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EIT financial guide

31 May 2013

Related to the implementation of KIC added value activities under the Grant Agreement 2013

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Table of Contents

I. Background .......................................................................................................................................... 3

II. Legal basis ....................................................................................................................................... 3

III. General criteria on eligibility of costs ........................................................................................... 3

IV. Specific rules on eligibility ............................................................................................................. 6

1. Direct costs ...................................................................................................................................... 6

a. Cost of personnel ........................................................................................................................ 6

b. Travel, accommodation and subsistence allowance .............................................................. 9

c. Fixed assets and capital expenditure ....................................................................................... 9

d. Other direct costs ..................................................................................................................... 10

e. Subcontracting .......................................................................................................................... 11

f. Financial support to third parties (sub-granting) ................................................................. 12

2. Indirect costs ................................................................................................................................. 14

3. Non-eligible costs .......................................................................................................................... 15

4. Surplus and interest generated on pre-financing .................................................................... 16

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I. Background

The objective of this document is to provide guidance to the KIC Legal Entities (LE), and via them to the

KIC partners, on financial issues related to the implementation of KIC added value activities (KAVA).

After introducing the legal basis in chapter II, this document provides overall information on the general

principles of eligibility. The general criteria on eligibility of costs are explained in chapter III, while

chapter IV provides in-depth clarification for each specific cost category. The treatment of surplus and

interests generated by the pre-financing payments are also covered at the end of this document, because

in this respect the EIT environment is different from other EU funding schemes.

II. Legal basis

A Framework Partnership Agreement (FPA) has been signed between the EIT and each KIC covering a

period of seven years starting in 2010. Article 6.1 of the FPA defines the criteria of what can be

considered as the KIC’s global expenditure, and specifies that the EIT financial contribution may cover up

to 25% of the KIC’s global expenditure between 1 January 2010 and 31 December 2013. Article 6.2 of

the FPA defines those activities carried out by the KIC which can be regarded as KAVA.

Annually, a Grant Agreement (GA) is concluded between the EIT and each of the KICs. According to

article 4.3 of the GA, the EIT shall contribute a maximum of 100% of the eligible costs of KAVA, within a

limit (maximum amount) specified each year. In addition, the provisions on costs (article 7),

subcontracting (article 8) and financial support to third parties (article 9) shall apply. Transfers between

headings of the budget and financial responsibilities are regulated in articles 4 and 5 respectively, while

the reporting requirements (including cost reporting) are stipulated in article 6.

It is also important to note that the Financial Rules of the EIT1 grant certain derogations with regard to

the EU Financial Regulation2and its Rules of Application3 in relation to eligibility, which are specified

further in the later sections of this document.

III. General criteria on eligibility of costs

The legal framework presented in the previous chapter sets out the general rules on eligibility. Especially

article 6.1 of the FPA and article 7.1 of the GA are relevant in this respect.

To be eligible for EIT funding, costs must be incurred by the KIC LE/partner, certified by the authorised

person of the KIC LE/partner in the form of signing a statement in the cost report, reported in line with

the provisions stipulated in article 6 of the GA, and approved by the EIT according to the procedure set

1Ref. Ares(2010)176740 adopted by the EIT Governing Board on 20 April 2010 available on the EIT website:

http://eit.europa.eu/fileadmin/Content/Downloads/PDF/Official_documents/EIT_Financial_Regulation.pdf. 2Regulation No. 966/2012 of the European Parliament and of the Council

3Commission Delegated Regulation No. 1268/2012

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out in article 10 of the GA. The final amount of the EIT grant is established according with the provisions

of article 13 of the GA.

Costs shall be declared in Euro. Costs incurred in a different currency shall be converted to Euro by the

KIC LE/partner using the average of monthly accounting rates established by the Commission and

published on its website4 (i.e. one rate for the whole reporting period). In case of entry or exit of a

partner during the reporting period, the averages of monthly rates shall be calculated including the

month of entry and/or exit, however excluding the months before or after this date (i.e. if a partner joins

on 20 May and exits on 11 October, the average of monthly accounting rates from May to October shall

be calculated).

In line with article 7.1.1 of the GA, the following forms of funding are possible, or the combination

thereof:

reimbursement of the proportion or the total of eligible costs actually incurred;

lump sums; and

flat rate financing in the form of scales of unit cost or at a fixed percentage.

The applicable flat rates and lump sums are defined in Annex IV of the GA 2013.

