Coronavirus and the EU State Aid Framework

The coronavirus pandemic has ushered in an era of government spending on a scale not seen since the financial crisis. The Chancellor has so far announced £330bn of financial support in the coronavirus business interruption loan scheme and further support for the self-employed. With some squeezed industries such as aviation clamouring for help, many predict that larger bailouts are around the corner.

Much of this support will fall within the scope of the EU state aid framework. Article 107(1) TFEU prohibits any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition in a way which affects trade between Member States. Where a Member State proposes to put in place a state aid, it must notify the Commission, which determines the compatibility of the proposed aid with the internal market under Article 108 TFEU. 

The Commission has scrambled a hasty response to clarify to governments how they can support businesses without infringing the rules. The Commission has done two things: first, explained which kinds of support will fall outside the scope of EU rules and so may not require notification; and second, put in place a Temporary Framework (which was amended on Friday) which sets out the kind of notified aids which it will consider compatible with the internal market. 

As the Commission has clarified, there are several kinds of aid which will fall outside the scope of the state aid framework altogether or which will automatically be deemed to be compatible with the internal market: 

a. The state aid rules will not catch generally applicable measures. For example, a government can generally suspend payments of corporation tax or VAT, provided there is no selective advantage to specific companies. 

b. Financial support provided directly to consumers – for example in the form of compensation for cancelled services or tickets not reimbursed by concerned operators – will also generally not be caught.

c. State aid may also fall within an existing block exemption. Perhaps most importantly, the Commission has issued a de minimis block exemption permitting aid of up to €200,000 to be granted to an undertaking over a three-year period without prior approval (Regulation (EU) 1407/2013).

d. Article 107(2)(b) provides that aid granted to make good the damage caused by “exceptional occurrences” shall be considered compatible with the internal market. The Commission has made it clear that it considers coronavirus an exceptional occurrence. Accordingly, if a government compensates an undertaking for damage caused by the coronavirus, the Commission will regard that aid as compatible with the internal market. An example was the Commission’s approval on 12 March 2020 of a scheme by the Danish government to provide up to €12m in compensation to the organisers of large events which had been cancelled due to the pandemic. 

Where none of the above apply, the Commission’s Temporary Framework may come into play. Article 107(3)(b) provides that aid “to remedy a serious disturbance in the economy of a Member State” may be considered compatible with the internal market. The Temporary Framework (which will continue until 31 December 2020) recognises that the coronavirus has caused such a “serious disturbance” such that this provision in principle applies (§18). It goes on to detail criteria for certain different kinds of aid which the Commission will consider compatible with the internal market. In broad terms, the kinds of aid covered are:

a. Direct grants, repayable advances or tax advantages up to a limit of €800,000 per undertaking.

b. Guarantees on loans at a prescribed level of premium where the principal of the loan (generally) does not exceed 25% of the turnover of the beneficiary or twice its annual wage bill, or subsidised interest rates for loans of the same size. (The Commission has also clarified that aid of this kind can be channelled through financial institutions – in which case it will not be caught by the specific aid rules relating to the banking sector, found in Directive 2014/59/EU and Regulation 806/2014).

c. Aid in connection with short-term export credit insurance.

d. Direct grants, repayable advances or tax advantages having an “incentive effect” for COVID-19 research and development.

e. Investment aid having an “incentive effect” for the construction or upgrade of COVID-19 testing and upscaling infrastructures (including infrastructures relating to treatment and vaccination).

f. Investment aid having an “incentive effect” for the production of COVID-19 relevant products (including medical equipment such as ventilators and medicinal products). 

g. Deferrals of tax or social security contributions for undertakings particularly affected by the pandemic (contrast the generally applicable measures which may fall outside the scope of Article 107(1)).

h. Wage subsidies designed to avoid lay-offs during the pandemic which do not exceed 80% of the benefitting employee’s monthly gross salary.

The Temporary Framework will ease the passage of many government measures through the Commission approval process (the Commission has already made over 20 decisions authorising state aids pursuant to the framework, including approving three UK schemes). But it nevertheless has its limitations. Leaving aside aid connected with the medical response – in respect of which there are understandably very few limitations – many of the temporary measures are best suited for SMEs. 

Should a struggling company such as an airline require a larger bailout, however, the Temporary Framework is unlikely to apply. In such cases, Member States are likely to need to invoke Article 107(3)(c), which provides that aid to facilitate the development of certain economic activities may be considered compatible with the internal market. Government rescues and bailouts are generally considered under this provision. The threshold for the approval of such aid (explained in the Commission’s pre-existing Guidelines on State Aid for Rescuing and Restructuring, 2014/C 249/01) is much stricter, requiring a well-defined objective of common interest, appropriately designed and proportionate measures, and an absence of undue negative effects on competition (among other things).

The above framework is likely to be much applied in the near future. Fiscal policies will have winners and losers and the scope for disputes is clear. Disappointed undertakings may be able argue that grants to rival companies constitute unlawful state aid. Where there has been no notification to the Commission, the route for such a challenge may be a judicial review of the relevant scheme (see e.g. R v Customs and Excise, ex p. Lunn Poly Ltd [1999] 1 CMLR 1357). Where the Commission has authorised the scheme, the proper recourse is likely to be an annulment action.

What will Brexit mean for the coronavirus state aid framework? The answer is likely to be: not much. The Commission will remain competent to complete state aid procedures commenced before the end of the transition period (31 December 2020) under Article 92 of the Withdrawal Agreement. More strikingly, under Article 93, the Commission will remain competent for a period of 4 years to initiate new state aid procedures relating to aid granted before the end of the transition period; and under Article 95, the CJEU will retain exclusive jurisdiction in respect of the legality of the Commission’s decisions under such new procedures. The practical result of these provisions is that all UK state aids granted before the end of the transition period will continue to be subject to scrutiny by the Commission and ultimately the CJEU for a considerable length of time.