basis, the
Authority doubts that the proposed scheme does not confer an advantage on the undertakings covered by it.

The Norwegian authorities furthermore argue that the scheme is not selective, since the tax benefits for
certain cooperatives is justified by the nature or general scheme of the Norwegian tax system. According to
the Norwegian authorities, the proposed scheme implies that the general system of equity financing for
corporations by receiving non-taxable share deposits is made available for cooperatives. According to the
notification, the cooperatives covered by the proposed scheme will have access to a special tax deduction
which will not be available to companies organised as limited companies, etc. This deduction is justified by
the difficult access to equity capital. However, there is no link between these two components. Income tax is
levied on a company's income from normal trade whereas share deposits and other equity deposits are not
qualified as income according to Norwegian law. Already on the basis of the above, the Authority is in
doubt as to whether the measure is justified by the nature or general scheme of the Norwegian tax system.
In addition, the proposed tax deduction is only proposed to cover certain cooperative societies, whereas the
Authority, on the basis of the information available to it, assumes that the same difficulty concerning access
to equity capital applies to other cooperatives as well.

Moreover, the Norwegian authorities argue that the aid does not distort or threaten to distort competition
because it only counters existing competitive disadvantages for the cooperatives. On the basis that the
scheme will reduce the income tax payable by the cooperatives covered, the Authority doubts that the
scheme does not distort or threaten to distort competition.

The Authority has doubts that the measure can be regarded as complying with any of the exemptions set
out in Article 61 of the EEA Agreement.

CONCLUSION

In light of the foregoing considerations, the Authority decided to open the formal investigation procedure in
accordance with Article 1(2) of Protocol 3 to the EEA Agreement. Interested parties are invited to submit
their comments within one month from publication of this decision in the Official Journal of the European
Union.

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EFTA SURVEILLANCE AUTHORITY DECISION

No 719/07/COL

of 19 December 2007

to initiate the procedure provided for in Article 1(2) in Part I of Protocol 3 to the Surveillance and
Court Agreement with regard to the proposed scheme concerning tax benefits for cooperative
societies

(Norway)

THE EFTA SURVEILLANCE AUTHORITY (1),

Having regard to the Agreement on the European Economic
Area (2),
in particular to Articles 61 to 63 and Protocol 26
thereof,

Having regard to the Agreement between the EFTA States on
the Establishment of a Surveillance Authority and a Court of
Justice (3), in particular to Article 24 thereof,

Having regard to Article 1(2) of Part I and Articles 4(4) and 6
of Part II of Protocol 3 to the Surveillance and Court Agree-
ment,

Having regard to the Authority's Guidelines (4) on the applica-
tion and interpretation of Articles 61 and 62 of the EEA Agree-
ment, and in particular the Guidelines on business taxation,

Whereas:

I. FACTS

1. Procedure

By letter dated 28 June 2007 from the Norwegian Ministry of
Government Administration and Reform, received and registered
by the Authority on 29 June 2007 (Event No 427327) and
letter from the Ministry of Finance dated 22 June 2007, received
and registered by the Authority on 4 July 2007 (Event
No 428135), the Norwegian authorities notified the proposed
amendments to the rules on taxation of cooperative companies
contained in Section 10-50 of
to
Article 1(3) of Part I of Protocol 3 to the Surveillance and Court
Agreement. As it was only the cover letter from the Ministry of
Government Administration and Reform that was received by
the Authority on 29 June 2007, the Authority considers the
notification to have been submitted on 4 July 2007. This was
communicated to and agreed upon by the Norwegian authori-
ties by an e-mail dated 10 August 2007 (Event No 433019).
According to the notification, the scheme is notified for reasons
of legal certainty.

the Tax Act, pursuant

By letter dated 4 September 2007 (Event No 433067), the
Authority requested additional information from the Norwegian
authorities.

By letter dated 28 September 2007 from the Norwegian
Ministry of Government Administration and Reform, forwarding

(1) Hereinafter referred to as ‘the Authority’.
(2) Hereinafter referred to as ‘the EEA Agreement’.
(3) Hereinafter referred to as ‘the Surveillance and Court Agreement’.
(4) Guidelines on the application and interpretation of Articles 61 and 62
of the EEA Agreement and Article 1 of Protocol 3 to the Surveillance
and Court Agreement, adopted and issued by the EFTA Surveillance
Authority on 19 January 1994, published in OJ L 231, 3.9.1994, EEA
Supplement No 32, 3 September 1994. The Guidelines were last
amended on 3 May 2007. Hereinafter referred to as ‘the State Aid
Guidelines’.

a letter from the Ministry of Finance of 28 September 2007,
received and registered by the Authority on the same day (Event
No 444538), the Norwegian authorities requested an extension
of the deadline to reply. By letter dated 1 October 2007 (Event
No 444790), the Authority met this request.

By letter dated 16 October 2007 from the Norwegian Ministry
of Government Administration and Reform, forwarding a letter
from the Ministry of Finance of 16 October 2007, received and
registered by the Authority on the same day (Event No 447272),
the Norwegian authorities replied to the Authority's information
request.

