III.1.a State Aid
State aid policy is a central determinant of Serbia’s economic governance and its capacity to deliver inclusive and sustainable growth. It plays a decisive role not only in the EU accession process, but also in shaping productivity dynamics, market entry conditions, regional development, and the credibility of the business environment.
By determining which undertakings and sectors receive public support, under what conditions, and with what safeguards, state aid policy directly influences long-term economic outcomes. In the EU accession context, this role becomes even more consequential, as all forms of public support—including subsidies, tax incentives, and guarantees—must be progressively aligned with the EU acquis on competition.
This alignment requires compliance with EU standards of legality, transparency, targeting, and proportionality, ensuring that public resources are used in a manner consistent with a functioning market economy.
State Aid within the Reform Agenda
Within the Reform Agenda, state aid functions as a key policy lever for:
- Investment
- Industrial development
- Regional cohesion
- Green and digital transition
Its proper design and implementation are therefore integral to sound economic governance. A core reform challenge lies in aligning existing state aid schemes with EU rules that require aid to be granted only where clearly identified market failures exist.
Applying these rules strengthens selectivity, increases the likelihood of genuine developmental impact, and preserves competitive market conditions. In the absence of such discipline, state aid risks becoming arbitrary, distorting competition, delaying the restructuring of low productivity state-owned enterprises, and creating fiscal risks that undermine broader reform objectives embedded in the Reform Agenda.
Link to Economic Governance
Effective state aid control is closely linked to the strengthening of economic governance by aligning with the “fundamentals first” principle and supporting Serbia’s preparations for entry into the Single Market.
By limiting ad hoc interventions and enforcing a level playing field, state aid control supports the functioning of a market economy. At the same time, it enhances Serbia’s ability to withstand competitive pressure within the EU by steering public support toward measures that raise productivity and comply with internal market rules.
State aid policy serves both a domestic governance function and an external convergence function, aligning national economic interventions with the logic and constraints of the EU economic framework.
Progress on Reform Agenda Obligations
As part of the Reform Agenda for private sector development and the business environment, Serbia undertook concrete obligations to align existing state aid schemes with the EU acquis.
State Aid Inventory
Although the initial deadline of December 2024 was not met, Serbia completed and formally adopted a comprehensive state aid inventory in 2025. The inventory was finalized in line with European Commission comments and subsequently approved, as confirmed in the latest Progress Report.
While this fulfills a formal requirement, the inventory has neither been publicly disclosed nor proactively communicated. Although publication is not legally mandatory, public disclosure would represent good administrative practice, enhancing transparency, accountability, and stakeholder understanding of the scope and structure of existing state aid.
Action Plan for Alignment
A remaining and more substantive obligation concerns the adoption and publication of a time-bound action plan for aligning incompatible state aid schemes. In line with the Reform Agenda, this plan was due by June 2025.
While a draft was submitted to the European Commission and funding for implementation was requested in July 2025, the plan was returned for substantive revision. As a result, the obligation remains unfulfilled. Moreover, the Reform Agenda matrix explicitly foresees publication of the finalized action plan on the website of the Commission for State Aid Control (CSAC). Its absence from the CSAC website limits public scrutiny and weakens the credibility and signaling effect of Serbia’s commitment to transparent and rules-based reform.
Legal Framework and EU Requirements
The obligation to align state aid is firmly anchored in Serbia’s Stabilisation and Association Agreement and EU accession framework. The Agreement requires progressive alignment with EU law and explicitly links domestic state aid control to Articles 106 to 108 of the Treaty on the Functioning of the European Union.
This alignment is also a benchmark for opening Chapter 8 on competition policy. According to the 2025 Progress Report, Serbia’s State Aid Control Law is largely aligned with the EU acquis. However, full alignment depends on consistent application in practice, as well as further harmonization of implementing regulations and secondary legislation.
Key Challenges
The main challenge identified by the European Commission is the continued non-alignment of several major existing aid schemes, including:
- Fiscal measures embedded in corporate and personal income taxation
- The free zones regime
- State guarantee frameworks
Although Serbia has completed a comprehensive inventory of these schemes, systematic redesign is still required to ensure compliance with EU compatibility rules and safeguard provisions.
