A New Temporary State aid Framework to Fight the Effects of the Corona Virus

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Member States will be allowed to provide grants, guarantees and loans to companies to alleviate the effects of the corona virus.

Introduction

At the end of 2009, the European Commission adopted a Temporary Framework of State aid rules to enable Member States to support companies that were harmed by the outbreak of the financial crisis in 2008.

Now, the corona virus covid-19 has prompted the Commission to draft a new Temporary Framework to combat the economic effects of the pandemic. The purpose of the Framework is to allow Member States to grant both operating and investment aid under harmonised rules in order to avoid excessive cross-border distortions.

In fact, the Commission has already approved the first measure to address the impact of covid-19, which was adopted by Denmark and which aimed to compensate businesses for the abrupt cancellation of various events.

DG Competition of the Commission has set up a special website on measures for dealing with the fallout from the covid-19 pandemic (View it here: https://ec.europa.eu/competition/state_aid/what_is_new/covid_19.html).

The site contains, as of 20 March 2020, the following:

  • The Temporary Framework,
  • A document entitled “COVID-19: Commission sets out European coordinated response to counter the economic impact of the Coronavirus”,
  • A statement by Executive Vice-President Margrethe Vestager on a draft proposal for a State aid Temporary Framework to support the economy in the context of the COVID-19 outbreak,
  • A document with “information that should be provided for notifications of aid under Article 107(2)(b) – exceptional occurrence”,
  • A diagram explaining “how Member States can provide liquidity support”,
  • And, a PDF file of the first measure authorised by the Commission: SA.56685, compensation scheme for cancellation of events related to COVID-19, notified by Denmark.

This article first explains what Member States may do within the context of the normal rules in response to an emergency, then outlines the main features of aid measures intended to make good the damage caused by a natural disaster or exceptional occurrence and then it reviews the provisions of the new Temporary Framework.

Response to emergencies: Options of Member States

Past practice suggests that in response to emergencies, Member States may grant State aid in compliance with two different legal bases:

Article 107(2)(b): Aid intended to make good the damage caused by a natural disaster or exceptional occurrence. Epidemics and other wide-spread contaminations have been considered to be exceptional occurrences [e.g. foot & mouth disease, bovine spongiform encephalitis, dioxin contamination of animal feed].

Article 107(3)(b): Aid intended to remedy a serious disturbance in the economy. The previous Temporary Framework, 2009-2011, for the support of the real economy and the measures in favour of the financial sector that were adopted after the outbreak of the financial crisis in 2008 were based on this Treaty provision.

Covid-19 qualifies as an exceptional occurrence. The rules on the classification of an event as an exceptional occurrence are:

  1. the event must be unforeseeable or difficult to foresee;
  2. it must have a significant scale/economic impact; and
  3. it must be extraordinary, i.e. differ markedly from the conditions under which the market normally operates.

For aid to make good the damage of an exceptional occurrence,

  1. there must be a direct causal link between the aid granted and the damage suffered by each beneficiary [being in the same sector or region as other harmed companies is not enough];
  2. it must be limited to the cost of the damage [up to 100% aid intensity is allowed];
  3. any insurance pay-out must be deducted from the cost of the damage and the amount of compensation.

In the longer term, Article 107(3)(c) may also be used to support the development of economic activities that are particularly hit by adverse economic events. The difference with Articles 107(2)(b) and 107(3)(b) is that under Article 107(3)(c) the aid must in principle support investment while the other two legal bases above allow also aid to fund operating expenses.

Commission Communication on “coordinated economic response to the COVID-19 outbreak”, COM(2020) 112 final, 13 March 2020[1]

The Commission Communication of 13 March 2020 deals with a number of issues such as the economic impact of the pandemic, disruption in medical supplies, restrictive measures that Member States may adopt, establishment of new support instruments at EU level with the use of guarantees from the EU budget and mobilisation of structural funds. It also includes a part that is dedicated to State aid.

Section 5, pp. 8-9, and Annex III of the Communication outline the various measures that Member States may adopt and the procedure they should follow. The Commission outlines several options for Member States.

Type of support measures

General measures which do not contain State aid: Member States can decide to take measures applicable to all companies [e.g.  “wage subsidies and suspension of payments of corporate and value added taxes or social contributions”].

Assistance to consumers which do not contain State aid: Member States can grant financial support directly to consumers [e.g. subsidies for “cancelled services or tickets that are not reimbursed by the operators concerned”].

Measures based on Article 107(3)(c) TFEU: Member States may implement schemes “to meet acute liquidity needs and support companies facing bankruptcy”.

Measures based on Article 107(2)(b) TFEU: Member States may compensate companies for the damage suffered in exceptional circumstances [e.g. compensation of “companies in sectors that have been particularly hard hit (e.g. transport, tourism and hospitality)” and compensation of “organisers of cancelled events for damages suffered due to the outbreak”].

