WORLD TRADE
ORGANIZATIONG/SCM/N/60/LVA
1 December 2000
(00-5205)
Committee on Subsidies
and Countervailing MeasuresOriginal:  English
SUBSIDIES
Updating Notification Pursuant to Article XVI:1 of
the GATT 1994 and Article 25 of the SCM Agreement
LATVIA
The following communication, dated 29 November 2000, has been received from the
Permanent Mission of Latvia.
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INTRODUCTION
Due to financial constraints and the liberal approach to economic policies (the policy of
minimum intervention in business activities), the Republic of Latvia provides very limited financial
support to its 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 aid is minimum.
This survey covers all the assistance to the industry, to agriculture and fisheries.  Public
expenditures, credit programmes or tax measures are included in this survey without prejudgingwhether 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. The analysis of aid to the manufacturing sector is the centrepiece of the Notification although
it is by far not the most assisted sector of the economy and it is even was among the few sectors which
experienced considerable decrease in the volumes of aid granted. However, the legal obligations inthe manufacturing sector are the strictest in the area of State aid.  Besides, a deeper analysis of aid 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 declined by more than 15 per cent
during 1999.  Nevertheless, taking into account the decline in manufacturing output, the relation of
the respective aid vis-à-vis the value added in the manufacturing sector remained practically at the
1998 level, i.e. at 1.5  per cent level (or 2.22 per cent level, if de minimis  aid would be taken intoG/SCM/N/60/LVA
Page 2
account as well).  Also the amount of aid per person employed in the sector did not change
significantly, staying at around  LVL 57.0 level per employed.
Table 1. State aid to the manufacturing sector: overall indicators
Total in M LVL In per cent of
GDPIn per cent of the
value addedIn LVL per person
employed
Overall State aid 10.611 0.29% 2.22% 57.7
Non- de minimis  aid     7.4 0.2% 1.5% 40.2
3. The only new aid scheme introduced in 1999 was the system of capitalisation of real estate
and personal income tax debts accrued prior to privatisation (Cabinet of Ministers' Regulations
No. 168 and 177).  The new aid scheme started its operation in 2000 and all individual aid cases,
except for de minimis,  are subject to consideration by the State Aid Surveillance Commission in
accordance with the full set of State aid rules (national law and EU rules).  At the same time one State
aid scheme was closed as of 1 January 2000 (see point 7).
Aid objectives
4. 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:
Horizontal objectives:
• Small and medium-sized enterprises
• Environment
• Research and development
• Trade
• Other objectives (mainly rescue and restructuring)
Particular sectors*
• synthetic fibres
*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)G/SCM/N/60/LVA
Page 3
Regional objective
Table 2.  State aid to the manufacturing sector –1999
Breakdown of aid according to sector and function
Horizontal objectives Particular
sectors
(Synthetic
fibres)Regional
objective
SME Environm. R&D Trade Other (mainly,
rescue and
restructuring)
million LVL
0.898 0.26 1.413 0.381 3.800 **
(5.038)***3.422 0.437*
As a per cent of total aid to manufacturing
8.5 2.5 13.3 3.6 35.8 32.2 4.1
Approximate value of non - de minimis aid in respective category of state aids
- 0.22 - - 3.6 ** (4.8)*** 3.422 0.201
As a per cent of total  non- de minimis  aid to manufacturing
- 3.0 - - 48.4 45.9 2.7
* the figure includes LVL 0.149 M. support (in form of tax relieves) for the steel company
** the sum of state aid (the sum of capitalised tax debts) less the revenues obtained in 1999 from
the previously concluded tax capitalisation agreements
*** the sum of state aid (the sum of capitalised tax debts)
5. Table 2 includes all data on all aid provided to the manufacturing sector, including de minimis
aid.1 .  All the aid granted under sections SME, R&D and Trade is de minimis  aid.  The same is true
for the majority of cases under the heading Regional Aid.  To provide as comprehensive information
as possible on the support provided to the sector, both the figures of overall State aid (including de
minimis  aid) and the figures on non- de minimis  aid 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.
6. As it is shown in Table 2, the biggest aid amount appears under the heading “Others”, where
rescue and restructuring–type aid  accounts for more than 35 per cent.  The remaining amount of aid
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.