The general criteria in case of reimbursement of actual costs are set out in article 7.1.2:

’Actual’: costs must be real and not estimated or budgeted. Staff cost may also be calculated on

the basis of average personnel costs in line with article 7.2.2 of the GA. Supporting documents

shall be available providing for the occurrence of the costs by the KIC LE/partners;

‘Incurred during the period of implementation of the Action’: only costs generated during the

period defined in article 2.2 of the GA can be considered eligible. This period normally follows

annual cycles, from 1 January to 31 December every year, although in case of entry and exit of a

KIC partner during the implementation of the Action, in line with article 7.1.4. of the GA 2013,

the entry/exit dates shall be seen as the first/final date of eligibility. As an exception to this rule,

costs relating to final reports and CFS report by the auditor incurred after the end of the period

are considered eligible. The costs of financial guarantees incurred after the end of the period are

considered eligible;

‘Necessary for the implementation of KAVA, and clearly indicated in the estimated overall

budget’: the costs must be essential for the performance of KAVA. The partner must be able to

demonstrate to any third party reviewing the records that the costs entered in the budget have a

direct relationship with KAVA described in the BP.. When the final grant is determined, the

eligible cost base cannot therefore include costs which did not appear in the originally estimated

budget or in any approved amendments. Moreover, according to article 4.4 of the GA transfers

between headings are permitted if they are not exceeding 20% of the amount of the heading for

which the transfer is intended. 100% flexibility applies between budget items within the same

4 http://ec.europa.eu/budget/contracts_grants/info_contracts/inforeuro/inforeuro_en.cfm

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subheading or between budget subheadings within the same heading. This applies at the level of

the KIC, and not for each partner individually;

‘Identifiable and verifiable, in particular being recorded in the accounting records’: supporting

documents must be produced for all costs. The KIC LE/partner must enter costs in its accounts in

accordance with the applicable rules, i.e. the accounting standards of the country where it is

established and according to its usual cost-accounting practices. Costs need to be accountable to

the reporting period and need to be recorded in the accounting records no later than the date of

cost report or the audit certificate. KIC LE/partners do not have the possibility to create specific

accounting principles in the context of KAVA, which would differ from their usual principles and

practices;

‘Comply with the requirements of applicable tax and social legislation’: the costs declared shall be

in compliance with the relevant tax laws and social legislation of the country in which they are

incurred;

‘Reasonable, justified and comply with sound financial management’: costs must be reasonable

and comply with the principles of economy, efficiency and effectiveness, as defined in article 30

of the EU Financial Regulation.

Costs which cannot be justified are, as a matter of principle, to be considered not eligible

Where in accordance with article 7.1.1.a. the EIT financial contribution for KAVA activities takes the form

of the reimbursement of actual costs, the KIC LE/partners’ accounting and internal control procedures

must permit reconciliation of the costs and receipts declared in respect of KAVA with the corresponding

accounting statements and supporting documents.

Where in accordance with article 7.1.1.b. the EIT financial contribution for KAVA activities takes the form

of a lump sum contribution as indicated in Annex IV of the 2013 GA, the KIC LE/partner must declare as

eligible costs or as requested contribution or as requested contribution the global amount specified in the

annex subject to the proper implementation of the corresponding activities as described in Annex I of the

GA. In addition, the KIC LE/partner's must be able to provide adequate supporting documents to prove

the proper implementation. However, the KIC LE/partner does not need to identify the actual eligible

costs covered or to provide supporting documents, notably accounting statements, to prove the amount

declared as lump sum.

Where in accordance with article 7.1.1.c. the EIT financial contribution for KAVA activities takes the form

of scales of unit costs or at fixed percentage as indicated in Annex IV of the 2013 GA, the KIC LE/partner

must declare as eligible costs or as requested contribution the amount obtained by multiplying the

amount per unit specified in the annex by the actual number of units used or produced. In addition, the

KIC LE/partner's must be able to provide adequate supporting documents to prove the number of units

declared. However, the beneficiary does not need to identify the actual eligible costs covered or to

provide supporting documents, notably accounting statements, to prove the amount declared per unit.

In case of lump sums and flat rate financing, the general eligibility criteria set out in article 7.1.3 refer to

the activities for which costs are declared, instead of costs incurred.

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IV. Specific rules on eligibility

1. Direct costs

Eligible direct costs5 are all those costs which can be attributed directly to the implementation of KAVA,

and respect the general criteria on eligibility presented in the previous chapter of this document.

a. Cost of personnel

It refers to the cost of staff assigned to carry out KAVA. Costs are eligible only if they are in accordance

with the normal policy and practices of the KIC LE/partner.

