WORLD TRADE
ORGANIZATIONG/SCM/N/71/LVA
22 October 2001
(01-5180)
Committee on Subsidies
and Countervailing MeasuresOriginal:  English
SUBSIDIES
New and Full Notification Pursuant to Article XVI:1 of the GATT 1994
and Article 25 of the Agreement on Subsidies and
Countervailing Measures
LATVIA
The following communication, dated 18 October 2001, has been received from the
Permanent Mission of Latvia.
_______________
NOTIFICATION ON PUBLIC AID IN LATVIA
2000
Riga, October 2001
INTRODUCTION
Due to financial constraints and liberal approach to economic policies (the policy of minimum
intervention in business activities), the Republic of Latvia provides very limited financial support toits business sector even for internationally accepted goals of regional development, environmental
protection, research and development.  Therefore the possibility of distortion of competition as a
result of state aids is minimum.
This survey covers all the assistance to the industry.  Public expenditures, credit programmes
or tax measures are included in this survey without prejudging whether the subsidy measure is
specific or whether it can be qualified as a general policy measure.
This survey includes financial measures provided at the national and local level.
PART I - AID TO THE MANUFACTURING SECTOR
Volume and trend of aid
1. State aid to the manufacturing sector accounts for 25 per cent of the total volume of aid
granted in Latvia in 2000.  The analysis of aid to the manufacturing sector is the centrepiece of the
Report, because the legal obligations in the manufacturing sector are the strictest in the area of StateG/SCM/N/71/LVA
Page 2
aids (especially in the context of Latvia’s internati onal obligations).  Besides, a deeper analysis of aids
to the manufacturing sector could serve as a good basis for the reformulation of the State policy in the
sector, taking into account the negative trends in the development of the industry.
2. The overall volume of aid in the manufacturing sector in 2000 increased by approximately
17 per cent, but taking into account that industria l output had increased, the relationship between the
support payments and the added value in the manufacturing sector remained virtually unchanged from
1999 – around 2.26 per cent, taking into account de minimis  support.  The volume of support per each
person employed in the sector, by comparison, increased a bit to LVL 72.60 per employee.  One
reason for that is that the total number of employees in the sector declined between 1999 and 2000.
Table 1.  State aid to the manufacturing sector:  overall indicators
Total in MLVL In per cent of
GDPIn percent of the
value addedIn LVL per person
employed
1999 2000 1999 2000 1999 2000 1999 2000
Overall State aid 10.61
112.508 0.29% 0.29% 2.22% 2.26% 57.7 72.6
Non-de minimis aids 7.4 9.643 0.2% 0.22% 1.5% 1.74% 40.2 56.0
Aid objectives
3. Aid to the manufacturing sector is classified according to the principal purposes for which it
is given or the sector to which it is directed:
A. Horizontal objectives:
• Small and medium-sized enterprises
• Environment
• Research and development
• Trade
• Other objectives (mainly rescue and restructuring)
B. Particular sectors
Aid to the steel sector is not classified under this heading since it is integral part of the
regional aid scheme.  Detailed info on aid to the steel industry is, accordingly, described under
respective point (see point 27).G/SCM/N/71/LVA
Page 3
C. Regional objective
Table 2.  State aid to the manufacturing sector –1999, 2000
Breakdown of aid according to sector and function
Horizontal objectives Particular
sectors
(Syntheticfibres)Regional
objective
SME Environm. R&D Trade Other (mainly,
rescue and
restructuring)
million LVL
1999 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 2000
0.898 0.936 0.26 0.0016 1.41
31.303 0.381 0.435 3.8*
(5.038)**9.29*
(10.780)
**3.422 - 0.437
***0.543
***
As a per cent of total aid to manufacturing
8.5 7.48 2.5 0.01 13.3 10.42 3.6 3.48 35.8 74.27 32.2 - 4.1 4.34
Approximate value of non - de minimis aid in respective category of state aids
- - 0.22 - - - - 0.232 3.6*
(4.8)**9.2*
(10.7)**3.422 - 0.201 0.174
As a per cent of total  non- de minimis  aid to manufacturing
- - 3.0 - - - - 2.41 48.4 95.79 45.9 - 2.7 1.8
* the sum of state aid (the sum of capitalised tax debts) less the revenues obtained in 2000 from the
previously concluded tax capitalization agreements
** the sum of state aid (the sum of capitalized tax debts)
*** the figure includes 0.08 MLVL support (in form of tax relieves) for the steel company
4. Table 2. includes all data on all aids provided to the manufacturing sector, including
de minimis  aids.  All the aids granted under sections SME and R&D are de minimis  aids.  The same is
true for the majority of cases under the heading Trade and Regional Aids.  To provide as
comprehensive information as possible on the support provided to the sector, both the figures of
overall State aid (including de minimis  aids) and the figures on non- de minimis  aids are indicated.
