Introduction
Eu law does not prohibit states from owning or investing in companies [see Article 345 TFEU]. This means that when the state, as owner, makes payments to the companies it owns or loses part of its capital as a result of commercial losses, it does not grant to them State aid if such payments are mandated by law and the law applies uniformly to all owners. An important distinction has to be made in this context between mandated payments and discretionary payments.
However, discretionary payments by the state to its own companies may constitute State aid if they confer an abnormal advantage. This is the case when they are not in line with the market economy investor principle [MEIP].
In decision 2025/906 that was published in the Official Journal on 22 May 2025, the Commission had to distinguish between compulsory and discretionary payments.[1] In that decision, the Commission investigated the financial support provided to “WestSpiel”, a German casino, in 2009-2015. The support consisted of coverage of annual losses in 2009-2015 and a capital injection in 2015. WestSpiel operated in North Rhine Westphalia and until 2021 was 100% owned by NRW.BANK which itself was 100% owned by the Land of North Rhine Westphalia [NRW]. Afterwards, WestSpiel was sold to a private operator.
In its assessment, the Commission found that the coverage of annual losses was not State aid. First, it established that the loss coverage was mandatory under the relevant German law. Second, it confirmed that a private investor would have acted in the same way as NRW.BANK. However, the capital injection would not have been undertaken by a private investor and, therefore, it constituted State aid. In the same decision, the Commission concluded that the aid was incompatible with the internal market and had to be recovered.
Presence of State aid
1) Annual losses
The Commission took the view that “(99) the annual loss coverage does not confer an advantage to WestSpiel due to two lines of reasoning, as WestSpiel merely consumed its own capital when it was following its obligation under German company law […] and as a comparable private investor would have acted in the same manner and therefore the measure was granted at normal market conditions”.
“(101) WestSpiel would actually never have received direct compensation for its losses from NRW.BANK as its sole limited partner but in reality only consumed its equity capital (which was contributed in 1978 and 2002) to compensate its accumulated losses; i.e. there were no direct payments from NRW.BANK. Germany instead refers to the mechanism of offsetting losses through the automatic deduction from the partnership’s capital account under German company law.”
“(102) The Commission takes the view that the annual loss coverage did not confer an advantage to WestSpiel, as it did not involve any transfer of funds from outside of the company and constituted a pure legal automatism to offset WestSpiel’s losses within its own accounts according to an obligation under German company law.”
“(103) The share of the annual losses of NRW.BANK as sole limited partner of WestSpiel was deducted from the already existing equity capital of the company and did not require any contribution of new capital from outside of the company. Due to this pure legal automatism, the State was also not at all involved in the process and an active decision on granting annual loss coverage was not taken.”
Behaviour of a private investor
The Commission also considered that “(106) a private investor under comparable circumstances would not have chosen one of the alternative scenarios, the liquidation or the sale of WestSpiel (counterfactual scenarios) over the granting of the annual loss coverage (factual scenario), as the latter constitutes the most rational scenario. WestSpiel would have received the same economic benefit under normal market conditions and […] the annual loss coverage did not confer an advantage to WestSpiel.”
Next the Commission explained why neither liquidation, nor sale of WestSpiel would have been a preferable option over the coverage of operating losses.
Counterfactual scenario 1: Liquidation of WestSpiel
In essence, the Commission found that NRW.BANK could not have saved its original capital contribution into WestSpiel had it liquidated the company. This is because the liquidation value of WestSpiel would have been negative [i.e. its liabilities exceeded its assets] and, therefore, it was economically irrational.
“(109) The compensation for a large number of liabilities to third parties, including significant pension liabilities, contract termination costs (e.g. employment and rental contracts) and the liquidation of fixed and current asset items, would have had to be taken into account and would have led to significant reductions in WestSpiel’s book values.”
“(113) In particular, the relation between liabilities and capital during the period from 2009 to 2015 depicted in these documents would have led to a negative liquidation value of WestSpiel: According to the annual account for the business year 2009, the total amount of WestSpiel’s liabilities was at EUR 25,3 million and the company’s capital amounted to EUR 27,9 million. Then, from the business year 2010 on, the amount of liabilities (at EUR 22,7 million) exceeded WestSpiel’s capital (at EUR 22,1 million) and the situation remained unchanged in the years until 2015. Therefore, at this time, after satisfying its creditors […], WestSpiel would have indeed shown a negative liquidation value”.
Counterfactual scenario 2: Sale of WestSpiel
“(120) The Commission confirms […] that at no point in time throughout the years 2009 to 2015 WestSpiel would have been an attractive investment for a theoretical buyer, due to its continuous net losses and to the occurring struggles with legislative challenges at national level.”
Apparently, changes in the German legislation introduced higher taxes on gaming revenue, bans on smoking in casinos and stricter admission rules. In addition, onsite casinos were negatively affected by the growth of online gambling. In light of these changes which made casino ownership less attractive commercially, the Commission considered that the factual scenario chosen by NRW.BANK was the most reasonable approach by a shareholder.
