State Aid and Industrial Policy

State aid control determines whether public support corrects market failures or entrenches privilege. It is hence not only an accession obligation but a governance test. This chapter shows that Serbia's main alignment gaps sit in high-weight schemes in tax legislation, the free-zones regime, and state guarantees. It sets out what alignment would concretely change through clearer classification, cumulation control, grant-equivalent reporting, regional differentiation, transparency, and evaluation. It also clarifies that de minimis is not the ceiling for SME policy under EU rules: the General Block Exemption Regulation (GBER) enables materially larger rules-based support.¹⁵

VI.1 State Aid in the Reform Agenda

State aid control occupies a strategic position in Serbia's Reform Agenda because it goes to the heart of how public resources shape economic structure. Under the Stabilisation and Association Agreement, Serbia committed to align with Articles 106–108 TFEU on competition (European Union & Republic of Serbia, 2013). This is also an opening benchmark for Chapter 8. The Growth Plan reinforced these obligations by linking disbursements to demonstrated progress.

The Reform Agenda structures alignment as a sequenced process: complete an inventory of existing schemes (due end-2024, delivered late, unpublished); adopt a time-bound action plan for alignment (due June 2025, returned for revision); implement alignment (2025–2027); and achieve full acquis compatibility (December 2027).

Table 7: Reform Agenda — State Aid

Source: Reform Agenda for Serbia, Annex (2024).

As of end-2025 Serbia is behind on the first two steps. The CSAC adopted an inventory in February 2024, but the version required under the Reform Agenda — finalised in line with the Commission's March 2024 comments — was not completed by the December 2024 deadline. Two drafts were submitted in early 2025 with outstanding comments still unaddressed. No version of the inventory was publicly disclosed. At the Reform and Growth Facility Monitoring Committee meeting, government representatives stated that Serbia had adopted the final Inventory of State Aid Schemes in July 2025 following European Commission approval. As of the time of writing, however, this has not been independently confirmed. Work on the time-bound action plan could not substantively proceed without a finalised inventory as its analytical basis; no draft had been published or submitted for Commission approval. Both steps entered a grace period running until December 2026.

Why does this matter beyond acquis alignment? EU state aid rules exist to ensure that public support corrects genuine market failures — financing gaps for SMEs, underinvestment in R&D, regional underdevelopment — without distorting competition or creating permanent dependencies. The rules require that aid be targeted to a clear objective, demonstrate an incentive effect (meaning it changes behaviour rather than rewarding what would happen anyway), remain proportionate to the identified need, be tracked through cumulation control to prevent over-subsidisation, and operate transparently with time limits and evaluation. When these principles are violated, support may flow to whoever has connections rather than where market failures are binding, public resources may reward investments that would occur anyway, a few large beneficiaries absorb disproportionate shares, and discretionary allocation becomes normalised. This is precisely Serbia's current pattern.

VI.2 How Serbia Uses Each Type of State Aid

Serbia's deployment of the available instruments of state aid is highly uneven. Table 8 presents the standard categories recognised under EU rules, their primary objectives, the instruments typically used to deliver them, and — in the final column — how Serbia actually uses each.

Table 8: Types of State Aid and How Serbia Uses Them

Source: Authors' compilation based on EU state aid guidelines, Serbian legislation, and state aid reporting.

The pattern that emerges is one of overreliance on regional aid for large FDI, systematic underfunding of horizontal and SME instruments, and formal compliance easily masking discretionary practice in high-risk categories. The pattern reflects the biases described in the previous chapters. The dominant category by far is regional aid, applied at maximum intensity across the entire territory — which, by treating Serbia as a single region, effectively channels support toward more developed locations rather than the lagging areas the instrument is designed to help. Horizontal aid for innovation and green transition is declared but barely funded. SME support, rather than drawing on the substantial possibilities available under GBER, is confined in practice to de minimis ceilings — a domestic policy choice, not an EU requirement, that keeps the main SME channel an order of magnitude below what EU rules would permit. Rescue and restructuring controls are formally in place but circumvented through tolerated arrears to state-owned utilities — a mechanism that achieves equivalent outcomes without triggering formal state aid procedures.

