18 Apr, 2016

The New Decree on the Conditions and Manner of Attracting Investments – A Step Forward In Creating a More Favorable Business Environment for the Investors, Yet Some Questions Remain Unanswered

To create a more favorable business environment for domestic and foreign companies wishing to invest in Serbia, and to enhance the national economy, a new Decree on the Conditions and the Manner of Attracting Investments1 (Decree), announced by the Act on Investments2, has been enacted on 11 March 2016.

Relying on the Serbia Investment and Export Promotion Agency’s (SIEPA) 2015 Decree on the Conditions and Manner of Attracting Direct Investments3 (SIEPA Decree), the new Decree provides for incentives in the form of grants or, under certain conditions, exemption from customs duties, both for the investments in new production facilities (greenfield investments) and those in existing production facilities (brownfield investments) in sectors which are not expressly exempt from its application (transportation, games of chance, commerce, production of synthetic fibers, coal and steel, tobacco and tobacco products, weapons and ammunition etc.). Due to their particularities, the said sectors are traditionally exempt from the application of general rules on regional state aid, both in the European Union (EU) law and the laws of its member countries.

The new Decree has certain shortcomings, primarily due to a lack of precision and clarity in defining basic terms such as “investor”, “beneficiary”, “joint company” etc., prerequisites for its efficient application and legal certainty. Also, the Decree should, in line with its Article 1, regulate investments of local interest, which it merely defines, but it fails to elaborate on how those investments would be treated. Finally, the appropriateness and strictness of the rule that the only envisaged collateral for the received funds is a bank guarantee issued by a Serbian bank are questionable, as is the strictness and complexity of the control procedure.

Still, one can say that the Decree established a more favorable legal framework for the domestic and foreign investors, as the conditions under which the incentives may be received have been relaxed. Traditionally, the companies in difficulty and companies which credibility has already been undermined when they failed to settle their outstanding liabilities towards the state or reduce the number of employees, as well as companies which are already partly state-owned and which can only exceptionally receive incentives were expressly exempted.

The newly adopted scheme for the state aid allows for the incentives to investors whose eligible investment costs amount to at least 150.000 EUR, provided that the respective project creates at least 20 new jobs in the most underdeveloped areas or 15 new jobs in the sector of the cross-border services provided by electronic means, as well as to those who invest in more developed municipalities at least 300,000 EUR/600,000 EUR, opening 30, 40 or 50 new jobs.

Provided that they secure funding for 25% of the eligible investment costs from own resources, and depending on the size of the investor, the total amount invested, the number of new job openings linked to the project and its location, investors may expect up to 70% of the eligible investment costs to be covered by the state, or to have their costs reduced by up to 7,000 EUR for each newly created job. In that sense, a higher level of incentives for a lower overall investment can be achieved by investing in underdeveloped municipalities in Serbia, especially by small and medium-sized enterprises by which it is sought to, on the one hand, overcome the gap and balance the level of development of municipalities in Serbia, and, on the other hand, encourage development of private entrepreneurship and companies, with the aim of strengthening economic and business development, employment growth and overall social well-being, which is the primary objective of the Decree.

The replaced SIEPA Decree was based on the principle that the amount of state aid is determined in relation to the so-called “eligible investment costs”, entailing investments in tangible and intangible assets. The new Decree specifies these terms, harmonizing our legislation with the relevant EU rules on granting the regional investment aid and, exceptionally, operating aid. Thusly, the “eligible costs of investment” encompass investments in land, facilities, machinery and equipment, as well as in patents, licenses or know how, from the date of signing the contract on granting incentives up to the deadline for the realization of the project, and also the costs of gross salaries for the new jobs stemming from the project, within the two years following the full employment envisaged by the project. The term also includes the costs of financial leasing, as well as the costs of operating lease of real estate provided that it lasts for at least five/three years after the completion of the project.

As stipulated by the Act on Investments, the so-called “investments of special importance for the Republic of Serbia”, which, given the way this term is defined, can encompass a wide range of investments, demand special attention and treatment. Namely these are the investments whose “realization significantly affects the further development of Serbian economy, which contribute to improving the competitiveness of the economy and the Republic of Serbia as an investment location and which realization encourages balanced regional development in relation to the subject of investment and territorial concentration of certain economic sectors and economic activities”.

