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Overview

Ulrich Soltész and Isabel Taylor

Gleiss Lutz and Slaughter and May

Friday 20 July 2018


EU state aid rules in legal practice

In recent years, EU state aid rules have become increasingly important for all private practitioners. They play a role in all kinds of areas, such as taxation, finance, mergers and acquisitions, public-private partnerships, corporate, R&D agreements, infrastructure, transport, real estate, public procurement, energy and environmental law. The ever-growing importance of EU state aid law can be highlighted by the numerous investigations by the European Commission concerning tax rulings in various member states targeting multinationals (eg, Starbucks, Apple and Fiat) or the formal proceedings into various state measures in the field of energy, ranging from the financing of nuclear power stations to the support for renewable energy sources.

Over the past decades, the Commission has developed an increasingly active concept of its role as a guardian of the state aid rules. Competition Commissioners Karel Van Miert, Mario Monti, Neelie Kroes and Joaquín Almunia have successively intensified the control of state aid measures and strengthened the enforcement of negative decisions and recovery orders concerning illegal aid. The current Commissioner, Margrethe Vestager, also seems to be following this trend and has made state aid control one of her key priorities.

Today, state aid law penetrates numerous areas of life, from state-financed infrastructure (airports, football stadiums) and public services of general interest (public banks, railways, hospitals, broadcasting) to the acquisition and disposal of public assets. The ever-growing importance of EU state aid rules became particularly apparent during the financial crisis, when state aid became the de facto vehicle through which the European Commission sought to ensure a level playing field between member states and, in consequence, through which large parts of the European banking sector were restructured. In recent years the Commission has particularly focused on state aid through the taxation regimes of member states and in the energy sector.

EU state aid control as part of EU competition policy

EU state aid control has always been one of the major pillars of EU competition policy. The aim of the state aid rules is to create a common framework, to ensure a level playing field for all market participants and prevent member states engaging in wasteful subsidy races that would ultimately be financed by taxpayers. The Commission and the courts have emphasised the importance of articles 107 and 108 of the Treaty on the Functioning of the European Union (TFEU) as a necessary safeguard for effective competition and free trade.

From an economic point of view, a strict state aid regime is a key factor for the creation and maintenance of effective competition in the internal market. Excessive state intervention in favour of ‘national champions’ distorts competition, alters the incentives of market players, creates moral hazards and thus leads to considerable inefficiencies. Beneficiaries can use state money to pursue aggressive competitive behaviour that would not be possible without public support. Firms that can ultimately rely on being bailed out by the taxpayer are encouraged to take excessive risks. In addition, excessive subsidies can reduce investment by other market players (the ‘crowding out’ of private investment).

Although the state aid rules have existed since 1958, they have become increasingly important as a result of increasing integration within the EU. If one player strengthens its competitive position by receiving subsidies, this will almost inevitably affect competitors in the internal market.

State aid control is unusual in that, unlike other branches of competition law, there is no sharing of powers with national competition authorities. This in turn reflects the fact that the state aid rules impose obligations on member states, rather than directly on undertakings. This in turn reflects a recognition that there are inbuilt incentives for member states to favour their own national players, and that it is difficult to ask national authorities, which are often themselves stake-holders or at least subject to political pressure in their home countries, to enforce EU-level rules against their own member state.

The general prohibition of state aid

The basic rule contained in article 107(1) TFEU is straightforward and simple. It provides for a general prohibition of any aid granted by a member state. In order to be caught by this provision, a measure has to fulfil the following conditions:

  • the recipient of the measure must be an undertaking – in other words, an entity that performs an economic activity;
  • the measure must confer an advantage that could not (or not on the same terms) have been obtained from private market participants;
  • the measure in question must be attributable to the member state;
  • the advantage must be directly or indirectly funded by state resources;
  • the advantage must be conferred on certain specific undertakings, as opposed to measures that apply equally to all market participants in comparable circumstances;
  • the advantage must lead to a distortion of competition; and
  • the advantage must have an effect on trade between member states.

