Executive Summary:
- The aid application must be submitted before the start of works.
- Where required, the incentive effect of the aid on the basis of a credible counterfactual scenario must be demonstrated when the application for aid is submitted.
- It is very difficult to prove ex post the incentive effect of aid.
- Errors by the granting authorities do not relieve the aid recipient from repaying incompatible aid.
Table of Contents:
- Introduction
- No ex post confirmation of incentive effect
- No proof of the proportionality of the aid
- Should the Commission have assessed the compatibility of the aid directly on the basis of the Treaty?
- Right to be heard
Introduction
Probably the most important factor that determines the compatibility of state aid with the internal market is the incentive effect of the aid. That is, the potential recipient may not start work on the aided project before it applies for aid and it must demonstrate that without the aid it would not carry out the project or it would carry out a smaller or less ambitious project. If the incentive effect is not verified before the aid is granted, then the aid is not only unlawful [because it is not granted in compliance with the relevant state aid rules] but most likely incompatible with the internal market because it is very difficult to prove the incentive effect of the aid ex post.
The judgment of the General Court of 15 July 2026, in joined cases T-310/24 and T-311/24, Úsovsko Agro & Úsovsko Eko v Commission, proves the legal difficulty of attempting to prove ex post the presence of incentive effect.[1]
The two applicants sought the annulment of Commission decision 2024/2474 on aid schemes SA.50787 and SA.50837 implemented by the Czech Republic in favour of large enterprises active in primary agricultural production.
The two schemes were notified to the Commission in 2018. They were intended to enlarge the group of eligible beneficiaries by including large enterprises and to replace the existing aid schemes SA.46621 and SA.46972 that were exempt from notification under Commission Regulation 702/2014, the then block exemption regulation that applied to agriculture [ABER].
The Commission found that state aid had already been granted to large enterprises prior to the date of those notifications, which, consequently, was unlawful. By contrast, for SMEs, the Commission found the aid to be compatible with the internal market. For large enterprises, it decided in 2019 to launch the formal investigation procedure. In April 2024, the Commission concluded that the aid for large enterprises that was granted before notification was incompatible with the internal market because it did lack incentive effect and, therefore, it had to be recovered.
During the proceedings it transpired that the aid had been granted as a result of an administrative mistake by the CZ authorities. That mistake, of course, did not absolve the recipient large enterprises from verifying beforehand that the aid was granted to them legally; i.e. in conformity with the conditions laid down in the then ABER [which excluded aid to large enterprises]. Later on, when the CZ authorities tried to correct that mistake by expanding the existing schemes to cover large enterprises, they committed another mistake. The CZ authorities proceeded to grant the aid before notification and without checking first the presence of incentive effect.
Before the General Court considered the pleas concerning the presence or absence of incentive effect, it rejected other arguments advanced by the applicants alleging that the text of the Commission decision could not be understood and that the Commission failed to specify the amount that had to be recovered by the Czech authorities.
No ex post confirmation of incentive effect
The applicants argued that the Commission failed to state the reasons which led it to conclude that the aid granted to large enterprises under the aid schemes notified in 2018 was incompatible with the internal market.
The General Court, first, observed that “(63) in recitals 178 to 181 of the contested decision, the Commission noted that none of the aid applications submitted by large enterprises in the context of the aid schemes in force in 2016 and 2017 included a counterfactual scenario. It therefore concluded that, if the conditions set out in points 72 and 73 of the 2014 Guidelines, according to which the situation without the aid had to be described by the aid applicant in the aid application and verified by the granting authority in advance of the aid grant, were not met, the presence of an incentive effect remained hypothetical and unproven.”
“(64) Accordingly, in the contested decision, the Commission considered that the 2014 Guidelines did not provide for any alternative demonstration of the counterfactual scenario and that it could not accept or assess the ex post counterfactual scenarios which the large enterprise beneficiaries had submitted in their comments on the 2021 decision to initiate the formal procedure.”
No proof of the proportionality of the aid
If the incentive effect of the aid cannot be proven, then it is also very difficult to determine whether the aid is the minimum amount necessary for the project to be carried out.
The General Court went on to note that, “(65) in recitals 184 to 188 of the contested decision, the Commission recalled that, pursuant to point 95 of the 2014 Guidelines, in case of investment aid granted to large enterprises under the notified aid schemes, Member States had to ensure that the aid amount was limited to the minimum on the basis of a ‘net-extra cost approach’. Furthermore, it considered that, pursuant to point 97 of those guidelines, the Member State concerned had to ensure that the aid amount corresponded to the net extra costs of implementing the investment in the area concerned, compared to the counterfactual scenario in the absence of aid.”