By letter dated 10 December 2007 (Event No 456448), the
Authority according to Article 4(5) in Part II of Protocol 3 to
the Surveillance and Court Agreement asked the Norwegian
authorities for an extension of 2 days of the deadline to take a
decision according to paragraphs 2-4 of the same Article. By
letter dated 12 December 2007 from the Norwegian Ministry of
Government Administration and Reform, received and registered
by the Authority on the same date (Event No 457226) the
Norwegian authorities met this request.

2. Description of the proposed measure

2.1. Background

the Norwegian authorities

In 1992,
introduced a scheme
concerning special tax deductions for cooperatives. According to
the scheme, cooperatives within the agricultural and fisheries
sectors as well as consumer cooperatives were entitled to incor-
porate tax deductions on the basis of allocations to equity
capital. Other forms of cooperatives were not covered by the
scheme.

The deduction was limited to maximum 15 % of the annual net
income, and taken solely from the part of the income deriving
from trade with the members of the cooperative. A deduction
corresponding to the maximum allowed would imply a reduc-
tion from the normal corporate tax rate of 28 % to 23,8 % (5).
According to the Proposal by the Norwegian Government of
29 September 2006 (6), the aim of the scheme was to grant a
fiscal advantage to the cooperatives on the basis that the coop-
eratives were considered to have a more difficult access to
equity capital than other undertakings.

(5) Cf. Section 12.2 of the Proposal by the Norwegian Government of
29 September 2006 (Ot. prp. nr. 1 (2006-2007) Skatte- og avgiftsop-
plegget 2007 — lovendringer).

(6) Ot. prp. nr. 1 (2006-2007) Skatte- og avgiftsopplegget 2007 — love-

ndringer.

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The scheme was abolished as of the fiscal year 2005. However,
in relation to the State Budget for 2007, the Norwegian authori-
ties proposed to reintroduce the scheme in a slightly amended
form.

Cooperatives, however, do not have this possibility as they,
according to the Norwegian law on cooperatives, cannot issue
shares to the public or issue other capital certificates or securi-
it is considered that the principle of open
ties. Furthermore,
membership limits the size of capital contributions that the
cooperatives can claim from their members.

2.2. The cooperative movement in Norway

According to the notification, the cooperatives in Norway are
described in the Article ‘Cooperative Law in Norway — Time for
Codification?’ (1). According to the Article, there are four big
cooperative sectors in Norway, namely agriculture,
fisheries,
consumer and housing. The cooperatives in the agricultural
sector are undertakings involved in activities such as processing,
sale, purchasing of agricultural products and goods used for
agricultural production (fertilisers, machines etc.), breeding,
credit and insurance. In the fisheries sector cooperatives have
the exclusive right to first-hand sale of all kinds of fish and
shellfish, except farmed fish. Furthermore, the consumer coop-
eratives in Norway operate 1 300 stores (supermarkets, building
materials dealers etc.), and have more than 900 000 members.
Finally, housing is an important cooperative sector in Norway
with more
and
256 000 dwellings owned by cooperatives. In addition to these
traditional cooperatives, there are cooperatives in many other
parts of the economy, such as transport and energy supply, but
also health care, schools, media etc.

cooperative members

652 000

than

the Norwegian authorities describe a
In the notification,
cooperative as a company which is owned by its members,
the Act on cooperative societies (2). The
cf. Section 1 of
members'
liabilities are limited to any membership fee or
deposit that may have to be paid according to the memorandum
of association. The surplus of the cooperative may only be allo-
cated to the members according to the members' transactions
with the company, cf. Sections 26-30 and 135 of the Act on
cooperative societies. The membership deposits may only be
increased by a return according to an interest rate set with a
mandatory maximum, cf. Section 30 of the Act on cooperative
societies.

2.3. Norwegian rules on corporation tax and the cooperatives

The general income tax for undertakings in Norway is 28 %.
The tax also applies when the income is added to the company's
equity capital. However,
the Norwegian Supreme Court has
concluded that share deposits are not taxable income for the
receiving company (3). The reason is that the contributions are
deemed to have been previously taxed as the contributor's
income. Hence, whereas an undertaking has to pay 28 % tax on
equity financed through the undertaking's own income, no tax
is paid with regard to deposits from the shareholders or the
public. It follows from the above that undertakings which are
organised as limited companies etc. may increase their equity
capital by receiving non-taxable share deposits from their share-
holders or from the public.

(1) ‘Cooperative Law in Norway — Time for Codification?’ by Tore Fjørtoft and
in Law’,

Ole Gjems-Onstad, published in ‘Scandinativan Studies
Volume 45 — Company Law, 2003, pages 119-138.

(2) Act of 29 June 2007 No 81 Lov om samvirkeforetak (samvirkelova).
(3) Rt. 1917 page 627 and Rt. 1927 page 869.

