CJEU: Italian company must repay compound interest on top of illegal state aid

The Court of Justice of the European Union (CJEU), Europe's highest court, has ruled that Italian legislation that allows the application of compound interest to the recovery of state aid does not break EU rules.

Italian municipalities have often provided services such as water, public transport and power through agreements with public companies like A2A, the CJEU said.

In the early 1990s, Italy granted tax exemptions and subsidised loans to these companies. In 2002, however, the European Commission said that this state aid was incompatible with the common market, and ordered Italy to recover it.

Italy began measures to recover the aid, plus compound interest, in 2009. The addition of compound interest was based on an EU regulation that came into force in 2004 – two years after the initial ruling in 2002.

A2A contested this calculation, and the Italian Court of Cassation asked the CJEU to rule on whether the compound interest can be charged, based on a regulation that was not applicable at the time when the original aid recovery was ordered.

The CJEU ruled that at the time when the Commission ordered the recovery of the aid, EU law did not state whether interest should be calculated on a simple or compound basis, so the question was not regulated. The Commission's practice at the time referred to national law, so the decision should be based on Italian law.

The principle of legal certainty means that a new law applies to the future effects of situations that arose before it came into force, the CJEU said.

In the light of the long delay between the recovery decision in 2002 and the recovery order to A2A in 2009, "it must be considered that the application of compound interest is a particularly appropriate means of neutralising the competitive advantage granted unlawfully to undertakings benefiting from the state aid at issue," the CJEU said.

State-aid expert Elaine McLean of Pinsent Masons, the law firm behind Out-Law.com said: "Where the Commission identifies state aid, it will order clawback, and the granting body must comply. This is yet more evidence that organisations need to be sure that any state aid they receive is lawful."