Measures based on Article 107(3)(b): Since this kind of aid may be granted only in response to a serious disturbance that affects the entire economy, it appears that the Commission considers that only in Italy is “the impact of the COVID-19 outbreak […] of [such] nature and scale that allows the use of Article 107(3)(b) TFEU”. “In reaching this conclusion, the Commission has considered a series of indicators, including but not limited to the expected contraction of GDP, the stringent public measures imposed, including prohibition of events, school closures, circulation restrictions, the constraints on the public health system, as well as flight cancellations and travel restrictions imposed by other countries.” The Commission further clarified that its “assessment for the use of Article 107(3)(b) for other Member States will take a similar approach of the impact of the COVID-19 outbreak on their respective economies.”

Measures based on existing rules such as, for example, the de minimis Regulation and the General Block Exemption Regulation.

In addition, the Commission stated that “aid granted by Member States to banks under Article 107(2)(b) TFEU to compensate for direct damage suffered as a result of the COVID-19 outbreak […] does not have the objective to preserve or restore the viability, liquidity or solvency of an institution or entity. As a result, the aid would not be qualified as extraordinary public financial support.” [p. 6]


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Commission Communication on a “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak”, C(2020) 1863 final, 19 March 2020[2]

Main points

Member States will be able to:

  1. set up schemes to direct grants or selective tax advantages up to €800,000 to a company for urgent liquidity needs;
  2. give state guarantees, at subsidised premiums, for bank loans taken by SMEs and non-SMEs for investment and working capital, subject to certain maximum amounts;
  3. enable public and private loans with subsidised interest rates.
  4. In addition, the new Temporary Framework will facilitate the channelling of aid to SMEs and other customers via banks without such aid being considered as aid to the banks themselves.

The Temporary Framework is divided into five sections as follows:

Section 1 reviews the economic impact of covid-19 and the need for state intervention and outlines the various State aid options available to Member States.

Section 2 explains the applicability of Article 107(3)(b).

Section 3 presents the new State aid options for Member States.

Section 4 lays down procedures for monitoring and reporting.

Section 5 contains final provisions.

Section 1: Need for coordinated intervention

The Temporary Framework acknowledges the exceptional and unforeseen nature of covid-19 which implies that even healthy companies with large reserves have been harmed by it. It also stresses the need for coordination of national counter-measures to avoid excessive cross-border distortions that can disrupt trade more than it has already been affected by the break down in value chains and the restrictive measures on travel.

It then explains the various existing options for Member States which are very much those that are outlined in the Communication on the coordinated economic response to covid-19. However, the Framework provides more details on certain important issues.

With respect to the use of Article 107(2)(b) and companies in difficulty, it clarifies that

“15. Furthermore, on the basis of Article 107(2)(b) TFEU Member States can also compensate undertakings in sectors that have been particularly hit by the outbreak (e.g. transport, tourism, culture, hospitality and retail) and/or organisers of cancelled events for damages suffered due to and directly caused by the outbreak. Member States can notify such damage compensation measures and the Commission will assess them directly under Article 107(2)(b) TFEU. The principle of ‘one time last time’ of the Rescue and Restructuring Guidelines does not cover aid that the Commission declares compatible under Article 107(2)(b) TFEU, since the latter type of aid is not “rescue aid, restructuring aid or temporary restructuring support” within the meaning of point 71 of the Rescue and Restructuring Guidelines. Therefore, Member States may compensate under Article 107(2)(b) TFEU the damages directly caused by the COVID-19 outbreak to undertakings that have received aid under the Rescue and Restructuring Guidelines.”

[Point 71 of the R&R Guidelines requires Member States to indicate whether the aid recipient received rescue or restructuring aid in the previous 10-year period. If that is the case, then the Commission does not authorise additional rescue or restructuring aid.]

Section 2: Use of Article 107(3)(b) to remedy a serious disturbance in the economy of a Member State

A disturbance is serious when it is of significant magnitude and affects the whole of the economy of a Member State.

[In paragraph 17, the Temporary Framework also mentions “or an important part” of a Member State. I am not aware of any judgment of the Court of Justice or the General Court that refers to “an important part” of the economy. In the Commission’s decisional practice it appears that only one case of aid to an important part of the economy has been approved on the basis of Article 107(3)(b). In decision 2018/1040, “the Commission recall[ed] that the exceptional economic crisis the Greek economy is facing, […], in combination with the railway sector’s vital role to the Greek economy, justifies the exceptional use of Article 107(3)(b) of the Treaty.”]

