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Brussels, 8th February 2007

State aid: Commission decides tax reductions on regional production in Sicily constitute illegal aid

The European Commission has decided that fiscal incentives adopted by Sicily in two regional laws are incompatible with EC Treaty state aid rules. The schemes provide for exemptions from the Italian tax on regional production activities (IRAP) in favour of companies operating in certain sectors in Sicily. These tax exemptions would be liable to distort competition with the EU's Single Market by selectively favouring certain categories of undertakings and therefore cannot be implemented. As no aid has yet been granted under these measures, there is no need for the Commission to ask for recovery.

Competition Commissioner Neelie Kroes said “These two decisions illustrate my determination to crack down on aid which distorts competition without promoting growth".

On 6 September 2005 (see IP/05/1102) and 21 September 2005, the Commission opened a formal investigation into fiscal incentives adopted by Sicily in its regional laws n° 21 of 29/12/2003 and n° 17 of 31/12/2004. According to these regional laws, certain new firms created in 2004 and some existing undertakings can benefit from a 5-year exemption from paying the IRAP. This concerns new firms which, as of 2004 started operating in the sectors of tourism, hotels, cultural goods, agricultural feed, information technology and craft activities, plus all new firms starting their activities in an industrial sector as of 2004 with a turnover smaller than €10 million. Moreover, the regional laws give existing firms, except firms operating in the chemical and petrochemical sectors, a five-year exemption as from 2004 on that part of IRAP which is due on the share of the tax basis exceeding the average tax basis of the years 2001-2003.

The regional laws also created a so-called 'Euro-Mediterranean Centre of Finance and Insurance Services'. Under the regional laws, subsidiaries of financial and insurance companies that operate within the Centre can benefit from a 50% reduction on the rate of IRAP for activities made within the Centre. The regional laws also grants cooperatives a reduction in the rate of IRAP by 1% in 2005, 0.75% in 2006 and 0.5% in 2007. The same benefit can be extended to security service companies.

In accordance with the Commission's long-standing practice, such measures are considered to constitute operating aid, as they consist of selective reductions of taxes normally borne by companies in the course of their business activities. Operating aid can be declared compatible with the Single Market only in areas with an abnormally low standard of living or serious underemployment (assisted areas according to Article 87(3)(a) of the EC Treaty) and, under strict conditions. None of these conditions are fulfilled in these cases.

During the consultation period following the opening of the inquiries, no observations whatsoever have been submitted either by the Italian authorities or by third parties. The Commission can therefore only confirm the doubts raised in its decisions to open formal investigation procedures and find the proposed measures incompatible with the Single Market.

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