Overview of Existing State Aid Schemes
| Scheme / Legal Basis | Alignment Status | Key Issue from EU Perspective |
|---|---|---|
| State Aid Control Law | Largely aligned | Requires consistent implementation and further alignment of implementation bylaws and secondary legislation |
| Inventory of existing schemes | Aligned (formally completed) | Needs time-bound action plan and systematic alignment or phase-out of incompatible schemes |
| PPP incentives (CIT Law, Art. 25a(3) and 30a) | Not aligned | Highly selective (high threshold), unclear policy objective, weak legal qualification and no effective cumulation control |
| Aid for employing persons with disabilities (CIT Law, Art. 46) | Partially aligned | Legitimate social objective, but no linkage to detailed horizontal aid rules, risk of exceeding permissible aid intensities |
| Large investment and job creation tax relief (CIT Law, Art. 50a) | Not aligned | Unclear legal basis, undermines cumulation control, thresholds effectively exclude most SMEs |
| Tax credit for investing in start-ups (CIT Law, Art. 50j) | Not aligned | Does not follow EU-style framework for risk finance aid, risk of prohibited forms or excessive aid amounts |
| Employment-related tax relief package | Not aligned | Operates outside horizontal aid safeguards, lacks transparency and incentive effect tests, no cumulation control |
| Customs incentives in free zones (Law on Free Zones, Art. 19, 29) | Not aligned | Overly broad and undefined objective, difficult to classify under recognized aid categories |
| State guarantees (Public Debt Law, Art. 16, 18) | Not aligned | Market-conform pricing not mandatory, selective advantage for state-owned entities, significant competition distortion |
Structural Weaknesses
Legal Architecture Issues
The core weakness of these schemes lies primarily in their legal architecture and systemic design rather than in their stated economic objectives. Support for investment, innovation, and employment is legitimate, but many measures rely on automatic eligibility rules—such as fixed investment thresholds—without clearly defining the aid objective or the applicable EU compatibility category.
This prevents the application of appropriate safeguards. These schemes often:
- Lack a demonstrable incentive effect
- Fail to express aid in comparable gross grant equivalent terms
- Do not properly enforce cumulation rules, making compliance with maximum aid intensities difficult to verify
- Are not time-limited, contrary to EU practice
Procedural Detachment
A further structural weakness arises from the procedural detachment of many aid measures from the state aid control system. Because numerous schemes are embedded in tax or sector-specific legislation, they operate as a de facto parallel regime outside effective institutional oversight.
This explains why they are repeatedly assessed as incompatible and formally identified as non-aligned by the State Aid Control Commission. The problem is reinforced by the fact that many such measures are enacted through primary legislation, placing them beyond the CSAC’s power to suspend or invalidate even when incompatibility has been formally established.
Implications for SMEs
Alignment with EU state aid rules is particularly relevant for addressing unequal access to public support, especially for SMEs. EU state aid control is not an SME protection regime in a narrow sense, but it is designed to make support schemes more accessible to smaller firms.
This is reflected in aid categories that allow:
- Higher permissible intensities for SMEs
- Lower thresholds for SMEs
At the same time, EU rules function as a governance framework that constrains discretion, enforces transparency and proportionality, and disciplines cumulation. These features matter for SMEs because discretionary, opaque, or negotiated aid allocation structurally disadvantages firms that lack scale, administrative capacity, or political access.
Benefits of EU Alignment for SMEs
From an SME perspective, EU alignment would primarily reduce discriminatory outcomes by strengthening transparency and rule-based allocation. EU rules emphasize:
- Objective eligibility criteria
- Publication of significant aid awards
- Incentive effect requirements (aid must influence investment decisions and be applied for before projects begin)
By limiting opaque overcompensation and requiring aid to be expressed in comparable and reviewable terms, alignment would make access to support more predictable and less dependent on informal channels.
Dispelling Misconceptions
Contrary to common misconceptions, EU alignment expands the range of tools available to support SMEs rather than restricting them to “de minimis” aid.
A frequent misunderstanding in the Serbian public debate is that the SAA prohibits substantial aid to SMEs; however, EU practice actually encourages horizontal measures reserved exclusively for smaller firms. Through the General Block Exemption Regulation (GBER), Serbia can implement:
- Targeted investment aid
- Financial instruments
- RDI incentives specifically for SMEs
The real issue is not whether SMEs may receive aid, but how that aid is currently structured to prevent the same large beneficiaries from repeatedly absorbing limited public resources. Without effective safeguard mechanisms, large-scale regional aid can often crowd out smaller players.
By adopting EU-style constraints and redesigning threshold-based measures, Serbia can ensure that its state aid policy becomes a genuine engine for SME growth and broader economic diversification.