ECJ strikes down State aid for Paks II nuclear for procurement failures

On 11 September 2025, the Court of Justice of the European Union (ECJ) delivered a significant judgment annulling the 2017 decision of the European Commission approving Hungarian State aid for the Paks II nuclear power station. According to the ECJ Grand Chamber, the European Commission should have ascertained whether the direct award of the contract for the construction of two new reactors to a Russian company complies with EU public procurement rules.

What you need to know

• When reviewing the compatibility of a State aid, the European Commission must look beyond compliance with State aid rules alone and consider any infringements of EU law that arise from (i) the economic activity financed, (ii) the aid itself, (iii) its object, or (iv) aspects inextricably linked to its object. An indissoluble link exists where a modality is essential for achieving the aid's objective or for its functioning.
• In the Paks II case, the ECJ considered that the European Commission should have ascertained whether the direct award of the contract for the construction of two new reactors complies with EU public procurement rules. The construction of the reactors, including the manner of awarding the contract, was indispensable for achieving the aid's objective, namely the provision free of charge of the reactors to the beneficiary.
• The European Commission could not merely refer to the closure of separate infringement proceedings in order to show that Hungary, in any event, did not breach EU procurement rules. Its decision therefore lacked sufficient reasoning.
• The judgment has important implications, especially for notifiable State aid in the context of large infrastructure and energy projects. It opens the doors for challenging procurement decisions during State aid procedures, even after national remedies are no longer available.

Background

In 2015, Hungary notified the European Commission of its intention to provide financial support to a Hungarian State-owned company (Paks II) for the development of two nuclear reactors. In accordance with an intergovernmental agreement between Russia and Hungary, the project would be financed by a EUR 10 billion Russian State loan and EUR 2.5 billion from Hungary’s budget. That agreement also provided that a Russian state-owned entity would be entrusted with the construction of the two nuclear reactors. Once construction was complete, Paks II would become, free of charge, the owner and operator of the new reactors.

Following a formal investigation, the European Commission found the measure to constitute State aid compatible with the internal market, subject to certain conditions (the Decision).

The European Commission considered that it was not required to ascertain, as part of the compatibility assessment, whether the direct award of the contract for the construction of the two nuclear reactors to the Russian company complied with EU public procurement rules. It considered that the procurement aspects were not inextricably linked to the object of the aid because the beneficiary was Paks II, which would be enabled by the aid to generate electricity without bearing the investment costs, and not the company awarded the construction contract. Any possible non-compliance with EU public procurement rules might affect the market for nuclear construction works, but did not create an additional distortion of competition or trade on the electricity market, where Paks II would be active as the aid beneficiary.

For completeness, the European Commission highlighted that Hungary's compliance with public procurement rules for the construction works had already been subject to separate infringement proceedings, where the preliminary conclusion was that this contract would be exempted from EU public procurement rules. The European Commission merely mentioned the relevant article in Directive 2014/25/EU without any reasoning on why the exemption applied.

Austria challenged the Decision before the General Court (GC), arguing that the direct award of the construction contract without a competitive tender breached EU procurement law and that this aspect was inextricably linked to the aid measure.

After the GC dismissed the action, Austria brought an appeal before the ECJ.

The ECJ ruling

In its judgment, the ECJ set aside the GC judgment and annulled the Decision, broadly following the Opinion of Advocate General Medina of February 2025.

Clarifications on the concept of an indissoluble link

The ECJ recalled that State aid cannot be declared compatible with the internal market if it, or any of its modalities, contravenes other provisions or general principles of EU law. The European Commission must therefore look beyond compliance with State aid rules alone and consider any infringements of EU law that arise from (i) the economic activity financed, (ii) the aid itself, (iii) its object, or (iv) aspects inextricably linked to its object.

The ECJ clarified that such indissociable aspects are modalities that cannot be evaluated separately because they are "necessary for the attainment of the objective [of the aid] or for its functioning". Based on earlier case law, these include the method used to finance an aid (such as a dedicated national tax) and a scheme's eligibility conditions (such as a residence requirement).

By contrast, measures adopted by Member States which are de facto linked to the object of the aid but legally distinct do not constitute indissociable aspects. For example, the ECJ found in the past that operating licences and occupancy decisions adopted by a Member States relating to wind farm projects were not inextricably linked to operating aid for these farms (see Order in C-742/21).