Personnel costs may be declared on the following basis:

1. Actual costs

a. on the basis of an employment contract

b. natural persons working under a contract other than an employment contract

2. Average personnel costs on the basis of an employment contract

3. Flat-rate financing of SME owners and other natural persons who do not receive a salary

Where it is the usual practice of the KIC LE/partner to account for certain types of personnel costs (such

as administrative or support staff) as indirect costs, the costs of this personnel cannot be charged as

direct eligible costs, but only as indirect costs. From this respect a differentiation can be made on the

basis of the work performed by the support staff instead of the status, as long as it is in line with the

usual accounting practice of the entity concerned.

As a general rule, the number of productive hours should be that applied as the usual practice of the KIC

LE/partner. For instance, KIC LE/partners could use the actual productive hours of each person according

to the time-records or instead use a standard number of productive hours (generally annual productive

hours). When the KIC LE/partner applies a standard number of productive hours, this should be

representative of its working standards. Background information used to determine the standard

productive hours should be available and verifiable.

1.a) Declaration of actual costs on the basis of an employment contract

The costs of personnel working under an employment contract with the KIC LE/partner or an equivalent

appointing act and assigned to the KAVA, comprising actual salaries plus social security contributions and

other statutory costs included in the remuneration, provided that these costs are in line with the KIC

LE/partner‘s usual policy on remuneration. Those costs may also include additional remunerations,

including payments on the basis of supplementary contracts regardless of the nature of those contracts,

provided that they are paid in a consistent manner whenever the same kind of work or expertise is

required, independently from the source of funding used.

5 Eligible direct costs are specified in article 7.2.2 of the GA

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Only the costs of actual time worked and recorded on the KAVA are eligible. Actual time worked refers to

the productive hours representing the number of hours made available by the employee after the

deduction of holiday, sick leave and other entitlements. Working time to be charged must be recorded

throughout the duration of the project by adequate means, which provide evidence of their reality and

reliability (e.g. signature of the staff member and of the supervisor). Employees have to record their time

on a daily, weekly, or monthly basis using a paper or a computer-based system. The time-records have

to be authorised by the project manager or other superior. A time-recording system (a system which

certifies the reality of the hours worked) is a requisite for the eligibility of the personnel costs. A contract,

as a document signed before the work is actually performed, would not be sufficient without an

appropriate time-recording system, unless the KIC LE/partner can prove that the person was hired

exclusively for and has worked exclusively on KAVA (e.g. by a job description or any other relevant

document).

In cases where personnel work on several projects during the same period, the time recording system

must enable complete reconciliation of total hours per person, listing all activities (EU projects, internally

funded activities, administration, absences etc.).

In the absence of timesheets, the KIC LE/partner must substantiate the cost claimed by reasonable

means (alternative evidence) giving an equivalent level of assurance and allowing to identify the time

spent on the KAVA and its apportionment, with regard to the total time actually worked. In the absence

of integral time records, working time' declared shall represent the actual number of hours spent on GA

2012 KIC added value activities by the employee.

1.b) Declaration of actual costs for natural persons working under a contract other than an

employment contract

These costs can be considered as personnel costs, regardless of whether the persons are self-employed

or employed by a third party, if the following cumulative criteria are fulfilled:

The KIC LE/partner has a contract to engage a natural person to work for it and the work

involves tasks to be carried out under KAVA;

The person must work under the instructions of the KIC LE/partner (i.e. the work is decided,

designed and supervised by the KIC LE/partner);

The person must work in the premises of the KIC LE/partner (except in specific cases where

teleworking has been agreed between both parties);

The result of the work belongs to the KIC LE/partner;

The costs are not significantly different from the personnel costs of employees of the same

category working under labour law contract for the KIC LE/partner;

The remuneration is based on working hours rather than on the delivering of specific

outputs/products and should be recorded in the accounts of the KIC LE/partner; and

Travel and subsistence costs related to such persons’ participation in project meetings or other

travel relating to the project would have to be paid directly by the KIC LE/partner in order to be

eligible.

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2. Average personnel costs on the basis of an employment contract

The KIC LE/partner may calculate and declare personnel costs on the basis of averages, rather than on

an actual cost basis, if this is consistent with the management principles and accounting practices of the

KIC LE/partner. The personnel must be directly hired by the KIC LE/partner either on a permanent or

temporary basis, and must work under the sole supervision and responsibility thereof.

