Ukraine conflict European Commission adopts State aid crisis framework

Introduction

The aggression against Ukraine by Russia, the sanctions imposed by the EU and its international partners and the retaliatory counter-measures have created significant economic uncertainties, and disrupted trade flows and supply chains in many sectors. They have also led to exceptional price hikes, especially in gas and electricity, but also in numerous other inputs, raw materials and primary goods.

In response to these unprecedented challenges, the European Commission ("Commission") has adopted on 23 March 2022 a Temporary Crisis Framework ("Temporary Framework") to enable EU Member States to make full use of the flexibility foreseen under State aid rules to support the EU economy in the context of Russia's invasion of Ukraine (for further information on the EU State aid regime, see our State aid Quickguide). As with the similar framework adopted in the context of the COVID-19 crisis, the Temporary Framework provides for several types of aids deemed to be compatible under Article 107(3)(b) TFEU, which allows measures to remedy a serious disturbance in EU economies. It also reminds Member States that they have the possibility under Article 107(2)(b) TFEU to mitigate damage directly caused by the conflict in Ukraine.

This briefing note sets out the EU State aid legislative framework within which EU Member States may adopt measures to support their national economies in the context of the current crisis.

Financial support measures which do not need to be modified

The Temporary Framework recalls that a number of measures do not fall within the scope of State aid control or are exempted from notification to the Commission. These include:

• public support measures benefiting non-commercial energy consumers, provided that such measures do not indirectly benefit a specific sector or company, e.g. social payments, public support for energy efficiency improvements;
• public aids available to all companies, e.g. general reduction of taxes or levies, reduction of rates for the supply of natural gas or electricity including a reduction of network costs;
• public aid for the transport of refugees and humanitarian materials provided that the State acts within the exercise of its public powers and as long as transport services are not purchased above market prices;
• public aids falling under the de minimis Regulation, which applies until 31 December 2023. This can include aid up to EUR 200,000 for individual undertakings for three years; subsidised loans up to EUR 1 million and subsidised guarantees for loans of up to EUR 1.5 million; and
• public financial measures falling under the General Block Exemption ("GBER"). This includes reduction of harmonised environmental taxes provided they are in line with the specific conditions set out in the Energy Taxation Directive and 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 to cope with the immediate effects of the crisis which will be considered compatible under EU State aid rules. Depending on the type of measure envisaged, Member States can rely mainly on two different legal bases, namely:

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

Compensation for the damage caused by the Russian aggression against Ukraine (Article 107(2)(b) TFEU)

The Temporary Framework confirms that the conflict in Ukraine qualifies as an 'exceptional occurrence' under Article 107(2)(b) TFEU. As a result, Member States can adopt measures directly under this provision to compensate companies particularly hard hit for the damage suffered due to this exceptional occurrence.

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

• directly linked to the damage caused by the Russian aggression against Ukraine. This may include certain direct negative effects of economic sanctions or counter-measures on a beneficiary's economic activity; and
• proportionate, i.e. the compensation should not exceed what is necessary to make good the damage. This involves a precise assessment of the damage incurred as a result of the crisis and ensuring that there is no overcompensation or compensation for damage unrelated to the crisis (e.g. by setting-up claw back mechanisms).

Where these conditions are satisfied, the Commission has no discretion but to declare the aid compatible with the internal market. In the context of the COVID-19 crisis, the General Court has confirmed that aid under this provision can be declared compatible even if it is targeted at companies which are important to a Member State's national economy and does not extend to all companies active in a given sector (see our May 2021 newsletter article).

As regards the scope of application of this provision, the Temporary Framework clarifies that such aid can be granted to (i) undertakings in difficulty and (ii) credit institutions. Credit institutions will however only be able to receive aid under this provision if the aid does not have the objective of preserving or restoring their viability, liquidity or solvency. If, due to the current crisis and sanctions, credit institutions were to need extraordinary public financial support (e.g. in the form of liquidity or recapitalisation), such measures would need to be assessed under the EU legislation and State aid rules specifically applicable to the banking sector.

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 in the economy of a Member State".

The Temporary Framework recognises that the crisis originating from the Russian aggression against Ukraine as well as the related sanctions and counter-measures is causing a serious disturbance in EU economies. To complement the existing State aid toolbox, it provides for several types of aids deemed to be compatible under Article 107(3)(b) TFEU where specific conditions are met.

Where all the conditions of the Temporary Framework are not satisfied or where the measure is not covered by it, Member States can still obtain clearance directly under Article 107(3)(b) TFEU.

Scope of application

The measures covered by the Temporary Framework intend to support undertakings affected by the Russian military aggression and/or the consequences of the economic sanctions and the retaliatory counter-measures. Undertakings subject to sanctions adopted by the EU are excluded.

