Labour's proposed tax credits to SMEs could breach EU rules

The European Commission has called into question the applicability under EU rules of the Labour Party's proposal to subsidise electricity tariffs for small businesses.

Last Monday, Labour leader Alfred Sant announced plans to halve the surcharge on utility bills paid by small businesses in the form of a tax credit.

However, a spokesman for EU Competition Commissioner Nellie Kroos said this may breach EU state aid rules and would in all likelyhood require the go-ahead from Brussels.

She explained that since such tax credits may constitute state aid, member states must seek the opinion of the Commission by listing these measures under the state aid rules and not implement them before the Commission has taken a decision.

Commission sources told The Sunday Times that the EU does not normally favour these kind of tax credits, since they are considered to be an indirect form of subsidy to businesses which can distort competition in the EU's single market.

"The state financing of certain companies' electricity costs could distort competition between European industries and prevent consumers from fully enjoying the benefits of the single market."

The sources added, however, that the EU still did not have the full details of such a scheme and would have to look at the proposals once they were presented to Brussels.

"At this stage we are not saying that these proposals cannot be implemented in Malta. But we will definitely have to look closely at them to see whether these are compatible with EU rules."

Other member states, like France and Spain, which in the past have introduced similar initiatives to Labour's proposal, are currently facing legal procedures by the Commission.

Last year the Commission opened infringement procedures against the two member states under EC Treaty state aid rules in connection with potential aid to medium-sized companies. These were in the form of artificially-low regulated electricity tariffs that are financed by the state directly or indirectly.

The Commission had said that it wanted to assess whether these schemes constituted state subsidies to small businesses and, if so, whether such aid could give rise to disproportionate distortions of trade and competition within the single market.

The Commission's investigation in both member states, which is still ongoing, does not concern regulated tariffs or subsidies for households.