According to the notification, the obligations and limitations
imposed on the cooperatives by law are seen by the Norwegian
authorities as essential and inherent in the cooperative princi-
ples. Hence, the Norwegian authorities consider that the lifting
these restrictions would violate fundamental cooperative
of
the
principles. The Norwegian authorities point out
Norwegian act on cooperative companies may be stricter at this
point than the legislation on cooperatives in other European
States. As an example,
to
Article 64 of
the Council Regulation on the Statute for a
European Cooperative Society (4), according to which the
cooperative may provide for the issuing of securities other
than shares which may be subscribed both by members and
non-members.

the Norwegian authorities refer

that

2.4. Objective of the scheme

According to the notification, the cooperative societies must be
upheld due to the public interest of maintaining undertakings
based on principles such as democracy, self-help, responsibility,
equality, equity and solidarity as an alternative to limited compa-
nies. Thus, in order to ensure the public, intangible interest of
maintaining the cooperative societies as an alternative to the
limited companies, there is a need to compensate the coopera-
tives for the disadvantage they otherwise suffer compared with
other companies. The objective of the proposed scheme is to
offset some of these disadvantages related to capital supply.

2.5. The proposed measure

The notified measure is laid down in a new Section 10-50 of
the Tax Act.

The first paragraph of the Tax Act reads as follows:

‘Cooperative societies may claim deduction in their income for
additional payments to the members according to Section 27 of
the Act on cooperative societies [(5)]. In addition, deduction may
be granted for allocations to equity capital up to 15 % of the
income. Deduction is only granted with regard to income deriving
from trade with the members. Trade with members and equivalent
trade must appear in the accounts and must be substantiated’ (6).

‘Equivalent trade’ is defined in paragraph 3 of Section 10-50 of
the Tax Act as fishermen's sales organisations purchase from
members of another fishermen's sales organisation provided
that certain conditions are fulfilled, purchase by an agricultural
cooperative from a corresponding cooperative in the aim to
regulate the market and purchase imposed by a State authority.

(4) Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute

for a European Cooperative Society (OJ L 207, 18.8.2003, p. 1).

(5) The first sentence of the provision is not relevant for the notified

scheme.

(6) Unofficial translation by the Authority. The original Norwegian text is
as follows: ‘(1) Samvirkeforetak kan kreve fradrag i inntekten for etterbeta-
linger til medlemmene etter samvirkeloven § 27. I tillegg kan det gis fradrag for
avsetning til felleseid andelskapital med inntil 15 prosent av inntekten. Fradrag
gis bare i inntekt av omsetning med medlemmene. Omsetning med medle-
mmene og likestilt omsetning må fremgå av regnskapet og kunne legitimeres.’.

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It follows from the provision that deduction is only granted
with regard to income deriving from trade with members and
equivalent trade. Hence, no deduction is granted in income
from trade with others.

certificates or securities in order to strengthen their equity
capital, restrictions which the Norwegian authorities consider as
essential. The intangible benefit is the public interest of keeping
up and safeguarding the cooperative companies as alternatives
to limited companies and other organisational forms.

The Norwegian authorities estimate that the loss in tax revenue
resulting
between
scheme will
NOK 35 million and NOK 40 million (approximately
EUR 4-5 million) for the fiscal year 2007.

from the

amount

to

2.6. Beneficiaries

The scheme is proposed to apply to the cooperative societies
indicated in paragraphs 2 and 4-6 of
the proposed
Section 10-50 of the Tax Act.

It follows from the provisions referred to above that the notified
scheme mainly includes certain consumer cooperatives (1) and
cooperatives active within the agriculture, fisheries and forestry
industries. Furthermore, cooperative building societies which are
covered by the Act on cooperative building societies (2) may
also benefit from the tax deduction (3). Other forms of coopera-
tives are not covered by the scheme.

3. Comments by the Norwegian authorities

The Norwegian authorities have stated that the scheme has been
legal certainty. The
notified to the Authority for reasons of
Norwegian authorities
cannot be
claim that
supposed to constitute State aid within the meaning of
Article 61(1) of the EEA Agreement. This seems to be based on
three different lines of argumentation.

the scheme

Firstly, the Norwegian authorities argue that the scheme does
not confer any advantage on the cooperatives. In this regard, the
Norwegian authorities argue that
the general principle laid
down in the Altmark doctrine (4), referred to by the Norwegian
authorities as the market investor principle, ‘must apply where the
measure consists of advantages given to the recipient to cover the extra
costs for the undertaking to fulfil obligations imposed on it and by
which the State in return is given an intangible benefit of public
interest’ (5). According to the Norwegian authorities, this should
in any case apply where the obligation imposed is external to
the undertakings concerned. The Norwegian
the interests of
authorities claim that the principle laid down in the Altmark
judgement should apply in this case even though ‘the Norwegian
authorities are not of the opinion that the notified scheme is in line
with the Altmark judgement or compatible with the Authority's Guide-
lines on State Aid in the Form of Public Service Compensation’ (5).

The obligation imposed on the cooperatives is in this case the
prohibition for cooperatives to issue shares or other capital

(1) According to paragraph 2a of Section 10-50, the provision only applies
to cooperatives where more than 50 % of the regular turnover is related
to trade with the members.

(2) Act of 6 June 2003 No 38 Lov om bustadbyggjelag (bustadbyggjelagslova).
(3) This is an expansion of the scheme compared to the scheme in force

until 2005, cf. Section I.2.1 above.

(4) Case C-280/00, Altmark Trans GmbH, [2003] ECR I-7747.
(5) Section 1 of the letter from the Ministry of Finance dated 16 October

2007 (Event No 447272).