The cost methodology applied for the use of average personnel costs by the KIC LE/partner should be

based on the actual personnel costs as registered in the statutory accounts of the KIC LE/partner. The

number of productive hours should be that applied as the usual practice of the entity, on the basis of

verifiable background information. The methodology should also prevent double funding of the same

costs, e.g. as personnel costs as well as indirect costs.

The EIT does not require the submission of a certificate on the methodology for average personnel costs.

Nevertheless if for a KIC LE/partner such a certificate exists in the framework of other EU funded

programmes (e.g. FP7), it must be applied also in case of KIC activities and provided to the EIT. If such a

certificate does not exist, the KIC LE/partner can apply its own methodology when calculating average

personnel costs, as long as it respects the criteria set out by the EIT.

The following cumulative criteria for the acceptance of average personnel cost methodologies shall apply:

The average personnel cost methodology shall be the one declared by the KIC LE/partner as its

usual cost accounting practice; as such it shall be consistently applied to all KAVA carried out

under the GA;

The methodology shall be based on the actual personnel costs of the KIC LE/partner as

registered in its statutory accounts, without estimated or budgeted elements;

The methodology shall exclude from the average personnel rates any ineligible cost item as

defined in the GA and any costs claimed under other costs categories in order to avoid double

funding of the same costs;

The number of productive hours used to calculate the average hourly rates shall correspond to

the usual management practice of the KIC LE/partner provided that it reflects the actual working

standards of the KIC LE/partner, in compliance with applicable national legislation, collective

labour agreements and contracts and that it is based on auditable data.

3. Flat-rate financing of SME owners and other natural persons who do not receive a salary

The target group consists of SME owners and other natural persons who do not receive a salary. They

may calculate and charge personnel costs on the basis of flat rates specified in Annex IV of the GA.

Employees of the SME and other natural persons who do receive a salary registered as such in its

accounts cannot use this flat rate.

The partners declaring costs according to this provision shall calculate the value of personnel costs by

applying the corresponding rate on the actual time worked on KAVA. The number of hours actually

worked for the project shall be duly justified by supporting time-records. The total number of hours

claimed in a year cannot be higher than the standard number of productive hours per SME owner /

physical person.

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b. Travel, accommodation and subsistence allowance

Actual costs of travel, accommodation and subsistence allowance relating to the implementation of KAVA

are eligible, providing they comply with the KIC LE / partner usual practices and they are adequately

recorded. If such practices do not exist, the allowances cannot exceed the scales approved annually by

the European Commission6. Travel, accommodation and subsistence allowance must be limited to the

necessity of the activity, to staff working on KAVA and to events related to KAVA.

c. Fixed assets and capital expenditure

The cost of fixed assets means the cost of purchase, rent or lease of property, plant and/or durable

equipment (new or second-hand), including hardware.

New equipment purchased for the purposes of carrying out the action can be considered eligible,

providing that costs are determined according to the KIC LE/partner usual accounting practice and they

are depreciated in accordance with the relevant tax and accounting rules applied by the entity. The same

rule applies to second-hand equipment, with the condition that no previous EU funding has been used for

newly purchasing the equipment and the KIC LE/partner is able to prove it.

Cost for equipment may include all those costs necessary for the asset to be in working condition for its

intended use (site preparation, delivery and handling, installation, etc.) according to the usual accounting

practice of the KIC LE/partner. In the case of rental or leasing, the cost of any buy-out option at the end

of the lease or rental period is ineligible.

Only the portion of depreciation costs of the fixed assets corresponding to the duration of the action and

the rate of actual use for the purposes of the KAVA is eligible provided that it is written off in accordance

with the tax and accounting rules applicable to the beneficiary and generally accepted for items of the

same kind. Depreciation is charged in each relevant periodic report. Depreciated costs of fixed assets can

never exceed the purchase price of the equipment. Depreciation cannot be spread over a period

exceeding the useful life of the asset. Any potential residential value of the asset shall be taken into

consideration.

If the fixed asset purchased before the start of the activity is used for the purposes of KAVA, the portion

of depreciation costs covering the funding period and the portion of use belonging to funded KAVA of

such asset can be considered eligible. However, if a KIC Partner joins the KIC during the implementation

of the annual Grant Agreement, depreciation charged before the start date of eligibility of the KIC Partner

is not eligible.