Taking into account the very small number of State aid programmes under operation in the
manufacturing sector and their undifferentiated character as well as the availability of data on almost
all final beneficiaries, it was possible to list rather precisely the aid amounts by categories of aid.
5. As it is shown in Table 2, the biggest aid amount appears under the heading “Others”, where
most of the state aid went for the rescue and restructuring–type aids.   The remaining amount of aids
was linked to:
•  tax relieves available for companies with foreign investment, in conformity with the
procedure that was set out in the law “On foreign investments in the Republic of Latvia”(since 1 April 1995, no new enterprise income tax relief has been awarded to companies with
foreign investment).  The enterprise income tax relief was intended to cover a period of four
to eight years, conditions were differentiated according to the amount of foreign investment;
• government-issued loans;
• local government subsidies and real estate tax relief
6. Most of the rescue and restructuring aids were related to the programme of capitalization of
tax debts accrued before privatization as well as to payment extensions for those pre-privatization tax
debts which could not be capitalised [Relevant legal basis: The Law on Taxes and Fees andG/SCM/N/71/LVA
Page 4
subordinated Cabinet of Ministers' regulations].  As to tax debt capitalization, in a considerable
number of cases the possibility of tax debt capitalization was foreseen in the privatization rules of the
companies, clearly influencing the price for which the companies were sold.  Because all projects
related to tax debt capitalization, except de minimis , were individually evaluated by the State Aid
Surveillance Commission, the projects which cannot be seen as state aid projects (because ofprivatisation regulations) are not included in the Report 2000.
Calculating the aid amount under the category “Others” the revenues obtained in 2000 from
the previously concluded tax capitalization agreements were taken into account (i.e. the sum of aids
was reduced by LVL 1.490 M obtained from the sales of the State shares received in manufacturing
companies as a result of the tax debt capitalization).  Thus only the net “cost” of the programme was
taken for the year 2000.
As to the possibility of tax debt extensions up to three years, the respective State aid scheme was
closed as of 1 January 2000.  This report, therefore, reflects only the schedule extensions that had
been approved in previous years.
7. Aids for R&D  are mainly composed of numerous de minimis  size projects (average size of the
project financed falls well under LVL 10.000 LVL) administered by the Latvian Council of Science
and carried out by public owned universities and institutes.  All projects administered by the Council
fall under the category of fundamental research projects thus having practically no influence on
competition.  The report covers all research projects the results of which could be at least of indirect
interest for the manufacturing sector.
Apart from the projects administered by the Latvian Council of Science there is in operation
the programme of market oriented research administered by the Ministry of Education and Science
(LVL 0.196 M in 2000).  Although the results of this type of research are "closer" to the market, it isdifficult to classify any of them as pre-competit ive development activity, i.e. the projects mostly
correspond to industrial research category.  The fina ncing per project is somewhat higher than in the
case of the research programme administered by the Latvian Council of Science but normally it does
not exceed LVL 10.000 per project.
8. Aids to SMEs  are mainly related to tax relief (20 per cent discount on the calculated tax)
provided for in the law “On the enterprise income tax” for micro-enterprises.  Enterprises which have
not more than 25 employees, a balance value of not more than LVL 70.000 and a net turnover of not
more than LVL 200.000 can receive the discount.  These conditions are sufficient to ensure that the
respective aids do not exceed the de minimis  ceiling.  This was the only functioning support
instrument specifically directed at SMEs.
Even though the State J.S.C “Latvian Guarantee Agency” (LGA) was set up in 1998 with the
specific goal of supporting the investment projects of small and medium enterprises, thus reducing the
risk which is undertaken by banks and other financial institutions which issue loans for the relevant
projects, the agency’s work did not develop as had been planned.  By the end of 2000, the LGA had
concluded only seven guarantee agreements, and only one of those was in the industrial sector (wherethe state aid equivalent amounted to LVL 2,500).
