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Optimizing Your Business in Serbia: Competition Law and State Aid Essentials

Jelena Obradović

Jelena Obradović

Attorney at Law

20/06/2024

Are you eyeing the dynamic Serbian market for your next big move? Or perhaps you’re already operating in Serbia and looking to scale up or streamline your business operations? To ensure your success, it’s crucial to grasp the intricacies of competition law and state aid regulations. These rules are designed to maintain fair competition but in distinct ways. Competition law targets business practices that could harm market fairness, while state aid laws ensure that government support doesn’t skew the market balance. Ignoring these rules can lead to hefty penalties—up to 10% of your consolidated turnover—or even state aid recovery, putting your business (or, in competition law jargon, “undertaking”) at risk.

At Zunic Law, our recent expansion into the Competition Law area positions us perfectly to be your reliable advisor, helping you navigate regulatory challenges and ensure smooth operations.

In this blog, we’ll cover:

  1. Key points to consider when navigating Serbian competition and state aid rules.
  2. Practical tips to help your business stay compliant with these regulations.

 

Let’s jump straight in as we demystify these important aspects and set your business on the path to success in Serbia.

Competition Law in Serbia

The Law on Protection of Competition (“Competition Law”)[i] is the key piece of competition legislation in Serbia, supplemented by numerous bylaws and soft law instruments. The Commission for the Protection of Competition (“CPC”)[ii] monitors the implementation of all these instruments.

Serbian competition law is largely modeled on the European Union rules. It aims to foster economic development and societal welfare while ensuring consumer benefit. However, there are some key distinctions in both legislation and case law between Serbian and EU rules that can potentially create challenges for undertakings operating in Serbia.

First, Competition Law and its bylaws have their own set of procedures and thresholds that trigger the obligation of notifying certain transactions to the CPC and obtaining its approval. Second, unlike in the EU, some restrictive agreements must be exempted from prohibition by the CPC. Further, certain business practices that might be acceptable under EU law could be scrutinized differently under Serbian law.

Undertakings must therefore be vigilant in recognizing when their practices and actions might trigger these requirements and seek local legal expertise to guide them through the complexities of Serbian competition legislation. By doing so, businesses can avoid potential pitfalls and leverage opportunities within the Serbian market, ensuring they remain competitive and compliant.

It is important to note that the notion of “undertaking” does not always encompass a single company. If such company owns shares in some other companies, or controls or is being controlled (on the notion of control, please see below) by another company or person, the company in question and all these entities shall be deemed a single undertaking for the purposes of Competition Law to reflect economic reality. Undertakings should be aware of three main sets of rules that govern distinctive and, sometimes, prohibited behaviors: (i) restrictive agreements; (ii) merger control; and (iii) abuse of dominance. Below we provide key considerations for each of these rules.

  1. Restrictive agreements

Collaboration can be beneficial, but recognizing and avoiding agreements that significantly restrict, distort, or prevent competition – known as “restrictive agreements” – is a must. Note that pretty much anything can be considered an “agreement” in this sense, such as a traditional wet-ink signed commercial contract, an exchange of emails, an oral agreement, or tacit acceptance of certain behaviors or practices. By default, restrictive agreements are prohibited and null and void, but there are some exceptions.

Broadly speaking, there are two groups of restrictive agreements:

  1. So-called “by object” agreements: These agreements are illegal by nature, because they are inherently harmful to competition (their object is to infringe competition) and are always prohibited.
  2. So-called “by effect” agreements: These are agreements that restrict competition, but may have beneficial economic effects. These agreements may be permitted if their pro-competitive effects outweigh the anti-competitive effects.

 

Thus, practices like price fixing, market sharing, customer allocation, and bid-rigging are deemed “by object” restrictions and are always prohibited. These agreements can seem tempting when trying to stabilize or grow market share, but the legal and financial repercussions can be severe. Note that these agreements represent competition infringement even if they ultimately benefit consumers – if two mobile phone retailers decide to fix a lower price of a flagship phone than their main competitor, they are entering into a by object agreement even though their consumers will likely be happy about it.

In contrast, “by effect” agreements are allowed if they have pro-competitive effects. Examples include provisions on exclusive sale/supply/distribution, non-compete clauses, sales restrictions, research and development agreements. Whether these agreements are permitted in a specific situation depends primarily on the market shares of the undertakings involved.

