EU State aid
24 October 2019
24 October 2019
This Quickguide provides an overview of the EU State aid rules.
The EU State aid rules are designed to maintain a level playing field for businesses in Europe and to prevent the creation of "national champions" through State subsidies. EU State aid is an area of EU competition policy where the European Commission (the "Commission") has become increasingly active, using its powers to investigate and claw back subsidies unlawfully paid to public and private sector firms. State aid enforcement is an ongoing priority for the Commission as part of the Lisbon strategy for growth and jobs in Europe.
State aid law should be of interest to businesses in their capacity as:
Typically, a careful assessment of State aid issues would be required, for example, in the context of a firm contemplating the purchase of a business from a Government body or an asset which has historically received State aid. In addition, the Commission's recent investigations into tax ruling practices of Member States, which led to a number of decisions1 and several appeals before the EU General Court, has created significant legal uncertainty for companies having received or seeking tax rulings from national tax administrations. Given the severe financial consequences attached to a finding of State aid in such cases, there is an increasing need for businesses to carry out State aid compatibility checks with respect to existing tax rulings, as well as any request for new rulings.
A failure to identify unlawfully paid State aid may result in lengthy Commission investigations and eventual repayment of State subsidies received plus interest. Businesses, particularly in countries where in general aid to industry is sparse, are becoming increasingly aware of their right to challenge unlawful subsidies paid to their overseas competitors in breach of the Treaty on the Functioning of the European Union (the "TFEU"). It is therefore critical for businesses to examine the possibility that State aid may arise in the context of their own transactions or for attacking any suspected unlawful State aid measures that competitors may receive that could distort fair competition.
The TFEU generally prevents EU Member States from granting financial assistance in a way that distorts competition and inter-state trade within the EU. The reason for this prohibition is to promote the maintenance of a level playing field for businesses within the EU. Article 107(1) TFEU provides that: "Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market".
State aid consists of any transfer of State resources that favours one or more undertakings, resulting in a competitive advantage that could not have been obtained under normal market conditions. The aid does not necessarily need to be granted by the State itself. It may also be granted by a private or public intermediate body controlled by the State (including regional or local authorities, public banks and foundations or any other "emanation" of the State). In its 2016 notice on the "Notion of State aid", the Commission provides further guidance on the four cumulative conditions of State aid, summarised below.
The requirement that State aid must be granted through State resources means that granting the aid must constitute some depletion of the State's resources, compared with what they would have been had the aid not been granted. Direct subsidies are the most obvious form of aid. However, aid can consist of the State foregoing revenue which it would otherwise receive, for example, such aid could take the form of a "shortfall" in tax and social security revenue due to exemptions or reductions in taxes or social security contributions granted by the Member State, or exemptions from the obligation to pay fines or other pecuniary penalties.
"Favouring" means conferring a financial benefit over and above what market forces would provide. The simple act of buying goods or lending money is not necessarily "favouring".
"Undertakings", for the purposes of State aid, are entities engaged in economic activity. This means that they operate in a market providing goods or services in competition with other market operators. The same entity may well be an undertaking for some of its activities and not for others. For example, a school might not be an undertaking when it teaches its pupils but may be one when it purchases textbooks and furniture.
The limitation of the prohibition of State aid to "certain" undertakings means that measures which apply generally to all undertakings in the relevant Member State will not amount to State aid. In order for the measure to be considered State aid it must be selective. Therefore, if a guarantee is only offered to specific undertakings, businesses based in a certain region or businesses that manufacture a certain product, it will be State aid. If a bank guarantee for liability to third parties is available to the entire economy it would be regarded as a "general measure" and would not be caught by the EU State aid framework because any business could take advantage of it.
In practice, once it is clear that aid has been given, it will usually be held to distort or threaten to distort competition. Since aid is only aid if it is received by undertakings who are operating in a market there will usually be the potential for distortion, regardless of the characteristics of the market.
"Affecting" trade means having an effect on potential, as well as existing, cross-border trade. Therefore, support to an undertaking, or class of undertakings, will nearly always be held to affect cross-border trade.
State aid is unlikely to arise in the following situations:
The Commission is empowered2 to enact regulations (known as Block Exemption Regulations) providing for an automatic exemption, for certain types of aid from the general prohibition. There are currently two Block Exemption Regulations:
In addition to general exemptions there are also a range of sector specific rules governing grants of aid to, for example: audiovisual production, deployment of broadband networks, public broadcasting, postal services, shipbuilding, steel sector, airports and airlines, maritime transport, rail and road transport services.