“(66) Consequently, the Commission considered that, since the investigation had confirmed that the large enterprises had not submitted counterfactual scenarios in their aid application, the Czech authorities had not had the available information which would have allowed them to check and confirm that the aid granted complied with the net-extra cost approach referred to in points 95 to 97 of the 2014 Guidelines. In addition, since no other point in those guidelines provided for an alternative demonstration of the net-extra cost approach, it considered that its doubts regarding the failure to ascertain the proportionality of aid granted to large enterprises were confirmed.”
“(67) Therefore, in the contested decision, the Commission explained to the requisite legal standard the reasons why it had considered that the aid granted to large enterprises under the aid schemes notified in 2018, prior to the notification of the 2021 decision to initiate the formal procedure, was incompatible with the internal market.”
Should the Commission have assessed the compatibility of the aid directly on the basis of the Treaty?
The applicants then alleged that the Commission committed an error in the context of the examination of the compatibility of the aid under Article 107(3)(c) TFEU. They claimed that the Commission should have applied directly Article 107(3)(c) TFEU.
The General Court reiterated the fundamental principle that “(88) the assessment of the compatibility of aid measures with the internal market, under Article 107(3) TFEU, falls within the exclusive competence of the Commission, subject to review by the Courts of the European Union”.
“(89) In the exercise of its discretion, the Commission may adopt guidelines in order to establish the criteria on the basis of which it proposes to assess the compatibility, with the internal market, of the aid measures envisaged by the Member States. In adopting such guidelines and announcing by publishing them that they will apply to the cases to which they relate, the Commission imposes a limit on the exercise of that discretion and cannot, as a general rule, depart from those guidelines, at the risk of being found to be in breach of general principles of law, such as equal treatment or the protection of legitimate expectations”.
“(90) Accordingly, in the specific area of State aid, the Commission is bound by the guidelines and notices that it issues, to the extent that they do not depart from the rules in the Treaty”.
“(91) Furthermore, although the review carried out by the Courts of the European Union is limited as regards the complex economic and social assessments made by the Commission, that review is, by contrast, comprehensive as regards the evaluations made by the Commission which do not involve such assessments or as regards questions of a strictly legal nature”.
“(92) In the present case, …, the Commission considered that the aid granted to large enterprises prior to the … 2021 decision to initiate the formal procedure was not compatible with the internal market under the derogation provided for in Article 107(3)(c) TFEU, on the ground that that aid did not comply with the conditions set out in Part I of the 2014 Guidelines on the presence of an incentive effect and the proportionality of that aid.”
“(100) The Commission could not depart from the 2014 Guidelines, at the risk of being found to be in breach of general principles of EU law, such as equal treatment or the protection of legitimate expectations.”
“(101) In the present case, the Commission based its conclusion on the incompatibility with the internal market under Article 107(3)(c) TFEU of the aid granted to large enterprises prior to the notification of the 2021 decision to initiate the formal procedure, on the ground that the applicants had not submitted counterfactual scenarios in their aid application and that, accordingly, the national authorities had granted that aid without, in actual fact, having verified the credibility of such counterfactual scenarios and, consequently, the presence of an incentive effect and the proportionality of that aid.”
“(104) Compliance with the condition relating to the submission of a counterfactual scenario falls within the scope of the verification obligation incumbent on the national authorities in the context of the granting of aid under an aid scheme duly notified to and approved by the Commission.”
“(105) In the present case, the applicants do not dispute that their aid application, which gave rise to the aid granted in 2016 and 2017, did not contain counterfactual scenarios and that such scenarios were submitted only during the formal investigation procedure of 2021, in response to the doubts raised by the Commission in the 2021 decision to initiate the formal investigation procedure.”
“(106) It was therefore possible for the Commission not to take into account the counterfactual scenarios submitted during the formal investigation procedure of 2021, which, in accordance with points 72 and 73 of the 2014 Guidelines, had to be submitted to the national authorities for the purposes of granting individual aid in the context of an aid scheme.”
“(107) Furthermore, it follows from the failure to include counterfactual scenarios in the aid applications that the proportionality of the aid granted was not assessed in the light of the requirements of points 95 to 97 of the 2014 Guidelines, which impose additional conditions applicable to investment aid subject to an individual notification requirement and to investment aid for large enterprises in the context of notified aid schemes.”
