competition law update 20 May 2020 The impact of Covid-19: Navigating EU State aid

Introduction

As the Coronavirus (Covid-19) emergency worsens, governments, businesses and individuals are scrambling to keep up with a host of unprecedented challenges. Almost all EU Member States are drawing on the State budget to urgently adopt important measures to support the national economy, public services and individuals. This briefing note sets out the EU State aid legislative framework within which EU Member States may have to have such aid approved by the European Commission ("Commission") and what steps have been taken to expedite this process.

Summary of the State aid rules

Under EU State aid rules, EU Member States are generally prevented from granting financial support to undertakings in a way that distorts competition and inter-state trade within the EU. Measures qualifying as State aid may nonetheless be approved by the Commission if they are found to be compatible with the EU internal market under Article 107(2) and (3) TFEU. For further information on the EU State aid regime, see our State aid Quickguide.

In the context of the Covid-19 crisis, the Commission has taken a number of steps to ensure that Member States are sufficiently equipped to make full use of the flexibility foreseen under State aid rules in order to support undertakings or sectors affected by the outbreak. Following the issuance of a communication, which together with its annex, set out all the possibilities already available to Member States to mitigate the socio-economic impact of the Covid-19 outbreak, it has adopted an evolutive Temporary Framework which provides for several types of aids deemed to be compatible under Article 107(3)(b) TFEU. It also put in place a number of procedural facilitations to ensure a swifter approval process.

Financial support measures which do not need to be notified

A number of measures do not fall under State aid control rules or are exempted and can therefore be put in place by Member States immediately, without prior notification to the Commission. These include:

• public support measures that are available to all companies, e.g. wage subsidies, suspension of payment of corporate and value added taxes or social contributions;
• public aids to health services or other public services. Compensation for public service obligations will not constitute State aid if they comply with the Altmark criteria. In guidance documents recently published on its website, the Commission has clarified the conditions under which public service compensations for Services of General Economic Interest ("SGEI") in the air transport and maritime sectors do not constitute State aid under the exceptional circumstances created by the COVID-19 outbreak;
• economic transactions carried out by public entities that are compliant with the Market Economy Operator test. The Commission recently confirmed that if Member States purchase existing shares of undertakings at market price or invest pari passu with private investors or provide undertaking, this does not constitute State aid;
• public financial support granted directly to consumers, e.g. for cancelled services or tickets that are not reimbursed by the operators concerned;
• public aids which fall under the de minimis Regulation. This can include aid of up to EUR200,000 over three years in most sectors, subsidised loans of up to EUR1 million, and subsidised guarantees for loans of up to EUR1.5 million.
• public aids which fall under the General Block Exemption Regulation ("GBER"). This can include risk finance aid scheme in favour of Small and Medium Enterprises ("SMEs"), up to EUR15 million per eligible undertakings. Besides, officials are currently discussing changes to the GBER, and are said to envisage a possible relaxation of the exclusion of aids to undertakings in difficulty from the scope of the GBER.

Financial support measures which need to be approved

Subject to the Commission's prior approval, Member States can design a number of other measures which will be considered compatible under EU State aid rules. Depending on the type of measure envisaged, Member States can rely mainly on three different legal basis, namely: 

• Article 107(2)(b);
•  Article 107(3)(b) TFEU and the Temporary Framework adopted under this provision; and/ or
• Article 107(3)(c).

To date, the vast majority of the national measures notified to the Commission in the context of Covid-19 have been declared compatible under Article 107(3)(b) TFEU and the Temporary Framework while only a couple of measures have been cleared under Article 107(2)(b). Over the past few weeks, there has been a growing number of individual aid measures targeted at national companies active in sectors particularly hit by the pandemic. A common feature is that all these measures have been cleared by the Commission within a very short lapse of time (often within a couple of days from notification).

Compensation for the damage caused by the Covid-19 outbreak (Article 107(2)(b) TFEU)

The Commission has recognised that Covid-19 outbreak qualifies as an 'exceptional occurrence' under Article 107(2)(b) TFEU, as it is an extraordinary, unforeseeable event having a significant economic impact. As a result, Member States can adopt measures to compensate companies in sectors that have been particularly hard hit (e.g. transport, tourism and hospitality) as well as organisers of cancelled events for the damages suffered due to the outbreak.

