Another Case of Indirect State Aid

Another Case of Indirect State Aid - State Aid Uncovered photos 4

Introduction

On 19 May 2021, the General Court, in case T-643/20, Ryanair v Commission, annulled Commission decision SA.57116 by which it authorised State aid in favour of KLM in the context of the measures implemented by the Dutch government to address the covid-19 pandemic. In July 2021, the Commission re-adopted its original decision without the errors that had been identified by the General Court.

On 20 December 2023, the General Court in two related cases, T-216/21, Ryanair and Malta Air v Commission and T-494/21, Ryanair and Malta Air v Commission, annulled the corresponding Commission decisions of 2020 by which it authorised State aid for Air France and for the Air France-KLM holding, respectively, also in the context of measures implemented by the French government to address the covid-19 pandemic.

On 7 February 2024, the General Court, in case T-146/22, Ryanair v Commission, annulled again Commission decision SA.57116 as was corrected in July 2021.1

The main reason was that the Commission authorised Dutch aid that could also indirectly benefit Air France and the Air France-KLM holding. Therefore, it failed to ensure the necessity and proportionality of the aid.

The Air France-KLM group and Air France were not excluded from the scope of the beneficiaries of the aid measure

Ryanair challenged the Commission’s assessment of the direct and indirect beneficiaries.

The General Court, first, recalled that “(54) several separate legal entities may be considered to form one economic unit for the purposes of the application of the rules on State aid. In that field, the question whether several legally separate entities form an economic unit arises, in particular, where the beneficiary of the aid needs to be identified”.

“(55) Among the factors taken into account by the case-law in order to determine the presence or absence of an economic unit in the field of State aid are, inter alia: the undertaking concerned being part of a group of companies which is directly or indirectly controlled by one of those companies, the pursuit of identical or parallel economic activities, and the companies concerned having no economic autonomy […]; the formation of a single group controlled by one entity, despite the constitution of new companies each having a separate legal personality […]; the possibility, for an entity having a controlling shareholding in another company, to exercise functions relating to control, direction and financial support in relation to that company which go beyond the simple placing of capital by an investor, and the existence of organic, functional and economic links between that entity and that company […]; the existence of relevant contractual clauses”.

“(56) Furthermore, the type of aid measure granted, any commitments made by the Member State concerned and the context in which that measure was granted may, depending on the case, also constitute relevant factors for determining the presence or absence of an economic unit in the field of State aid.”

In addition, the General Court observed that “(58) the Commission recognised in paragraph 11 of the Notice on the notion of State aid that several separate legal entities may be considered to form one economic unit for the purposes of the application of State aid rules. To that end, according to that paragraph, it is necessary to take into consideration the existence of a controlling share and the existence of other functional, economic and organic links.”

On the basis of the above criteria, the General Court examined the links between KLM, the direct aid recipient, and Air France and the Air France-KLM holding, the potential indirect recipients, and concluded that the latter could also benefit from the aid. The reasoning of the Court was very much the same as in cases T-216/21 and T-494/21. So, there is no need to repeat it here. Please see the separate article on these cases [].

Difference between a direct or indirect advantage and mere secondary economic effects

The Commission, in its defence, argued that the aid measure at issue had, at most, only mere secondary economic effects.

The General Court pointed out that “(150) an undertaking receiving an indirect advantage must be regarded as a beneficiary of the aid. An advantage directly granted to certain natural or legal persons may constitute an indirect advantage and, therefore, State aid for other legal persons that are undertakings.”

“(151) Moreover, according to paragraph 115 of the Notice on the notion of State aid, a ‘measure can also constitute both a direct advantage to the recipient undertaking and an indirect advantage to other undertakings, for instance, undertakings operating at subsequent levels of activity’. Footnote 179 to that notice states that, in case an intermediary undertaking is a mere vehicle for transferring the advantage to the beneficiary and it does not retain any advantage, it should not normally be considered as a recipient of State aid.”

“(152) Paragraph 116 of the Notice on the notion of State aid further states that indirect advantages should be distinguished from mere secondary economic effects that are inherent in almost all State aid measures. For that purpose, according to that paragraph, the foreseeable effects of the measure should be examined from an ex ante point of view. Thus, an indirect advantage is present if the measure is designed in such a way as to channel its secondary effects ‘towards identifiable undertakings or groups of undertakings’. Footnote 181 to that notice explains that, by contrast, a mere secondary economic effect in the form of increased output, which does not amount to indirect aid, can be found where the aid is simply channelled through an undertaking, for example through a financial intermediary, which passes it on in full to the aid beneficiary.”

