COVID-19 and EU State Aid Law – 'we will do whatever it takes'
COVID-19 and EU State Aid Law – ‘we will do whatever it takes’
Governments around the world are giving financial support to many businesses to cope with the COVID-19 crisis. Businesses receiving this support appreciate the assistance during this troubling but temporary crisis.
However, businesses must also be careful that the support from EU Member States and the UK (during its Brexit transition period) is lawful State aid. Otherwise, the support could be stopped suddenly by virtue of it being unlawful aid (e.g. following a complaint from a competitor) with businesses having to then repay to the EU Member State or the UK an amount equal to the value of the unlawful assistance plus interest.
When is a business in receipt of State aid?
State aid is essentially:
the provision of State resources from an EU or UK Government in any form whatsoever (e.g., payments such as grants or not charging beneficiaries the full cost of loans or land)
which is provided on a selective basis to some beneficiaries (i.e., not everyone in the same category receives the benefit)
by favouring certain undertakings or the production of certain goods or services
in a way which affects trade between EU Member States
Who administers the State aid rules?
The State aid system is primarily administered by the European Commission with appeals from the Commission's decisions going to the Court of Justice of the European Union. The vast majority of State aid decisions are made by the Directorate General for Competition which is currently headed up by Commissioner Vice-President Margrethe Vestager.
Is all State aid banned?
No, the EU does not outlaw all State aid. Some forms of aid – dealing with, for example, earthquakes – are automatically lawful (Automatically Deemed Lawful State Aid). Most forms of aid, however, require prior approval by the European Commission before the aid may be provided (Aid Capable of Approval). Hence, for example, aid given by EU Member States during the Financial Crisis was Aid Capable of Approval which had to be approved by the Commission; such approval normally came with an obligation on the recipient to commit itself to an onerous restructuring plan.
What are the State aid rules?
The rules on State aid are primarily contained in Articles 107-109 of the Treaty on the Functioning of the European Union (TFEU). In essence, any State aid is unlawful unless it is Automatically Deemed Lawful State Aid under Article 107(2) or approved in advance by the European Commission where it is Aid Capable of Approval under Article 107(3).
Initial response to COVID-19
The State aid rules are usually applied quite strictly. However, the European Commission has reacted swiftly and decisively to the COVID-19 outbreak to relax – but not to switch-off – the State aid rules. On Friday, 13 March 2020, the European Commission signalled that “it will do whatever it takes” and indicated, for example, that it considered a Danish scheme to compensate organisers of certain events for losses suffered as involving lawful aid. You can read our earlier briefings on these events here and here. Since then, the European Commission has moved fast and further.
State aid Temporary Framework to combat COVID-19 outbreak
On Tuesday, 17 March 2020, Competition Commissioner Vestager announced that there would soon be a "Temporary Framework to Support the Economy in the Context of the COVID-19 Outbreak" (the Temporary Framework). By Thursday, 19 March 2020, it had been adopted. What took three weeks during the Financial Crisis was done in days during the COVID-19 crisis. The Temporary Framework permits certain forms of aid to deal with the crisis. It is based on Article 107(3)(b) of the TFEU which provides that "aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State" may be permitted by the European Commission – the aid is not automatically lawful, it does require approval by the European Commission. The State aid rules are being relaxed so as to enable businesses to have continuity, but also to ensure that the EU's unity and internal market are preserved. In her statement on the draft proposal Commissioner Vestager emphasised that rapid, decisive and coordinated action would be essential in order to combat the impact of the COVID-19. She stated that the "EU State aid rules provide a toolbox for Member States to take swift and effective action".
The two common goals of the Temporary Framework as outlined by Commissioner Vestager include: (a) that businesses have the liquidity to keep operating, or to put a temporary freeze on their activities, if necessary, and that support reaches the businesses that need it; and (b) that support for businesses in one Member State does not undermine European unity during a crisis, because Member States have to be able to rely on the internal/single market to help the European economy weather the outbreak and recover going forward.
The Commissioner commented that lessons learned in the implementation of the State aid framework in 2009 in the wake of the Financial Crisis will assist the Commission in the rapid implementation of the new Temporary Framework.
The Temporary Framework include measures that will enable Member States to:
set up schemes direct grants, selective tax advantages and advance payments of up to €800,000 (an increase from the €500,000 limit proposed by the Commission two days earlier) to a business to address urgent liquidity needs
give subsidised State guarantees on bank loans taken out by businesses
enable public loans with subsidised interest rates
put in place safeguards for banks, recognising the important role of the sector to deal with the economic effects of the COVID-19 outbreak to channel aid to final customers, in particular small and medium-sized enterprises. The Temporary Framework makes clear that such aid is direct aid to the banks' customers, not to the banks themselves and gives guidance on how to ensure minimal distortion of competition between banks
Businesses that entered into difficulty after 31 December 2019 would be eligible for aid under the Temporary Framework.
Legal basis for the Temporary Framework
The Temporary Framework is based on Article 107(3)(b)TFEU. Article 107(3)(b) is applied in particularly severe economic situations and allows Member States to grant support to remedy a serious disturbance to their economy. Article 107(3)(b) is a different to the legal basis on which the Commission approved a recent State aid scheme in Denmark.
That scheme related to the compensation of organisers of events for loss caused by cancellations of large public events due to the coronavirus outbreak. That scheme was found to be compatible with EU State aid law under Article 107(2)(b), which provides that "aid to make good the damage caused by natural disasters or exceptional occurrences" are automatically "compatible with the internal market". If aid could fall within Article 107(2)(b) then it does not need authorisation but the grounds will be more limited.
Role of the Temporary Framework
The Temporary Framework applies in addition to measures already available to Member States under the State aid rules. So, it is an additional means of approving aid to businesses.
Challenging State Aid
While Governments may be keen to provide State aid, it is quite possible that competitors of the beneficiaries (and others) may complain about the aid to the European Commission or even institute court proceedings in egregious cases. Therefore receiving the support may not be the end of the story where a competitor or other third party brings a challenge or complaint.
Key takeaways for business on State aid
State aid is a feature of the COVID-19 crisis
The European Commission is working towards issuing swift clearances for all necessary and appropriate aid to businesses to try to cope with COVID-19
The European Commission has approved individual aid schemes but has also adopted a Temporary Framework to approve automatically certain specified schemes generally – the Framework has higher ceilings for aid to business than originally proposed and was adopted in days unlike the equivalent measure in the Financial Crisis which took weeks to adopt
Businesses may receive lawful State aid and should check whether the assistance they are receiving is lawful
Businesses whose competitors are receiving unlawful aid can complain about, and challenge, the aid
So Governments deciding to give aid is not the end of the story so business executives would be prudent to double-check the legality of the support