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State Aid

PR(07)19: Norway is asked to amend its law on compensation for value added tax (VAT)


The EFTA Surveillance Authority declared today that the Norwegian Act on compensation for VAT infringes the state aid rules of the EEA Agreement. It has therefore asked the Norwegian authorities to amend the Act and also to recover any compensation that has been paid out in contravention of the state aid rules.

The VAT Compensation Act came into force in 2004. It applies to municipalities, county municipalities and certain other institutions, mostly carrying out tasks under municipal supervision.

Under the general VAT rules, municipalities have to pay VAT on their purchase of goods and services in the same way as ordinary consumers. In some instances, the municipalities may decide not to purchase certain goods or services but instead that they shall be provided by their own employees. This could, for example, be the case for cleaning services. Such in-house production does not involve any sales transaction and no VAT is levied. As no VAT is paid on in-house production, municipalities would have an incentive to choose that instead of external purchase subject to VAT.

The VAT Compensation Act established that municipalities get VAT reimbursed. By that the VAT system would not create any incentive either way between in-house production and outsourcing. In this way the Act did away with a distortion of competition and no state aid is involved as long as provision of goods or services subject to VAT is concerned.

The state aid issue arises, however, because certain services are not subject to VAT. That is the case, for example, for financial services, or health and education services. Providers of such services shall not charge VAT on their sales, but they have to pay VAT on the goods and services they buy themselves, like teaching material to provide educational services. Municipalities and other institutions covered by the VAT Compensation Act are reimbursed in full for the VAT they pay. This is not the case for private providers of VAT-free services.

When such private companies operate in competition with municipalities or municipal institutions, the compensation to the municipalities for VAT implies that there is a transfer of state means that distorts competition. The VAT Compensation Act does not contain any provisions that otherwise would mean that no state aid is involved or that aid would be compatible with the EEA Agreement. The Authority has therefore concluded that the VAT Compensation Act constitutes an aid scheme in the meaning of the EEA Agreement. Aid under such a scheme is operating aid, which is normally not accepted.

Considering this background, the Authority has asked the Norwegian authorities to amend the VAT Compensation Act such that no aid will be granted, and to recover aid that has been granted.

The formal investigation procedure which was opened in this case in July 2006 on the basis of a complaint was closed by today's decision.

For further information, please contact:

Mr. Amund Utne
Director, Competition and State aid Directorate
Tel. (+32)(0)2 286 18 50; or

Mr. Inge Hausken Thygesen
Press and Information Officer, Legal & Executive Affairs
Tel. (+32)(0)2 286 18 66

3 May 2007

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