“By effect” agreements can be roughly divided into four groups:

  • So-called “de minimis” agreements: Agreements of minor significance due to the parties’ low market shares, which are automatically exempted from prohibition.
  • Block-exempted agreements: These are categories of restrictive agreements that are automatically exempted only if they meet certain conditions and are entered into by parties whose market shares are below certain thresholds.
  • Individually exempted agreements: Agreements that do not fit de minimis or block exemption criteria (for example because the parties’ market shares slightly exceed the block exemption thresholds) but can be individually exempted by the CPC if they produce demonstrable pro-competitive economic effects.
  • Prohibited Agreements: These are by effect agreements whose economic benefits cannot be proven by the parties.

 

Therefore, entering into all “by object” and some “by effect” agreements represents a serious competition infringement. Apart from such agreements being deemed null and void, the parties who enter into such agreements risk a fine of up to 10% of their consolidated annual turnover.

Example Scenario 1: Ana and Mona, two local ice cream manufacturers, decide to set their prices at the same low level to gain some leverage against competitors and keep their businesses afloat after the peak season. They heard about competition rules, but do not think they apply to small businesses like theirs. If the competition watchdog decides to investigate, they risk hefty fines of up to 10% of their consolidated annual turnover.

Example Scenario 2: Lea’s company, a major producer of wood panels, agrees to sell them exclusively to Nikola’s firm, a fast-growing and reputable furniture manufacturer. They sign the deal and announce it all over social networks. CPC’s case-handler loves modern furniture and follows Nikola’s firm on Instagram, so she learns about the deal. Knowing that Lea’s company is quite a strong local player, CPC decides to investigate why Lea and Nikola did not obtain individual exemption for their exclusivity deal. Still, initiation of an investigation does not mean that Lea and Nikola’s companies needed to obtain CPC’s individual exemption.  

  1. Merger Control

Expanding your business by acquiring another company or business generally sounds like a good idea. However, if your undertaking or the “target” company are big enough, you may need to notify the acquisition to the CPC and obtain its clearance.

In this process, your legal advisors first need to establish if a deal is deemed a “concentration.” If so, the next step is determining if the concentration meets certain “turnover thresholds” to trigger CPC’s jurisdiction. Note that a concentration needing CPC’s clearance cannot be implemented before obtaining such clearance. Implementing before clearance (“gun jumping”) infringes Competition Law and is subject to fines of up to 10% of the consolidated annual turnover of the acquiring undertaking(s).

Competition Law considers the following transactions as concentrations:

  • Mergers and other status changes resulting in consolidation of undertakings,
  • Acquisition of control over another undertaking(s) or a part thereof,
  • Creation of a joint venture by two or more undertakings or acquisition of joint control over an existing undertaking that operates on a long-term basis with all functions of an independent undertaking.

 

The key takeaway from this section is the notion of “control”, which is a prerequisite for concentration to arise. Control can be exercised in various ways, such as through controlling shareholding, ownership or contractual rights, or even on a factual basis. Whether the acquisition of control arises is determined on a case-by-case basis. Note that the acquisition of a minority shareholding can also represent concentration, while certain regulated industries (such as media, banking, telecommunications) may require both CPC and regulatory approvals for concentrations carried out in that sector.

If a transaction indeed represents concentration (and most M&A transactions do), you need to notify it to the CPC and obtain its clearance if the following “turnover thresholds” are met:

  • The consolidated worldwide turnover of all participants in the concentration (“undertakings concerned”) in the financial year preceding the concentration is at least EUR 100 million, with at least one participant achieving a turnover in Serbia of at least EUR 10 million.
  • The consolidated turnover in Serbia of at least two undertakings concerned in the financial year preceding the concentration is at least EUR 20 million, with each of at least two participants achieving a turnover in Serbia of at least EUR 1 million.

 

The turnover of an undertaking concerned includes the total turnover of its entire group of companies, excluding intra-group sales, so that it can accurately represent the economic strength of the participants to the concentration. Special rules for turnover calculation apply to banks and other financial institutions.

Notably, transactions involving the acquisition of control over Serbian joint-stock companies must always be notified to the CPC, regardless of turnover thresholds. Additionally, the CPC can, if it finds out about an implemented concentration, investigate such concentration if it determines that the combined market share of undertakings concerned on a relevant market is at least 40%, i.e. if it suspects that such concentration can significantly impede competition.

