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Getting the Deal Through: State Aid 2018. Ukraine
Author: Igor Svechkar, Sergiy Glushchenko
Source: Getting the Deal Through: State Aid 2018
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1. Outline your jurisdiction’s state aid policy and track record of compliance and enforcement. What is the general attitude towards subsidies in your system?

Although Ukraine adopted laws to protect free competition in the 1990s, the regulation of state aid had lagged behind until recently. Over the past two decades, in the course of regional integration, Ukraine has signed a number of international agreements containing certain state aid-related provisions (ie, the EU-Ukraine Partnership and Cooperation Agreement (1994), the World Trade Organisation Agreements (2008) and the Energy Community Treaty (2011)). However, this in principle did not improve national state aid regulation, which continued to lack genuine monitoring and a system of enforcement for many years.

The EU-Ukraine Association Agreement (the Association Agreement) gave Ukraine an opportunity to fill this gap and finally develop a comprehensive and transparent legal framework for state aid. In particular, the Association Agreement requires Ukraine to roll out state aid regulation in convergence with the EU acquis. The new legislation took effect from 2 August 2017 and is expected to break a lasting Ukrainian bias towards state support measures representing about 9 per cent of its GDP.

What may contribute to the successful implementation of state aid reform is the ongoing economic crisis and constrained budget resources, which have naturally made Ukraine focus more on effective management of public funds and lean away from uncontrolled and chaotic state support measures.

Although less than a year has passed since the Ukrainian framework state aid rules became effective, its major secondary part has already been developed and adopted, while the first enforcement steps have already been made. This gives a good perspective on the future state aid regime outlined in our answers below.

2. Which national authorities monitor compliance with state aid rules and have primary responsibility for dealing with the European Commission on state aid matters?

The new state aid legislation allocates monitoring of compliance with state aid rules to the Antimonopoly Committee of Ukraine (AMC). The AMC is entrusted with various duties, including:

  • assessment and consideration of state aid notifications;
  • monitoring of state support measures in Ukraine and recovery of unlawful state aid incompatible with competition;
  • collection, processing and registration of data on existing state aid;
  • maintenance of the state aid register;
  • preparation of annual reports on state aid;
  • fostering of international cooperation in relation to state aid policy; and
  • preparation of draft proposals of the legislation concerning state aid, as well as the promotion of improvements to the state aid system.

The AMC has established a dedicated State Aid Unit with more than 20 employees. On numerous occasions AMC officers have pointed to the fact that its current capacity is insufficient to enforce state aid rules effectively (it is expected that the AMC may undertake hundreds of state aid assessments per year) and more people will be hired and trained for this purpose.

3. Which bodies are primarily in charge of granting aid and receiving aid applications?

Ukraine has no specific bodies primarily in charge of granting state aid. These may be different institutions (eg, ministries, state or local authorities, or legal entities authorised to manage state resources), depending on the state support measure. As to the receipt of aid applications, this is within the AMC’s domain.

4. Describe the general procedural and substantive framework.

In general terms, state aid is normally a public law issue in Ukraine, but private law may also be involved when supporting measures are provided via civil law instruments (eg, guarantees, capital injections, loans) or by undertakings authorised to manage public resources.

Structurally, the Ukrainian state aid-related rules are fragmented and incomplete. They are scattered around various legal acts, from the Commercial, Budget and Tax Codes to sectoral laws tailored to a particular industry (eg, the Law on State Support of Cinematography in Ukraine; the Law on the Electricity Market of Ukraine; the Law on State Support of Agriculture of Ukraine; the Law on State Support of Research and Development Institutes and Organisations that Develop and Sell Ammunition, its Elements and Special Chemical Goods; the Procedure for the liquidation of non-competitive coal and processing enterprises, approved by Resolution of the Cabinet of Ministers of Ukraine of 27 August 1997 No. 939; the Procedure for the use of funds provided by the state budget for restructuring of the coal and peat industry approved by Resolution of the Cabinet of Ministers of Ukraine of 11 March 2011 No. 236; the Procedure on approval of the use of funds of the state budget to support the construction of coal and peat mining enterprises, technical re-equipment of these enterprises approved by Resolution of the Cabinet of Ministers of Ukraine of 8 October 2012 No. 988).