“(108) Secondly, it follows from points 72 and 73 of the 2014 Guidelines that the credibility of the counterfactual scenario must be examined prior to the granting of the aid, a condition which is of essential importance in the context of Section 3.4 of those guidelines concerning the presence of an incentive effect. It is inherent in the very requirement to present a counterfactual scenario in the aid application that failure to comply with that requirement renders any counterfactual scenario drawn up subsequently entirely lacking in credibility. Accordingly, the Commission was entitled to consider that the presence of an incentive effect could not, in the present case, be demonstrated by the submission of a counterfactual scenario several years after the aid was granted.”
“(109) Thirdly, the applicants do not dispute that the Czech authorities granted aid to the applicants in 2016 and 2017 under aid schemes whose essential characteristics coincided with those of the aid schemes notified in 2018 and that, de facto, those schemes had resulted in the systemic granting of individual aid to large enterprises, on account of an administrative omission, as described in particular in paragraphs 38 to 43 above.”
“(110) It follows that, in a case such as the present one, the applicants cannot criticise the Commission for having restricted its examination of the compatibility with the internal market of the aid which was granted to them to verification of compliance with the provisions of the 2014 Guidelines concerning the presence of an incentive effect and the proportionality of individual aid granted to large enterprises under an aid scheme. In that regard, it should be noted that any departure from those guidelines is liable, on the one hand, to undermine the effectiveness of the Commission’s State aid control system, one of the fundamental elements of which is the notification requirement laid down in Article 108(3) TFEU.”
“(111) On the other hand, such a derogation would run the risk of being in breach of general principles of law, such as equal treatment in relation to the competitors of large enterprises which received aid in 2016 and 2017, it being noted that undertakings to which aid has been granted may not, in principle, entertain a legitimate expectation that the aid is lawful unless it has been granted in compliance with the procedure laid down in Article 108 TFEU and a diligent business operator should normally be able to determine whether that procedure has been followed”.
“(112) Fourthly, even though the Member States retain the right to notify the Commission of proposed aid which does not meet the requirements laid down in guidelines such as the 2014 Guidelines and the Commission may authorise such proposed aid in exceptional circumstances …, in the present case, the Czech Republic neither requested that the Commission directly apply Article 107(3)(c) TFEU for the purposes of assessing the aid granted to large enterprises prior to the notification of the 2018 aid measures, nor relied in that notification, during the formal investigation procedure, on exceptional circumstances.”
On the basis of the above reasoning, the General Court rejected this plea.
Right to be heard
Before concluding, it is also worth mentioning that the applicants also claimed that their right to be heard was violated and that the Charter of Fundamental Rights was infringed because they were not given an opportunity to challenge the Commission’s analysis.
The General Court, first, recalled that “(75) the procedure for reviewing State aid provided for in Article 108 TFEU is a procedure initiated only against the Member State responsible for granting the aid. Only the Member State concerned, as the addressee of the Commission’s future decision, may rely on true rights of defence. By contrast, the undertakings receiving the aid and their competitors are considered only to be interested parties in the procedure, for the purposes of Article 108(2) TFEU. No special role is reserved to the recipients of aid, among all the interested parties, by any provision. Those recipients cannot rely on rights which are as extensive as the rights of the defence as such and cannot seek to engage in an adversarial debate with the Commission”.
“(76) The parties concerned have, in essence, the role of information sources for the Commission in the procedure for reviewing State aid. It follows that, far from enjoying the same rights of defence as those which individuals against whom a procedure has been instituted are recognised as having, the parties concerned have only the right to be involved in the procedure to the extent appropriate in the light of the circumstances of the case”.
“(77) Moreover, the Charter of Fundamental Rights is not intended to alter the nature of the review of State aid established by the Treaty or to confer on third parties a right of scrutiny which Article 108 TFEU does not provide”.
“(78) In the present case, … the applicants were given the opportunity to submit their comments during the formal investigation procedure.” “(79) Furthermore, …, the Commission responded to those comments [in its decision] and explained the reasons why it considered that the aid in question did not satisfy the conditions relating to the presence of an incentive effect and to proportionality set out in the provisions of the 2014 Guidelines which, in its view, were applicable.”
Since none of the pleas of the applicants was successful, the General Court rejected the action for annulment in its entirety.
[1] The full text of the judgment can be accessed at:
