EUROPEAN COMMISSION

Brussels, 11.7.2012
C(2012) 4629 final

Subject: State Aid SA.33183 (2012/N) – Latvia

Tax Support Measure

Sir,

I. Procedure

1. By letter registered on 15 June 2011, the Latvian authorities pre-notified the Tax
Support Measure (TSM), registered as SA.33183 2011/PN. Following a pre-notification
meeting held on 14 July 2011, the Commission requested additional information on 29
July 2011, 29 September 2011 and 16 November 2011. The Latvian authorities replied
on 16 September 2011, 24 October 2011 and 2 December 2011, respectively.

2. On 16 February 2012, the Latvian authorities notified the TSM for reasons of legal
certainty. The Commission requested further information by email dated 29 March 2012
and by letter of 15 June 2012. The Latvian authorities provided the requested
information by letters dated 16 April 2012 and 21 June 2012, respectively.

Edgars RINKĒVIČS
Ārlietu Ministrs
K.Valdemāra iela 3,
Rīga LV-1395
LATVIJA

Commission européenne, B-1049 Bruxelles/Europese Commissie, B-1049 Brussel – Belgium

Telephone: 00- 32 (0) 2 299.11.11.
II. Description of Measure

Objective of the notified measure

3. The TSM is part of an overall strategy to fight tax evasion and improve tax collection in
Latvia. In the context of significant amounts of outstanding tax liabilities1, the measure
aims at providing the taxpayers with an incentive to regularize their debt situation with
the Latvian tax administration. As a result, it should improve the collection of taxes
which were identified by 1 September 2010 and would be still unpaid by the date of
entry into force of the measure.

4. Within the framework of the EU medium-term financial assistance in support of the

Latvian authorities' Economic Stabilization and Growth Programme2, the EU and Latvia
agreed on a set of measures to be implemented in order to achieve a deficit of no more
than 2.5% of GDP in 2012. In this context, the TSM was considered by both parties as a
key measure to be taken with the 2012 budget3.

Nature of the notified measure

5. Under existing fiscal law, Latvian taxpayers with outstanding tax debts are liable to a
late payment interests, and, in some cases, to an audit penalty due in case of wrong
fiscal declarations brought to light by an audit.

6. The notified measure waives the late payment interest rate and 90% of the audit penalty
(if applicable) on fiscal debts due by 1 September 2010 by any taxpayer.

7. The tax debts themselves are not cancelled, but their payment can be further postponed.
The Latvian tax administrations shall grant an extension of the tax payment term
according to the following criteria:
- the tax debt payments under the TSM shall be divided equally and made at least once
a month,
- the maximum payment extension period is of 60 months for all tax payers,
- the minimum payment threshold is of 50 LVL (EUR 71.64) per month per type of
tax.

8. In case the taxpayer does not make regular payments in accordance with the payment
schedule, the Latvian tax administrations shall cancel the decision on application of the
TSM; full late payment interest and full audit penalty (if applicable) shall be restored on
the outstanding principal debt (since the principal debt occurrence date).

1
The total amount of tax liabilities on 1st January 2012 amounts to LVL 929 million (EUR 1.3 billion).
2
See Council Decision 290/2009/EC of 20 January 2009 providing Community medium-term financial
assistance for Latvia (OJ L 79, 25.3.2009, p. 39–41).
3
See Fifth Supplemental Memorandum of Understanding of 21 December 2011 between the European Union
and the Republic of Latvia.
4
The exchange rate at the time of notification, i.e. 16 February 2012, is EUR 1 = 0.6986 LVL (OJ C 46,
17.02.2012, p. 1).

2
 Scope of the notified measure

9. The TSM refers to the following taxes :

- personal income tax,
- corporate income tax,
- value added tax (VAT),
- excise duty,
- customs duties (and charges having an effect equivalent to customs duties payable on
the importation of goods) and import charges introduced under the common
agricultural policy or under the specific arrangements applicable to certain goods
resulting from the processing of agricultural products,
- mandatory state social insurance contributions,
- natural resource tax,
- real estate tax.