7. Most of the rescue and restructuring aid was related to the programme of capitalisation of tax
debts accrued before privatisation as well as to payment extensions for those pre-privatisation tax
                                                     
1 Aid which in terms of euro does not exceed 100,000.G/SCM/N/60/LVA
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debts which could not be capitalised [Relevant legal basis: The Law on Taxes and Fees and
subordinated Cabinet of Ministers' regulations].  As to tax debt capitalisation, in a considerable
number of cases the possibility of tax debt capitalisation was foreseen in the privatisation rules of the
companies, clearly influencing the price for which th e companies were sold.  As a result, the State aid
element of the scheme could well be overestimated.  Calculating the aid amount under the category“Others” the revenues obtained in 1999 from the previously concluded tax capitalisation agreements
were taken into account (i.e. the sum of the aid was reduced by LVL 1.238 million obtained from the
sales of the State shares received in manufacturing companies as a result of the tax debt
capitalisation).  Thus only the net “cost” of the programme was taken for the year 1999.
As to the possibility of  tax debt extensions up to three years, the respective State aid scheme
was closed as of 1 January 2000.
8. The only non-de minimis  ad hoc rescue and restructuring  aid decision which was taken in
1999 is also classified under the heading “Others”. It is related to the rescue and restructuring
operation of an electric instrument company in the least developed region of the country.  The
company came into serious difficulties after the Russian crisis.  The aid package was conditionallyapproved by the State Aid Surveillance Commission, but the initial plan was not realised due to
shortage of resources in the State budget.  Only a minor part of the rescue and restructuring package
was implemented when the local government bought out the assets of the company arrested by the
commercial bank (LVL 0.39 million financing by a municipality was involved).  Quite big hopes are
being laid upon a recently formed alliance with an en terprise in the same region operating in a related
sector.  This could bring synergy effects which could help to save the company.
9. As a special feature of the year 1999 the second biggest amount of aid to the manufacturing
sector appears under the category Aid to synthetic fibres sector.  The respective aid is linked to a
7-year credit guarantee agreement signed by the Government in the year 1993 for the benefit of thethen State owned company "Dauteks" located in the city of Daugavpils. [N.B. this agreement was
signed prior to Latvia's engagement in any sort of  obligations in the area of State aid, i.e. before
joining the WTO and signing the LV-EU FTA and Europe Agreement].  As a result of privatisation
the company was later taken over by the Singaporian firm Tolaram Fibers .  First problems started in
1998 when the State had to pay LVL 0.07 M. under a guarantee agreement.  In 1999 the state had to
pay LVL~0.9 M. under the guarantee agreement.  Shortly thereafter Tolaram Fibers  was declared
insolvent by a court decision.  The State submitted a claim to the administrator of the insolvent firmTolaram Fibers for the sum of LVL 3.494 M. (this sum includes also payments made by the State
Treasury before the decision on the insolvency of the company was taken by the court).  In
February 2000 a joint meeting of creditors decided to initiate bankruptcy procedure.
In an open auction the assets of the company were sold for US$9 million to the French
company Rhodia.   Resources obtained through the auction were transferred for covering the claim of
the secured creditor of the company – Unibanka.  In the year 2000 Rhodia  partly restarted the
production of synthetic fibres.  Taking into accoun t the absence of links between the former and the
present owner of the enterprise the restarting of the synthetic fibres production did not involve any
State aid.  Although the State will continue incurring expenses due to the guarantee agreementconcluded in favour of Tolaram Fibers,  the sum of overall losses incurred in 1999 and expenditure
planned for the next years (in total LVL 3.4 M.)  is included in the State Aid Report for the year 1999
because of the liquidation of the company.  Of course, it is still an open question how much of the
sum can be classified as real aid to the enterprise and how much is linked to fraud by the former
owner of the company.
10. Aid for R&D  is mainly composed of numerous de minimis  size projects (average size of the
project financed falls well under LVL 10,000) administered by the Latvian Council of Science and
carried out by public owned universities and institutes.  All projects administered by the Council fallG/SCM/N/60/LVA
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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 0.2 M. in 1999).  Although the results of this type of research are "closer" to the market, it is
difficult to classify any of them as pre-compe titive 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.
It is important to stress that all the aid under the category R&D were de minimis .
11. Aid to SMEs  is 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 notmore than LVL 200,000 can receive the discount.  These conditions are sufficient to ensure that the
respective aid does not exceed the de minimis  ceiling.  This was the only functioning support
instrument specifically directed at SMEs since the activity of the Latvian Guarantee Agency (LGA)
did not develop as fast as it was planned. [The LGA was established with support of the EU Phare
programme to promote the investment projects of small and medium enterprises, reducing the risk
incurred by banks and other financial institutions which credit SMEs].  By the end of the year 1999
the LGA had concluded only three guarantee agreements, only one of them  in the manufacturing
sector.
