In a recent decision of the Serbian State Aid Commission, the watchdog found that the conversion of the right of use to the right of ownership of land, without compensation, did not amount to State aid. This opens the question: if such conversion does not represent State support, why other companies should pay for it?

1. What was the Commission decision about?

The decision concerned alleged State support to the Serbian Electric Power Industry (in Serbia, this company is commonly referred to as ‘EPS’). The case was started upon complaint of the Secretariat of the Energy Community that Serbia, a signatory to the treaty establishing the Energy Community, was providing illegal State assistance to EPS.

According to the Secretariat, one of the forms of such assistance was the transfer of ownership of certain real estate (land and buildings) owned by the state to EPS, without compensation. More precisely, the transfer was effected by way of converting EPS’ right of use to the right of ownership of the real estate – free of charge.

2. What is the right of use and why is it relevant here?

In the communist era, a company could not own construction land – such land was owned by the state and the company was only entitled to the right of use of the land. The right of use, however, was fairly broad in nature, as it entitled its holder to the powers generally reserved the owner. Inter alia, the holder of the right of use was able to develop the land by acquiring the necessary construction permits.

3. What is a ‘conversion fee’?

Eventually, Serbian legislation was changed and companies can now own construction land. However, the companies which in the old system had the right of use of land need to pay a ‘conversion fee’ in order to convert their right of use to the right of ownership. And this is not just a nominal fee – it is an amount representing the market value of the land, with certain deductions.

4. Why would companies want to convert their right of use to the right of ownership?

Among other reasons, a company would want to convert its right of use to the right of ownership in order to obtain a construction permit for development on the land. The right of use is no longer sufficient to obtain a construction permit.

5. Did EPS pay for the conversion?

No, EPS did not pay for such conversion – the Serbian Government decided to convert EPS’ right of use to the right of ownership without compensation.

6. How did the Serbian State Aid Commission find that such conversion without compensation did not amount to State aid?

Inter alia, the Serbian State aid watchdog considered that, when EPS acquired the right of use, such right was most the company was entitled to according to the Serbian law at the time.

According to the Commission, by converting EPS’ right of use to the right of ownership, the Serbian Government did not confer any benefit onto EPS, as such conversion was only a part of transition from a communist to a socialist economy.

7. Do companies which feel it’s unjust for them to pay the conversion fee have any legal recourse?

Actually, yes. For instance, an investor could claim protection under one of the bilateral investment treaties (BITs) Serbia is a party to. There are also State aid mechanisms which could help.

8. How to challenge this under a BIT?

Serbia is a party to a number of BITs, which guarantee the investor’s acquired rights and protect them from discrimination. For instance, an acquired right in this context could be the right to develop land with the right of use, while now, in order to develop land, the investor needs to pay a substantial fee. Basically, the investor would need to pay for the same thing again, just in order to preserve his scope of rights.

As a forum, Serbia’s BITs usually prescribe ICSID or UNCITRAL arbitration.

9. And what about State aid mechanisms?

Serbia has its own State aid legislation, which is based on the EU model. This legislation is enforced by Serbia’s own Commission for the Control of State Aid, which rendered the EPS decision referred to above.

Not less importantly, Serbia and the EU are parties to the Stabilization and Association Agreement (SAA), which was signed in 2008 and entered into force in 2013. Inter alia, the SAA regulates State aid matters and prohibits any unlawful State aid which may affect trade between Serbia and the EU. The SAA also prescribes that any instance of such aid needs to be assessed in accordance with the criteria applicable in the EU.