5. Identify and describe the main national legislation implementing European state aid rules.

The main national legislation, which has implemented the European-style state aid rules, includes the Association Agreement and the Law of Ukraine on State Aid to Undertakings No. 1555-VII of 1 July 2014 (the State Aid Law).

The Association Agreement sets out the fundamental principles underlying the approximation of the Ukrainian legislation and practice in convergence with the EU acquis.

The State Aid Law includes the general principle of incompatibility of state aid with competition, as well as framework rules on the assessment of various state support measures, de minimis threshold, powers and functions of the AMC, notification procedures for existing and new state aid, investigation of unlawful and misused aid, limitation periods, monitoring issues and judicial review. The State Aid Law became fully effective on 2 August 2017. The main upcoming deadlines established in the State Aid Law are as follows:

  • 2 August 2018: deadline to notify existing state aid measures; and
  • 2 August 2022: deadline to align existing state aid measures with state aid rules.

Notably, the Association Agreement and the State Aid Law lay down only the basic rules and leave the details to secondary legislation. The secondary legislation developed so far includes the following:

  • The Procedure on Conducting Monitoring of State Aid to Undertakings approved by Regulation of the AMC No. 43-pII of 28 December 2015 (AMC Monitoring Procedure), which sets out the rules on how the AMC will monitor state aid and deliver annual reports and became effective on 2 August 2017.
  • The Procedure on Submission of Information on Existing State Aid to Undertakings to the AMC approved by Regulation of the AMC No. 43-pII of 28 December 2015 (AMC Procedure on Existing State Aid), which sets out the rules and forms on how the AMC will collect information on existing state aid, review submissions and issue recommendations and became effective on 2 August 2017.
  • The Procedure on Keeping of, and Access to, the State Aid Register approved by Regulation of the AMC No. 43-pII of 28 December 2015 (AMC Procedure on the State Aid Register), which clarifies the way the AMC will maintain the state aid register and provide access to it and became effective on 2 August 2017.
  • The Procedure of the AMC on Rules for Review of Cases on State Aid to Undertakings No. 8-pII of 12 April 2016 (AMC Procedure on State Aid Cases), which sets out the rules on how the AMC will issue information requests and investigate cases of unlawful or misused state aid, the rights of the parties, access to files, timeline, etc and became effective on 2 August 2017.
  • The Procedure of the AMC on Rules for Preparation of Notifications on New Aid and Re-Examination of Existing State Aid 2-pII of 2 March 2016 (AMC Procedure on Notification of State Aid), which sets out detailed rules on how the new state aid measures should be notified and reviewed by the AMC and became effective on 2 August 2017.
  • Resolution of the Cabinet Ministers of Ukraine on Approval of the Rules for Recovery of Unlawful Aid Incompatible with Competition No. 468 of 4 July 2017 (Cabinet Ministers of Ukraine Resolution on Recovery of State Aid), which lays down the detailed procedure for the recovery of unlawful state aid found by the AMC to be incompatible with competition.
  • Resolution of the Cabinet Ministers of Ukraine on Criteria for Approval of State Aid for Professional Training No. 11 of 11 January 2018.
  • Resolution of the Cabinet Ministers of Ukraine on Criteria for Approval of State Aid for Employment of Certain Categories of Workers and Creation of New Jobs No. 33 of 31 January 2018.
  • Resolution of the Cabinet Ministers of Ukraine on Criteria for Approval of State Aid for Reorganisation and Restructuring No. 36 of 31 January 2018.
  • Resolution of the Cabinet Ministers of Ukraine on Criteria for Approval of State Aid for Research and Development No. 118 of 7 February 2018.
  • Resolution of the Cabinet Ministers of Ukraine on Criteria for Approval of State Aid for Regional Development and Support of SMEs No. 57 of 7 February 2018.