In addition, it is further foreseen that this type of investment includes investment in fixed assets exceeding 20,000,000 EUR/2,000,000 EUR (in the case of investments in underdeveloped municipalities) and investments which ensure more than 500/100 new jobs (in underdeveloped municipalities) for 3/5 years. Furthermore, the Decree stipulates that the investments of special importance also encompass investments which “encourage the realization of common development priorities of one or more municipalities for the purpose of increasing their competitiveness” and investments made on the basis of adopted bilateral agreements on cross-border cooperation. The aforementioned is especially significant in light of the provisions of the Decree under which the incentives for investments of special importance are granted without a public call, in the form of individual state aid, and the provisions which cap the amount of funds that can be granted in regard to these investments.

At a first glance it seems that the relevant provisions of the Decree on the amount of incentives for investments of special importance, which are taken from the SIEPA Decree, correspond materially to the limits stipulated by the relevant provisions of the EU law pertaining to big investment projects, taking into account the fact that providing the state aid to big investors may have significant adverse effects on competition. Namely, the Decree stipulates that in regard to “the investments exceeding 50 million EUR” the amount of incentives “cannot be greater than 25 % of the eligible investment costs”, and in regard to “the investments exceeding 100 million EUR, this amount may not exceed 17% of the eligible investment costs”. In addition, the Decree expressly provides for a special method of calculating the amount of incentives to cover only a part of the eligible costs exceeding 50 million EUR/100 million EUR at a maximum of 25%/17% of these costs.

Assuming that the predicted formula for calculating the amount of incentives aims at adjusting the amount of incentives granted to big investors, a number of questions remains open, and they may lead to significant problems during the future application of the Decree.

On the one hand, it is insufficiently clear whether the formula refers to the investments where the total amount exceeds 50,000,000 EUR or to the investments where only eligible costs exceed the said amount (as provided, for example, by the relevant EU rules), but where the total amount can be higher, since such amount would encompass the costs of investment that are not necessarily considered eligible costs within the meaning of the Decree.

On the other hand, given that the Decree does not expressly regulate the manner of calculation of the incentive amount for the part of the eligible investment costs not exceeding 50 million EUR, the question remains open as to whether the investors would be able to receive incentives for this part of the eligible costs i.e., whether the general rules on maximum incentive of 50% for big investors would be implemented in this respect.

Finally, it remains unclear whether the aforementioned percentages of 25%/17% will be applied to the total amount of the investment exceeding 50 /100 million EUR, or the total eligible costs are seen as single tranches to which a certain/determined percentage would be applied so as to get the total amount of incentives by their sum (as is the case under the formula used in the EU for big investors). It remains even more uncertain which of the aforementioned interpretations will be given by the competent authorities, given that the Decree also provides that “the amount of funds awarded to the beneficiary (…) shall be determined up to the percentage (of 25% and 17%)”.

Furthermore, although it seems legitimate that the Commission for State Aid Control (Commission) decides on the merits of granting the state aid in excess of a certain amount, it is still not quite clear why the Decree stipulates that a prior individual application must be submitted to the Commission in regard to granting incentives for all investments of special importance. Irrespective of the fact that this provision contributes to legal certainty of investors, it appears that the Decree introduces somewhat stricter system of control of granting the state aid, compared to the one related to the regional state aid in the EU, especially if one has in mind a rather broad definition of the term “investment of special importance“, which can also have the effect opposite to desired on attracting investments.

Given that the Decree leaves the possibility for its provisions to apply to the sectors of agriculture, fisheries and forestry, which are governed by special rules according to the state aid rules of the EU and its member states, as it does not expressly exempt the said sectors from its application, the question of grounds on which the Commission for State Aid Control would have the possibility to decide on the investments of special importance in these sectors remains open. Especially since the Act on State Aid Control, which has supremacy over the Decree and which regulates the conditions and procedure of granting approval for individual state aid, expressly exempts the agriculture and fisheries sectors from its application. Unlike the incentives for investments of special importance in these sectors which cannot be realized because the competent Commission has to approve this kind of state aid, it seems that receiving incentives for investments of local interest in agriculture and fisheries can be achieved.

If the new Decree creates a more favorable climate for investors in certain segments and potentially expands the envisaged number of beneficiaries, to what extent will the solutions proposed by the Decree represent a true incentive, especially for big investors, depends largely on the answers to the open questions which may be given only by applying the Decree. Accomplishing the main goals proclaimed in the Act on Investments and in the Decree itself will further depend on the effect of those solutions.

 

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1 Official Gazette of the Republic of Serbia, No. 27/2016

2 Official Gazette of the Republic of Serbia, No. 89/2015

3 Official Gazette of the Republic of Serbia, No. 28/2015

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