To be compatible under this provision, any aid must be:

• directly linked to the damage caused by the Covid-19 outbreak; and
• proportionate, i.e. the compensation should not exceed what is necessary to make good the damage.

Where these conditions are satisfied, the Commission has no discretion but to declare the aid compatible with the internal market.

To assist Member States, the Commission published a template setting out the information to be provided in any notification made on this basis. This information aims in particular at:

• precisely assessing the damage; and
• ensuring that there is no overcompensation or compensation for difficulties unrelated to Covid-19. In this respect, Member States are expected to make various commitments.¹

Any scheme relating to the transport sector (e.g. airlines, airports, rail and bus companies) will be assessed on a case-by-case basis and should include the following additional information:

• identification of the additional costs, foregone revenues and costs not incurred as a result of the Covid-19 outbreak;
• definition of a reference period, when the situation was comparable to the situation that should have prevailed during the period of the spread of the Covid-19;
• reconstitution of damages caused by comparison of the situation during the period of spread of Covid-19 and the reference period (which should factor the change of important parameters such as the fall in price of fuel).

In this sector, Member States can also draw on experience from past practice to determine notably the reference period, proxies to determine economic loss or mechanisms to rule out overcompensation. For example, in the context of the Icelandic volcanic eruption and dust cloud in April 2010, the Commission authorised a support scheme in Slovenia to cover 60 per cent of the economic losses of airlines and airports (compared to a situation where the disaster would not have occurred) in the period following the disaster, until the companies could again operate normally. 

Aid to remedy a serious disturbance to the economy (Article 107(3)(b) TFEU and the Temporary Framework)

Article 107(3)(b) TFEU enables the Commission to approve national support measures to remedy a serious disturbance to the economy of a Member State. 

To complement the existing possibilities described above, the Commission adopted on 19 March 2020 – as it did during the 2008 financial crisis – a State aid Temporary Framework on the basis of this provision. To date, this Temporary Framework has been amended and extended twice – on 3 April and 8 May – to cover additional temporary State aid measures. 

As at 18 May 2020, more than 100 schemes in 26 Member States (all except Cyprus) and the UK have been authorised by the Commission under the Temporary Framework. A tracker of the national measures approved under the Temporary Framework is available on the Commission's website.

Types of aid under the Temporary Framework

It now provides for twelve types of aid, namely: 

• five types of aid that aim at ensuring that sufficient liquidity remains available to all companies:
  • aid in the form of direct grants, selective tax advantages, repayable advances or equity up to EUR 800,000 per company;²
  • State guarantees for loans taken by companies from banks;
  • aid in the form of subsidised interest rates for loans;
  • aid in the form of guarantees and loans which is not directly provided by the State but channelled through banks;³ and
  • aid in the form of short-term export credit insurance⁴.
• three types of aid that aim at accelerating research, testing and production of Covid-19 relevant products:
  • aid for Covid-19 related research and development (R&D);
  • aid for the construction and upgrade of testing and upscaling facilities required to develop, test and upscale, up to first industrial deployment prior to mass production, Covid-19 relevant products;
  • aid for the rapid production of products relevant to tackle the outbreak (such as medicinal products and treatments; medical devices and equipment; disinfectants; data collection and processing tools useful to fight the spread of the virus);
  
  For each of these types of aid, a higher maximum aid intensity will be allowed for projects supported by more than one Member State.
• two types of aid that aim at protecting jobs in sectors and regions severely hit:
  • aid in the form of deferrals of tax payments and/or suspensions of social security contributions;
  • aid in the form of wage subsidies for employees to avoid lay-offs during the Covid-19 outbreak.⁵

• two types of aid that aim at addressing long-term solvency issues:
  • aid in the form of recapitalisation measures (in the form of equity or hybrid capital instruments) for non-financial undertakings. Such measures can be granted only if no other appropriate solution is available and, among other conditions, must give incentives for beneficiaries to buy out the shares acquired by the State in order to ensure the temporary nature of the State's intervention;
  • aid in the form of subordinated debt to undertakings at favourable terms.