“(153) In the present case, it is apparent […] that the role of the Air France-KLM holding is not limited to that of a ‘mere vehicle for transferring the advantage to the beneficiary’ or to a ‘financial intermediary’ for the purposes of paragraphs 115 and 116 of the Notice on the notion of State aid. That holding company actually exercises control over its subsidiaries by involving itself directly or indirectly in their management and thus takes part in the economic activity they pursue, for the purposes of the case-law cited in paragraphs 66 and 67 above, which enables it to control and direct the activities of its subsidiaries on the basis of its own interests and those of the group in general. The Commission’s argument that the Air France-KLM holding and Air France benefit only from mere secondary economic effects that are inherent in any State aid must therefore be rejected.”

“(154) Similarly, the foreseeable effects of the measure at issue from an ex ante perspective suggest, in view of the type of aid measure granted and the context in which it was granted, consisting, in essence, of a financing solution, that that financing solution was likely to benefit the Air France-KLM group as a whole, by improving its overall financial position, which indicates the existence, at the very least, of an indirect advantage in favour of ‘[an] identifiable [group] of undertakings’ for the purposes of paragraph 116 of the Notice on the notion of State aid.”

“(155) It is apparent in particular from recital 13 of the contested decision that, in view of the significant and immediate financial impact of the COVID-19 pandemic, the Kingdom of the Netherlands decided to assist KLM at a time of severe liquidity shortage and risk of failure. Thus, since the objective of the measure at issue is to find a financing solution in order to meet KLM’s liquidity needs and since it is apparent from the documents before the Court that the Air France-KLM holding plays a certain role in financing the Air France-KLM group, that measure would have the foreseeable ex ante effects of (i) improving the financial situation of that holding company – which is a party to the framework agreement and has significant contractual rights and obligations in that capacity – and thus of the group as a whole, and (ii) ensuring the financial stability – including in the eyes of the financial markets – of that group as a whole, including Air France.”

“(156) Furthermore, […], in the absence of the measure at issue, the immediate threat to the continuity of KLM’s activities, identified in the contested decision, could have spread to the Air France-KLM group as a whole, given that KLM is one of the main subsidiaries of that group, generating a significant portion of its revenue.”

“(157) That finding is not called into question by the order of 21 January 2016, Alcoa Trasformazioni v Commission (C-604/14 P, not published, EU:C:2016:54), cited by the Commission in support of its argument that, when calculating the amount of aid, it does not examine the secondary effects of the aid on consumers, suppliers, investors or employees of the beneficiary. First, as the applicant submits, the case which gave rise to that order did not concern an intra-group situation. Secondly, […], the present case does not concern the secondary economic effects of an aid measure on consumers, suppliers, investors or employees.”

“(158) Accordingly, the Commission’s argument that the measure at issue has, at most, merely secondary economic effects vis-à-vis the Air France-KLM holding and its other subsidiaries, including Air France and its subsidiaries, must be rejected.”

Was the aid necessary and proportional?

Having found that the aid measure in question had indirect effects, the General Court proceeded to examine its compatibility with the internal market. The Commission had authorised the aid on the basis of Article 107(3)(b).

“(160) Article 107(3)(b) TFEU requires not only that the Member State concerned is indeed faced with a serious disturbance in its economy, but also that the aid measures adopted to remedy that disturbance are, first, necessary for that purpose and, secondly, appropriate and proportionate for achieving that objective.”

“(161) In addition, and more specifically, in accordance with paragraph 25(d)(i) of the Temporary Framework, State aid in the form of new public guarantees on loans is considered to be compatible with the internal market on the basis of Article 107(3)(b) TFEU provided that, for loans with a maturity beyond 31 December 2020, their total amount per beneficiary is not more than double the annual wage bill of the beneficiary for 2019, or for the last year available. The same threshold applies to State aid in the form of subsidies to public loans, in accordance with paragraph 27(d) of that framework”.

“(162) Thus, the examination of the necessity and proportionality of the aid, in general, and of compliance with the conditions cited by way of example in paragraph 161 above, in particular, presupposes that the beneficiary of the aid has been identified beforehand. The incorrect or incomplete identification of the beneficiary of an aid measure is likely to have an impact on the entire analysis of the compatibility of that measure with the internal market.”

For these above reasons, the General Court concluded that the Commission decision had to be annulled.

The General Court also added that “(164) as regards the possibility for Member States to grant State aid to companies belonging to a group of companies active in a number of Member States, it should be noted, for all practical purposes, that the Member States and the EU institutions are bound by reciprocal duties of sincere cooperation, in accordance with Article 4(3) TEU. The Commission and the Member States must therefore work together in good faith with a view to ensuring full compliance with the provisions of the FEU Treaty, in particular the provisions on State aid […] That duty of sincere cooperation and of coordination is all the

more necessary where different Member States intend to grant aid simultaneously to entities belonging to the same group of companies which operates in a coordinated manner in the internal market in order to derive full benefit therefrom.”

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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