By Kathleen Wang What is state aid?
State aid is any aid granted by national governments to a company or organisation, thereby putting that undertaking at an advantage. Such aid can come, among others, in the form of subsidies, tax exemptions, preferential loans and debt write-offs.
Because of its potential to distort competition and inter-state trade within the EU by granting favourable advantages to some companies rather than others, state aid grants are governed closely by the European Commission and can only be granted upon clearance. If aid is granted without approval, the organisation receiving it can be ordered to pay it back.
Criteria for state aid
The European Commission has set out specific rules for what qualifies as state aid and which needs clearance to grant. Specifically, state aid must have the following four features:
An intervention by the state (the ‘aid’) – this is the financial aid given to the company or organisation, such as grants and tax reliefs. Aid may also come in non-monetary forms such as providing state services/resources on preferential terms.
However, there are also forms of aid that would be less likely to draw scrutiny from the Commission – these include situations where the state is paying market price for the company’s goods/services, or vice versa.
An advantage – the aid must give the recipient an advantage on a selective basis, for example, to specific companies or industry sectors, or to companies located in specific regions.
Crucially, the advantage must also be such that it would not have been given to the company in ‘normal market circumstances’. This is determined by, most commonly, the Market Economy Investor Principle (MEIP); this test asks whether a private investor would have given the same advantage to the company where they are solely motivated by considerations of profit or a return on investment.
Distortion of competition – this advantage has distorted, or has the potential to, distort competition, by giving a certain company an advantage over others in the same industry. This is also a significant reason why the European Commission closely scrutinises state aid requests, so as to minimise any potential anti-competitive effects.
Affecting trade between Member States – as state aid regulation is part of a set of regimes governing the European Union, the Commission will only have the power to intervene in state aid where the intervention is likely to affect trade between member states. However, in practice this requirement is easily fulfilled, given that many companies today trade on a multinational basis or have other EU facets.
Types of state aid and exemptions
There are two main exemptions under the state aid regulations, specifically:
Aid under Article 107(2) TFEU – under this article in the Treaty on the Functioning of the European Union (wherein state aid regulations are set out), state aid will be automatically granted where they are given to individual customers or given to repair damage caused by natural disasters or exceptional occurrences. Given their narrow range, most state aid in practice will not be able to rely on these exemptions.
Under Article 107(2), the European Commission has recently allowed state aid to be given, for a limited period, to compensate companies and sectors especially hard hit by Covid-19, such as the transportation, tourism, and hospitality industries.
General Block Exemptions – if the form of state aid falls under statutory block exemptions, it will automatically be granted. Examples of block exemptions include, among others, aid in favour of research and development, for environmental protection, employment and training, culture and heritage conservation, innovation, and sports.
In addition, the Commission has adopted a useful EU mechanism where any state aid that amounts to less than €200,000 over 3 consecutive fiscal years for a single company and for a wide range of purposes will not attract scrutiny (the de minimis principle).
Procedure for processing state aid requests
Where state aid does not fall within the exemptions above, the government of any EU Member State must notify the European Commission and obtain approval before granting the aid. The process for obtaining clearance for state aid is as follows:
Completing the notification form – the government must complete a notification form for the aid, including: its purpose and scope, the total expenditure envisaged, the proposed recipient, and the benefits envisaged (for example, in terms of the number of jobs created). The notification must be made with enough time to allow the Commission to investigate, typically during the planning stage.
The Member State can either notify the Commission for a one-off aid scheme, or a general aid scheme; if the Commission approves the aid scheme, then individual payments made under that scheme need not be notified.
Preliminary examination – the Commission will then conduct a preliminary examination of the aid, and must decide within two months to clear the aid (or that the aid does not fall within ‘state aid’ under the state aid regulations) or to conduct a more detailed investigation.
Formal inquiry – if the Commission decides more detailed scrutiny is needed, it will notify the relevant Member State and open a formal investigation. At this point, the Commission must publish clearly its doubt as to the aid’s legality, so that interested parties can make submissions (from, for example, the intended recipient, trade associations, or from third parties). There is no formal time limit for this stage of the investigation, and cases typically range from six months to more than a year.
Concluding the investigation, the Commission can either prohibit the aid, clear the aid, or clear it subject to certain conditions.
The Simplified Procedure Notice – the Commission has also created a ‘fast-track’ notification process for categories of state aid that, in its experience, are normally approved without raising any doubts. These categories include extension of previously approved aid schemes, and aid which falls within ‘safe harbor’ sections of state aid regulations. Under this simplified procedure, the clearance process will undergo an accelerated review.
Consequences for unlawful state aid
If aid is granted without undergoing the notification process or granted despite failing to obtain clearance, the Commission has power to recover the aid, with interest, from the recipient firm.
Where the Commission suspects that unlawful aid has been granted, it can request further information from the Member State. It can also issue an information injunction, ordering the member state to respond with the requested information within a prescribed period. The Commission will then undertake an evaluation on the basis of the information to determine whether the aid is unlawful or not.
Lastly, the Commission may also issue injunctions to suspend any aid until the Commission has ruled on its compatibility (an interim injunction).
State aid after Brexit
State aid has been a topic of strong discussion between the EU and the UK on the latter’s withdrawal from the EU; the UK has argued for less comprehensive regulations on state aid (including, for example, information sharing obligations), while the EU has pushed for regulations similar to the existing regulations, especially given the UK’s proximity to other Member States and therefore greater risk for impacting inter-state trade.
In the event that no deal is reached concerning state aid, the UK will only be bound to a limited extent by existing EU state aid regulations (mostly concerning Northern Ireland. In addition, the national government can refuse to recognise the legality of Commission decisions regarding UK state aid, or allow ministers to override state aid provisions. As such, UK state aid will largely only be subject to the regulations as set by the World Trade Organisation (WTO).
The European Commission extends temporary state aid framework in light of ongoing coronavirus outbreak (October 2020) – the Commission has decided to prolong, until 30 June 2021, the State Aid Temporary Framework adopted on 19 March 2020 to support the economy in the context of the coronavirus outbreak. The Framework allows the government to financially support, up to €3 million per undertaking, for companies that have faced turnover declines of at least 30%.
Commission approves €1.5 billion Dutch scheme to compensate public transport companies for damages suffered due to coronavirus outbreak (November 2020) – The Commission has recently approved an approximately €1.5 billion scheme to compensate companies providing regional and long-distance public passenger transport, after public transport levels fell to levels as low as 90% of 2019 numbers following Dutch Covid containment measures.