Charging the full price of an asset in one single year might be considered as excessive cost, and therefore

non eligible, except:

if it is according to the usual accounting practice of the KIC LE/partner for expensing it

immediately in case this practice follows applicable tax or accounting rules (e.g. for lower-value

items); or

6 ftp://ftp.cordis.europa.eu/pub/fp7/docs/flat-rates-subsistence_en.pdf

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if the asset falls under the items allowed to account for as capital expenditure under the

conditions set out in the GA (see following section on capital expenditure).

Capital expenditure

As an exception from the rule described above, a particular regime applies to certain expenditure

requiring substantial up-front investment for establishing the large infrastructure in the KIC LE and co-

location centres. The purchase cost of large infrastructure and/or equipment used for the set up and

development of co-locations and the KIC LE are eligible. In case of capital expenditure the EIT will bear

up to the total cost of the large infrastructure/research equipment, regardless of the depreciation used by

the KIC LE/partner. In this specific context, the partner could therefore charge up to the full price of

equipment, providing that on an annual basis at KIC level it is limited to the threshold referred to in

article 7.2.2c) of the GA 2013. In such cases the corresponding expenditure is treated as capital

expenditure, but at the same time the depreciation of the relevant fixed asset shall not be deemed

eligible. In any case and under any circumstances, such equipment reimbursed by its capital expenditure

cannot be charged to any other EU project.

d. Other direct costs

This category refers to direct costs having a short life expectancy (not greater than the duration of the

annual Grant Agreement), such as consumables, office supplies and sundry items, etc. As any direct

costs, these shall be identifiable and assigned to the KAVA, as well as being necessary for their

implementation.

In addition, this category shall include the cost of use of premises assigned to KAVA, or the adequate

portion if the premises are utilised also for other activities. However if premises are leased form a third

party, such a lease agreement shall be considered as subcontracting.

Finally, costs arising directly from requirements imposed by the FPA or the GA can form part of this

category of costs declared. Most typically, these will be the costs associated to the certificates on financial

statements, and the costs of financial guarantees.

The financial guarantee constituted in accordance with article 10.1 of the GA shall remain in force until

the approval of the KIC Report by the EIT in case of a final balance payment due from the EIT to the

KIC, or the receipt of the recoverable amount from the KIC. The EIT undertakes to release the guarantee

within 30 days following that date. In terms of period of eligibility the costs of financial guarantee

constitute an exception from the main rule, because these costs are eligible even if they are incurred

after the final date of eligibility (which is typically 31 December due to the annual GA cycle).

The certificate on the action's financial statements and underlying accounts shall accompany the KIC

Report for all KIC LE/partners declaring a total eligible KAVA cost of an amount exceeding the threshold

set out in the EIT methodology for certificates on the financial statements.. The related costs are eligible,

even though they are always incurred after the period of eligibility set out in the GA.

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e. Subcontracting

The KIC LE/partners may enter into contracts with suppliers and service providers7. The general rule is

that KIC LE/partners shall have sufficient resources to carry out the activities, and thus subcontracts can

only cover the execution of limited parts of KAVA.

A subcontractor is normally a third party which is not a KIC LE/partner or a subsidiary of a KIC LE/partner

under the GA. Subcontracting occurs when a KIC LE/partner procures services to carry out part of the

KAVA, usually for specialised tasks that a KIC LE/partner cannot carry out itself or because it is more

efficient to use the services of a specialised organisation.

Subcontracting is defined by certain characteristics:

The contract is based on business conditions. This means that the subcontractor charges a price,

which usually includes a profit for the subcontractor. This makes it different from financial

support to third parties, where a third party is reimbursed only for the costs of the activity;

The subcontractor works without the direct supervision of the KIC LE/partner and is not

hierarchically subordinate to the KIC LE/partner (unlike an employee of KIC LE/partner);

The subcontractor's motivation is pecuniary, not the KIC added value activity itself. It is a third

party whose interest in the KIC added value activity is only the profit that the commercial

transaction will bring. A subcontractor is paid in full for its work by the KIC LE/ partner with

whom it has a subcontract. As a consequence, subcontractors do not have any IPR rights on the

foreground of the activity;

The responsibility vis-à-vis the EIT-KIC GA for the work subcontracted lies fully with the KIC

LE/partner. The work that a subcontractor carries out belongs to the KIC LE/partner. A

subcontractor has no rights or obligations vis-à-vis the EIT or the other KIC partner, as it is a

third party.

According to article 8.1 of the GA, the KIC LE/partners shall award the contract on a best value for

money basis. In doing so, they shall take care to avoid any conflict of interest.