10. In case of collective insolvency proceedings, participation in the TSM shall be available
as far as it is not contrary to the insolvency regulations. A taxpayer may not apply for
the TSM if the court has ruled on the Insolvency Proceeding.

Duration

11. The measure should enter into force on 1 September 2012 and the maximum fiscal
debts payment extension period will be of 60 months. However, the TSM only concerns
taxes due by 1 September 2010.

Aid beneficiaries and estimated budget

12. All taxpayers (both undertakings and natural persons) are eligible. According to the
Latvian authorities, the number of beneficiaries will be higher than 1 000.

13. As the participation in the TSM is on a voluntary basis, the revenues deriving therefrom
will depend upon taxpayers' decision to participate. For 2012 only, the Latvian
authorities expect that the notified measure will produce a positive budgetary impact
(improved tax collection) amounting to LVL 15 000 000 (EUR 21 471 514)5. This
estimate, which was approved by the Commission in the context of the fifth review
mission carried out by the Commission in cooperation with the IMF in 20116, relies on

5
This amount breaks down as follows:
- corporate income tax: 1.10 million;
- personal income tax: 4.40 million;
- VAT: 6.10 million;
- social security contributions: 3.20 million;
- other taxes: 0.20 million.
6
In the Supplemental Memorandum of Understanding between the EU and Latvia, the amount of LVL 15
million is explicitly mentioned as a positive impact on the revenue side of the budget for 2012.

3
 an empirical IMF calculation based on tax amnesties implemented in other countries7. A
slightly reduced impact is expected for the following years.

III. Assessment

Existence of aid

14. According to Article 107 (1) of the Treaty, “any aid granted by a Member State or
through State resources in any form whatsoever which distorts or threatens to distort
competition by favouring certain undertakings or the production of certain goods shall,
in so far as it affects trade between Member States, be incompatible with the internal
market”.

15. It follows that in order to be qualified as State aid, the following cumulative conditions
have to be met: 1) the measure has to be granted out of State resources, 2) it has to
confer an economic advantage to undertakings, 3) the advantage has to be selective and
distort or threaten to distort competition, 4) the measure has to affect intra-EU trade.

16. The notion of selectivity is interpreted by the jurisprudence in such a way that the
measure is selective if it is “intended partially to exempt those undertakings from the
financial charges arising from the normal application of the general system of
compulsory contributions imposed by law.”8 It follows that a tax measure is selective if
it constitutes a departure from the application of the general tax framework. For this
purpose, the case-law of the Court of Justice states that one should assess whether a
given measure favours certain undertakings in comparison with other undertakings
which are in a legal and factual situation that is comparable in the light of the objective
pursued by the scheme in question.9 By contrast, advantages resulting from a general
measure applicable without distinction to all economic operators do not constitute State
aid within the meaning of that article10.

17. Under the notified measure, all taxpayers, both undertakings and private persons, are
eligible to the TSM. The TSM foresees a single extension of 60 months of the payment
term as well as a waiver of the late interest and audit penalty applicable to all
undertakings of any sector. The exception providing that the payment term extension
should not lead to monthly payment of less than 50 LVL (EUR 71.6), is justified by the
disproportionate administrative costs that would follow from the collection of monthly
payment of less than 50 LVL (EUR 71.6). As a result, such an exception should not be
viewed as a selective feature.

7
Theoretical review of the results of tax amnesties implemented in other countries, adjusted to the Latvian
conditions on the basis of discussions with the Latvian Employers' Confederation and Chamber of
Commerce.
8
Case 173/73 Italian Republic v. Commission of the European Communities [1974] ECR 1974 p. 709,
Summary no. 3.
9
Case C-88/03 Portuguese Republic v. Commission of the European Communities [2006] ECR I-7115,
paragraph 54; Case C-172/03 Wolfgang Heiser v. Finanzamt Innsbruck [2005] ECR I-1627, paragraph 40;
Case C-169/08 Presidente del Consiglio dei Ministri v. Regione Sardegna [2009] ECR I-10821, paragraph
61.
10
Case C-66/02 Italy v Commission [2005] ECR I-10901, paragraph 99.