Several other secondary legal acts are in the pipeline. They include:

  • Draft Resolution of the Cabinet Ministers of Ukraine on General Criteria for Assessment of Compatibility of State Aid (Cabinet Ministers of Ukraine Draft Resolution on General Criteria), which establishes the requirements, terms, conditions (purpose, categories, thresholds of state aid, etc) and other necessary legal elements for the assessment of compatibility of state aid that is not intended for horizontal and sectoral purposes.
  • The Draft Resolutions of the Cabinet Ministers of Ukraine on Criteria for Approval of State Aid for Environmental Protection.
  • The Draft Law of Ukraine on Amendments to Some Laws of Ukraine to Bring them into Compliance with State Aid Laws, which aligns more than 15 laws of Ukraine with state aid legislation, including the aforesaid criteria.

The fully fledged and operational state aid regulation is also supplemented by secondary legislation on sectoral aid, services of general economic interest (SGEI), a procedure on the revocation of decisions on clearance of new state aid by the AMC, etc.

6. What are the most significant national schemes in place governing the application and the granting of aid, that have been approved by the Commission or that qualify for block exemptions?

The European Commission has no power to approve state aid schemes or to grant block exemptions in Ukraine. As far as the AMC is concerned, on 17 April 2018, the AMC took its first ever decision on compatibility of new state aid. The decision follows the review of the new aid measure notified by the municipality of Chernigov City. The notified measure involves financial support for the city cultural centre, covering its wage costs and utility bills. The AMC found the measure to constitute state aid, which, however, is compatible as it promotes culture and heritage conservation and has limited effect on competition.

Importantly, on 30 December 2016, the AMC published a report on its inquiry into state support measures in the energy sector (Energy Sector Report). In the Energy Sector Report, the AMC concluded that many of the measures in Ukraine may qualify as state aid under EU rules (and may even contravene these rules). Unless these measures had expired or were repealed before August 2017, they have to be notified to the AMC for closer assessment and approval.

7. Are there any specific rules in place on the implementation of the General Block Exemption Regulation (GBER)?

The GBER is not implemented in Ukraine. Notably, however, under the State Aid Law the AMC can develop and adopt the respective block exemption from the obligation to notify new state aid. However, this does not appear to be mandatory for the AMC; nor is it on its short-term agenda.

8. Do state aid implications concerning public undertakings, public holdings in company capital and public-private partnerships play a significant role in your country?

So far, this has not played a significant role in Ukraine in the context of state aid, though a large proportion of state support measures (ie, tax benefits, direct subsidies, state guarantees and debt write-offs) have been provided to public undertakings active in certain priority sectors (ie, coal mining, steel and energy), including in the provision of SGEI. As this public support results in a great share of budget revenue forgone or not collected at all, these measures will be scrutinised by the AMC under the State Aid Law and associated secondary rules.

For example, one of the state support measures analysed by the AMC in the Energy Sector Report related to compensation for losses generated from supplies of electricity to preferential customers on a regulated tariff. In this respect, the AMC clarified in the Energy Sector Report that this measure may constitute state aid. However, reasonable compensation for losses generated from electricity supplies to preferential customers on a regulated tariff will not amount to state aid if such supplies qualify as SGEI.

9. Are there any specific national rules on SGEI? Is the concept of SGEI well developed in your jurisdiction?

Currently, there are no specific national rules on SGEI, other than the broadly worded derogation in the State Aid Law saying that any reasonable compensation to undertakings providing SGEI is not caught by the State Aid Law. It appears, however, that the EU principles envisaged by the Altmark case have not been fully implemented in the State Aid Law. At the same time, the AMC, in its decisions, frequently makes references to the Altmark case and we understand it should apply the criteria from this case while measuring the compensation.

However, it remains unclear whether the AMC will be involved at all in measuring the accounts of SGEI providers to ensure that state support measures do not result in overcompensation. Namely, in the Energy Sector Report the AMC expressly invited the Cabinet of Ministers to clarify the AMC’s role in relation to the SGEI. In particular, the AMC maintains in the Energy Sector Report that ‘in order to exclude the fact that these entities receive [overcompensation], the [AMC] may . . . together with [national regulators in the energy sector] decide on the approach to the revision of prices and costs that were incurred to comply with “reasonable compensation” requirement’.