Deadline for notifying the concentration to the CPC is 15 days from any of the following acts, whichever happens first: (i) conclusion of an agreement; (ii) publication of a public bid, offer or closing of the bid; or (iii) acquisition of control.

Example Scenario 3: Elizabeth’s global tech company plans to acquire Frank’s firm, a strong European player. Even though Frank’s firm has no presence or revenue in Serbia, Elizabeth’s legal advisors check if the deal needs CPC clearance, and it turns out it does! Namely, Elizabeth’s company generated more than EUR 100 million globally and EUR 10 million in Serbia in the previous financial year thus triggering the first of the two turnover thresholds and requiring CPC’s clearance before closing.

  1. Abuse of Dominance

While aiming to grow and increase market power is inherent to business, adhering to competition rules in the process is paramount. Holding a dominant position in a market is not prohibited, but abuse of dominance is. Practices like pricing below cost (predatory pricing), excessive pricing, or treating customers differently are allowed until an undertaking is deemed dominant in a certain market. Abuse of dominance is hard-core competition infringement, as it can severely distort the markets, drive out competitors, and lead to less choice and higher prices for consumers. Undertakings engaging in abuse of dominance risk fines of up to 10% of aggregate turnover.

Example Scenario 4: Nikola’s company, with a 50% market share in the voice recognition software market, starts selling below cost to halt competition from fast-growing innovative rivals. One competitor reports this to the CPC, which opens an investigation. The CPC must first prove that Nikola’s company holds a dominant position, and then assess if the pricing policies are indeed abusive and contrary to the Competition Law.

Unlocking Government Support: Understanding State Aid

The Serbian Government and other state entities often offer incentives like grants, tax breaks, and loan guarantees. Understanding these regulations can unlock significant benefits for your business while ensuring compliance.

The Law on State Aid Control (“State Aid Law”)[i] and its bylaws govern state aid in Serbia. The Commission for State Aid Control (“CSAC”)[ii] ensures proper application of state aid rules. While compliance with State Aid Law primarily lies with entities granting state aid, recipients should actively monitor the granting process to avoid potentially having to return any aid that did not comply with the State Aid Law.

Below are some key considerations for the Serbian state aid regime:

  • Notion of State Aid: Only state support that cumulatively meets the following four conditions qualifies as state aid:
    • (i) granted through state resources;
    • favors certain undertakings or industries (i.e. is “selective”),
    • distorts or potentially distorts competition, and
    • affects trade between Serbia and the EU (note that CSAC always deems this condition fulfilled).
  • Compatibility: Similar to restrictive agreements, state aid is prohibited by default and allowed only exceptionally under detailed and complex rules mirroring EU models. Assuring that the aid complies with these rules is thus crucial.
  • CSAC Clearance: Certain types of state aid require prior notification to and clearance from the CSAC. Aid grantors have the obligation to obtain CSAC’s clearance.
  • Recovery: Although they do not notify aid to the CSAC, the state aid recipients could ultimately recover any amount of aid deemed incompatible. Aid recipients should therefore make sure that the granting process was carried out in full compliance with the State Aid Law.

 

Example Scenario 5: Sofia’s start-up company is about to receive a subsidy from the Serbian Government to develop new technology. Her legal advisors cooperate with the Government throughout the process and assure Sofia that the subsidy is compatible with the State Aid Law. Sofia can now fully focus on developing her software without having to worry about the potential recovery of the subsidy.

How to Comply with Competition and State Aid Rules – A Few Tips

To ensure your Serbian operations are fully compliant, follow these practical tips:

  • Review competition-related risks your company faces or could face in its business activities. Watch out for any red flag behaviors and immediately contact a lawyer specialized in competition law if you notice any.
  • Prepare, enforce, and monitor a robust competition compliance program tailored to your company’s needs.
  • Ensure all employees understand the competition-associated risks of their roles and receive regular and up-to-date training.
  • Check if you need CPC’s approval before acquiring another company or business.
  • Verify that any state assistance your business receives is compatible with the State Aid Law to avoid recovery risks.
  • Regularly assess your market position – even if you are small now, your market share may increase over time subjecting you to stricter competition rules.

 

For any challenges or uncertainties, partnering with a trusted expert in competition and state aid law can help clear up questions and minimize risks.

[i] „Official Gazette of the RS“, no. 73/2019

[ii] https://kkdp.gov.rs/

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