12. Aid amounts to regional development  (LVL 0.437 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 the
support 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 11,000] 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 the
business support in specially assisted territories is  provided in the form of interest subsidies of
investment related credits. Apart from the support granted from the resources of the Regional Fund,
the companies operating in these territories can, subject to certain conditions (like approval of
business plans), benefit from an accelerated depreciation scheme.  Taking into account that the
general rules on depreciation are rather favourable, it is very rarely that companies use the different
rules offered by the law for specially assisted territories.  For that reason as well as because of thedifficulty of the calculation of the effect of the application of the scheme in every individual case, no
information was gathered and processed on the application of the accelerated depreciation scheme.  At
the same time theoretical calculations clearly show that in cases of application of the scheme, the
respective aid intensity is well below 5 per cent.
As to the SEZ mechanism the manufacturing co mpanies situated in the two SEZs of Latvia
benefited from aid in the form of 80 per cent real estate tax rebates, which on average amounted to
LVL 5,000 per company, if aid to the steel sector was not counted.  No aid was granted in the form of
corporate income tax relief as provided for by  the law since the respective companies operated
without profits. Aid to the steel sector  under the SEZ mechanism amounted to ~65 per cent of the
total sum of the tax relieves received by SEZs co mpanies.  However, the respective aid amount which
was received by the steel company Liepajas Metalurgs  was well below 0.3 per cent of the turnover of
the company.  This aid covers only a minor part of the company's modernisation expenses which the
company has to undergo to bridge the investment gap typical for the previous economic system.G/SCM/N/60/LVA
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13. State aid to trade  amounting to LVL 0.381 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 organisations (mainly the Latvian Development Agency)  - LVL 0.081 M;
• the support programme for exports of Latvian goods  (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 0.1 M;
• operations of  the State Joint Stock Company Latvian Export Credit (LEK).  This institution offers
guarantees and credits. It should be added that the services which LEK provides, satisfy thecriteria which are set out by the OECD.
At the end of 1999, the outstanding credit sums amounted to LVL 0.5 M., but of guaranteed
credits – LVL 1.97 M.  State aid involved in LEK activities was equivalent to the amount of lossesincurred during the year under review amounting to LVL 0.2 M. [N.B. – in Table No.3 this amount is
equally divided between the category of “guarantees” and “soft credits”].  This approach had been
decided because the standard business principles of the LEK did not deviate considerably 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.  Thesame applies to credit guarantees (if one would calculate the aid element similarly as with credit,
deducting the premiums received).  However, the LEK sometimes accepted assets as collaterals which
normally were not accepted by commercial banks, e.g. stocks of production.  Yet, part of the losses
incurred during 1999 will be recovered in subsequent years: in many cases court proceedings have
been launched and the probability of recovery of considerable amount of liabilities vis-à-vis the LEKis rather high.
14. Aid to environment protection.   In 1999 the financing of companies for the promotion of
activities in the area of environment protection amounted to just LVL 0.26 M.  This was basically
related to one State aid case (the only non- de minimis  case). The respective project, which was
financed by the Environmental Protection Fund (EPF) and the Environmental Investment Fund,
related to the establishment of a waste paper processing plant.  The company constructing the plant
was selected through a competition procedure. The aid package involved a LVL 0.5 M. loan from
Environmental Investment Fund
2  (the calculated subsidy equivalent for 1999 amounted to
LVL 0.022 M.) and a capital injection of LVL 0.2 M. from the EPF (for the purposes of the report, the
whole sum was taken into account, although capital injection conditions are by nature similar to
interest-free credits).
In 1999, the Environment Protection Fund granted also LVL 0.03 M.of aid for a R&D project.
15. Other activities financed by the EPF were, after a thorough evaluation by the SASC, not
considered as State aid.
                                                     
2 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/60/LVA
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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 utilising 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, hous ehold waste dumps, etc).  These were projects
managed by municipalities. Taking into account the nature of the projects, these were not considered
as State aid, although in some cases they had a positive impact on business development, e.g. in somecases investments financed by the Environmental Investment Fund made it possible to establish
companies in certain areas where previously it was not allowed to establish any industrial enterprise
due to the absence of general environmental infrastr ucture.  Otherwise, the EPF does not finance any
projects related to adaptation of enterprises to requ irements of environmental standards.  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; the only exception is
financing distributed through tenders – see below).