This provision has always been interpreted very widely and encompasses aid in any form. Aid may take the form of a direct grant or subsidy, but it can also take other forms including, for example, the provision of loans or guarantees at discounted rates, tax benefits, the sale of assets at an undervalue or the purchase of assets at an overvalue. However, where the state intervenes on terms that would be acceptable to a private sector operator – for example, through the provision of loans or guarantees at market rates – then it is said to be behaving as a market economy operator (the MEO principle). Where the MEO principle is satisfied, the measure is not regarded as conferring an advantage and so will not involve aid. The MEO principle can be applied as a benchmark in many forms, such as the ‘private investor test’ (capital injections), the ‘private vendor test’ (privatisations or sale of assets), the ‘private creditor test’ (recovery of debt) and the ‘private purchaser test’ (public bodies buy goods or services).

If a measure constitutes state aid, it is automatically prohibited. There is one (seeming) exception to this rule, which is where the aid measure satisfies all the conditions laid down in the de minimis Regulation. This Regulation establishes that aid to an enterprise that is below the threshold of €200,000 over a period of three fiscal years (and that respects certain conditions) is deemed not to constitute state aid within the meaning of article 107(1) TFEU and therefore does not need to be notified.

Standstill obligation

If state aid within the meaning of article 107(1) TFEU has not been approved by the Commission, the measure cannot be implemented (article 108(3) TFEU and articles 2 and 3 of the Procedural Regulation). This ‘standstill clause’ in article 108(3) TFEU has direct effect and can therefore be invoked before the member states’ national courts. National courts must give full effect to this obligation.

The European courts have ensured the effectiveness of this ex ante control mechanism by consistently holding that state aid granted without notification or without approval by the Commission is ‘invalid’. Even a subsequent clearance decision of the Commission does not retroactively validate measures for the period in which they were implemented in violation of the standstill obligation.

At this point, national law comes into play. According to case law, the precise legal consequences of this invalidity are governed by national law. In this regard, national courts and authorities must ensure the effectiveness of the prohibition laid down in article 108(3) TFEU. Aid that was implemented in violation of the standstill obligation must in principle be recovered. Under its CELF case law, the European Court of Justice (ECJ) requires the national courts to draw ‘all necessary inferences’ from a violation of article 108(3) TFEU under national law ‘as regards the validity of the measures giving effect to the aid, the recovery of financial support granted . . . and possible interim measures’.

Notification procedure

EU state aid control is based on a system of ex ante authorisation. Member states are required to notify the Commission of any plan to grant or alter state aid, and, as described above, they are not allowed to put such aid into effect before it has been authorised by the Commission.

Under this system, the Commission is given sole competence to decide whether the notified measure qualifies for exemption under article 107(3) TFEU.

There are a limited number of mandatory exemptions from the prohibition on aid, but of more practical importance are the discretionary grounds for exemption that give the Commission (very wide) powers to grant exemptions for aid measures serving certain defined purposes that are in the common EU public interest (article 107(3) TFEU and article 106(2) TFEU). Examples of categories of aid that have been accepted as, in principle, capable of exemption are regional aid, aid for research and development, energy and environmental aid, rescue and restructuring aid, aid for small and medium-sized enterprises, aid for risk capital, aid for services of general economic interest, aid for certain types of infrastructure (eg, airports, ports, broadband) and training aid. Essentially, the Commission carries out a balancing assessment, under which it balances the positive effects of the aid against its negative effects. The Commission has developed a voluminous body of decision-making practice, which is mainly codified in guidelines and frameworks.

Investigation procedures

Where a member state notifies a proposed aid measure, there is a preliminary two-month investigation by the Commission, following which the Commission will either approve the aid or open an in-depth investigation. There is no binding time limit for the completion of an in-depth investigation, although the Commission is obliged to endeavour ‘as far as possible’ to complete the investigation within 18 months of the opening of the formal procedure. On conclusion of its investigation, the aid measures can be approved, approved subject to conditions, or prohibited.

Where the Commission becomes aware of unnotified aid (whether as a result of a complaint or otherwise), it follows a similar procedure but there is no formal time limit.