The Norwegian authorities argue that the case law on which the
Authority's Public Service Compensation Guidelines is based
‘does not rule out that the market principle is applicable to payments
to compensate obligations
to ensure intangible
the public’ (5). The Norwegian authorities in this
benefits
regard refer to the Opinion of Advocate General Fennelly in
Case C-251/97 (6).

imposed in order

for

The Norwegian authorities go on to say that the obligation
imposed on the cooperatives is wholly external to the interest of
the cooperatives as it does not bring them any advantage as
regards their competitive or market position. The obligation
implies a loss in profit for the cooperatives as their equity may
not be optimal. The Norwegian authorities claim that the advan-
tage granted to the cooperatives by the scheme does not exceed
this loss, or at any rate does not exceed the intangible benefit
received by the State.

Secondly, the Norwegian authorities argue that the scheme is
not selective. The Norwegian authorities observe that all compa-
nies with limited liability may increase their equity by receiving
deposits and issue shares or other securities to the investors.
Although share deposits constitute an economic advantage for
the companies, the deposits are not subject to taxation for the
receiving company.

rule of

The cooperatives are not permitted to receive equity from
external investors or members by issuing shares or other kinds
of capital certificates or securities. According to the Norwegian
‘the notified scheme is based on the same logic as the
authorities,
general
regarding equity or share deposits as non-taxable
income. By the allocation as equity of an amount eligible under the
scheme, the amount is deemed as already taxed and not as taxable
income for the company’ (7). The Norwegian authorities further-
more point out that the tax deduction can only be made on
income deriving from trade with members and some other
associates.

the Norwegian tax system.

In essence, the Norwegian authorities argue that the tax benefit
for the cooperatives is justified by the nature or general scheme
the Norwegian
of
authorities claim that
that
‘the general system of equity financing for corporations by receiving
non-taxable deposits is made applicable also to the cooperative socie-
ties’ (8).

the proposed scheme implies

In particular,

(6) Opinion of Advocate General Fennelly in Case C-251/97, French

Republic v Commission, [1999] ECR I-6639.

(7) Section 4 of the letter from the Ministry of Finance dated 16 October

2007 (Event No 447272).

(8) Section VI of the letter from the Ministry of Finance dated 22 June

2007 (Event No 428135).

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Thirdly, the Norwegian authorities argue that the measure does
not distort or threaten to distort competition in a way contrary
to Article 61(1) of the EEA Agreement, as the scheme is aimed
at compensating the disadvantage for the cooperatives when it
comes to access to equity capital. The difficulty for cooperatives
with regard to capital supply, itself, according to the Norwegian
authorities, implies a distortion of competition at the expense of
the cooperatives. The objective of the scheme is to counter this
distortion and thereby presumably improve the efficiency of the
markets in question.

As an additional point, the Norwegian authorities refer to the
Communication from the Commission to the Council and the
European Parliament,
the European Economic and Social
Committee and the Committee of Regions on the promotion of
cooperative societies in Europe (1). The Norwegian authorities in
particular refer to Section 3.2.6 of the Communication where
the Commission i.a. states:

that cooperatives' shares are not

‘Some Member States (such as Belgium,
Italy and Portugal)
consider that the restrictions inherent in the specific nature of
cooperative capital merit specific tax treatment: for example, the
fact
listed, and therefore not
widely available for purchase, results almost in the impossibility to
realise a capital gain; the fact that shares are repaid at their par
value (they have no speculative value) and any yield (dividend) is
normally limited may dissuade new memberships. In addition it is
to be mentioned that cooperatives are often subject to strict require-
ments in respect of allocations to reserves. Specific tax treatment
may be welcomed, but in all aspects of the regulation of coopera-
tives, the principle should be observed that any protection or bene-
fits afforded to a particular type of entity should be proportionate
to any legal constraints, social added value or limitations inherent
in that form and should not lead to unfair competition.’

The Norwegian authorities claim that the notified scheme is in
accordance with the EEA State aid rules and the principles
expressed by the Commission in the Communication.

II. ASSESSMENT

1. Scope of the Decision

As set out in Section I.2.6 above, the potential beneficiaries
under the scheme are mainly certain consumer cooperatives,
cooperatives active within the agriculture, fisheries and forestry
industries and cooperative building societies.

On this basis, the agriculture and fisheries sectors to a large
extent fall outside the scope of the State aid rules of the EEA
Agreement.

Hence, this Decision applies to the proposed tax concession for
cooperative societies, but it does not deal with cooperatives
active in the agriculture and fisheries sectors to the extent that
the activities of these cooperatives fall outside the scope of the
State aid rules of the EEA Agreement.

2. The presence of State aid

State aid within the meaning of Article 61(1) of
EEA Agreement

the

Article 61(1) of the EEA Agreement reads as follows:

‘Save as otherwise provided in this Agreement, any aid granted by
EC Member States, EFTA States 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 shall,
in so far as it affects trade between Contracting
Parties, be incompatible with the functioning of this Agreement.’

The Authority will in the following examine whether the condi-
tions laid down in Article 61(1) of the EEA Agreement are
fulfilled in the present case and whether, consequently, the noti-
fied measure constitutes State aid.