Application to this case: indissociable link between the award of the construction contract and the aid's object

The ECJ held that the direct award of the construction contract was inextricably linked to the object of the aid notified by Hungary. The award was indispensable for achieving the aid's objective, namely the provision free of charge of the reactors to Paks II. This was confirmed by the financing arrangement between Russia and Hungary.

Accordingly, the European Commission was required to ascertain whether the direct award of the construction contract to the Russian company complied with EU public procurement rules.

That examination was especially important because the organisation of an open tender for the award of a contract for the construction of an infrastructure can influence the investment costs associated with the construction and, hence, the proportionality of the aid provided.

The ECJ also insisted on the circumstance that several interested parties specifically raised the compatibility of the direct award with EU procurement rules during the investigation.

Finally, it rejected the view that a potential breach of procurement rules would produce effects solely on the construction market and not on the electricity market, which was the focus of the aid. Indeed, when reviewing the compatibility of State aid, the European Commission must consider potential distortions of competition and trade in general, not just on the market directly targeted by the measure.

Failure to state reasons

The ECJ found that the European Commission did not adequately explain its subsidiary conclusion that Hungary had complied with EU public procurement rules. The mere reference in the Decision to the outcome of the separate infringement proceedings was not sufficient. The Decision did not outline the specific reasons leading to the conclusion that EU public procurement procedures were inapplicable.

The ECJ further clarified the case law according to which the European Commission is not required to address in its decision arguments from parties other than the Member State concerned. That is only the case where those interested parties have access to documents showing the evidence underpinning the decision. However, here, interested parties did not have access to the relevant aspects of the infringement proceedings.

The failure to state reasons constituted a breach of an essential procedural requirement and by itself, justified annulling the Decision, without the need to examine the merits of the European Commission's conclusion or the justifications advanced at the litigation stage.

Comments

Implications for the aid for the Paks II project

The European Commission could, in principle, readopt a decision approving aid to Paks II if it clearly explains why Hungary did not breach EU public procurement rules by directly awarding the construction contract to the Russian company. To do so would require justifying the use of the relevant exemption from procurement procedures. The new decision could then be challenged before EU Courts, including on whether it complies with EU public procurement rules.

The European Commission is not bound by the outcome of the infringement proceedings and may reach a different conclusion after re-examining the procurement issues. The ECJ indeed made clear that closing infringement proceedings against a Member States does not conclusively determine whether the national measure is consistent with EU law. If the European Commission has doubts about the compatibility of the direct award with procurement rules, it would likely need to open a new formal investigation.

The crossover between State aid and procurement compliance

The judgment has significant implications, especially for notifiable State aid in the context of large infrastructure and energy projects. Where some parts of these projects (such as construction) are covered by EU public procurement rules and these parts are essential for achieving the aid's objective, the European Commission is now required to ensure that its compatibility assessment explicitly addresses compliance with EU procurement law. It must also provide clear and reasoned decisions on these aspects.

In practice, the judgment significantly extends the possibilities to challenge procurement decisions. It opens the doors for a broad range of actors (including other Member States, competitors, and potentially other interested parties) to contest procurement irregularities during State aid procedures, even after national remedies are no longer available.

Enhanced role of third parties in State aid procedures

The judgment also reinforces the importance of third parties during formal State aid investigations. It underscores the critical role played by third parties in identifying potential issues related to compliance with procurement laws or other EU laws. When third parties raise concerns during the formal investigation, the burden of proof on the European Commission is heightened, as it must carefully consider and explicitly address these concerns in its assessment.

This development echoes the recent introduction by the European Commission in May 2025 of a new mechanism allowing non-governmental organisations to request the internal review of certain State aid decisions for compliance with EU environmental laws (see our May 2025 update).

Heightened scrutiny and legal risks

While the requirement for the European Commission to verify that State aid measures do not contravene other EU laws is not new, the judgment underscores the critical importance of this step. It makes clear that the absence of such verification or a too light reasoning by the European Commission can lead to the annulment of the decision.

It also endorses a broad interpretation of the notion of indissoluble link, permitting challenges to aspects of a project that largely predates the aid notification. However, such aspects must be essential for achieving the objective of the aid, which should serve as a filter for the European Commission.

In practice, these developments mean that Member States and aid recipients face

• a greater burden to verify and confirm compliance with other EU laws when notifying State aid,
• an increased scrutiny of procurement processes and other provisions of EU law in the context of State aid notifications, and
• an increased risk of litigation, in particular for in large scale infrastructure or energy projects.

Other author: Róisín Dunlea, Trainee Solicitor