Once an in-depth investigation is launched, details are published in the Official Journal and third parties have an opportunity to make representations. Since the revision to the procedural regulation in 2013, the Commission has had the power, once a formal investigation has been opened, to issue formal information requests to third parties as well as to member states.

In addition, the Commission has been given the power to carry out ‘sector enquiries’ (ie, broader ex officio investigations in areas where there is a suspicion of state aid). This tool was used for the first time in 2015, namely in the field of ‘energy capacity mechanisms’.

Block exemption

Council Regulation (EC) 994/98 empowered the Commission to adopt regulations declaring that certain general categories of aid are compatible with the common market and are not subject to the requirement of prior notification and Commission approval. To this end, the Commission has adopted ‘block exemption regulations’ for state aid.

Since 2008 these regulations have been consolidated in the General Block Exemption Regulation (GBER). As a result, member states are able to grant aid that meets the conditions laid down in the GBER without the need to give prior notification to, and secure the agreement of, the Commission. Where this is the case, no individual notification is necessary and the standstill obligation under article 108(3) TFEU (see below) does not apply. Since these regulations have direct effect in member states’ legal systems, national courts may have to assess whether a certain aid measure meets their requirements.

In 2014 the Commission adopted a revised GBER that covers new areas, such as sports infrastructure, innovation clusters, R&D infrastructure, audiovisual works, broadband, culture and local infra-structure. In 2017 the GBER has been extended further to exempt some public support measures for ports, airports and culture. According to DG Comp’s state aid scoreboard, around 95 per cent of state aid measures are now covered by the GBER. The Commission believes that this represents a reduction in red tape that has allowed it to focus its attention on more distortive aid.

State aid modernisation

In May 2012, the Commission announced the start of an ambitious programme of state aid reform that has become known as the ‘state aid modernisation’ programme. The declared aim of this project was to foster growth and economic rejuvenation in member states by improving the quality of their public spending at a time when ‘the [financial] crisis has increased the demand for a greater role of the state to protect the most vulnerable members of society and promote economic recovery’.

In line with its broader Europe 2020 growth strategy, the Commission identified three main objectives in the communication, namely:

  • to foster sustainable growth in a competitive internal market;
  • to focus Commission ex ante scrutiny on cases with the biggest impact on the internal market; and
  • to streamline the procedures for decisions in state aid cases.

This has involved a detailed review of nearly all of the secondary legislation and Commission guidance relating to the state aid regime. Specifically, the Commission has:

  • revised and streamlined the various state aid guidelines to update them in line with current practice and to try to introduce a greater level of consistency in terms of how the guidelines are expressed and how they approach the state aid assessment;
  • revised and significantly extended the GBER to encompass additional categories of aid (see above);
  • revised and amended the core procedural regulations applying to state aid cases; and
  • adopted a new guidance note that clarifies and explains the notion of state aid.

State aid issues in a cross-border context

State aid issues often arise in a cross-border context. Even though there is a uniform EU set of state aid rules, national law remains of pivotal importance in practice. A number of important questions are still governed by national law both in terms of substance and procedure. This applies in particular to complaints brought by competitors in national courts, and the position of the aid recipient when it comes to granting of the aid and recovery.

Complaints to the European Commission

As described above, the Commission is the only body that is competent to determine whether aid is compatible with the common market. Consequently, the European courts have held that, unlike in other areas of competition law where the Commission has a discretion whether to pursue cases, it is obliged to take a decision on the complaints that it receives. However, the courts have recognised that the Commission is entitled to give different levels of priority to different matters. Under the state aid modernisation programme, the Commission has also sought to take steps to streamline the handling of complaints – which in practice represent a significant burden on its resources – through (i) a greater insistence on the requirement that complaints must be submitted by an interested party within the meaning of the Procedural Regulation; and (ii) the introduction of a mandatory complaint form that will require a minimum level of information to be provided.

Complaints before national courts and national authorities

Notwithstanding the possibility of complaining to the Commission, remedies under national law remain of pivotal importance in practice. In this regard the ECJ has repeatedly emphasised the important role of national courts when it comes to ‘private enforcement’ of the state aid rules.