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18. The question arises as to whether the notified measure would grant a selective
advantage to the undertakings benefitting from the measure as compared to
undertakings who paid their taxes in due time. In this respect, the Commission
acknowledges that the limited temporal application and the exceptional nature of the
measure (which concerns tax debts due by 1 September 2010 and still outstanding at the
date of entry into force of the measure) is inherent to the concept of a tax amnesty
which aims to improve both the collection of taxes and the taxpayers' compliance. The
fact that only taxpayers satisfying the eligibility conditions can benefit from the
measure cannot in itself make it into a selective measure.

19. The Latvian authorities have confirmed the exceptional nature of the measure which is
expected to provide a strong incentive for taxpayers to voluntarily comply with tax
regulations (without entailing exemption from verification), and, to accelerate debt
collection, while simultaneously saving enforcement expenses of the tax administration.

20. In view of the significant outstanding tax liabilities in Latvia, the Commission is of the
opinion that the measure should result in significant additional tax revenues by
encouraging taxpayers to normalize their situation. The expected positive budgetary
impact of the TSM (LVL 15 000 000 for 2012) indicates that the notified measure must
be considered as an effective tax amnesty resulting in improved tax collection in Latvia.

21. It also appears from the scope of the notified measure that it does not differentiate
between undertakings on the basis of their sector or size. The existence of significant
amounts of outstanding tax liabilities may be explained by various causes such as the
existence of pending litigations11. In this context, the TSM does not exclude any
category of undertakings, nor does it lead to the existence of any kind of selective
feature.

22. Furthermore, the figures provided by the Latvian authorities regarding the amount of
debt, late interest and penalties due by the estimated 20 largest beneficiaries,
demonstrate the absence of de facto selectivity in favour of certain undertakings or
sectors. In this context, the measure must be considered as being effectively open to any
undertakings of any sectors without favouring any particular pre-defined group of
undertakings.

23. Finally, the absence of de jure and de facto selectivity is further reinforced by the
absence of any discretionary power exercised by the tax administration. The measure is
of direct application for all taxpayers volunteering for its application. The tax
administration's action is limited to administering the implementation of the measure
without any power to intervene in the granting or intensity of the measure.

24. For the reasons explained above, the Commission has come to the conclusion that, for
the purpose of the application of the selectivity criterion, the TSM applies equally to all
taxpayers without providing any form of selective advantage. It follows that the
measure is to be considered as a general measure falling outside the scope of Article
107 TFEU.

11
In this respect, the Latvian authorities have explained that the TSM will offer an opportunity for taxpayers
with pending tax litigation to enter into compliance.

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25. The Commission recalls that, in designing their tax legislation, Member States are under
the obligation to comply with EU law. It follows that the notified measure should
comply with EU harmonised rules on VAT and customs duties, which includes the
obligation to ensure effective collection of the EU's own resources without disrupting
the proper functioning of the common system of VAT (neutrality principle)12 and
without affecting the EU rules on the recovery of customs duties13. The present decision
is taken without prejudice of the compliance of the notified measure with EU
harmonised rules on VAT and customs duties.

IV. Decision

The Commission has accordingly decided:

- that the notified measure does not constitute aid.

If this letter contains confidential information which should not be disclosed to third parties,
please inform the Commission within fifteen working days of the date of receipt. If the
Commission does not receive a reasoned request by that deadline, you will be deemed to
agree to the disclosure to third parties and to the publication of the full text of the letter in the
authentic language on the Internet site:

http://ec.europa.eu/competition/elojade/isef/index.cfm

Your request should be sent by registered letter or fax to:

European Commission
Directorate-General for Competition
State Aid Greffe
Rue Josef II 70
B-1049 Brussels
Fax No: (+32)(0)22.96.12.42

Yours faithfully
For the Commission

Joaquín ALMUNIA
Vice-President

12
See Council Directive 2006/112/EC of 28 November 2006 on the Common System of Value Added Tax
(OJ L 347, 11.12.2006, p. 1).
13
See Regulation (EEC) No 450/2008 of the European Parliament and of the Council of 23 April 2008 laying
down the Community Customs Code (OJ L 145, 4.6.2008, p. 1).