Debt write-off for Slovak alcohol producer declared illegal subsidy

09/06/06 The European Commission has decided under EC Treaty state aid rules that a write-off of tax debt of SKK 416. 5 million (€11 million) to Frucona Košice, a.s., formerly one of the major producers of spirits in Slovakia, constituted illegal state aid and was incompatible with the Single Market. In order to redress the distortion of competition caused by the debt write-off, the Commission has decided that Slovakia must recover the unlawful aid from Frucona with interest.

Competition Commissioner Neelie Kroes commented: “We are applying the rules on state aid for restructuring of ailing companies strictly, in line with the State Aid Action Plan. We have taken into account the size of the company and the fact that it is in an underdeveloped region. Nevertheless, the measure was pure operating aid, without any genuine restructuring to restore Frucona’s sustainable commercial viability”.

Frucona Košice, a medium-sized company in Eastern Slovakia, used to be one of the major producers of spirit and spirit-based beverages in Slovakia and currently operates as a distributor. In 2004, Frucona’s accumulated tax debts, mainly composed of excise taxes and VAT, amounted to SKK 641 million (€ 16.9 million), and the company asked its creditors for an arrangement under the applicable insolvency legislation. In July 2004, the tax office agreed to write off 65% of its debt.

The Commission found that the tax office had not behaved as would be expected of a normal commercial creditor in a market economy. To be free of state aid, a state intervention must be made on the same conditions a private creditor would have accepted, without taking account of considerations (such as regional or social policy) that are not economic. The Commission concluded that the tax office would have obtained a higher repayment of its claims through a bankruptcy procedure, in which the company would be sold or liquidated, and especially through the tax execution procedure, allowing direct sale of the company’s assets. The debt write-off therefore constituted state aid.

Such aid would only be compatible with the Single Market and the Commission’s guidelines on restructuring aid, if it were linked to a sustainable restructuring plan, that would analyse the situation of the company, the reasons for its difficulties, its strengths, weaknesses and prospects and draw conclusions in the form of detailed restructuring measures. Moreover, such aid can only be granted on condition that the restructuring plan is properly implemented. When this is not the case, the company is considered to have received operating aid, which has given it an unfair advantage vis-à-vis its competitors.