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
light bulbs, mineral oils, plastic packaging material, used tyres) through the repayment ofenvironmental taxes paid for the original products – bottles, new accumulators, light bulbs, etc.  In
1999 the EPF spent LVL 1.671 M. for such purposes. The respective financing is granted through
unrestricted tender.  The State pays to an enterprise the compensation 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, even if in certain
cases the companies produce tradable goods out of the waste.
*******
16. The notification does not cover specifically the costs the Government had to undergo in
connection with repayment of so called G-24 credits since these are linked to failures/fraud which
took place mostly before 1999 (the credits influenced business conditions in previous years).Although the credit programme did not involve direct subsidy elements (the interest requested was
above the interest level stipulated by the foreign institutions from which the Government was
borrowing resources), the State  had to undergo substantial expenses in subsequent years due to poor
financial management characteristic for the first years of transition.  Relevant expenditure for the year
1999 amounted to LVL 1.639 M.  This includes LVL 0.544 M. expenditure related to failures ofcompanies in the food processing sector.  The respective amount cannot be considered as a net loss,
since in many cases recovery procedures/court proceedings take place.  The respective crediting
programme does not have a debt write–off mechanism, i.e. the failure to repay amounts owed to the
State leads to the initiation of insolvency proceedings.
Types of aid instruments
17. Table 3 gives an overview of the use of the various types of aid instruments in supporting the
manufacturing sector.G/SCM/N/60/LVA
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Table 3
State aid to the manufacturing sector –1999
Breakdown according to type of aid
(figures in the table refer to net grant equivalent of state aid measures)
In M LVL In M LVL
(non- de
minimis  aids)As a % of the total
aid to
manufacturingAs a % of the total
aid to
manufacturing
(non- de minimis
aids)
Group A Grants 2.224 0.39 21.0% 5.3%
Tax exemptions 3.249 2.24 30.6% 30.3%
Group B Equity
participation0.122 0.122 1.2% 1.7%
Group C Soft loans 0.21 - 1.9% -
Tax deferrals 1.284 1.218 12.1% 16.5%
Group D Guarantees 3.522 3.422 33.2% 46.2%
TOTAL 11.225 7.392 100% 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  aid
granted to the manufacturing sector.
18. The overall situation in 1999 continued to resemble the pattern of aid of previous years in the
sense of dominance of indirect instruments of aid.  At the same time the year 1999 was rather
particular because the aid amounts granted under Category D were the highest, exceeding 30 per cent
of total aid to the manufacturing sector, due to one big failure case.
19. The second place belonged to Group A aid measures with tax exemptions accounting for most
of them.  Half of the sum of the tax exemptions was related to “classical tax exemptions”, while the
other half was linked to write-offs/reductions of fines calculated due to late payment of taxes and
penalties.
20. Group C aid instruments were the third according to their weight in non- de minimis  aid.
Practically the whole amount of aid in this category was 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.  As to soft loans, the expenses of theGovernment related to these loans disbursed in the first years of transition were not included in the
report for the reasons explained in point 16.
21. Aid amounts granted under Group B (equity participation) are the smallest  because of a
somewhat particular situation in the old tax debt capitalisation programme:  The Government obtained
a bit more in revenues from the sales of the shares in companies it had previously received through
the capitalisation of old tax debts  than the sum of tax debts capitalised in 1999.  This developmentcan be explained by the decrease of the amounts of capitalised tax debts over time.G/SCM/N/60/LVA
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PART II - AID TO AGRICULTURE
22. Pursuant to the law on Agriculture of 24 October 1996 and the Law on State Budget for 1999
the total amount of the direct support to agriculture in 1999 amounted to LVL 19.039 M.
23. More precise information is available in Report on support for agriculture in Latvia.
PART III – AID TO FISHERIES
24. In 1999 the total amount of State aid to fisheries amounted to LVL 7.026 M.
25. In 1999, LVL 0.686 M. of state aid was granted to fisheries from the Fisheries Funds.  The
financial resources have been devoted to increasing of fish stock, its preservation, respective scientific
and research activities, international co-operation and other - overall involving in 47 various projects.
26. In 1999, fisheries received LVL 0.410 M. in state subsidies for realisation of 77 projects. The
projects covered such areas as procurement of fish boats, fish storage equipment, upgrade of fishing
ships and fish processing companies to comply with the EC requirements as well as i.a. compensation
of losses incurred as a result of natural calamities.
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