State aid rules have been further eased
The European Commission has amended the restriction rules on production capacity relocation within the EEA
In view of the economic difficulties caused by the COVID-19 virus epidemic, on 2 July 2020 the European Commission suspended the relocation restriction rules primarily related to state aid awarded to investment and job creation provided under the General Block Exemption Regulation (GBER) in force.
The companies that benefit from regional investment aid under the GBER - e.g. development tax allowance, VIP cash grant, investment grant provided from EU sources related to assets or job creation – had to commit not to relocate, i.e. not to lose jobs in establishments belonging to the same group of companies in other European Economic Area (EEA) Member States in which they carry out the same or similar activities as the aided company from the date of submitting the aid application until the end of the second year following the completion of the aided investment.
Relocation may occur if all the following criteria are met:
- relocation of same or similar activities from an establishment in one EEA Member State (initial establishment) to an establishment in another EEA Member State (aided establishment), where
- the products or services in the initial and the aided establishment serve at least partly the same purpose,
- the products or services in the initial and the aided establishment serve the same type of customer, and
- at least two jobs are lost in the initial establishment in the same or similar activity.
As a result of the regulation, the beneficiary had to declare that in the two years preceding the submission of the aid application, it had not realized any relocation to the aided establishment, besides the beneficiary also had to undertake not to do so for at least two years after the completion of the investment.
If there is a risk of relocation, the aid is generally subject to the approval of the European Commission. As a general rule, the violation of the relocation restriction is considered as a breach of the commitments undertaken, the potential consequence of which may be the reimbursement of the regional investment aid received.
However, the European Commission acknowledged that, due to the coronavirus epidemic, aided companies may not be able to avoid certain job losses. Due to the economic difficulties caused by the COVID-19 virus epidemic, the European Commission has amended the relocation restriction rules. According to the decision of the European Commission, for companies that received aid under the GBER prior to 31 December 2019, therefore committed themselves not to relocate their activities, any loss of jobs, in the same or similar activity in one of the initial establishments of the beneficiaries in the EEA occurring between 1 January 2020 and 30 June 2021, shall not be considered as relocation.
The relocation restriction rules were applicable to various incentives available in Hungary.
In the case of state aid granted by individual government decision (VIP cash grant), the beneficiary shall make a declaration on the subject of relocation. According to the original regulation, if it is verified that the beneficiary has made a false declaration, the aid grantor may withdraw from the incentive agreement, besides the payment of the grant shall be suspended in the event of the breach of the commitment.
In the case of applying for development tax allowance, the taxpayer shall declare that in two calendar years preceding the application, neither the taxpayer nor its affiliate has made a relocation in connection with the activity for which the tax allowance is claimed. Besides the taxpayer shall undertake that for two calendar years following the completion of the aided investment neither the taxpayer nor its affiliate will carry out relocation in connection with the aided investment. If the taxpayer or its affiliate carried out or will carry out relocation in connection with its particular investment activity during the period specified, it may lose its entitlement for the development tax allowance, and it may also be required to repay the development tax allowance already used.
In the case of applying for regional investment aid in the frame of an Operational Programme in Hungary, the beneficiary also had to declare and make commitments within the aid application in accordance with the community rules on relocation under the burden of the repayment of the grant.
In view of the outbreak of the COVID-19 virus and the severe economic consequences of the pandemic, suspending the relocation restriction is a significant and positive change that could be also applied in Hungary, however the investment activities of the companies must still be in line not only with the relocation restriction, but other state aid rules as well.
For practical answers to key questions related to relocation, COVID-19 state aid schemes and other state aid questions, please contact our professional on the contact details below.