10. Is there a legal right for businesses to obtain state aid or is the granting of aid completely within the authorities’ discretion?

This depends on the exact state support measure. In some cases, the measure is expressly envisaged by law and can be claimed by a beneficiary fulfilling eligibility criteria. But, on the whole, it is within the discretion of an awarding authority.

11. What are the main criteria the national authorities will consider before making an award?

As far as aid providers are concerned, the main thing they will need to consider before making an award is whether the aid measure has been duly notified to and approved by the AMC, which has broad discretion to assess substantive criteria.

In this context, before authorising an aid measure the AMC will need to make sure that it meets certain criteria and is beneficial to the economy. In general terms, state aid will be considered beneficial if, for example, it brings social and economic development to regions with poor living standards or a high unemployment rate, or supports and preserves national cultural heritage and has a minor impact on competition.

12. What are the main strategic considerations and best practices for successful applications for aid?

Under the State Aid Law, all state support measures existing as of 2 August 2017 will have to be notified to the AMC by 2 August 2018, which can then investigate and declare them incompatible with competition. Therefore, it is in the interest of providers of state support to make a timely notification to the AMC. Because of the complexity of substantive state aid rules, before the filing is made, it makes sense to re-examine the measure in advance to identify potentially problematic state support and be able to adapt it accordingly to withstand further scrutiny of the AMC.

This policy consideration appears to be especially important in cases involving new individual supporting measures, where the success of interaction with the AMC will generally depend on how closely a beneficiary works with an aid provider and how early the former is included in the notification process.

13. How may unsuccessful applicants challenge national authorities’ refusal to grant aid?

Generally, refusal of an aid measure may be subject to judicial review.

14. To what extent is the aid recipient involved in the EU investigation and notification process?

State aid providers bear primary responsibility for ensuring that their policy measures and projects comply with state aid rules. However, beneficiaries of aid may also be notably involved in the notification and investigation process.

For instance, under the State Aid Law, an undertaking intending to obtain an aid measure shall provide extensive information about itself to an aid provider. Additionally, under the AMC Procedure on Notification of State Aid, state aid providers may seek state aid beneficiaries’ participation in the pre-notification consultations with the AMC to provide clarifications on technical or financial details that may be involved in a particular state measure.

Separately, in accordance with the State Aid Law, the AMC can open the formal investigation procedure whenever it finds that authorised aid is being misused. In this case, the aid beneficiary will likely bear the status of the defendant (either alone or with an aid provider) obliged to provide the AMC with all assistance or information needed. To ensure equality of treatment of the parties in this case, such an aid beneficiary will have various corresponding rights, including access to the file and being heard by the AMC.

15. To which national bodies should competitors address complaints about state aid? Do these bodies have enforcement powers, and do they cooperate with authorities in other member states?

Competitors should address complaints about state aid to the AMC.

16. How can competitors find out about possible illegal or incompatible aid from official sources? What publicity is given to the granting of aid?

There are several ways in which competitors can discover illegal or incompatible aid from official sources.

The most straightforward way is to monitor the AMC website. Under the State Aid Law, the AMC should publish the decision to open a state aid case on its website, along with the invitation of all interested parties to submit their comments within one month. Notably, if a competitor so requests, its identity shall be withheld from the provider of the state aid.

As part of state aid-monitoring functions, the AMC will also establish and maintain the state aid register, and will provide free access to all interested parties. Additionally, the AMC shall issue annual reports on granted state aid in Ukraine. Such reports will be published in the Uriadovy Kuryer Newsletter and on the Cabinet Ministers of Ukraine web page.

17. Give details of any legislation that gives competitors access to documents on state aid granted to beneficiaries.

Under general rules envisaged by the State Aid Law and the AMC Procedure on State Aid Cases, a competitor may inform the AMC of any alleged unlawful aid and any alleged misuse of aid by submitting a complaint. Upon review of this complaint, the AMC may open a state aid case where the competitor will bear the status of the complainant with all corresponding rights, including access to the file.