Competitors trying to challenge illegal aid granted to competitors before national courts are often faced with a number of obstacles. In a number of member states, there is uncertainty about the appropriate legal basis for such an action. Depending on the respective national system, such actions can be based on administrative (public) law, on unfair competition, tort, or even directly on article 108(3), third sentence, TFEU. This is not purely an academic question but one that can have a great impact on the chances of success of a challenge.

Legal systems also widely differ regarding the question of who would typically be in the defendant role (ie, the state or the beneficiary), on the precise implications of ‘invalidity’ (pending or definitely null and void), on procedure (burden of proof, possibility of discovery, role of economic evidence, costs, duration, possibility of appeal and availability of injunctions, interim relief or both, among others) as well as on the possibility for competitors to obtain damages in case of a breach of the standstill obligation. The general willingness of national judges to apply European law, as well as their understanding and experience of the state aid rules, can also be different in the various member states.

In addition, complainants may try to enforce their rights by other means. Some member states have specific (sometimes even independent) national bodies that deal with competitor complaints, but complainants sometimes have to be creative and develop other ways in order to make their point; for example, by contacting an insolvency administrator who relies on an illegal capital injection by the state or by raising state aid questions in a shareholder meeting (directly after having become a shareholder).

There are also significant variations between member states as to how competitors can find out about illegal aid; in other words, what publicity is given to the granting of aid. National law, therefore, still has a significant impact on the enforceability of the state aid rules.

The perspective of aid recipients

Companies can, of course, also benefit from state aid measures. In this role as an aid recipient, they are often confronted with state aid issues outside their home jurisdiction; for example, if they receive subsidies for investments or R&D projects in other member states. State aid issues can also occur in the context of acquisitions in other member states (privatisations, acquisition of companies that have received state aid, etc).

In this regard, the national rules in the various member states often differ significantly, in particular as far as the substantive and procedural rights of the aid recipient, possible remedies against negative decisions and judicial protection against recovery orders are concerned. In addition, some considerable political, economic and cultural differences between member states have to be taken into account.

Brexit

The future implications of Brexit – that is, how state aid issues are likely to be dealt with in the new relationship between the EU and the United Kingdom after the currently envisaged transitional period has expired – are still very unclear. Depending on the post-Brexit legal framework between the EU and the United Kingdom (Free Trade Agreement, ‘EEA plus model’, Swiss model, Ukrainian model, etc) there are various possible solutions. In general, the ‘EU 27 side’ seems to take the view – which the UK government seems to have accepted – that there will still be some need for state aid control and cooperation after Brexit, at least in the very likely scenario in which there will still be some meaningful degree of economic integration between the EU and the United Kingdom. This is because closer economic cooperation can only work if a ‘level playing field’ is ensured, thereby excluding ‘subsidy races’ between different states. If, therefore, British businesses do obtain some form of access, in whatever form, to the EU internal market post-Brexit (and vice versa), this will probably be combined with a mechanism that ensures some form of state aid discipline. It is therefore not unlikely that state aid may continue to be prohibited in the future and that such rules will be put in place in bilateral agreements that are actually quite similar to article 107 TFEU.

In any case, as long as the United Kingdom is still a member state, and during the envisaged transitional period, articles 107 et seq TFEU still apply. This would also, in principle, prohibit any attempt by the British government to grant incentives in order to stop investors from leaving the country because of Brexit, and it would likewise block EU member states from making gifts to those companies that are likely to relocate to the United Kingdom (because of lower tax, less regulation, etc).

Outlook

During recent years, the state aid rules have become increasingly important for private practitioners. Because of ever-increasing economic integration within the EU, all economic players have become more sensitive to distortions of competition caused by state intervention in the market. State aid law has also developed in an extremely dynamic manner, which is reflected in the growing academic interest in this field of law. The tremendous speed of legislative action that the Commission has developed in recent years has indeed been remarkable.

However, differences on a national level remain significant. Even though EU law provides a comprehensive and sophisticated set of rules, many aspects concerning the practical enforcement of the state aid rules are still governed by national law. As a result, the interplay between these domestic rules and the rules at EU level is often a challenge, and can lead to gaps in the system as far as judicial protection is concerned.


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