Importantly, and in contrast with the COVID-19 Temporary Framework, aid will be available to companies that qualified as undertakings in difficulty before the start of the crisis.

The Temporary Framework applies from 1 February 2022 to 31 December 2022.

Types of aid under the Temporary Framework

The Temporary Framework covers three different types of aid and sets the specific conditions for their assessment under Article 107(3)(b), namely:

• Limited amounts of aid: Member States will be able to set-up schemes to grant up to EUR 400,000 per undertaking (a lower cap of EUR 35,000 and specific conditions apply to undertakings active in the primary production of agricultural products, and the fisheries and aquaculture sector). Aid may be granted in the form of direct grants, tax and payment advantages or other forms (including repayable advances, guarantees, loans and equity).
• Liquidity support in the form of subsidised State guarantees or loans with subsidised interest rates: among other conditions, the maximum amount of loans shall not exceed (i) 15% of the beneficiary's average total annual turnover over the last three accounting periods, or (ii) 30% of its energy costs over the 12 last months preceding the application for aid. Such amount can be increased if "appropriately" justified (e.g. in the case of beneficiaries active in sectors particularly affected by disruptions of supply chains or increased risks of cyber-attacks).
• Aid for additional costs due to the exceptionally high energy prices:
  
  • Scope and form of aid: aid must be granted on the basis of a scheme which can cover any form of aid, including direct grants. Member States can limit the aid to activities that support specific economic sectors of particular importance to the economy or to the security and resilience of the internal market.
  • Eligible costs:  the calculation of eligible costs is based on the increase in natural gas and electricity costs linked to the Russian aggression against Ukraine and involves a comparison with the average energy price paid by a company in 2021.
  • Overall cap: the aid must not exceed 30% of the eligible costs, up to a maximum of EUR 2 million.
  • Higher ceilings for energy intensive users: when an energy intensive user (i.e. businesses for which the purchase of energy products amount to at least 3% of their production value) incurs operating losses and aid is necessary to ensure the continuation of an economic activity, Member States may grant aid up to EUR 25 million and even up to EUR 50 million for companies active in particularly affected sectors (such as production of aluminium and other metals, glass fibers, pulp, fertilizer or hydrogen and many basic chemicals).
  • Advance payments: granting authorities can make an advance payment to the undertakings when the aid is granted before the eligible costs have been incurred (based on estimations of such costs).
  • Green condition? Although not a condition, Member States are "invited" to consider (in a non-discriminatory way) setting up requirements related to environmental protection/security of supply (e.g. requiring that a certain share of energy consumption needs is met by renewable energy or requiring investments to reduce or diversify natural gas consumption) for granting this type of aid.
  • Cumulation rules: Aid to compensate for high energy prices can be cumulated with aid under 'Limited amounts of aid' above, provided that the capped amount of EUR 2 million (or the higher ceiling provided for energy intensive businesses) is not exceeded.
    

Safeguards

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:

• the granting of aid shall not be subject to the relocation of an activity of the beneficiary from another country within the EEA to the territory of the Member State granting the aid, as such a condition would be harmful to the internal market; and
• there should be a link between the amount of aid that can be granted to businesses and the scale of their economic activity and exposure to the economic effects of the crisis, by taking into account their turnover and energy costs.

Cumulation rules

The Temporary Framework confirms that aid under Article 107(2)(b) TFEU and aid under the Temporary Framework can be cumulated provided that there is no overcompensation of damage suffered by the beneficiary.

These measures can also in principle be cumulated with aid granted under the COVID-19 Temporary Framework (subject to the specific cumulation rules laid down in that document). However, in the event Member States provide to the same beneficiary loans or guarantees under both the COVID-19 Temporary Framework and the Temporary Framework, they must ensure that liquidity needs are covered only once with aid.

Comment

The Temporary Framework and the qualification of the Ukrainian conflict as an "exceptional occurrence" echo the mechanisms put in place two years ago to help EU Member States support their economies in the context of the COVID-19 outbreak. Like the COVID-19 Temporary Framework, which has been amended six times and has now been in force for over two years, the Temporary Framework will likely be reviewed and amended in light of the development of the Ukrainian conflict and its impact on energy markets, other input markets and the general economic situation.

Just as for aid notified to remedy the consequences of the COVID-19 crisis, the Commission is expected to approve swiftly aid notified under the Temporary Framework and to provide rapid and pragmatic guidance to Member States (including on aid which may not fall within the scope of State aid rules). Member States are recommended in the Temporary Framework to inform the Commission of their intentions and to notify plans to introduce State aid measures "as early and comprehensively as possible".

With thanks to Jessica Bracker, Cecilia Borelli and Emma Nekelson for their contribution.