A conflict of interest situation occurs when the KIC LE or a KIC partner is involved in multiple interests,

one of which could possibly corrupt the motivation for an act in the other. In principle, the KIC LE/partner

should not subcontract part of the work to its related companies or subsidiaries. The exceptions to this

principle are the cases when other EU Regulations (e.g. Antitrust, State Aid rules) or other specific

circumstances prevent the partners to participate in the activity in any other way. In these exceptional

cases the KIC LE/partners shall request the EIT’s approval before the signature of such contracts. The

request shall include a detailed description of the conditions and the reasons justifying the exception.

As opposed to considering the price as the only decisive factor, the best value for money basis means the

selection of the offer which presents the best price-quality ratio, or in other terms the optimum

combination total costs of ownership over the life-cycle and benefits. Furthermore, it can include other

criteria, such as social, environmental, or other qualitative considerations. The exact procedure to be

applied for the selection and award of subcontracts depends on the status of the KIC LE/partner:

7 Subcontracting is regulated in article 8 of the GA

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Public entities must follow the procurement principles established by their national authorities.

For subcontracts exceeding certain amounts, the directive on public procurement of services8

applies and the publication of a call for tenders is mandatory;

Private legal entities must follow the rules that they apply for awarding procurement contracts.

The publication of a call for tenders is normally not necessary for private legal entities, but in

principle they must at least require submission of several quotes (usually a minimum of three),

unless a framework contract for the provision of those services has been established. In the

absence of formalised internal rules on procurement, if awarding a contract above a value of

10,000 euro without receiving at least three offers, the reasons for such an arrangement shall be

properly documented by the KIC LE/partner, and for the request of the EIT the relevant

documentation shall be made available.

It is possible that for technical or artistic reasons, or for reasons connected with the protection of

exclusive rights, the contract may be awarded only to a particular economic operator. However in this

case the KIC LE/partner shall be able to provide evidence proving that such a situation occurs.

Many entities have signed framework contracts with a third party to carry out routine or repetitive tasks

(e.g. an external auditor who periodically audits the accounts of a KIC LE/partner). They might have been

established before entering the KIC, and are the usual practice of the entity for a given type of task.

These frameworks contracts can be used to carry out tasks necessary for implementing the KAVA

provided they have been established on the basis of the principles mentioned above.

In exceptional cases, subcontracting between the KIC LE and/or KIC partners, or between the KIC LE/

partner and its subsidiary or related company is possible. When one KIC LE/partner needs the services of

another KIC partner in order to perform a part of its tasks, no profit element shall be included in the fee

charged for the work carried out by the second partner. If on the basis of cost accounting records it is

not possible or practicable to establish the respect of the no profit principle, the entity shall provide

alternative proof, such as the fee charged in comparison to the official price list, or compared to an

appropriate benchmark price for a similar activity. In case of subcontracting between a KIC partner and a

subsidiary or related company, the use of transfer prices shall be justified on a case-by-case basis in the

KIC Report submitted to the EIT.

In terms of reporting, certain details shall be provided about each subcontract in accordance with the

Guidelines for the Preparation of KIC Reports. However, this requirement applies only to individual items

exceeding the value of 5,000 euro. For all items below this threshold it is sufficient to provide an

aggregated figure, without the required details.

Subcontracting costs shall be declared as direct costs, however they shall not be taken into account when

calculating indirect costs on a flat rate basis.

f. Financial support to third parties (sub-granting)

The KIC LE/partners may give financial support to third parties9. The recipient of such a support is a third

party, i.e. a beneficiary which is not a KIC LE/partner under the GA. As opposed to subcontracting, the

8 Directive 2004/18/EC: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:134:0114:0240:EN:PDF

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recipient of the financial support does not necessarily deliver goods or provide services to the KIC

LE/partner, but the simple participation of the third party takes the KIC closer to the achievements of its

objectives. No profit element is involved, the financial support shall cover only the costs associated with

the participation in the action.

The main aim of financial support to third parties is to facilitate the participation of individuals (e.g.

students) and/or SMEs in the KIC activity, provided that the use of such financial support is foreseen in

the approved Business Plan.

As specified in article 9.1 of the GA, the conditions on granting financial support to third parties must be

defined by the KIC in the Business Plan (Annex 1 of the GA). This shall include in particular the maximum

amount, the criteria for determining the exact amount, the different types of activities supported, the

categories of beneficiaries, as well as the award criteria. The financial support may not exceed 60,000

euro for each third party, irrespectively of the type of recipient.