2.1. Presence of State resources

The aid measure must be granted by the State or through State
resources. According to the notified scheme, the cooperatives
mentioned in Section 10-50 of the Tax Act will be entitled to a
special form of tax deduction. Hence, these cooperatives may
deduct allocations to equity capital from their income. The tax
deduction implies that
the tax payable by the cooperatives
covered by the scheme is reduced. Hence, the measure consti-
tutes a loss of tax revenues for the Norwegian State, estimated
by the Norwegian authorities to amount to between approxi-
mately NOK 35 and 40 million (approximately EUR 4-5 million)
for the fiscal year 2007. Consequently, State resources are
involved.

Article 8 of the EEA Agreement defines the scope of the Agree-
ment. It follows from paragraph 3 of Article 8 that:

2.2. Favouring certain undertakings or the production of certain goods

‘Unless otherwise specified, the provisions of this Agreement shall
apply only to:

2.2.1. Advantage

(a) products falling within Chapters 25 to 97 of the Harmonized
Commodity Description and Coding System, excluding the
products listed in Protocol 2;

(b) products specified in Protocol 3, subject to the specific arrange-

ments set out in that Protocol.’

(1) COM(2004) 18 of 23 February 2004.

The aid measure must confer on the cooperatives advantages
that relieve them of charges that are normally borne from their
budgets.

As referred to above, the proposed tax deduction implies that
the tax payable by the cooperatives covered by the scheme is
reduced. Thereby, the measure relieves them of charges that are
normally borne from their budgets.

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However, the Norwegian authorities argue that the proposed tax
deduction does not confer an advantage on the cooperatives
because the tax deduction must be regarded as compensation
for the obligations imposed on the cooperatives by law, and in
particular the prohibition for cooperatives to issue shares or
other capital certificates or securities in order to strengthen their
equity capital. The Norwegian authorities go on to argue that
the said prohibition is inherent in the legal form of cooperatives.
Furthermore, the issue of safeguarding the cooperatives, with
the legal restrictions and obligations imposed on them, as an
alternative to companies organised as limited companies, etc., is
of public interest.

It is the Authority's understanding that the Norwegian authori-
ties consider that
the proposed aid is a part of a bargain
whereby the State, on the one hand, achieves that the coopera-
tives in their current form are safeguarded. The cooperatives, on
the other hand, obtain compensation for the disadvantages with
regard to equity capital imposed on them by law in the form of
a tax concession.

The Norwegian authorities refer to the Opinion of Advocate
General Fennelly in Case 251/97 (1) to justify their argumenta-
tion, and in particular argue that the obligations imposed on the
cooperatives are wholly external to the interests of the coopera-
tives themselves. The obligations are only advantageous for the
State, and the cooperatives should therefore be compensated for
their services.

The Norwegian authorities have referred to the market investor
principle as a justification for the scheme in the notification. It
is the opinion of the Authority that in this case the market
investor principle cannot be applied, simply because the notified
measure is a fiscal measure which, as the Authority sees it, has
nothing to do with the State's possible behaviour as a market
investor.

The question remains whether the State may grant compensa-
tion for disadvantage of the cooperatives with regard to equity
capital without this amounting to State aid within the meaning
of Article 61(1) of the EEA Agreement (2).

First, the Authority will examine whether the prohibition for
cooperative societies to issue shares or other capital certificates
or securities is a service of general economic interest and there-
fore whether the Altmark doctrine (3) may apply.

Justice (4)
In the Altmark judgement, the European Court of
concluded that ‘where a State measure must be regarded as compen-
sation for the services provided by the recipient undertakings in order to
discharge public service obligations, so that those undertakings do not
enjoy a real financial advantage and the measure thus does not have
the effect of putting them in a more favourable competitive position
than the undertakings competing with them, such a measure is not
caught by Article 92(1) of the Treaty’ (5).

(1) Opinion of Advocate General Fennelly in Case C-251/97, French

Republic v Commission, cited above.

(2) Cf. paragraph 20 of the quoted Opinion.
(3) Cf. Case C-280/00, Altmark Trans GmbH, cited above.
(4) Hereinafter referred to as ‘the Court of Justice’.
(5) Cf. paragraph 87 of the Judgement.

In the Altmark judgement the Court of Justice set up four condi-
tions which have to be complied with in order
for such
compensation to escape classification as State aid in a particular
case (6). First,
the recipient undertakings must actually have
public service obligations to discharge, and the obligations must
be clearly defined. Second, the parameters on the basis of which
the compensation is calculated must be established in advance
in an objective and transparent manner. Third, the compensa-
tion cannot exceed what is necessary to cover all or part of the
costs incurred in the discharge of public service obligations,
taking into account the relevant receipts and a reasonable profit
for discharging those obligations. Fourth,
the undertaking
which is to discharge public service obligations is not chosen
pursuant to a public procurement procedure which would allow
for the selection of the tenderer capable of providing those
services at
the level of
compensation needed must be determined on the basis of an
analysis of the costs which a typical undertaking, well run and
adequately provided with means of transport so as to be able to
meet the necessary public service requirements, would have
incurred in discharging those obligations, taking into account
the relevant receipts and a reasonable profit for discharging the
obligations.

