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Introduction to state aid

Under European Union rules it is illegal for EU countries to give financial help to some companies and not others in a way which would distort fair competition. This help is called state aid, and the rules barring it are enforced by the European Commission and national courts.

State aid is governed by the Treaty on the Functioning of the European Union (TFEU). These rules say that the European Commission must give prior clearance to any state aid, and that countries must not grant the aid until it is cleared by the Commission. If aid is granted without permission it will almost always automatically be deemed to be unlawful and the organisation that received it can be ordered to pay it back.

There are two exceptions to this rule: when the sum involved is small and when it is covered by the General Block Exemption Regulation.

What is state aid?

The TFEU says that "any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market".

This has been broken down into a commonly-used four step test to help work out if an action will be state aid. The test is cumulative and state aid will only exist if all four parts are met. For state aid to exist, the following must be satisfied:

•           aid is granted by the state or through state resources

•           to a certain undertaking

•           thereby creating a selective advantage

•           the transfer of resources distorts or has the potential to distort competition and trade between EU countries.

Examples of state aid include:

  • direct state grants or subsidies, such as ‘rescue’ aid;
  • tax or other social security exemptions;
  • loans at preferential interest rates;
  • guarantees or indemnities on favourable terms;
  • preferential grants or loans;
  • disposal of land or buildings at less than full market value;
  • debt write-offs;
  • waiving of profits or other returns on public funds;
  • export assistance;
  • ‘sweeteners’ to attract investment into a region;
  • ‘forgiveness’ of liabilities (for example, employers’ social security payments or licence fees).

The four part test

Part one: 'state resources'

'State resources' includes central and all local governments together with public or private bodies which use state resources or are controlled by the state. A “transfer of resources” can be positive, such as a grant or negative, such as a tax rebate or loan at less than market rates of interest. If the transfer improves the beneficiary’s net financial position, or prevents it from deteriorating, then it is likely to constitute a transfer of state resources.

Part two: 'to an undertaking'

This requires an assessment of whether the recipient of state aid is an ‘undertaking’ within the meaning of the rules. An undertaking is an entity in any legal form whatsoever which is engaged in an economic activity. This is the case even if the recipient of aid is a publicly owned company, a non-profit making company or even a charity, so long as it carries on an economic activity in competition with other operators.

Part three: 'selective advantage'

To establish whether either party will derive an “advantage” it is necessary to consider whether the undertaking is in receipt of an economic advantage which could not have been obtained under normal market conditions.

Part four: 'potential to distort competition'

The most important aspect of this last part of the test is whether the selective advantage conferred on the undertaking has the potential to distort competition. There is no requirement for an actual distortion to be proved. As a general rule therefore, this part of the test is easy to satisfy and more often than not the selective advantage will be found to have the potential to distort competition.

The market economy investor principle test

To help with the third part of the test, about whether an economic advantage has been given by the aid, the 'market economy investor principle' (MEIP) test can be used. This asks the question: would a private investor in comparable circumstances have provided such sums or support to the recipient if it were operating under normal market economy conditions?

The benefit can take a variety of forms and include loans, guarantees and capital injections, but no matter what form the benefit takes the public body behind it must be behaving in the same way as a private investor in similar circumstances.

Private investors do not provide an advantage to others without demanding compensation. A private investor in normal market conditions is motivated solely by the possibility of making profits or a return on investment and all other objectives, no matter how worthy, such as lowering unemployment or increasing regional investment, are ignored by that private investor.

MEIP test assessments are not carried out retrospectively and an analysis would be applied to the facts which were available at the time the relevant public body made the decision to invest. The financial measure or investment will not be assessed with the benefit of hindsight and it is irrelevant if the investment subsequently turns out to be profitable when at the outset there was no realistic benefit involved for the public body.

State aid compliance using other instruments

There are two exceptions to the application of state aid rules.

General Block Exemption Regulation (GBER)

Certain types of aid are exempt under the GBER, and whether a project is exempt will depend on the type of project, the form of aid and any conditions regarding the granting of the aid.

The new GBER was published in May 2014 and came into effect on 1 July 2014. It considerably broadens the scope of pre-approved aid and encompasses several new categories of aid.

Countries will not be required to notify the Commission for approval if their state aid measures fall within the provisions of the GBER.

De Minimis Regulation

Under the De Minimis Regulation aid can be granted provided it does not exceed €200,000 over any period of three fiscal years.

Notification

If neither exemption applies and the four part test finds that activity qualifies as state aid then the Commission must be notified of the proposal. Article 108(3) of the TFEU says that notification must come in sufficient time to enable the Commission to submit its comments. If it believes that the proposal is not compatible with the internal market it will take action and the country must not act on its proposed measures until a final decision has been made.