“(128) Therefore, […], the Commission concludes that the alleged annual loss coverage did not confer an economic advantage on WestSpiel, since such payments were only consuming WestSpiel’s own capital […] and given that NRW.BANK behaved in an economically rational way when deciding to maintain its capital contribution in WestSpiel, in the sense that it made economic sense not to sell at loss but rather to wait for better times (even if it may have meant to – possibly – continue incurring losses, i.e. seeing WestSpiel’s capital reduced even to a larger extent) when it could compensate this capital consumption by selling WestSpiel at a profit.”
The Commission found that a rational private investor would not have sold the company because the value of WestSpiel was negative at any point in the period 2009-2015. However, a private investor would also be motivated to sell to avoid larger losses. On this point the Commission merely stated, rather unconvincingly that “(125) in general, annual loss coverage by shareholders is also common practice in companies”. The automatic coverage of annual losses was mandated by German law. But there was no obligation on NRW.BANK not to sell WestSpiel. The Commission did not examine how reasonable it was for NRW.BANK to “wait for better times”.
Then the Commission turned its attention to the 2015 capital injection of EUR 65 million.
2) Capital injection
Before the Commission examined whether the capital injection conferred an advantage to WestSpiel, it assessed whether it could be imputed to the state.
“(141) In cases where a public authority grants an advantage to a beneficiary, the measure is by definition imputable to the State. Imputability is less evident, however, if the advantage is granted through public undertakings. In such cases, it is necessary to determine whether the public authorities can be regarded as having been involved, in one way or another, in adopting the measure. The mere fact that a measure is taken by a public undertaking is not per se sufficient to consider it imputable to the State. Therefore, the imputability to the State of a measure taken by a public undertaking may be inferred from a set of indicators arising from the circumstances of the case and the context in which the measure was taken”.
“(144) As regards the imputability of the measure, the Commission notes that the decision to inject capital was taken by NRW […] the Commission notes that: (i) NRW.BANK is the promotional bank of NRW, whose mission is to support its owner – NRW – in the completion of its structural and economic policy tasks; (ii) NRW is the guarantor of NRW.BANK; and (iii) the governing bodies, in particular the Board of Guarantors and the supervisory body, are composed for the most part of persons holding public office.”
“(145) The Commission notes that:
- NRW is the guarantor and sole shareholder of NRW.BANK. […]
- BANK disposes of a Board of Guarantors where NRW exercises its rights within its legal empowerment and as owner of NRW.BANK, and exercises its voting rights through two representatives. Other members of the Board of Guarantors are the minister of economic affairs of NRW, the minister of finance of NRW and the minister for housing of NRW as well as members ex officio.
- With regard to the Administrative Board of NRW.BANK, […], as the supervisory body of NRW.BANK, it is its role to monitor the management carried out by the Executive Board and to appoint and remove the members of the Executive Board. In 2015, the Administrative Board consisted of 15 members in total, of which 7 members, and hence the majority [sic], were delegated by NRW as the guarantor of NRW.BANK.
- Moreover, NRW.BANK is additionally supervised by the State”.
“(146) In light of the indicators presented above, the Commission takes note that through its role as sole guarantor of NRW.BANK, exercising voting rights through its ministers in the Board of Guarantors and having delegated the majority of the members of the supervisory body, which controls the actions of the Executive Board of NRW.BANK, NRW and thus the State exercised a decisive influence over NRW.BANK and on the decisions taken within its corporate bodies at the time when the capital was injected into WestSpiel in 2015. Therefore, the Commission notes that the capital injection can also be regarded as being imputable to the State.”
With respect to the presence of advantage, “(155) The Commission considers that Germany did not have elements, which could establish that through the capital injection, NRW would have generated – from an ex ante perspective – an additional return on capital which it would not have generated in the absence of the injection.”
Nonetheless, the Commission proceeded to examine whether the capital injection satisfied the market economy investor principle [MEIP].
The Commission thought that “(168) the liquidation or sale of the business or the possibility not to act at all would still have been preferable to the capital injection. Notably, WestSpiel’s annual accounts have to be evaluated from a different perspective for the capital injection and for the annual loss coverage, as the situations are not comparable:
- Firstly, a reasonable private investor would not have injected additional capital in order to strengthen a business if already significant investments in the past (the annual loss coverage since 2009) have not shown any positive outcome in the financial situation of the business. […] the situation of WestSpiel did not improve due to the annual loss coverage […] A reasonable investor would therefore not have injected additional capital by taking the risk of even higher financial losses and would have instead immediately proceeded with the liquidation or the sale of the business.