the community,

the least cost

for

if

Based on the information available to it, the Authority is uncer-
tain whether the Norwegian authorities argue that the service of
general economic interest involved is the interest of safeguarding
the cooperatives with their present obligations and restrictions
or more specifically the prohibition for cooperative societies to
issue shares or other capital certificates or securities. At this
stage of the proceedings, the Authority has not been presented
with any argument that would permit it to conclude that any of
these alternative definitions can be classified as a service of
general economic interest. In this regard, the Authority notes
that for Article 59(2) of the EEA Agreement to apply, what
needs to constitute a public service is the actual activities
performed by the undertakings concerned. In other words, that
a given company structure is seen as beneficial does not in itself
constitute a public service within the meaning of that provision.

In any event, even if the obligation for the cooperatives had
been considered to be a service of general economic interest,
the criteria for compensation set out in the judgment of the
Court of Justice in the Altmark case must apply if the measures
at hand were not to be covered by Article 61(1) of the EEA
Agreement.

However, the Norwegian authorities expressly state that they do
not consider the notified aid scheme to be in line with the
Altmark judgement. The Authority in this regard also refers to
information submitted by the Norwegian authorities
the
whereby they have i.a. calculated neither the costs incurred on
the cooperatives by offering the alleged public service nor the
advantage for the cooperatives resulting from the tax conces-
sion.

On this basis, the Authority has reached the preliminary conclu-
sion that the Altmark doctrine does not apply to the present
case.

(6) Cf. paragraphs 89-93 of the Judgement.

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Second, the Authority will examine whether it can be concluded
that the proposed scheme does not involve an advantage for the
cooperatives covered by it on the basis that the aid is granted in
order to compensate the cooperative for structural disadvan-
tages (1).

i.a.

The Norwegian authorities claim that the cooperatives are disad-
limited
vantaged in comparison to other undertakings,
companies, when it comes to access to equity capital. However,
the Norwegian authorities have not provided detailed informa-
tion describing the situation of cooperatives in relation to other
companies which demonstrates that the possible disadvantage
with regard to equity capital is not offset by other elements in
the regime on cooperatives in Norway. The Norwegian authori-
ties confine their argumentation to the situation of the coopera-
tives with regard to equity capital.

Furthermore, it has not been accepted, either in the case-law of
the European Courts or in the practise of the Commission, that
a measure does not confer an advantage on the undertaking in
question merely because it compensates a ‘disadvantage’ suffered
by the undertaking (2).

Against this background, and on the basis of the lack of justifi-
cation provided by the Norwegian authorities, the Authority
doubts that the aid proposed to be granted to the cooperatives
can be regarded not to constitute an advantage for them on the
basis that they suffer from a structural disadvantage.

Third, the Norwegian authorities claim that the notified scheme
is in accordance with the EEA State aid rules and the principles
expressed in Communication from the Commission to the
Council and the European Parliament, the European Economic
and Social Committee and the Committee of Regions on the
promotion of cooperative societies in Europe (3). The Norwegian
authorities in particular refer to Section 3.2.6 of the Communi-
cation, where the Commission i.a. states that specific tax treat-
ment of cooperatives may be welcomed.

At this stage of the proceedings, the Authority is in doubt as to
what extent the Communication can provide the legal basis for
concluding that the notified scheme does not confer an advan-
the
tage on the cooperatives covered by it.
Authority in particular refers to Section 3.2.7 of the Communi-
cation, which reads as follows:

In this regard,

‘Cooperatives that carry out economic activities are considered as
“undertakings” in the sense of Articles 81, 82 and 86 to 88 of
the European Community Treaty (EC). They are therefore subject
in full to European competition and State aid rules, and also to
the various exemptions, thresholds and de minimis rules. There are
no grounds for special treatment of cooperatives in the general
competition rules; however certain aspects of their legal form and
structure should be taken into account on a case-by-case basis, as
previous decisions and rulings have demonstrated.’

this background,

Against
the
Authority is that the proposed tax concession implies an advan-
tage for the cooperatives covered by the scheme.

the preliminary conclusion of

2.2.2. Selectivity

The aid measure must be selective in that it favours ‘certain
undertakings or the production of certain goods’.

The proposed scheme only covers certain cooperatives as speci-
fied in the draft Section 10-50 of the Tax Act. These cooperative
societies are entitled to a deduction of up to 15 % in the part of
their income deriving from trade with their members. Thus, the
tax base of these undertakings is reduced, and thereby also their
income tax. This tax rule deviates from the normal rules on
income tax payable by undertakings in Norway. On this basis,
the proposed scheme appears to be selective in that it favours
certain undertakings.

However, the Norwegian authorities argue, in essence, that the
tax benefit for the cooperatives is justified by the nature or
general scheme of the Norwegian tax system (4). In particular,
the Norwegian authorities claim that
the proposed scheme
implies that ‘the general system of equity financing for corporations by
receiving non-taxable deposits is made applicable also to the coopera-
tive societies’ (5).