9. Aid amounts to regional development  (LVL 0.543 M) were evenly distributed between two
state aid schemes: the system of special economic zones (SEZs) and  the system of specially assisted
territories.  The latter, financed from the resources of the Regional Fund, is directed toward thesupport of business in the least developed territories of Latvia covering 15 per cent of the total number
of the population.  The scheme provides for de minimis  support [the average sum of State aid per
project is LVL 10.000] of  business activities in the respective territories which are mostly rural
districts.  All of the companies supported under the scheme are SMEs. In the majority of cases theG/SCM/N/71/LVA
Page 5
business support in specially assisted territories is  provided in the form of interest subsidies of
investment related credits, other are mostly related to local government projects that are aimed at
infrastructure development.
When it comes to the mechanism of Specia l Economic Zones, manufacturing companies
which are located in the two SEZs of Latvia benefited from aids in the form of 80 per cent real estate
tax rebates, as well as through company income tax relief.  Aids to the steel sector  under the SEZ
mechanism amounted to ~46 per cent of the total su m of the tax relieves received by SEZs companies.
At the same time, however, the steel manufacturer JSC “Liep ājas Metalurgs” received support which
was equal to only 0.1 per cent of its turnover. This aid covers only a minor part (i.e. 4.9 per cent) of
the company’s restructuring costs.
10. State aid to trade  amounting to LVL 0.435 M was linked to
• the programme of support of the participation in international business fares and exhibitions [of
de minimis  nature] under the auspices of the Ministry of Economy and managed by business
support organizations (mainly the non-profit State J.S.C. “Latvian Development Agency”).  Total
funding her amounted to LVL 15.000, of which LVL 6.336 went toward the Expo 2000
exhibition;
• the programme of marketing support to Latvian export  (Co-financing by the Latvian State of EU
Phare-97  supported project, aimed at reducing marketing costs related to entering new markets by
Latvian companies.  Basic conditions of the project – up to 30 per cent financing of marketing
costs; limit of financing per company – LVL 10.000.  Accepted by the State Aid Surveillance
Commission without object ions since the project was approved by the European Commission)  -
LVL 0.134 M
• operations of  the State Joint Stock Company Latvian Export Credit (LEK).  This institution offers
guarantees and credits and the services which LEK provides, satisfy the criteria which are set outby the OECD.
The standard business principles of the LEK did not deviate from the normal commercial practice.
Analysing the terms of credit agreements it became apparent that the interest rates charged were
above the average interest rates set by the Latvian commercial banks.  The same applies to creditguarantees (if one would calculate the aid element similarly as with credit, deducting the premiums
received).
It should be noted that the State Joint Stock Company Latvian Export Credit has not
undertaken any new obligations since the beginning of 2000, because the national budget in 2000
provided no new money for the process.  The data in this report, therefore, apply to the “old”agreements of the LEC.
At the end of 2000 the LEC was managing outstanding loans worth LVL 0.179 M
(LVL 0.168 M had been written off, of which LVL 0.054 M had been paid on behalf of the recipients
of the loans).  The agency was also managing LVL 0.952 M in loan guarantees (LVL 0.610 M were
written off, of which LVL 0.232 M were paid in place of the recipient).  Some of the losses which
were incurred in 2000 will be recouped in the next few years as the result of court cases that havebeen launched.
11. Aid to environment protection.   In 2000 the financing of companies for the promotion of
activities in the area of environment protection amounted to just LVL 0,0016 M.  The money cameG/SCM/N/71/LVA
Page 6
from the Environmental Investment Fund1.  Several environmental protection projects were run in
2000 which had received soft loans.
Activities financed by the Environmental Protection Fund (EPF) were, after a thorough
evaluation by the SASC, not considered as State aids.
Environmental Protection Fund (basic information).   The fund resources are formed from the
revenue of the natural resources tax and from a small part of the excise tax on oil products paid
to the national environmental protection special budget.  The revenues from the tax are mostly
used for the elimination of negative consequences of the activities subject to the respective tax.