In turn, non-complaining competitors may take advantage of the Law on Access to Public Information No. 2939-VI of 13 January 2011 by submitting a request to get access to the relevant documents. In this case, the AMC will generally be obliged to address this request within a period of up to 25 business days following its receipt.

18. What other publicly available sources can help competitors obtain information about possible illegal or incompatible aid?

Other publicly available sources include, for example, the Budget Code and the websites of ministries, the State Fiscal Service, the State Treasury Service of Ukraine, etc.

19. Apart from complaints to the national authorities and petitions to national and EU courts, how else may complainants counter illegal or incompatible aid?

Complainants active in the energy sector may take advantage of the Energy Community Treaty. In particular, the latter gives undertakings the right to approach the Secretariat of the Ministerial Council of the Energy Community (Council) with complaints.

Upon review of these complaints the Council may open an infringement case and impose sanctions. Under the Rules of Procedure for Dispute Settlement of the Ministerial Council of the Energy Community No. 2008/01/MG-EnC of 27 June 2008, interested parties may be granted access to the case file and may submit written observations to the Secretariat.

20. Which courts will hear private complaints against the award of state aid? Who has standing to bring an action?

Private complaints against the award of state aid can be heard by administrative courts. Complaints can be filed by anyone whose rights or legitimate interests have been breached or jeopardised by the award of unlawful state aid.

21. What are the available grounds for bringing a private enforcement action?

Private enforcement action can be brought under existing civil, commercial and administrative laws.

22. Who defends an action challenging the legality of state aid? How may defendants defeat a challenge?

This depends on the facts of the case. Potentially, the defendant can be either an aid provider (eg, if it failed to notify unlawful aid), an aid beneficiary (eg, in case of misused aid) or even the AMC (eg, if it incorrectly assessed compatibility of the new state measure).

23. Have the national courts been petitioned to enforce compliance with EU state aid rules or the standstill obligation under article 108(3) TFEU? Does an action by a competitor have suspensory effect? What is the national courts’ track record for enforcement?

To our knowledge, since the state aid rules became effective in August 2017, the Ukrainian courts have not been petitioned to enforce compliance with the state aid rules.

24. Is there a mechanism under your jurisdiction’s rules of procedure that allows national courts to refer a question on state aid to the Commission and to stay proceedings?

There is no mechanism that allows the Ukrainian courts to refer a question on state aid to the European Commission. Interestingly, though, under the Association Agreement, while interpreting the state aid legislation, the Ukrainian courts will nonetheless be bound by the relevant jurisprudence of the Court of Justice of the European Union (CJEU), as well as relevant secondary legislation, frameworks, guidelines and other administrative acts in force in the European Union.

25. Which party bears the burden of proof? How easy is it to discharge?

This depends on the court that reviews the case. In administrative courts the burden of proof rests with the defendant (ie, an aid provider that allegedly unlawfully granted the existing state aid or the AMC if the compatibility of the new state aid was allegedly wrongly assessed). In commercial courts the procedure is based on the adversarial principle, which means it is the complainant that has to prove its case.

26. Should a competitor bring state aid proceedings to a national court when the Commission is already investigating the case? Do the national courts fully comply with the Deutsche Lufthansa case law? What is the added value of such a ‘second track’, namely an additional court procedure next to the complaint at the Commission?

Under the Association Agreement, while interpreting the state aid legislation, the Ukrainian courts are bound by the relevant jurisprudence of the CJEU, as well as relevant secondary legislation, frameworks, guidelines and other administrative acts in force in the European Union. However, to our knowledge, the Ukrainian courts have not been petitioned yet to enforce compliance with the state aid rules. Therefore, it remains to be seen how compliant they will be with regard to the Deutsche Lufthansa case law.

27. What is the role of economic evidence in the decision-making process?

Generally, economic evidence can be taken into account, but in practice the national courts are reluctant to accept it.

28. What is the usual time frame for court proceedings at first instance and on appeal?

The administrative court, as a general rule, has one month to consider a case at first instance and 60 days for the appeal proceeding. Normally, the commercial court takes up to two or three months for trial and the same time for consideration of appeal.