According to Section 3.4 of the Authority's Guidelines on busi-
ness taxation (6), certain differential measures whose economic
rationale makes them necessary to the smooth functioning and
effectiveness of the tax system might not constitute State aid. In
such cases, the measure would no longer be considered selec-
tive (7).

Against this background, the Authority has to examine whether
the logic underlying the tax exemption could justify a differen-
tiation between the cooperatives covered by the proposed
scheme and other undertakings. As the exemption constitutes a
derogation from the income tax, this tax will be the general
the derogation must be
system against which the logic of
measured. In other words, the Authority will examine whether
the logic of the tax exemption for cooperatives is in line with
the objectives of the income tax itself.

According to the proposed scheme, certain cooperatives will be
entitled to a deduction in their income whereas companies
which are organised as limited companies etc. will not be
entitled to the same tax deduction. Thus, if a cooperative and a
limited company use their own income to add to their equity
capital, the cooperative covered by he proposed scheme will
benefit from a tax deduction which is not open to the limited
company.

(1) It has been recognized that structural disadvantages may, in certain
specific situations, be offset by aid measures. Cf. Case T-157/01, Danske
Busvognmænd v Commission, [2004] ECR II-917, where the aid was
granted in order to compensate a company for the costs of replacing
the status of the officials employed by it with the status of employees
on a contract basis, comparable to the employees of its competitors.
i.a. the Commission's Decisions in Case C-2/2006, OTE para-

(2) Cf.

graph 92.

(3) COM(2004) 18 of 23 February 2004, cf. Section I.3 above.

(4) Case 173/73, Italy v. Commission, [1974] ECR 709.
(5) Section VI of the letter from the Ministry of Finance dated 22 June

2007 (Event No 428135).

(6) The Authority's Guidelines on the application of State aid rules to

measures relating to direct business taxation.

(7) EFTA Court's judgment in Joined Cases E-5/04, E-6/04 and E-7/04, Fesil
and Finnfiord, the Kingdom of Norway, PIL and others v the EFTA Surveil-
lance Authority, [2005] EFTA Court Reports, p. 117 and Case C-143/99,
Adria-Wien Pipeline GmbH, [2001] ECR I-8365.

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C 96/35

The Norwegian authorities claim that the deduction on the part
of the cooperatives is justified on the basis of their difficult
access to equity capital. However, the there is no link between
the two components in the argumentation of the Norwegian
authorities. Income tax is a tax levied on a company's income
from normal trade whereas share deposits and other equity
deposits are not qualified as income according to Norwegian tax
law (1). Hence, at this stage of the procedure, the Authority is in
doubt as to whether the different rules applicable to cooperative
societies and other undertakings in relation to equity deposits
can justify discrimination with regard to the rules on income
tax.

Already on this basis, the Authority is in doubt as to whether
the measure can be regarded as justified by the nature or
general scheme of the Norwegian tax system. However, as an
additional point, the Authority notes that the notified tax deduc-
tion for cooperatives is not proposed to cover all cooperatives
in Norway. On the contrary, the scheme is only proposed to
cover certain cooperative societies as defined in the draft
Section 10-50 of the Tax Act. On the basis of the information
submitted by the Norwegian authorities, the Authority assumes
that the difficulties concerning access to equity capital explained
above are valid also for other cooperatives than he ones
proposed to be covered by the scheme.

this background,

the preliminary conclusion of

Against
the
Authority is that the tax deduction for cooperatives does not
seem to be justified by the nature or general scheme of the
Norwegian tax system. It is therefore the preliminary conclusion
of the Authority on the basis of the information available to it
that the measure notified by the Norwegian authorities is selec-
tive.

2.3. Distortion of competition and effect on trade between Contracting

Parties

trade
The aid measure must distort competition and affect
between the Contracting Parties. The tax deduction strengthens
the position of the cooperatives in relation to their competitors
which are organised differently. The tax deduction applies to all
main forms of cooperatives, and at least some of them are also
active on markets within the EEA. In this regard, the Authority
mentions that the consumer cooperative Coop NKL BA is part
of the Coop Nordic Group, which is the largest market partici-
pant in the retail food industry in Scandinavia (2).

The Norwegian authorities argue that the aim of the scheme is
to counter the existing competitive disadvantage for the coop-
eratives when it comes to access to equity capital. On this basis
they maintain that the scheme does not distort or threaten to
distort competition.

The Authority notes that the effect of the scheme is to reduce
the income tax of
the cooperatives covered by the scheme
compared to other companies. Thereby, the competitive position
of the cooperatives is strengthened. The fact that the coopera-
tives have certain obligations according to Norwegian law
which are not imposed on i.a. limited companies is not decisive
in this regard.

this background,

Against
the
Authority is that the tax deduction is likely to distort competi-
tion and affect trade between the Contracting Parties.

the preliminary conclusion of

2.4. Conclusion on the presence of State aid

On the basis on the information set out above, the Authority
has reached the preliminary conclusion that the notified scheme
concerning tax concessions for cooperative societies in Norway
constitutes State aid within the meaning of Article 61(1) of the
EEA Agreement.

