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Brussels, 17th Mai 2006

State aid: Commission opens investigation into Italian merger incentives for small and micro enterprises

The European Commission has opened a formal investigation, under EC Treaty state aid rules (Article 88 (2)), into an Italian tax credit scheme to encourage small and micro enterprises to merge. The Commission believes that the measure might distort trade and competition, and doubts that state aid is the appropriate instrument to tackle the issue. The design of the scheme may bring windfall gains to some players and the distortion may be reinforced by previous illegal and incompatible aid still to be reimbursed. The opening of the formal investigation will be published in the EU’s Official Journal, allowing interested parties to comment. The launch of this inquiry does not prejudge the Commission’s final decision.

EU Competition Commissioner Neelie Kroes said: “We need to ensure that, on balance, the positive effects of the Italian scheme outweigh any negative effects.”

The scheme is known as “Merger incentive” (“Premio di concentrazione”). It provides a tax credit to micro and small undertakings from the same sector for their consolidation by merger or acquisition. The credit totals 10% of the increase in the value of production of the acquiring enterprise, which constitutes the taxable basis for the regional business tax (IRAP). The credit may be used to offset payments with respect to a number of business taxes or social contribution charges. Although a link between the credit and the consolidation process exists, the amount of the tax credit is not calculated on the basis of investments or costs. The budget foreseen is €120 million for 2006, 242 for 2007, and 122 for 2008.

Italy already enacted a similar measure in 2005, which was in conformity with the EU’s Block Exemption Regulation for aid to SMEs (see IP/00/1415). The 2005 scheme limits the tax credit to up to 50% of the consultancy costs for the merger and acquisition process. Given its limited scope, the take-up of the measure has also been limited, with 132 beneficiaries receiving a total amount of aid worth € 3.47 million.

With the new measure, Italy aims to foster ‘external’ growth of SMEs (through acquisitions). State aid rules allow aid to SMEs mainly for investment or job creation. The Commission can approve state aid on the basis of Article 87 (3) c EC Treaty on condition that it contributes to the development of certain economic activities without affecting competition and trade against the common interest and where its positive elements outweigh the negative ones.

Italy has to prove first that the objective of the measure is to tackle a well identified market failure. However, studies indicate that the causes of the small size of Italian firms are due more to regulatory failures, such as fiscal rules, labour laws, lack of funding, excessive regulation in the product and service markets, and administrative burdens. The Commission doubts that aid is the appropriate measure to tackle this problem.

Second, the Commission has expressed doubts about the proportionality of the measure, in particular concerning the level of support (10%), and about the possible negative effects, notably the possibility that some firms may reap windfall gains from it.

Finally, the Commission has doubts as to the legality of the scheme in that it automatically applies also to undertakings that may have yet to repay previous illegal and incompatible aid. Such automatic application would prevent the Commission from assessing the potential cumulated distortion arising from the combination of the old and the new aid.

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