The rules specifically state that an aid measure should not be implemented prior to notification and a positive response from the Commission. This is known as the suspension obligation.

Suspension obligation breaches

The Commission has limited powers if a state does go ahead and implement the measures. It must conduct a full, and often lengthy, assessment of the compatibility of the aid with the internal market before it can order the recovery of that aid, regardless of whether the suspension obligation has been breached or not.

The Commission can provisionally order the recovery of the aid pending a final decision, but only in exceptional circumstances, such as when there are no doubts about the state aid nature of the measure, there is an urgency to act and there is a serious risk of substantial and irreparable damage to a competitor.

But there is another approach. The suspension obligation has 'direct effect', which means that national courts may take all necessary measures to remedy the breach of the suspension obligation, including ordering the full recovery of payments already made. Unlike the Commission, national courts can order the recovery of unlawful aid regardless of whether it may be compatible with the internal market, because the assessment of the compatibility of a measure is the exclusive responsibility of the Commission. This ensures a swifter aid recovery process than the Commission can achieve.

Challenges

A complaint to the Commission

Anyone can make a complaint to the Commission provided they can demonstrate that they have an interest. As a result, complaints are usually made by a competitor of the aid recipient.

The Commission process is very flexible so it will vary from case to case.

The main steps for a UK-related complaint are:

  • once a complaint is made, the Commission is likely to notify the UK authorities;
  • the Department of Business, Innovation and Skills (BIS) State Aid Unit will work with the relevant UK authority to resolve the matter and to guide the UK authority through it;
  • the Commission may request information from the UK authorities and will set out a specific timeframe for a response;
  • the Commission will decide if there is any substance to a complaint. If there is none, it may decline to further consider the case;
  • alternatively the Commission may pursue it further. This may involve further information requests or the Commission may decide to open up a formal investigation. If the latter, this could involve the Commission imposing an injunction on the UK to prevent further payments of aid. In extreme circumstances, such as where there is urgency and a risk of serious irreparable harm to a competitor, the Commission could require temporary recovery of certain aid.

There is a 10 year limitation period on the recovery of unlawful aid. Time starts running on the day on which the aid is awarded to the beneficiary. This can, however, be interrupted by various different events so in reality the period can often be even longer than 10 years.

Judicial challenge to a national court

Judicial challenges against unlawful state aid have been relatively rare in the UK. The preferred method of challenge was a complaint to the European Commission. But though complaints to the Commission are free to make, they can take a very long time to resolve. This may be why there has been an increase in the number of state aid court challenges in the UK in recent years.

A state aid court challenge in the UK would be made by way of a judicial review action, raised in the High Court. The challenge would be likely to be founded on a claim that an aid award decision was illegal or 'ultra vires', meaning that the acts were not in the state's power to undertake. State aid, unless specifically approved, is deemed to be illegal.

In the past those making challenges have sought damages for the loss suffered as a result of the aid being awarded, usually to one of their competitors. They have also sought injunctions against the aid awarding authority, to prevent it awarding or continuing to award the aid. This injunction would be an interim order, pending the outcome of the court action, or potentially even a complaint to the Commission.

A recent decision of the Court of Justice of the European Union (CJEU) has, however, changed the landscape upon which domestic state aid court actions are raised. The judgment in the case involving airline Lufthansa and airport Frankfurt-Hahn has now given national courts the ability to order repayment of the alleged unlawful state aid before the Commission has reached a final conclusion to an investigation.

How this European judgment will subsequently be implemented or followed in each EU country remains to be seen. However, there is concern that this judgment may result in claw-back being ordered as a type of interim measure, akin to an interim injunction. The difference being, however, that instead of being ordered to stop doing something, the aid recipient may be ordered to actively repay the aid.

This may allow vexatious challengers to intervene in aid measures to their competitors and obtain a claw-back order, something which could be very detrimental to the financial welfare of the aid recipient, without the expert scrutiny of the Commission.

There is a three month limitation period on a judicial review action.

Consequences of unlawful state aid

Only the Commission, subject to the supervision of the CJEU, can determine whether unlawful state aid is compatible with the internal market. Where it does so, it can impose a requirement that the state recovers the aid in question, with interest from the date of the grant. This could result in the organisation being awarded the unlawful state aid suffering severe financial consequences as, by repaying the aid, their cash flow or funds could be significantly reduced. Furthermore, there is likely to be reputational damage for the authority that granted the unlawful state aid.

Subject to the exclusive competence of the Commission as to the compatibility of the aid with the internal market, the national court can determine questions of liability arising where unlawful aid has been granted. The national court has the power to order the recovery of allegedly unlawful State aid pending final decision of the European Commission on its compatibility, grant injunctive relief, award damages or adopt any other necessary measures to remedy the unlawfulness of the aid.