- Secondly, the annual loss coverage constituted a purely passive behaviour by a shareholder which required no specific action or active decision, as the process whereby shareholders of a limited partnership offset losses from the equity capital follows from an obligation under German company law […] On the contrary, the decision to inject new capital is an active decision and not due to a pure legal automatism.
- Thirdly, even if the Commission argues for the loss coverage that it can be understandable for a shareholder who has undertaken a significant investment (the initial capital contribution) and accepted losses in a business over a long time to refrain from the liquidation or sale of the company […] this does not apply to the capital injection. The Commission takes the view that this argument cannot apply for an unlimited time and to an unlimited amount of losses made by a business, as this would lead to the possibility for an investor to make an initial investment in a business and to then accept losses or undertake additional payments without being obliged to assess the profitability and rationality of the continuous investment ever again.
- Fourthly, the Commission takes note of the rather positive forecast of WestSpiel’s financial situation for the period from 2021 to 2023 when a change from a negative to a positive payment balance was expected […] Nevertheless, it would not have been acceptable for a comparable private investor to refrain from a liquidation or sale in 2015 (when the capital injection took place) and to wait until the forecasted improvement of the company’s financial situation. The time span between 2015 and 2021 is still very long and it would not be reasonable to ask a shareholder to defer an urgent and necessary decision for six more years. In particular, the additional losses that the shareholder would have probably incurred during these years have to be taken into account as well as the economic and financial uncertainty, seen that the forecast still predicts a negative payment balance of WestSpiel until the final turning point in 2021. In any case, the reasonable alternative to a sale or liquidation in 2015 would not have been the capital injection, for the reasons presented above, but just the mere possibility for a shareholder not to act at all and to accept additional annual loss coverage under the automatism in the HGB, as already practised in the years beforehand.”
“(169) Therefore, on the basis of the arguments presented in the assessment of the specific counterfactual scenarios, the Commission concludes that a comparable private investor would have chosen to liquidate or sell the business or not to act at all instead of taking another investment by even injecting additional capital into an overall loss-making undertaking, risking to lose, in addition to the remaining capital at stake, also the newly injected amounts.”
The reasoning of the Commission on the capital injection seems robust. However, it undermines the credibility of its reasoning on the coverage of annual losses. Yes, the relevant law required that losses had to be covered by the owner – NRW.BANK – but the law did not obliged NRW.BANK to remain owner and continue sustaining losses.
Compensation for structural disadvantage?
Germany argued that the 2015 capital injection would not have provided an advantage to WestSpiel and therefore would not constitute State aid because it would have compensated the latter for its structural disadvantage of being taxed higher than its private competitors. Germany’s argument was based on a 20-year judgment of the General Court [T-157/01, Danske Busvognmænd v Commission (Combus), paragraph 57].
The Commission rejected that argument. It pointed out that “(177) in the more recent Orange judgment [C-211/15 P, Orange v Commission, paragraphs 22-34], the Court of Justice clarified that while the compensation for a structural disadvantage can be compatible with the internal market, in certain circumstances, it still represents State aid. More specifically, the Court clarified in paragraph 44 of the judgment that, except for cases of services of general economic interest falling under the Altmark criteria, an economic advantage granted through State resources is to be considered as State aid if all the other conditions of existence of aid are fulfilled.”
Since gambling was not an SGEI and all the other conditions of Article 107(1) TFEU were found to be satisfied, the Commission concluded that the capital injection constituted State aid. It then proceeded to assess the compatibility of the aid with the internal market.
Non-compatibility, recovery and indemnity clause
The Commission concluded that, given the operating nature of the aid, it was incompatible with the internal market. It also found that the aid did not comply with the conditions of the Rescue and Restructuring Guidelines. Therefore, it ordered Germany to recover the aid.
The Commission also issued a warning to Germany concerning an indemnity clause.
“(209) The Commission observes that WestSpiel’s Sale and Purchase Agreement entails provisions which amount to an indemnity clause against State aid recovery claims that is capped at EUR 30 […] The Commission recalls that it is settled case-law that such clauses may be qualified as separate State aid measures per se, and the exercise of such clauses may be qualified as a circumvention of the recovery of unlawful and incompatible State aid. The Commission highlights that the beneficiary of the clause is also the beneficiary of the aid.”
“(210) Allowing a Member State to grant aid equivalent to that of the unlawful aid, intended to neutralise the impact of the recovery which the beneficiaries are obliged to make, would clearly amount to thwarting the effectiveness of decisions taken by the Commission.”
“(211) After the present Decision becomes final, [it will trigger] the indemnity clause, obliging the State to pay to WestSpiel the same amount it has recovered capped at EUR 30 million. The implementation of such a clause would constitute a circumvention of the recovery of unlawful and incompatible State aid as found by the present Decision because it will not lead to effective recovery in form of the restitution of the situation which existed on the market before the aid was paid, which is contrary to its purpose.”
[1] The full text of the decision can be accessed at:
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202500906
