How to take advantage of EU new Business Incentive policy

How to take advantage of EU new Business Incentive policy

Tamás Polster Head of Consulting EMEA

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Executive Summary

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Executive Summary

Within a globalising economy countries and regions are competing at an unprecedented scale to attract employment and innovation. In this race to FDI, State Aid or Business Incentives often play a critical role.

Contrarily to the US the EU has a strict regulation defining maximum incentives levels across all member states. Since the new regulation of 2014, state aid is much more restricted, it is however still possible to obtain up to 50% of initial investment in many regions.

To leverage this incentive potential it is essential to understand how the policy works and follow a strict process to achieve it. A year on, simple mistakes are still common practice as committing to a lease before applying for state aid or not having a local legal entity ready to submit formal application.

It is also essential to understand what specific activities can be incentivised in each region as sometimes small adjustments can lead to substantial benefits, such as identifying all activity that can qualify for R&D within a project.

This white paper provides an introduction to the various stages involved in the process and offer guidance on the incentive negotiation process.

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Overhaul of Incentives policy in the EU

An EU wide strict regulation

Incentives in member states are regulated by a strict EU wide policy (1) designed to limit incentive competition between member states. The overall aim of the EU incentive policy is to reduce development gap between regions trough FDI and employment. This differs to the US where local authorities have a much wider autonomy in incentive policies these are much more regimented and less widely available in the EU. This difference of approach is easily understandable when looking at the abyssal development gap between EU member states.

New Sate Aid control 2.0:

In the context of a strongly unionised Eurozone, incentives are a sensitive political issue. The EU wide regulation has to navigate between the desire of each member state to attract as much FDI as possible, the need to channel these to less developed regions whilst avoiding State Aid being used to merely relocate activity from one country to the other.

To reconcile these diverging objectives EU has completely revised its Sate Aid policy (Guidelines on Regional aid for 2014-2020). Many developed regions will not be entitled to provide incentives anymore and there is a shifting emphasis from multinationals to local SME support. Control from Brussels is also expected to increase to ensure that member states do not misuse or camouflage State Aid. Whilst it remains unusual there is an increasing number of projects where reimbursement of irregular state aid has been requested after EU audit. .

(1) Guidelines on regional State aid for 2014-2020 (2013/C 209/01)

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Aid intensity ceilings are defined for each region

To reach this leveling objective and to regulate competition between member states and regions the EU sets "maximum aid intensity" ceiling for each region. The ceiling level depends on the development status of each region. Higher aid intensity will be allowed in less developed regions as Central or Eastern Europe usually up to 50% whilst no incentives will be available in the more prosperous western regions.

The objective of regional aid is to support economic development and employment in disadvantaged regions of Europe. In order to avoid or minimise any distortion of competition caused by this aid, the regional aid guidelines set out the rules under which Member States can provide financial incentives to companies to invest in these areas.

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Impact assessmentUnder new regulation each project will have to demonstrate that the incentives applied for have been essential in the decision to locate the activity in a given region. These impact assessments are relatively heavy and can be audited by Brussels.

R&D As R&D falls under different category and can be incentivised separately many industrial or services projects now boost significant R&D component .

Overhaul of Incentives policy in the EU

ˮObviously R&D angles are easier to demonstrate in certain sectors such as IT and high tech industries rather than more traditional projects.

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Incentive ceilingsThe ceilings are defined as a percentage of either a project's capital expenditure or the payroll of any new employment generated by a project in the first two years. Each member state is subdivided into regions and each receives a ceiling. Many regions of Central & Eastern Europe will have maximum aid intensity of 50% meaning that the sum of all of the incentives provided to a company investing in that region cannot exceed 50 % of the project's capital expenditure or 50% percent of the first two years' payroll. Since 2014 the aid ceilings can be increased for smaller projects applied for by SME

Member states have some flexibility in defining what can be incentivised and under what form:

Implementation at national level

Within the EU regulation and especially ceiling levels member still have some flexibility in defining their incentive policy.

Project requirement example: • Project must fall under activity sector X, Y, Z• Minimum investment volume • Minimum Employment threshold • Number of jobs with higher education level• Complexity of the task or products delivered• Etc...

Typical Incentive components (Σ< ceiling): • Direct government cash grant + • Training subsidy + • Tax exemption +• Etc...

Application process within the EU

Incentives will be ‘negotiated’ and channelled through national authorities except in Federal states as Germany or Belgium, where regional governments will be also involved. Local level incentives will be very limited and usually also covered by national IPA.

Member state (or federal region) can define which type of project can receive incentives, as well as the form these incentives take.

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Incentive negotiation Process

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EU Aid maximum intensity (2014-2018)

Romania

Slovakia

Poland

Hungary

Base map : © EuroGeographics Association for the administrative boundaries

Latvia

Bulgaria

Croatia

Ceiling > 35%

Article 107(3) and (c) of the Treaty on the Functioning of the European Union (TFEU)

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10 Tips for incentive negotiations in the EU

1. Don’t overestimate the availability of Incentives in the EU if you are used to US system

2. Understand local incentive policy requirements to present your project properly

3. Identify all potential R&D angles of your project as these are much easier to incentivise

4. Never sign a lease or recruit before your incentives have been approved.

5. Identify discretionary versus fixed items in the proposed incentive pack to focus negotiations.

6. Positions transferred from one member state to the other cannot be incentivised.

7. Check local government approval process as these can be lengthy.

8. Check if you require a local legal entity to submit application to be ready on time

9. Plan cash flow carefully as effective Incentive payments can in practice take long.

10. Verify project duration commitment details to avoid reimbursement risks.

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DTZ will guide you trough the entire location selection and Incentive

negotiations process. The routemap outlines our approach from the business case stage through to implementation and occupation. Individual components can be configured to best suit our clients’ needs. We are also able to supply individual components or integrate them within your own project team.

Tamás PolsterSenior Director Head of Consulting EMEA [email protected]

Kate MullinsAssociate DirectorConsulting [email protected]

DTZ EMEA Location and Incentive Advisory Services