KIC LE/partners shall ensure that transparent selection procedures are used for selecting the beneficiaries

of the financial support. In the Business Plans, at the request of the EIT and especially in the event of an

audit, KIC LE/partners must be able to demonstrate that they have respected this condition. KIC

LE/partners must be able to prove that:

the criteria and conditions of submission and selection are clear and identical for all applicants;

the selection and award are based on the clearly defined and communicated criteria.

The costs in relation to financial support to third parties can be declared by the KIC LE/partners on three

different basis:

actual costs

flat rate in the form of unit costs

lump sums

The relevant flat rates and lump sums are defined in Annex IV of the GA. In case of reimbursement of

actual costs, it is acceptable if the costs are recorded in the accounting records of the third party instead

of the KIC LE/partner concerned.

The KIC LE/partner shall enter into an agreement with the recipient of the financial support. However, as

opposed to a traditional type of contract signed by both parties, the agreement may take different forms,

such as a grant decision or a consent form signed only by one of the parties.

Prizes

As provided for in article 9.3 of the GA, the KIC LE/partners may give prizes to third parties. Prizes may

not be awarded directly without a contest, and shall be published by means of communication which are

non-discriminatory in nature for the submission of entries and which have no effect on restricting the

access of participants to the contest.

9 Financial support to third parties is regulated in article 9 of the GA

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The rules of the contest must be defined by the KIC in the Business Plan (Annex 1 of the GA), and shall

at least lay down the conditions for participation, the award criteria, the amount of the prize and the

payment arrangements. The rules of contests shall respect the relevant provisions laid down in article

122 of the Rules of Application of the EU Financial Regulation. Information relating to prizes awarded in

the course of the business plan implementation shall be disclosed in the KIC Report.

The amount of the prize is not necessarily linked to costs incurred by the recipient.

Third parties linked to a KIC partner

By way of derogation from paragraphs 1 to 3 of article 9, specific provisions apply to third parties linked

to a KIC partner. The 60,000 euro threshold referred to in article 9.1 of the GA does not apply in case of

third parties linked to a KIC partner falling under the scope of article 9.4.

In order to be eligible, third parties linked to a KIC partner shall be identified upfront, and specified in

Annex V of the GA.

The term ‘linked’ refers to an established formal relationship between a third party and the KIC partner,

defined by the following characteristics:

The relationship by nature is broad and is not limited to GA, or specifically created for the work in

the GA;

Accordingly, its duration goes beyond the duration of the KAVA and usually pre-dates and

outlasts the GA;

It has a formal external recognition, sometimes in the framework of a legal structure, sometimes

in the absence of legal personality, through the sharing of common infrastructures and resources

(e.g. joint laboratory).

Ad hoc collaboration agreements between legal entities to carry out KAVA are therefore not covered by

this provision.

When declaring costs, the third parties linked to a KIC partner shall submit their individual cost reports,

accompanied by a Certificate of Financial Statements (CFS), if necessary. The costs declared have to

comply with the provisions of the GA in the same way as for KIC LE/partners, especially in terms of the

rules relating to eligibility of costs, controls and audits.

2. Indirect costs

Eligible indirect costs10 are all those costs which cannot be identified by the KIC LE/partners as being

directly attributed to the KAVA, but which can be identified and justified by its accounting system as

being incurred in direct relationship with the eligible direct costs.

Two different ways exist to declare indirect costs:

actual basis

10

Eligible indirect costs are specified in article 7.2.3-5 of the GA

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flat-rate basis

In case of declaring indirect costs on an actual basis, different allocation methodologies are acceptable to

distribute actual indirect costs to different projects and/or activities carried out, as long as they are in line

with the general accounting policy of the KIC LE/partner concerned, and they are fair and reliable.

The simplified method is a modality of the actual indirect costs calculation, and is a way of declaring

indirect costs which applies to organisations which do not aggregate their indirect costs at a detailed level

(centre, department), but can aggregate their indirect costs at the level of the legal entity. It is a system

that can be used if the organisation does not have an accounting system with a detailed cost allocation.

This simplified method has to be in accordance with their usual accounting and management principles

and practices. KIC LE/partners are allowed to use it, provided this simplified approach is based on actual

costs derived from the financial accounts of the last closed accounting year. Therefore, KIC LE/partners

using the simplified method shall not submit an adjustment covering the difference between the indirect

costs derived from the accounts of the last closed financial year and the indirect costs derived from the

financial accounts of the project period. KIC LE/partners should be in a position to justify and reconcile

the results with the accounting records and be able to demonstrate in case of an audit that the indirect

costs are fairly allocated to the research activity/projects.

