The amendment to the General Block Exemption Regulation has entered into force. The Community legislation lays down the ground rules for several state aid schemes, such as the development and energy efficiency tax allowances, the tax allowance available for SME investments and the so-called VIP cash grant (aid granted based on individual government decisions).
A comprehensive amendment to a cornerstone of Community state aid rules, the General Block Exemption Regulation (GBER) has entered into force. The GBER will remain effective until 31 December 2026.
Why is the amendment important?
The GBER is a key tool for Member States for launching aid schemes without any prior notification obligation to the European Commission. A significant number of grants and tax incentives available in Hungary are also covered by the GBER and its relief scheme. The current amendment may provide additional flexibility and further possibilities for granting aid in the fields of environmental protection and energy. Member States will have six months to adapt their existing aid schemes to the amendment of GBER. Hence the amendment of the relevant provisions of the Act on Corporate Income Tax and Dividend Tax is also expected soon.
What are the novelties related to regional investment aid?
The development tax allowance and a part of VIP cash grants are both considered as regional investment aid.
Special rules apply to large investments of €50 million (at present value) and above. The regulation stipulates that for the purposes of eligible costs, further investments may be considered as one (i.e. a single investment project). In line with the rules of the Regional Aid Guidelines, these cumulation rules have also been modified. Previously, all investments started and provided aid within three years in the same county among the same group of companies had to be counted together. The amendment requires counting together only those investments that are related to the same or similar activities(i.e. that fall under the same 4-digit NACE Rev. code).
As an example, let’s take a large enterprise investor that has set up an electronic component factory (NACE Rev. 26.11) in a municipality in Pest County and has also expanded its existing lifting and handling machinery manufacturing activity (NACE Rev. 28.22) in the same or another municipality in Pest County within three years, receiving regional investment aid for both. The two projects will be considered as different investments for the purpose of determining the maximum aid. In other words, both investments may qualify for the theoretical maximum aid intensity of up to 50%.
The amendment also increases the maximum aid amount not subject to prior notification of the European Commission by a general 10%. This means that in a region with a 50% aid intensity (such as Pest County, among others), the maximum aid amount that can be granted without the prior approval of the European Commission is increased from EUR 37.5 million to EUR 41.25 million (at present value).
What is expected with regard to aid granted to energy efficiency measures?
The GBER clarifies the scope of eligible costs of energy efficiency measures. These provisions of the GBER serve as the legal grounds for the energy efficiency tax allowancein the corporate income tax regime in Hungary. The new provision fills some gaps, as the methodology of determining the eligible costs had raised several practical questions, as well as those related to interpretation. Recent developments of the market and technological advancements also encouraged the change.
There are still two methods for determining eligible costs. Where the cost of an energy efficiency investment can be identified as a separate investment within the total cost of the investment, the scope of the eligible costs is determined as the total investment cost of this separate investment (i.e. the investment value of the energy efficiency investment, refurbishment). In practice, investments that qualified for this method were mainly targeted at insulation for buildings.
Otherwise, the eligible costs shall be determined as the difference between the investment costs necessary to achieve a higher level of energy efficiency (an investment with higher costs) compared to an investment of lower energy efficiency and lower investment costs (the so-called differential method). As per the prior interpretation of the legislation, the extra investment cost was to be determined based on less energy efficient equipment available on the market that has the same functionality, and not based on the equipment that was to be replaced as part of the investment.
The new amendment of the GBER provides additional options for the differential method. The eligible costs shall be determined by comparing the costs of the investment to a counterfactual scenario that would occur in the absence of the aid, as follows:
- Where the counterfactual scenario consists in carrying out the same investment at a later point in time: the eligible costs shall consist of the difference between the costs of the investment for which the aid is granted and the net present value of the costs of the later investment;
- Where the counterfactual scenario consists in maintaining the existing installations and equipment in operation: the eligible costs shall consist of the difference between the costs of the investment for which aid is granted and the net present value of the investment in the maintenance, repair and modernisation of the existing installation and equipment;
- In case of an equipment subject to leasing agreements: the eligible costs shall consist of the difference in the net present value between the leasing of the equipment for which aid is granted and the leasing of the less energy efficient equipment that would be leased in the absence of aid.
The GBER clarifies that for the purposes of determining the eligible costs, an alternative investment that has a capacity and lifetime similar to the aided investment may be considered.