State aid law is an unfairly (and unwisely) misunderstood subject
In order to help fill this gap, we propose a synthetic presentation of the rules in force. For the benefit of all, this presentation is formulated in clear language.
State aid law limits government action
State aid law regulates – and limits – government intervention in the economy. To summarise, any subsidy offered by public authorities to a company must first be authorised by the European Commission.
Let’s face it, such control ruffles the feathers on both sides of the political spectrum: supporters of a dirigiste industrial policy, on the one hand, and sovereign-nationalists, on the other, find it hard to accept that the State’s action should be constrained – and moreover by the European Commission, which does not have a good press these days.
Therefore, in an effort to educate, the following lines present the rationale for State aid control (1), before outlining its governing principles (2).
1. Why state aid control?
State aid control is intended to achieve a number of objectives, both economic and political:
- prevent distortions of competition (discrimination between assisted and non-assisted enterprises);
- combat the lobbying of national companies to obtain funds from national authorities;
- fight against public deficits (aid policies to companies increase public deficits);
- prevent a subsidy race between Member States (e.g. in order to avoid relocations resulting from an aid measure taken by State 1, State 2 bids for aid to its own companies).
2. What are the main rules of State aid law?
Aid measures to companies are in principle prohibited.
Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) considers any state aid granted to an undertaking to be “incompatible with the Treaty”.
- The aid must therefore be granted to “an undertaking” within the meaning of the European Treaty (aid to workers or to consumers, for example, is not covered).
- Secondly, the measure must be a “State aid“. The existence of “State aid” is subject to the fulfilment of five cumulative conditions. The measure must :
- Involve a transfer of public resources (whether from the federal state, regions, communities, municipalities or any other part of the public authority);
- provide an economic advantage to the company;
- involve a selective dimension (not all companies benefit from the measure);
- distort, at least potentially, competition; and
- affect trade between Member States.
If all these conditions are met, the measure is state aid to an undertaking and is therefore in principle prohibited.
By way of exception, State aid may be authorised by the European Commission
The Belgian public authorities make a wide variety of aid available to businesses to encourage their development. Should we deduce from the above that the State is systematically illegal?
Intuitively, one understands that a loophole exists: state aid can be authorised by the European Commission.
Prior notification of the aid measure
The European Commission may, by way of exception, authorise State aid.
This presupposes that the State aid is “notified” (communicated) to the Commission:
- (otherwise, the aid will be “illegal” for not respecting the procedure);
- and that the Commission declares the aid “compatible” with the Treaty (otherwise the aid will be “incompatible” with the Treaty).
When aid is notified to the Commission, the Commission carries out a full assessment of the likely effect of the aid on the market.
The procedure and methodology for assessing the compatibility of aid have been published and are known, although the Commission retains discretionary powers in the exercise of its control.
Exemption from the notification obligation
As the control of all State aid is particularly time-consuming, the Commission has declared a number of aids compatible a priori, provided that they comply with strict conditions.
There are therefore a number of exceptions (sub-exceptions, to be more exact), in which the aid measure does not have to be notified to the European Commission. These are :
- aid to Services of General Economic Interest (“SGEI”) (in other words, aid to public services);
- de minimis aid (i.e. aid of less than EUR 200,000 over three tax years per undertaking, so small that it is presumed not to affect trade between Member States);
- This is the most useful instrument published to date. The GBER lists the types of aid that are permissible, and for each type of aid defines :
- costs eligible for aid ;
- lump sum thresholds;
- intensity thresholds by eligible costs.
For example, the GBER allows aid for the remediation of polluted sites for :
- bear the costs incurred for the remediation work, less the increase in the value of the land; where
- 100% of the above costs can be covered; and provided that,
- the total amount of aid does not exceed EUR 15 million per undertaking and per rehabilitation project.
It is important not to make analytical mistakes in the implementation of these instruments. Aid that has to be notified will be illegal. It may also be incompatible. This type of error can be sanctioned by the obligation to repay the aid (see below).
Grounds on which an aid measure may be authorised
At the stage of checking the compatibility of the aid, the Commission has to verify whether the aid is necessary for :
- respond to a “market failure”, including, for example :
- training of the professional workforce ;
- SME financing ;
- funding for research and development projects;
- financing of projects related to environmental protection;
- support for energy efficiency measures and enabling companies to go beyond environmental protection standards;
- investment aid for :
- high-efficiency cogeneration;
- of energy from renewable sources;
- efficient heating and cooling networks;
- energy infrastructure ;
- support for the remediation of contaminated sites ;
- investment aid for recycling and reuse of waste ;
- assistance with environmental studies
- correction of systemic risks (aid to the banking sector);
- meet a ‘social objective’, including, for example :
- hiring of disabled workers ;
- the emergence of female entrepreneurship ;
- promotion of culture and conservation of heritage;
- the creation of local infrastructure;
- the creation of sports and multifunctional infrastructures;
- the correction of geographical disparities in economic development (regional aid to European regions in difficulty
- saving and/or restructuring a company in difficulty (exceptional measure) :
- allow the safeguarding or development of certain strategic sectors:
- agriculture and fisheries ;
- high-speed ;
- electricity ;
- ship production ;
- transport sectors (air, sea, rail and road).
- automotive industry ;
- postal services ;
- coal industry; steel industry ;
- audiovisual production and broadcasting ;
Illegal or incompatible State aid must be repaid
It is very unwise to ignore state aid law. Illegal and/or incompatible aid is sanctioned by the obligation to repay the aid.
Action for reimbursement is time-barred after 10 years. Potentially, therefore, ten years of aid must be repaid in principal and interest.
A repayment order can be given:
- by the European Commission, where an investigation into the functioning of the market leads to the Commission becoming aware of the distribution of incompatible State aid;
- by the national court, referred to it by a competing company, unhappy with the breach of equality that had occurred in favour of the aid recipient.
The repayment obligation lies with the company that received the aid. However, when it comes to repaying 10 years of aid, the burden is so great that the repayment obligation leads many companies to bankruptcy.
In this respect, the fact that the state is liable for distributing prohibited aid does not change anything: the obligation to repay remains. At most, the company can hold the state liable for the part of the damage that is separate from the repayment obligation.
It is therefore important to be particularly careful:
- For the company, the risk is to suddenly have to pay back huge sums of money;
- for the public authorities (who recover the money distributed) the risk is that several years of effort to develop an effective economic fabric will be wasted.