Safeguards to limit distortion to competition

The Temporary Framework includes a number of safeguards to limit the negative consequences to the level playing field within the EU internal market. For example:

• it links the subsidised loans or guarantees to businesses to the scale of their economic activity, by reference to their wage bill, turnover, or liquidity needs, and to the use of the public support for working or investment capital;
• only companies which were not in difficulty on 31 December 2019 are eligible;⁶
• the beneficiaries of Covid-19 related R&D aid have to commit to grant non-exclusive licences under non-discriminatory market conditions to third parties in the EEA;
• the testing and upscaling infrastructures have to be open to several users and be granted on a transparent and non-discriminatory basis;
• the recapitalisation measures go with strict limits on the acquisition of a stake in competitors or other operators – until at least 75% of the recapitalisation is redeemed, beneficiaries are in principle prevented from acquiring more than 10% in competitors or other operators in the same line of business, including upstream and downstream operations.

Transparency requirements and temporal scope

Once a scheme has been approved under the Temporary Framework, Member States are not required to notify the Commission with individual aid, except where a recapitalisation measure for an individual beneficiary will exceed EUR 250 million. To ensure transparency, Member States will however have to publish certain information (including the name of the beneficiary and the aid amount) on each individual aid granted on the basis of schemes approved by the Commission on the State aid website within 12 months from the moment of granting.⁷

The Temporary Framework will be in place at least until the end of December 2020, except recapitalisation measures for non-financial undertakings which will apply until the end of June 2021. It is not excluded that these dates will be extended and that the Framework will be further adapted to clarify certain metrics and/or to capture additional support measures envisaged by Member States.

Possibility to obtain aid directly under Article 107(3)(b) TFEU

Where all the conditions of the Framework are not satisfied or where the measure is not part of the Temporary Framework, the State can still obtain clearance directly under Article 107(3)(b) TFEU (see below the example of French support measures to Air France).

The support is conditional upon Air France agreeing to slash domestic flights and make dramatic cuts to its carbon-dioxide emissions.

Moreover, in a recommendation adopted on 13 May 2020, the Commission made it clear that Member States can (and are even encouraged to) notify under Article 107(3)(b) TFEU guarantee schemes for vouchers to ensure that in the event of insolvency of the issuer of the voucher, passengers or travellers are reimbursed.⁸

Aid under Article 107(3)(c) TFEU

Rescue and restructuring aid

Member States can rely on the Rescue Aid and Restructuring Guidelines, which are based on article 107(3)(c) TFEU, to grant urgent and temporary assistance (e.g. in the form of loans or loan guarantees) to companies facing acute liquidity needs or bankruptcy due to the Covid-19 outbreak. Given the unprecedented circumstances, these rules can be applied with flexibility: 

• the Covid-19 outbreak qualifies as an exceptional and unforeseen circumstance and therefore, companies that are not (yet) in difficulty can also receive support under this framework, if they face acute liquidity needs. Still, any aid measure has to comply with the relevant conditions, notably with regard to the level of remuneration that the beneficiary is required to pay for the State guarantee or loan;
• subject to an individual assessment by the Commission, companies that have already received such support in the past 10 years may exceptionally be eligible for further aid.

Under these rules, Member States can notably put in place dedicated support schemes for SMEs including to cover their liquidity needs for a period of up to 18 months. For example, in February 2019, the Commission approved a EUR400 million support scheme in Ireland to cover acute liquidity as well as rescue and restructuring needs of SMEs as a Brexit preparedness measure. The Irish authorities have now repurposed this measure to help companies cope with the Covid-19 outbreak. With respect to approved schemes for SMEs, the Commission announced that: 

• Member States do not need to notify budget increases of less than 20% in view of the Covid-19 outbreak; and
• notifications of budget increases of more than 20% benefit from a simplified assessment procedure.

The Aviation guidelines

The Aviation Guidelines – adopted in 2014 and recently prolonged until 2024 – set out general principles and compatibility conditions under Article 107(3)(c) TFEU for State aid to airports and airlines. They aim at ensuring good connections between regions and the mobility of EU citizens, while minimising distortions of competition in the EU’s single market.

These guidelines cover the compatibility conditions of both operating aid and investment aid and provide for more flexibility in case of exceptional circumstances, such as the Covid-19 outbreak, as recently confirmed by the Commission (see below).