(The funds are mainly used to pay for utilizing or recycling goods and products harmful to the
environment, to finance and credit measures and projects of environmental protection of non-
commercial character, i.e. related to the general infrastructure).
A major part of the resources of the EPF went to the construction or reconstruction of general
infrastructure important from the environmental point of view (general waste water treatment
facilities, municipal water supply systems, household waste dumps, etc).  These were projectsmanaged by municipalities.  Taking into account the nature of the projects, these were not considered
as State aids.
It should be pointed out, that the EPF does not finance any projects related to adaptation of
enterprises to requirements of environmental standard s.  The same is true to financing of operating
costs related to environment protection measures (The EPF is, according to its statutes, prohibited to
finance any type of a current expenditure).
Apart from financing general infrastructure projects, a quite important activity of the EPF is the
financing of recycling/liquidation of waste (glass shards, lead accumulators, mercury luminized lightbulbs, mineral oils, plastic packaging material, used tyres) through the repayment of environmental
taxes paid for the original products – bottles, new accumulators, light bulbs, etc.  In 2000 the EPF
spent LVL 1.783 M for such purposes.  The respective financing is granted through unrestricted
tender.  The State pays to an enterprise the comp ensation for services provided.  For that reason the
respective financing is not "caught" by the Law on control of State and municipal aid to
entrepreneurial activities, but is rather subject to the Law on Public Procurement.
Types of aid instruments
12. Table 3 gives an overview of the use of the various types of aid instruments in supporting the
manufacturing sector.
                                                     
1 The Environmental Investment Fund  is created for crediting mostly SMEs projects in the sphere of
environment protection and energy saving.  It is mainly financed from resources attracted from foreign
assistance programmes and credits; the rest of the financing comes from the Environmental Protection Fund.G/SCM/N/71/LVA
Page 7
Table 3
State aid to the manufacturing sector –1999, 2000Breakdown according to type of aid
In MLVL In MLVL
(non- de minimis  aids)As a % of the total aid
to manufacturingAs a % of the total
aid to manufacturing
(non- de minimis
aids)
1999 2000 1999 2000 1999 2000 1999 2000
Grants 2.224 1.823 0.39 - 21.0% 14.57% 5.3% - Group A
Tax exemptions 3.249 5.02 2.24 4.078 30.6% 40.13% 30.3% 42.29%
Group B Equity participation 0.122 4.880 0.122 4.88 1.2% 39.02% 1.7% 50.61%
Soft loans 0.21 0.21 - 0.131 1.9% 1.68% - 1.36% Group C
Tax deferrals 1.284 0.341 1.218 0.322 12.1% 2.73% 16.5% 3.34%
Group D Guarantees 3.522 0.234 3.422 0.232 33.2% 1.87% 46.2% 2.4%
11.225 12.508 7.392 9.643 100% 100% 100% 100%
General remark:  in the description below the significance of different aid instruments is
evaluated taking into account the weight of the respective aid instrument in non -de minimis  aids
granted to the manufacturing sector.
13. The state aid policy when it comes to the capitalization of old tax debts have not changed, but
the largest support sums that have been awarded have nevertheless been categorized as Group B
support (participation in equity capital) in relation to the aforementioned programme.  This is because
many companies have only now decided to ask for the capitalization of debts which were incurred
prior to privatization so that they can better overcome the consequences of the previous economicsystem.
14. The second place belonged to Group A aid measures with tax exemptions accounting for most
of them.  The major part was related to write-offs/reductions of fines calculated due to late payment of
taxes and penalties, but the other part of the sum of the tax exemptions was linked to “classical taxexemptions”.
15. Group C aid instruments were the third according to their weight in non- de minimis  aids.
Practically the whole amount of aids in this category were related to 1-3 year tax deferral schemes
concerning tax debts accrued as a result of exceptional circumstances or tax debts accrued prior to
privatisation.  The scheme was abolished as of 1 January 2000.  The remaining amount of aids was
linked to soft loans.
16. The least amount of money went to Group D suppo rt – just 2.4 per cent of all support in 2000
that could not be classified as de minimis   (as opposed to 46.2 per cent in 1999).  That is because the
1999 report covered the losses and out year expenditures (Ls 3.4 million in all) that were related to the
guarantee agreement for JSC “Tolaram Fibres” which the government had signed in 1993.
__________