3. Procedural requirements

Pursuant to Article 1(3) of Part I of Protocol 3 to the Surveil-
lance and Court Agreement, ‘the EFTA Surveillance Authority shall
be informed, in sufficient time to enable it to submit its comments, of
any plans to grant or alter aid. […]. The State concerned shall not
put its proposed measures into effect until the procedure has resulted in
a final decision’.

The Norwegian authorities have complied with the notification
requirement by submitting notification of the new Section 10-50
of the Tax Act by letters dated 28 June 2007 and 16 October
2007 and by not implementing the scheme until
it possibly
would be approved by the Authority.

the Norwegian
The Authority can therefore conclude that
authorities have
to
Article 1(3) of Part I of Protocol 3 to the Surveillance and Court
Agreement.

respected their obligations pursuant

4. Compatibility of the aid

Support measures caught by Article 6l(l) of the EEA Agreement
are generally incompatible with the functioning of
the EEA
Agreement, unless they qualify for a derogation in Article 61(2)
or (3) of the EEA Agreement.

The derogation laid down in Article 6l(2) is not applicable to
the aid in question, which is not designed to achieve any of the
aims listed in this provision.

The aid can furthermore not be justified under Article 61(3)(b)
of the EEA Agreement, as the aid is not given to promote the
execution of an important project of common European interest
or to remedy a serious disturbance in the economy of Norway.

The aid in question is not linked to any investment. It simply
reduces the costs which companies would normally have to
bear in the course of pursuing their day-to-day business activ-
ities and is consequently to be classified as operating aid. Oper-
ating aid is normally not considered suitable to facilitate the
development of certain economic activities or of certain regions
as provided for in Article 61(3)(c) of the EEA Agreement.

(1) Cf. Section I.2.3 above.
(2) ‘Cooperative Law in Norway — Time for Codification?’ by Tore Fjørtoft and

Ole Gjems-Onstad, cf. footnote 7 above.

On the basis of the information available to it, the Authority is
of the opinion that none of the Authority's Guidelines apply to
the scheme.

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In light of the foregoing consideration, the Authority requires
that, within one month of
the
Norwegian authorities provide all documents, information and
data needed for assessment of the compatibility of the notified
scheme concerning tax benefits for cooperative companies,

this Decision,

receipt of

HAS ADOPTED THIS DECISION:

Article 1

The EFTA Surveillance Authority has decided to open the
formal investigation procedure provided for in Article 1(2) of
Part I of Protocol 3 to the Surveillance and Court Agreement
against Norway regarding the proposed scheme concerning tax
benefits for cooperative companies.

Article 2

are

authorities

The Norwegian
to
Article 6(1) of Part II of Protocol 3 to the Surveillance and
Court Agreement, to submit their comments on the opening of
the formal investigation procedure within one month from the
notification of this Decision.

requested,

pursuant

Article 3

The Norwegian authorities are invited to provide within
one month from notification of this Decision, all documents,
information and data needed for assessment of the compatibility
of the aid measure.

This Decision is addressed to the Kingdom of Norway.

Article 4

Only the English version is authentic.

Article 5

Done at Brussels, 19 December 2007.

For the EFTA Surveillance Authority

Per SANDERUD

Kristján Andri STEFÁNSSON

President

College Member

In the notification, the Norwegian authorities claim that the
notified scheme is in accordance with the EEA State aid rules
and the principles expressed in Communication from the
Commission to the Council and the European Parliament, the
European Economic and Social Committee and the Committee
of Regions on the promotion of cooperative societies
in
Europe (1).

At this stage of the proceedings, the Authority doubts that the
Communication can be understood as arguing that State aid
measures such as the notified scheme should be considered to
be compatible with the State aid rules of the EEA Agreement (2).

Against this background, the Authority is of the preliminary
opinion that the Communication does not provide a basis for
concluding that the scheme is compatible with the State aid
provisions laid down in the EEA Agreement.

On this basis, the preliminary conclusion of the Authority is
that the notified scheme does not qualify for derogation under
Article 61(2) or (3) of the EEA Agreement and is therefore not
compatible with the Agreement.

5. Conclusion

Based on the information submitted by the Norwegian authori-
ties, the Authority cannot exclude the possibility that the aid
measure constitutes aid within the meaning of Article 61(1) of
the EEA Agreement. Furthermore, the Authority has doubts that
the measure can be regarded as complying with Article 61(3)(c)
of the EEA Agreement. The Authority thus doubts that the noti-
fied measure is compatible with the functioning of the EEA
Agreement.

II of
Consequently, and in accordance Article 4(4) of Part
Protocol 3 to the Surveillance and Court Agreement,
the
Authority is obliged to open the procedure provided for in
Article 1(2) of Part I of Protocol 3 of the Surveillance and Court
Agreement. The decision to open proceedings is without preju-
dice to the final decision of the Authority, which may conclude
that the measure in question is compatible with the functioning
of the EEA Agreement.

In light of the foregoing considerations, the Authority, acting
under the procedure laid down in Article 1(2) of Part I of
Protocol 3 to the Surveillance and Court Agreement, requests
the Norwegian authorities to submit their comments within
one month of the date of receipt of this Decision.

(1) COM(2004) 18 of 23 February 2004.
(2) Cf. citation in Section II.2.2.1 above.