VI.3 Specific Schemes and Their Alignment Gaps

While Serbia's Law on State Aid Control is broadly aligned with the acquis, several major aid schemes — especially fiscal schemes under the corporate income tax, personal income tax, and free-zones laws — remain unaligned and are not subject in practice to systematic notification, standstill, and compatibility control. These high-weight instruments sit at the centre of Serbia's industrial policy model. As a result, they can confer selective advantages without transparent grant-equivalent reporting, credible tests of incentive effect, or effective cumulation control across overlapping supports. In practice, this channels support toward large, discrete projects rather than incremental domestic investment. Table 9 summarises the main schemes, their alignment status, and the specific issues they raise from an EU state aid perspective.

Table 9: Overview of Existing State Aid Schemes and Alignment Gaps

Source: Ministry of European Integration (2024); Republic of Serbia (2006, 2019a, 2020, 2024).

The core weakness of these schemes is not in their stated economic objectives but rather in their legal architecture, which prevents appropriate safeguards from being applied. 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. The corporate profit tax holiday (Art. 50a) is the clearest example: it grants exemption to firms that invest one billion dinars and create 100 jobs, but does not specify whether this is regional aid, employment aid, or something else. Without this classification, there is no way to determine which maximum intensities apply, accumulation rules govern, or how the incentive effect should be tested. The scheme functions as an "empty frame": it describes conditions for eligibility but provides no legal basis for compatibility control. The next section translates these design gaps into the concrete operational changes that alignment would require.

VI.4 What Alignment Would Concretely Change

Table 10 summarises the concrete operational changes that alignment would require for each of the main schemes identified above.

Table 10: What Alignment Would Concretely Change

Source: Authors' compilation based on EU state aid guidelines, Serbian legislation, and state aid reporting.

VI.5 De Minimis Is a Choice, Not a Constraint

A persistent misconception in Serbian policy discourse is that EU alignment would confine SME support to de minimis aid. This misreads the EU framework. De minimis, currently capped at EUR 300,000 over three years, is intended for small interventions that are presumed not to distort competition and therefore do not require notification. It is an administratively simple additional channel, not the main template for SME policy. By contrast, the GBER provides a framework for substantial SME support without individual notification. It allows investment aid at 20% intensity for small enterprises and 10% for medium-sized enterprises, with possible regional bonuses, and also permits aid for advisory services, innovation, environmental investments, and training at meaningful levels. Current agency-led instruments in Czechia, Ireland, and Finland show that member states use GBER, regional aid, and other non-de minimis bases to support SME upgrading at levels far above the de minimis ceiling (Text Box 4).

Serbia's reliance on de minimis as the default SME channel is therefore a domestic policy choice, not an SAA requirement. The SAA requires alignment with core state aid principles such as targeting, incentive effect, proportionality, cumulation control, and transparency. It does not require the use of the narrowest available instruments. Serbia could, in full conformity with EU rules, implement a GBER-style SME investment scheme that combines diagnostics, conditional co-financing, and implementation support, and that provides support far above current de minimis ceilings to firms that meet pre-defined criteria. The binding constraint is not Brussels but domestic policy preferences and continued reliance on fragmented, low-ceiling programmes whose chief advantage is their low administrative demands.

VI.6 Recommendations

While formal alignment proceeds through the inventory and action plan, the substantive policy adjustments that alignment will require deserve early attention because many of them directly serve the competitiveness agenda. Aligning incompatible schemes is not merely a matter of reclassification — it will require redesigning instruments that currently channel support disproportionately toward large, politically visible beneficiaries while leaving domestic SMEs dependent on narrow de minimis programmes. Several of the changes implicit in alignment — broadening eligibility, introducing objective criteria, shifting from automatic fiscal advantages toward targeted and time-limited support — are precisely the changes needed to make public support more productivity-enhancing and less regressive.

These adjustments require preparation: fiscal space must be identified, transitional arrangements designed, and alternative instruments developed before existing schemes are withdrawn. Beginning this work in parallel with the formal alignment process, rather than treating it as a consequence to be managed after the action plan is adopted, would allow Serbia to use the discipline of EU state aid rules as a framework for reorienting industrial support toward competitiveness — rather than experiencing alignment solely as a constraint. For more specific examples of policies and measures, see the Appendix.