State aid on the basis of Article 107(3)(b) may be granted “for a limited period, to remedy the liquidity shortage faced by undertakings and ensure that the disruptions caused by the COVID-19 outbreak do not undermine their viability, especially of SMEs.” [point 18]

Member States must demonstrate that State aid is necessary, appropriate and proportionate to remedy the serious disturbance or disruptions. [point 19]

Section 3: New measures

3.1 Aid in form of direct grants, repayable advances or tax advantages

Aid is compatible with the internal market under Article 107(3)(b) TFEU on the following conditions:

  1. The gross amount of the aid does not exceed EUR 800,000 per undertaking [direct grants, repayable advances, tax or payments advantages] or EUR 120,000 per fisheries undertaking or EUR 100,000 per agricultural undertaking.
  2. The aid is granted in the context of a scheme with a budget.
  3. Beneficiary undertakings must have not been in difficulty on 31 December 2019.
  4. The aid is granted before 31 December 2020.
  5. Undertakings processing and marketing agricultural products may not pass the aid to primary producers.

3.2 Aid in the form of guarantees on loans

Aid to improve liquidity in the form of new public guarantees on loans is compatible with the internal market under Article 107(3)(b) TFEU on the following conditions:

  1. The guarantee is granted before 31 December 2020.
  2. The guarantee may be granted for both investment and working capital loans.
  3. The minimum level of the guarantee premium varies from 25bp to 100bp for SMEs and from 50bp to 200bp for large enterprises, depending on the maturity of the loan [1-6 years].
  4. Alternatively, schemes may use above ranges as a basis, but with different maturity, pricing and guarantee coverage.
  5. The guarantee may not exceed six years and may not cover more that 90% of the loan principal where losses are sustained proportionally and under same conditions, by the credit institution and the state or 35% of the loan principal, where losses are first attributed to the state and only then to the credit institution.
  6. For loans that mature after 31 December 2020, certain thresholds apply with respect to the amount of the loan principal in relation to the wage bill or turnover of the beneficiary undertaking. For loans that mature before 31 December 2020, a higher amount is allowed.
  7. Beneficiary undertakings must not have been in difficulty on 31 December 2019.

3.3 Aid in the form of subsidised interest rates for loans

Aid in the form of subsidies to public loans is compatible with the internal market under Article 107(3)(b) TFEU on the following conditions:

  1. The loans may be both for investment and working capital.
  2. The minimum rate of interest must at least be equal to the base rate on 1 January 2020 plus a risk margin varying from 25bp to 100bp for SMEs and from 50bp to 200bp for large enterprises, depending on the maturity of the loan [1-6 years].
  3. Alternatively, schemes may use above ranges as a basis, but with different maturity, pricing and guarantee coverage.
  4. The loan contracts are signed by 31 December 2020 and are limited to maximum six years.
  5. For loans which mature after 31 December 2020, certain thresholds apply with respect to the amount of the loan in relation to the wage bill or turnover of the beneficiary undertaking. For loans which mature before 31 December 2020, a higher amount is allowed.
  6. Beneficiary undertakings must not have been in difficulty on 31 December 2019.
  7. This kind of aid may not be cumulated with aid for guarantees.

3.4 Aid in the form of guarantees and loans channelled through financial institutions

The Temporary Framework clarifies that although such aid may provide indirect benefits to financial institutions, the Commission considers that it would not be qualified as “extraordinary public financial support” according to Article 2(1) of the Directive 2014/59 on Bank Recovery and Resolution and Article 3(1) of Regulation 806/2014 establishing the Single Resolution Mechanism. Therefore, it would not lead to resolution or liquidation of banks that may derive indirect benefits.

Nonetheless, the Temporary Framework introduces safeguards to minimise any indirect aid. For this reason, banks are expected to pass on as much as possible the advantages of the public guarantees or subsidised interest rates on loans to the final beneficiaries through higher volumes of financing, riskier portfolios, lower collateral requirements, lower guarantee premiums or lower interest rates.

3.5 Short-term export credit insurance

This option applies only to “non-marketable” risks.

Section 4: Monitoring and reporting

Member States must publish relevant information on each individual aid granted within 12 months from the moment of the granting, submit annual reports to the Commission and keep detailed records.

Section 5: Final provisions: Application and period of validity

The Temporary Framework will remain in force from 19 March 2020 until 31 December 2020.

First approved measure: SA.56685 on compensation for cancellation of events related to COVID-19[3]

As mentioned earlier, Denmark is the first Member State to have State aid authorised for the purpose of ameliorating the fallout from covid-19. A number of other Member States have also notified similar measures, but they are still not approved.

The Danish measure provides compensation for income loss and additional costs caused by the cancellation of events that were planned for March 2020.

The aid was approved on the basis of Article 107(2)(b) rather than Article 107(3)(b) probably because until very recently the Commission considered that only Italy had suffered a serious disturbance that affected its entire economy [see Communication of 13 March 2020, p.9].

———————————

[1] The full text of the Communication can be accessed at:

https://ec.europa.eu/commission/presscorner/detail/en/ip_20_459.

[2] The full text of the Temporary Framework can be accessed at:

https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_temporary-framework.pdf.

[3] The full text of the Commission decision can be accessed at:

https://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_56685

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