State Aid Law
by Detlev Witt
1. Concept, function, and basic structure of state aid law
Economic competition can be distorted by the market behaviour of undertakings as well as by state interventions. Anti-competitive practices and interferences with market structure originating from undertakings are covered, within the scope of the competition rules (Arts 101 ff TFEU/ 81 ff EC) and related secondary legislation, by the prohibition of restrictive agreements, the prohibition of the abuse of a dominant position and by merger control. State interventions that the European treaties consider a threat to undistorted competition include financial assistance or relief from financial burdens granted by a Member State to particular undertakings or branches of the economy (state aid) insofar as their competitive position compared to other suppliers in the internal market is improved in such a way as to distort competition. In contrast to restraints on the economic freedom of action that are directly caused by undertakings, here the distorting effect is caused by the use of public funds. Under Union law, control of such assistance financed from Member State resources is effected by the state aid rules as codified in Arts 107–109 TFEU/87–89 EC. These rules are supplemented by sector-specific provisions on state aid in the areas of agriculture (Art 42 TFEU/ 36 EC) and transport (Art 93 TFEU/73 EC), as well as by secondary legislation based on the provisions of the treaty. The core of EU state aid law consists of a preventive ban on state aid with both automatic and discretionary exemptions (see 3. below).
The EU has extended its state aid regime to its legal relations with a number of non-EU countries. The 1992 agreement between the EC and the EFTA Member States, establishing the European Economic Area (EEA) that grants the EFTA states access to the internal market while committing them in return to adopt the internal market acquis, essentially follows the state aid rules of the EC Treaty/TFEU. In very much the same way association agreements between the EU and its accession candidates—targeted at adapting their domestic laws to Union law—include prohibitions of state aid in accordance with EC Treaty/TFEU rules.
The EU and its Member States are parties to the WTO and are therefore bound by its rules on subsidies which are, for the most part, incorporated in Arts VI, XVI and XXIII GATT 1947/1994 as well as in the Agreement on Subsidies and Countervailing Measures (SCM Agreement) of 1994.
2. Development trends in state aid law
State aid law, which had long been overshadowed by the development of the fundamental freedoms and of the competition rules as applied to undertakings, has developed noticeably in the course of the last decade. Basic legal instruments of recent secondary state aid legislation include a regulation on procedural rules for state aid control (Procedural Regulation, Reg 1999/659), the authorization to enact block exemption regulations for particular kinds of aid that shall be exempt, under generally defined requirements, from the prohibition of state aid (Enabling Regulation, Reg 1998/994) and a General Block Exemption Regulation (Reg 2008/800) based on that Enabling Regulation.
The trends of legal policy concerning state aid can be identified as follows: (i) All regulations of public subsidies approved by the EU and its Member States lead to the result that subsidies, under specific conditions, may be accepted as a legitimate instrument of economic governance. (ii) Within the EU, the intensity of state aid control remains relatively low on the national level but is relatively high in cases of cross-border commerce. (iii) The main purpose of state aid control, ie to prevent any distortion of competition within the internal market, has been increasingly supplemented by the aim to reduce the overall volume of state aid. (iv) There has been a trend towards using economic criteria for determining the legitimacy of state aid (market economy investor test for determining whether capital injections by the state should be regarded as an aid; market operator test for the assessment of commercial transactions between the state and undertakings; recently, the orientation of state aid control towards economic goals such as raising growth and employment as well as the justification of state aid under the aspect of market failure). (v) Specific rules and decisions on a case-by-case basis are increasingly being replaced by general rules simplifying the procedure of state aid control (eg block exemption regulations). (vi) Thus, substantive standards and legal instruments of state aid law converge with those applied to competition rules. (vii) Within their respective scope of application, block exemption regulations result in a decentralization of state aid control in favour of the Member States, thereby weakening the Commission’s exclusive control authority. (viii) On the other hand, European state aid law has de facto been gaining influence on domestic state aid policies of the Member States (eg the standardizing effects of uniform criteria for the evaluation of regional aid), thus having an impact even on policy areas for which the Union has no powers (eg tax law).
3. Implementation of state aid law in detail
a) Prohibition of state aid
The prohibition of state aid as laid down in Art 107(1) TFEU/87(1) EC implies that there is a state aid defined as: (i) any advantage (ii) favouring certain undertakings or certain branches of production (iii) that is granted by a Member State or through state resources. In order to trigger the prohibition, the state aid must: (iv) distort or threaten to distort competition and (v) affect trade between Member States. Neither the distortion of competition nor its impact on EU trade has to be of a certain (vi) appreciable extent.
(i) An advantage comprises any economic benefit the recipient may gain. The provision refers to aid ‘in any form whatsoever’ and is, therefore, subject to broad interpretation. It is the objectively favouring effect of an aid that is crucial and not the kind or the legal form the aid takes. Apart from net payments in cash or benefits in kind granted by a state (subsidies in a narrower sense), the concept of aid also includes measures that relieve undertakings from financial charges they would normally have to bear (see the fundamental decision in ECJ Case 30/59 – Steenkolenmijnen [1961] ECR 1, 43). Therefore, measures such as direct investment assistance; state sureties and guarantees; interest rate subsidies; tax relief or reduction of social security contributions; provision of goods and services or transferral of real property for use at discounted rates; and the extension of payment or the release of debts to public authorities are, inter alia, covered by the provision. Whether commercial transactions between the state and undertakings involve an advantage depends on whether the compensation for the state’s performance is in line with market standards (‘market operator test’). State injections of equity or debt capital to undertakings are to be assessed according to the conduct of a market economy investor or creditor. The question of whether compensation payments to undertakings entrusted with the operation of services of general economic interest (Art 106(2) TFEU/86(2) EC; public services) involve state aid has recently gained special attention. There is no state aid where the undertaking has been entrusted with legally binding and clearly defined public service obligations, where the compensation is calculated on the basis of transparent criteria without exceeding the additional costs caused by the service obligations and where the undertaking entrusted with the obligations was either chosen pursuant to a public procurement procedure or where the compensation is calculated according to the costs of an average and well-run undertaking (ECJ Case C-280/00 – Altmark Trans [2003] ECR I-7747, para 87). If these conditions are not met, compensation payments are regarded as state aid which, however, may nonetheless be approved.
(ii) The economic advantage must be granted to certain undertakings or certain branches of production. The selectivity requirement marks the threshold between measures conferring a specific advantage on certain undertakings—which are subject to EU state aid control—and general promotional measures fostering indiscriminately the undertakings of an entire economy—which are exclusively regulated by the Member States. Even measures favouring large groups of undertakings are considered to be state aid if they are granted on the basis of objective access requirements (eg measures fostering start-ups). On the other hand, the differentiated treatment of businesses does not constitute a selective advantage as long as it is justified by the nature or general scheme of the respective legal system (ECJ Case C-75/97 – Belgium v Commission [1999] ECR I‑3671, paras 34 ff).
(iii) In order to be considered state aid, the advantage must be granted directly or indirectly through state resources and accordingly must involve a financial burden on public funds (ECJ Case C-379/98 – Preussen Elektra [2001] ECR I‑2099, para 58). Financial transfers carried out exclusively between undertakings are not subject to state aid control even if those transfers follow state regulation.
(iv) A distortion of competition triggering the ban on state aid exists where the aid strengthens the recipient’s market position vis-à-vis actual or potential competitors (ECJ Case 730/79 – Philip Morris [1980] ECR 2671, para 11). Any interference with equal opportunities in competition is sufficient to constitute a distortion.
(v) The competence of the EU only extends to aid having an effect on trade between Member States (competition rules (applicability)). Therefore, advantages affecting only local markets within a Member State are subject solely to the respective state’s jurisdiction.
(vi) Unlike under the cartel ban (prohibition of restrictive agreements and exemptions), in the state aid context case law does not require the distortion of competition or the impact on trade to have an appreciable effect. However, the Commission substantiated the scope of discretion to be exercised in controlling state aid by rules on de minimis aid (Reg 2006/1998), thus exempting state assistance below a certain threshold from the prohibition of state aid and from notification requirements.
b) Exemptions from the prohibition of state aid
State aid covered by Art 107(1) TFEU/87(1) EC may be compatible with the internal market and therefore permissible according to (i) an automatic exemption pursuant to Art 107(2) TFEU/ 87(2) EC or (ii) a discretionary exemption under Art 107(3) TFEU/87(3) EC. The power to decide on exemptions rests with the Commission. The Commission applies instruments such as (iii) block exemption regulations as well as (iv) EU frameworks, guidelines and communications in order to generally exempt certain standardized types of state aid from the prohibition and to make the exercise of its discretion more transparent. While the prohibition of state aid focuses on its distorting effect on competition, the exemptions relate to the specific purpose of the respective state aid.
(i) According to the automatic exemptions, the following types of state aid are compatible with the internal market: aid of a social character granted to individual consumers and resulting in an indirect benefit to certain undertakings or branches of the economy, provided that such aid is granted without discrimination related to the origin of the products concerned (eg tax relief for the purchase of eco-friendly products; Art 107 (2)(a) TFEU/87(2)(a) EC); aid granted in connection with natural disasters or other exceptional occurrences (subsection b); aid to compensate for economic disadvantages caused by the division of Germany (eg the destruction of infrastructure; subsection c). If an aid comes under one of these exemptions, the Commission is without discretion and must declare the aid compatible with the internal market.
(ii) The discretionary exemptions, however, being of greater practical relevance, confer considerable discretionary power upon the Commission. The overriding factors to be weighed against each other in all groups of cases are the EU’s interest in assisting the recipients and the aim of state aid law to prevent competition in the internal market from being distorted. The discretionary exemptions subject to Commission approval include: regional aid to promote the economic development of less-favoured areas where the standard of living is abnormally low or where there is serious underemployment (Art 107(3)(a) TFEU/87(3)(a) EC); aid to promote the execution of important projects of common European interest (eg research and development projects of several Member States) or to remedy a serious disturbance in the economy of a Member State (subsection b); aid to facilitate the development of certain economic activities or of certain economic areas (eg rescue and restructuring aid, horizontal aid for research and environmental protection, regional aid for disadvantaged regions; subsection c); aid to promote culture and heritage conservation (subsection d). Furthermore, the Council may authorize other categories of aid that would be compatible with the internal market (subsection e); such an authorization was used for aid to the shipbuilding and coal mining industries.
(iii) Since 1998, the Commission has been empowered to generally allow certain categories of aid by block exemption regulations, provided they meet certain requirements (Enabling Regulation, Reg 1998/994). The Commission’s authorization relates to horizontal aid for the benefit of small and medium-sized enterprises, research and development, environmental protection, employment and education as well as to regional aid. The EU is currently extending the coverage of block exemption regulations. The aim of these regulations is to relieve the Commission from examining individual cases of state aid where general criteria for their compatibility with the internal market can be established and where their effect on competition does not cause concern. State aid falling under block exemption regulations is exempted from the requirement of prior notification to the Commission. It is the Member State and not the Commission that examines whether the aid meets the exemption requirements, thus decentralizing and accelerating state aid control. In 2008, the Commission adopted a general block exemption regulation merging previous block exemptions and extending their coverage to additional types of state aid (General Block Exemption Regulation, Reg 2008/800). In order to fall under the general block exemption regulation, the aid must, inter alia, not exceed certain threshold amounts, must be objectively calculable (transparent), have an incentive effect and must observe a certain relation between the eligible costs and the amount of aid received (aid intensity). To ensure continuing state aid control, Member States are obliged to report back to the Commission, and the Commission regularly monitors aid measures implemented under the general block exemption regulation.
(iv) In order to increase legal certainty and transparency, the Commission published EU guidelines, frameworks and communications indicating the standards it applies in determining the permissibility of state aid in typical cases (as, inter alia, for horizontally oriented regional aid, environmental protection aid, for aid to promote risk capital investments, for rescuing and restructuring aid, certain sector-specific aid and for special aid measures such as state guarantees and export credit insurance).
c) Specific types of state aid
(i) State aid within areas of particular EU policies is subject to specific regulations, eg in the sector of agricultural products (Art 42 TFEU/36 EC), in the transport sector (Art 93 TFEU/73 EC) or with regard to the freedom of establishment (Art 50(2)(h) TFEU/44(2) EC). (ii) In addition to aid granted by Member States, the EU itself affords financial assistance from EU funds on the basis of its own competences as laid down in EU primary law (Community aid). Numerous financial instruments such as structural funds, regional funds, social funds or cohesion funds are available for that purpose. These types of aid are not directly subject to state aid control as codified in Arts 107 ff TFEU/87 ff EC since they are not granted ‘through state resources’. However, EU institutions are to adhere to Union competition rules and must prevent competition in the internal market from being distorted by EU aid.
d) Procedures of state aid control
Article 108 TFEU/88 EC contains only basic procedural principles of state aid control, whereas details of supervision and enforcement are codified in rules of procedure issued by the Council on the basis of Art 109 TFEU/89 EC (Procedural Regulation, Reg 1999/659). EU state aid control is basically structured as a preventive supervision coupled with the Member States’ obligation to notify the Commission of plans to grant an aid. In principle, the authority to assess whether an aid complies with state aid law and whether the conditions for an exemption are met lies exclusively with the Commission. However, block exemption regulations and the de minimis rule cause, within their scope of application, a decentralization of decisional powers to the Member States, which decide in the first instance whether the requirements of these exemptions are met.
A distinction has to be made between intended (‘new’) and ‘existing’ state aid. The assessment procedure concerning new aid that does not fall under block exemption regulations or other specific exemptions is triggered by mandatory notification to the Commission effectuated by the Member State (Art 2 Procedural Regulation). The notification requirement also extends to the alteration of existing aid. Pursuant to a self-executing prohibition, notifiable state aid shall not be put into effect until it has been authorized by the Commission (Art 108(3)3 TFEU/88(3)3 EC; Art 3 Procedural Regulation). Within two months following notification the Commission conducts a preliminary examination as to whether the measure in question constitutes state aid and whether doubts exist as to its compatibility with the internal market. Where the Commission finds that there is no state aid or that the aid is compatible with the internal market, the Commission takes a ‘decision not to raise objections’, and the aid can be put into effect. Otherwise the Commission initiates the formal investigation procedure (Art 6 Procedural Regulation). It is not until this procedural stage that interested parties apart from the Member State concerned (beneficiary, competitors, professional associations, etc) are given an opportunity to submit comments. Decisions closing the formal investigation procedures can state that the measure in question does not constitute aid (Art 7(2) Procedural Regulation), that an aid exists but is allowed due to its compatibility with the internal market (‘positive decision’, Art 7(3) —if appropriate, subject to conditions and obligations, Art 7(4)) or that an aid exists which is not compatible with the internal market and, consequently, shall not be put into effect (‘negative decision’, Art 7(5)).
Existing aid approved and awarded under an aid scheme (in contrast to an individual aid) is subject to continuing review by the Commission, in cooperation with the Member States (Art 108(1) TFEU/88(1) EC; Arts 17 ff Procedural Regulation). For that purpose, Member States are obliged to give annual reports on existing state aid schemes to the Commission. Where an existing aid scheme is, for example, no longer compatible with the internal market due to economic changes, the Commission will issue a recommendation proposing appropriate measures to the Member State concerned (up to the abolition of the aid scheme; Art 18 Procedural Regulation). If no agreement can be reached, the Commission initiates formal investigation proceedings similar to the case of new aid (Art 19(2) Procedural Regulation).
In the case of unlawful aid put into effect by a Member State without Commission approval (Art 108(3)3 TFEU/88(3)3 EC), the Commission may order the aid to be suspended and provisionally recovered from the beneficiaries (Art 11 Procedural Regulation). If the subsequent examination of the substantive requirements leads to the conclusion that the aid is incompatible with the internal market and is not covered by an exemption, the Commission adopts a final ‘recovery decision’ compelling the Member State concerned to recover from the beneficiaries the aid already provided (Art 14 Procedural Regulation). Due to a lack of procedural rules on the EU level, the recovery of unlawful aid has to be effected pursuant to national law. The recovery procedure must be applied in a manner that is not discriminatory compared to procedures for similar but purely national disputes (principle of equivalence or non-discrimination), and the application of national law must not affect the scope and effectiveness of Union law (principle of effectiveness; ECJ Joined Cases 205–215/82 – Deutsche Milchkontor [1983] ECR 2633, paras 22–3; the principles of non-discrimination and effectiveness arise out of Art 10 EC/largely replaced by Art 4(3) TEU (2007)). The principle of effectiveness excludes to a great extent, inter alia, the application of national rules for the protection of legitimate expectations insofar as those rules would make it impossible to recover aid unlawfully granted (see ECJ Case C-24/95 – Land Rheinland-Pfalz v Alcan Deutschland GmbH [1997] ECR I-1591, paras 49 ff, 54). Even if a state aid which had initially been unlawful due to an infringement of the standstill clause would later be assessed as lawful by the Commission, the benefits obtained during the period of unlawfulness must be recovered (ECJ Case C-199/06 – CELF [2008] ECR I-469, paras 51 ff). In addition, national courts are particularly confronted with the task of protecting the beneficiary’s competitors against the effects of unlawful state aid. Hence, competitors may resort, under certain conditions, to claims for injunctive relief, removal of impairments or damages (see ECJ Joined Cases C‑6/90 and C-9/90 – Francovich [1991] ECR I-5357, paras 28 ff).
4. Projects, future developments
In 2005, the European Commission published its ‘State Aid Action Plan’ putting forward fundamental reforms of EU state aid law which was regarded as the most important reform project in the field of competition law. The plan’s underlying guiding principle is to achieve ‘less and better targeted state aid’. Besides reducing the total volume of state aid, the remaining aid shall be better oriented towards horizontal objectives of common interest. State aid control is to be improved using a ‘more refined economic approach’ that is expected to evaluate more accurately a state aid’s positive and negative effects on the market. Better enforcement of the Commission’s decisions at the national level, the strengthening of private enforcement and improved efficiency control of state aid are expected to contribute to the objective of preserving the principle of undistorted competition by means of EU state aid law.
Literature
Ernst-Joachim Mestmäcker and Heike Schweitzer, Europäisches Wettbewerbsrecht (2nd edn, 2004) §§ 42–7; Thomas Jestaedt, Jacques Derenne and Tom Ottervanger (coords), Study on the Enforcement of State Aid Law at National Level (2006, update October 2009); Leigh Hancher, Tom Ottervanger and Piet Jan Slot, EC State Aids (3rd edn, 2006); Walter Frenz, Handbuch Europarecht, vol 3: Beihilfe- und Vergaberecht (2007); Monopolkommission, Siebzehntes Hauptgutachten 2006/2007: Weniger Staat, mehr Wettbewerb—Gesundheitsmärkte und staatliche Beihilfen in der Wettbewerbsordnung (2008) 403 ff; José Luis Buendía Sierra and others, EC State Aid Law—Le Droit des Aides d’Etat dans la CE, Liber Amicorum Francisco Santaolalla Gadea (2008); Kelyn Bacon (ed), European Community Law of State Aid (2009); Conor Quigley, European State Aid Law and Policy (2009); Martin Heidenhain (ed), European State Aid Law (2010); Jacques Derenne, Alix Müller-Rappard and Cédric Kaczmarek, Enforcement of EU State Aid Law at National Level 2010 (2010).