Under the general rule the pre-trial proceedings in the administrative and commercial courts should last no longer than two months and the court should consider the case on the merits within one month. A case should be considered on appeal within two months. However, the time frames for pre-trial proceedings may be extended for up to one month and, in practice, the statutory limits may be exceeded.

29. What are the conditions and procedures for grant of interim relief against unlawfully granted aid?

Under the State Aid Law, an interested party can ask the AMC for interim measures. In particular, a competitor can submit a formal complaint to the AMC and, in parallel, ask the authority to suspend the state aid measure if it affects or may affect competition.

For commercial and administrative courts, a general test for granting interim measures is that failure to do so will significantly hinder or make impossible the enforcement of a final decision or the effective protection of the claimant’s rights and interests. An additional ground for granting an interim measure by administrative court is prima facie evidence of an unlawful action or decision by the defendant and violation of the claimant’s rights and interests by the action or decision in question. The court can grant interim relief upon the application of the interested party or by its own motion. A court order on interim measures may be challenged on appeal.

30. What are the legal consequences if a national court establishes the presence of illegal aid? What happens in case of (illegal) state guarantees?

To our knowledge, there is no developed case law on this in Ukraine, as national courts are yet to review their first state aid cases. At the same time, they should be bound by the relevant jurisprudence of the CJEU, as well as relevant secondary legislation, frameworks, guidelines and other administrative acts in force in the European Union.

31. What are the conditions for competitors to obtain damages for award of unlawful state aid or a breach of the standstill obligation in article 108(3) TFEU? Can competitors claim damages from the state or the beneficiary? How do national courts calculate damages?

There are no specific conditions for competitors to obtain damages for the award of unlawful state aid. Commercial and administrative courts have their own general mechanisms of calculating damages, which are relatively similar.

32. What is the relevant legislation for the recovery of incompatible aid and who enforces it?

The basic rules regarding the recovery of state aid are laid down in the State Aid Law and the Cabinet Ministers of Ukraine Resolution on Recovery of State Aid. The recovery of incompatible aid is enforced by the AMC.

33. What is the legal basis for recovery? Are there any grounds for recovery that are purely based on national law?

A negative AMC decision finding state aid unlawful and incompatible with competition constitutes a legal ground for ordering recovery.

34. Has the Commission ever opened infringement procedures before the CJEU because of non-recovery of aid under article 108(2) TFEU?

As far as Ukraine is concerned, the AMC has not yet opened infringement procedures before the national courts because of non-recovery of illegal aid.

35. How is recovery implemented?

Under the Cabinet Ministers of Ukraine Resolution on Recovery of State Aid, where a negative recovery decision is taken, the AMC sends copies to the aid provider and the beneficiary within three days and publishes it on its website.

The aid provider concerned shall take all necessary measures to recover the aid from the beneficiary and must inform the AMC about them within a set deadline, which should not exceed two months following publication of the negative decision. The overall deadline for recovery of the aid should not exceed six months following publication of the decision.

Where the aid provider or beneficiary does not comply with the recovery decision, the AMC may refer the matter directly to the Administrative Court of Kiev City.

The recovery decision is compulsory except for cases where the 10-year limitation period has passed or the beneficiary of the aid is liquidated.

36. Can a public body rely on article 108(3) TFEU?

Theoretically, this provision can be taken into account by public bodies, as Ukraine is bound by the relevant jurisprudence of the CJEU, as well as relevant secondary legislation, frameworks, guidelines and other administrative acts in force in the European Union.

37. On which grounds can a beneficiary defend itself against a recovery order? How may beneficiaries of aid challenge recovery actions by the state?

They may defend themselves with reference to provisions in the Ukrainian State Aid Law: the recovery decision is not compulsory if the 10-year limitation period has passed or the beneficiary of the aid is liquidated.

38. Is there a possibility to obtain interim relief against a recovery order? How may aid recipients receive damages for recovery of incompatible aid?

Theoretically, aid beneficiaries can apply for interim relief against the recovery decision in both commercial and administrative courts. However, there have been no such cases so far.