Entities having an analytical accounting system that can identify and group their indirect costs can report

their real indirect costs or choose the flat rate option. In the latter case, up to 20% of the total direct

costs excluding costs for subcontracting and for financial support to third parties can be charged as

indirect costs.

In addition, this threshold may be raised up to 40% in case of non-profit public bodies (in the meaning of

the definition set out in Directive 2004/18/EC on Public Procurement), higher education establishments,

research organisations or SMEs unable to identify with certainty their real indirect costs.

A KIC partner may apply different forms of declaring indirect costs for the different types of activities

carried out, as long as it is in line with its usual accounting and management principles and practices.

A KIC partner receiving an operating grant is not allowed to declare indirect costs on a flat rate basis.

3. Non-eligible costs

Costs not respecting the general rules on eligibility shall be considered non-eligible11. As stipulated in the

GA, the following costs shall be regarded as non-eligible: capital expenditure above the allowable

threshold, return on capital, debt and debt service charges, provisions for losses or potential future

liabilities, interest owed, doubtful debts, exchange losses, deductible VAT and VAT paid by KIC partners

where they act as public authorities, costs covered by another action or work programme receiving an EU

grant, excessive and reckless expenditure..

11

Non-eligible costs are specified in article 7.3 of the GA

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Treatment of VAT12

According to the Financial Regulation the approach to VAT eligibility is activity-oriented and not

beneficiary-oriented. In respect to decide on VAT eligibility, the differentiation shall be primarily made on

the basis of the activity performed by the entity, instead of its public or non-public nature.

VAT is eligible where it is paid by the KIC LE/partner in relation to taxed activities without a right of

deduction, but not where it is paid in relation to activities engaged in as public authorities by public

bodies as defined in the first subparagraph of Article 13(1) of Directive 2006/112/EC13, unless these are

activities listed in Article 13(2) of that Directive.

Activities in relation of which VAT paid is eligible:

Exempt activities without right of deduction, regardless of whether those activities are regarded

as activities engaged in by bodies governed by public law acting as public authorities. Many of

those activities are activities of general interest ('in the public interest').

Activities in relation of which VAT paid is not eligible:

Taxed activities, which consist in the supply of goods or services against payment, to which VAT

applies at a certain rate. VAT paid by the KIC LE/partner on purchases necessary for the

implementation of taxed activities can be deducted from VAT charged by the KIC LE/partner on

its sales. It does not constitute a cost for the beneficiary and may therefore not be eligible;

Activities in respect of which VAT is not deductible but refunded by means of specific refund

schemes or compensation funds;

VAT paid by a non-taxable person which refers to VAT paid by a public body in relation to

activities it carries out as a public authority.

4. Surplus and interest generated on pre-financing

According to the general principles, EU grants may not have the effect of producing a profit for the

beneficiary.

By derogation to this rule, the possible surplus, in accordance with the Article 13.5 of the GA, generated

on the implementation of a grant awarded by the EIT to a KIC may be entered in the budget of the KIC

for the following financial year. The same rule applies, also by derogation to the general financial rules, to

any interest generated on the pre-financing paid from the EIT to a KIC LE.

Thus, the amount corresponding to any interest on pre-financing and/or surplus generated in year 2013

shall be entered in the budget of the KIC for year 2014, i.e. shall be added to the EIT contribution part of

the 2014 budget. This ’additional’ grant should not be considered as automatically acquired for the KIC,

12

The rules on the treatment of VAT may need revision after the adoption of the revised EU Financial Regulation 13

Directive 2006/112/EC: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:2006L0112:20110101:EN:PDF

17

as it will only become real if the final approved eligible KAVA costs for year 2013 justify it. If this is not

the case, the amount from year 2012 shall be recovered by the EIT in year 2013.

Practically, a diligent planning and proper implementation of the Business Plans resulting in a higher level

of expenditure, and consequently higher consumption rate of the EIT grant, will be essential to finally

gain the previous year's amount for the activities of the KIC in the current year.

In terms of reporting, surplus incurring in year 2013 shall be reported in the cost report 2013. As regards

interest generated on pre-financing, the cost report shall contain the total figure of interest generated in

relation to the GA for year 2012, as well as the interest generated in year 2013 up to the final date

covered by the report (31 December 2013).