Procedural facilitations

To enable a swift approval process, the Commission has put in place all necessary procedural facilitations:

• it committed to decide on State aid notifications relating to Covid-19 within days of receiving a complete State aid notification;
• it set up a dedicated contact point to assist Member States with any queries they have;
•  when notifying schemes, Member States are asked to sign a waiver authorising the Commission to adopt and notify its decisions in English.

More State aid developments to be expected in the near future

Sector specific measures and possible discrimination issues

Numerous industry associations have called upon Member States to design specific measures for sectors hard hit by the outbreak, including the aviation, rail and automobile sectors. More national schemes to provide financial support to companies active in these sectors are very likely to be notified to the Commission in the near future.

Moreover, additional targeted measures to certain flagship companies are contemplated,⁹ in particular in the airline industry. Most notably:

• Italy adopted a decree allowing the government to nationalise Alitalia, subject to the prior approval of the Commission;
• Germany is said to be in talks with Lufthansa as regards a possible billions bailout.

Such measures will undoubtedly require a specific and thorough compatibility assessment by the Commission, taking account of the situation of these companies before the Covid-19 crisis.

Sector specific measures may likely raise questions of possible discriminations within a particular sector or even between sectors, which may lead to an increased number of complaints to the Commission. For instance, Ryanair accuses the state aid measures granted to flagship airline companies to be discriminatory and has already brought an appeal before the EU General Court against the Swedish airline loan guarantee scheme and the French Covid-19 airline tax deferral scheme, and claims to have several other State aid challenges in the pipeline.

Green conditions

In the wake of the conditions imposed by the French government on Air France, other Member States are likely to make their financial support subject to compliance with certain 'green' conditions. While Commissioner Vestager stated on 4 May 2020 before the European Parliament’s Internal Market and Consumer Protection Committee that these conditions cannot be legally imposed by the Commission under State aid rules, the latest version of the Temporary Framework expressly encourages Member States to "keep in mind the importance of meeting the green and digital twin transitions in accordance with EU objectives" when designing financial support measures. Moreover, large undertakings benefitting of recapitalisation measures are required under the amended Temporary Framework to report on how the aid received supports their activities in line with EU objectives and national obligations linked to the green and digital transformation, including the EU objective of climate neutrality by 2050. 

EU Recovery plan?

On 19 May 2020, France and Germany have published a joint initiative for the European Recovery from the Covid-19 crisis. In this declaration, they notably advocate for the set-up of a temporary fund of EUR500 billion to provide EU budgetary expenditure for the regions and sectors most affected. Under their proposal, the Commission would borrow money on financial markets and distribute it to national governments through the EU budget.

The Commission is expected to come forward with its own recovery proposal by the end of May. All Member States will then need to agree for any plan to take effect. This development is to be watch out as it may come up with additional adaptations to or clarifications regarding the existing State aid rules.

1. Including to claw back any payment exceeding the damage suffered; to deduct any amount recovered by insurance, litigation or arbitration; to not cumulate the scheme with other aid for the same eligible costs; to provide a report not later than one year after the Commission's decision..
2. Note that specific thresholds apply to aid granted to undertakings active in the agriculture, fishery and aquaculture sectors.
3. Such aid is still considered as direct aid to the undertakings, not to the banks themselves and should therefore not be assessed under the State aid rules applicable to the banking sector. To limit undue distortions to competition between banks, these are required, to the largest extent possible, to pass on the advantages of the public guarantee or subsidised interest rates on loans to the final beneficiaries.
4. Note that the Commission amended on 27 March 2020 its Short-term export-credit insurance Communication to further facilitate this type of aid.
5. The Commission confirmed that where those measures are of a general application and do not favour certain undertakings, or the production of certain goods, they do not fall within the scope of Article 107(1) TFEU and therefore do not need to be notified.
6. This condition does not apply to aids in the form of deferrals or wage subsidies, which correspond to sections 3.9 and 3.10 of the Temporary Framework.
7. This obligation does not concern individual aids granted in the form of deferrals or wage subsidies.
8. A notification template for such schemes has been published on the Commission's website.
9. The Commission has already approved aid to Air France and to Renault under the Temporary Framework and Article 107(3)(b). It has also approved aid to Condor and SAS under Article 107(2)(b).