The compatibility of State aid with the TFEU, if not de minimis or covered by the GBER, is assessed through the application of a so-called "balancing test". Essentially, this means that the compatibility of State aid will be assessed on a case-by-case basis through the application of a three-part test which examines the following questions:
The balancing test is not a substitute for notification to the Commission. Instead it describes the approach applied by the Commission to aid that is notified. It should help any businesses contemplating potential aid to assess the strength of their case, and it can also help to suggest how an arrangement might be adjusted to take it out of the State aid framework altogether, or render it more likely to be accepted as compatible.
State aid to individual undertakings in financial difficulty is usually assessed under Article 107(3)(c) of the TFEU and specifically under the Commission Guidelines on State aid for rescuing and restructuring firms in difficulty. A company is in difficulty and entitled to aid when "without intervention by the State, it will almost certainly be condemned to going out of business in the short or medium term".3 Rescuing and restructuring aid can usually only be received once, the so-called "one time, last time" condition (in exceptional circumstances every ten years), and is subject to the following conditions:
Under the TFEU the Commission is responsible for keeping existing systems of aid under constant review and for establishing an appropriate procedure for investigating aid. The system of control which has been put in place requires Member States to notify their plans to grant or alter aid and to obtain the Commission's authorisation before implementation. There is a standstill obligation meaning that Member States may not implement aid measures until they have been declared compatible with the TFEU. Member States are obliged to abolish illegal aid which is incompatible with the TFEU in order to re-establish the previously existing situation.
It is important to note that the procedures primarily involve a dialogue between the concerned Member State and the Commission. The aid recipient(s) and any complainants are not parties to the procedure.
State aid control involves a two-step procedure:
In the first phase (step 1), the Commission has a two-month period from the date of the complete notification to decide whether to clear the aid or initiate a more detailed enquiry. If the Commission has doubts as to the compatibility of the aid with the TFEU it launches a formal investigation (step 2) which involves an in-depth enquiry which can last up to 18 months or more in complex cases. The Commission has discretion to clear the aid, to prohibit it, or to clear it subject to conditions, unless the EU Council of Ministers decides otherwise.
There is a simplified procedure for straightforward cases, pursuant to which it will adopt a short form "no aid" or "no objections" decision within 20 working days.
The Code of Best Practice details how State aids procedures should be carried out in practice, in particular as regards their duration, transparency and predictability. It covers:
The Commission or a national court (the latter following an action brought by a third party) may recover unlawfully granted aid from the recipient. Interest will be charged on the aid. Any promise by the State to cover the repayment or interest will not only be unlawful and invalid but will also in itself constitute aid.
Any legal or natural person may trigger an investigation by lodging a complaint concerning alleged unlawful State aid with the Commission. The Commission also invites interested parties to submit comments (via a notice in the Official Journal of the EU) when it has doubts as to the compatibility of a proposed aid measure and opens a formal investigation procedure.
Third party rights are however, in practice, poorly protected in State aid proceedings with the consequence that they may take only a limited part in the Commission's initial assessment (increased if the Commission opens an in-depth investigation). However, third parties may play a major role in the appeal process of any State aid decision before the European Courts in Luxembourg. While the Commission stage of a complex State aid case could easily take up to two years (or more) if an in-depth investigation is launched, a Court appeal action would typically add at least four years to the period of legal uncertainty. It can be seen, therefore, that third parties can materially add to the period of legal uncertainty in State aid cases.
Any person or entity who has suffered loss because illegal State aid has been granted may bring an action for damages in a national court. With its "Enforcement Notice" the Commission aims to encourage private enforcement at the national level and, in practice, given poor third party complainant rights before the Commission, there is increasing evidence that this will often be the most effective means of enforcing third party rights.
None of the following is necessarily unlawful State aid but the presence of such arrangements should alert the participants to the possibility that aid is being granted:
Less obvious forms of State aid include the following:
These examples of aid measures all involve an element of favourable treatment conferred upon the recipient of the aid.
Since June 2013, the tax ruling practices of Member States are under close scrutiny. The function of a tax ruling is to establish in advance the application of the ordinary tax system to a particular case in view of its specific facts and circumstances. However, the Commission considers that a tax ruling may confer a selective advantage upon the concerned taxpayer, where it results in a lowering of that addressee's tax liability in the Member State as compared to companies in a similar factual and legal situation. Since 2015, the Commission has adopted negative decisions in several cases involving specific tax payers (including the "Apple" case where the Commission ordered Ireland to recover a record 13 billion euros from Irish based entities of the group) and also adopted a decision in a case involving a Member State scheme (the "Belgian excess profits" case).
For further information on any of these areas, please speak to one of the contacts listed below or your usual Ashurst contact.