I. Vouchers for SMEs II. Funding of Aid with Revenue from Levies Imposed on the Aid Beneficiaries

I. Vouchers for SMEs II. Funding of Aid with Revenue from Levies Imposed on the Aid Beneficiaries - State Aid Uncovered SM posts 4

State aid rules apply both to direct and indirect beneficiaries of aid.

Introduction

This week’s article reviews a Commission decision and a judgment of the Court of Justice. The Commission decision concerns Italian vouchers for SMEs to pay for the use of fast broadband services. The judgment deals with a German measure supporting milk quality tests.

In both cases an important issue was whether undertakings derived any advantage. Additionally, in the German case a question put to the Court was whether the Commission had to identify all of the sources of funding of the aid.

  1. Vouchers to SMEs: SA.57496[1]

Italy designed a measure consisting of vouchers that were to be offered to SMEs. The vouchers could be redeemed for broadband services. The measure aimed to facilitate transition to the digital economy. There was no doubt that the recipients of the vouchers would benefit from State aid.

The Commission also considered that the operators of the eligible broadband networks also benefited from State aid. Accordingly, “(68) an advantage, within the meaning of Article 107(1) TFEU, is any economic benefit which an undertaking could not have obtained under normal market conditions, that is to say in the absence of State intervention.”

“(69) The Measure confers an economic advantage to the eligible SMEs and to the electronic communications services providers of eligible NGA broadband services, under conditions that would not be available under normal market conditions […] The Measure reduces the costs for the eligible SMEs, by lowering their costs for the subscription to NGA broadband services. Also, the Measure confers an advantage to eligible electronic communications services providers, by allowing them to strengthen their market position and offer services to a larger number of customers.”

After finding that the measure constitute State aid, the Commission assessed its compatibility. In the end, it concluded that the positive effects of the aid outweighed the negative effects that, at any rate, were minimised.

“(103) The Italian authorities have demonstrated that the Measure will provide positive effects on the supported economic activities compared with what would have happened without the aid. In particular, the Measure will facilitate access of SMEs to eligible NGA broadband services which are necessary in the modern society and the digital economy.”

“(104) The Italian authorities have demonstrated that the negative effects are limited to the minimum necessary. The Italian authorities have designed the Measure in such a way as to minimise the potential distortion of competition arising from it. […] the Measure is designed to avoid that specific electronic communications services providers might disproportionality benefit from its implementation. Furthermore, based on the wholesale access obligations in place, every electronic communications services providers will be in the position to offer the eligible services.”

“(105) The overall impact of the Measure on competition is deemed to be positive. The negative effects on competition, if any, would be very limited.”

“(106) In light of the above, the positive impact of the Measure outweighs any potential negative effects on competition and trade.”

  1. Milk quality tests

Public funding of the cost of quality requirements imposed by law or safety standards defined by law confers an “abnormal” advantage that constitutes State aid, if all of the other criteria of Article 107(1) TFEU are satisfied. The fact that undertakings incur costs to comply with such requirements or standards is irrelevant. The cost of compliance is part of their normal cost of operation and any state intervention that offsets normal costs confers an advantage.

The applicability of Article 107(1) becomes less clear when undertakings themselves contribute to the funds which are used to offset the cost of compliance with legal requirements. What is not in doubt is that the revenue raised from a compulsory levy becomes a state resource. It follows that the decisive issue is whether the undertakings that pay the levy derive an advantage if they receive an equivalent amount of money to offset the cost of compliance. This, of course, is a hypothetical situation because it would be pointless for a public authority to impose a levy and then return all of the revenue from the levy back to those that paid it in the first place. The reason why a public authority would implement such a circuitous arrangement is because those who pay are not necessarily the same as those who benefit and those who benefit may receive more money than what they pay.

The Court of Justice had opportunity to rule on such a measure on 10 March 2022 in joined cases C-167/19 P, European Commission v Freistaat Bayern and C-171/19 P, European Commission v Interessengemeinschaft privater Milchverarbeiter Bayerns and others.[2]

In both cases the European Commission appealed against the judgments of the General Court of 12 December 2018, T-683/15, Freistaat Bayern v European Commission and T-722/15 to T-724/15, Milchverarbeiter Bayerns and others v European Commission. The applicants at first instance had sought the annulment of Commission decision 2015/2432 concerning State aid granted by Germany in respect of milk quality tests required by law.

The relevant German law empowered the Länder, to apply levies on dairies, milk collection centres and creameries to generate revenue to support the dairy sector.

The levy was imposed on dairy operators in respect of the quantities of raw milk delivered to them. Furthermore, the buyers of milk were obliged to test that milk or to have it tested. The revenue generated by the levy could be used only to finance certain activities such as promoting and preserving milk quality. In this case, tests were carried out by testing centres whose costs were defrayed by revenue from the levy.

After a formal investigation, the European Commission concluded that the levy and the use of the revenue to support milk quality tests constituted indirect State aid to dairy producers and milk users who were relieved from the obligation to carry out the tests themselves. Moreover, the aid was compatible with the internal market only pursuant to rules that were applicable before 2007. Aid granted after 2007 was incompatible with the internal market and had to be recovered.

Subsequently, the General Court annulled the Commission decision on the grounds that the Commission did not provide sufficient explanation of its reasoning and that, by failing to do so, it violated the rights of interested parties to express their views on all aspects of the aid measure during the formal investigation procedure.

The issue of contention was whether the Commission had identified correctly the method of financing of the milk tests in its opening decision.

Sources of funding

The Commission contended that the General Court was wrong to hold that the Commission decision opening the formal investigation procedure did not specify sufficiently the method by which the milk tests were financed.

The Court of Justice, first, recalled that for a public measure to constitute State aid, the advantage “(54) must, on the one hand, be granted directly or indirectly through State resources and, on the other hand, be attributable to the State […] In that regard, contrary to what the Commission maintains, in order to determine whether such is the case, the payment of an amount to the beneficiaries of an aid measure and the method of financing that measure cannot be dissociated”.

“(55) Consequently, the method of financing, in so far as it falls within the conditions governing the classification of ‘State aid’, for the purposes of Article 107(1) TFEU, is a relevant issue, within the meaning of the first sentence of Article 6(1) of Regulation No 659/1999 and, […], must, as such, be identified in the opening decision.”

“(57) An incomplete summary of the relevant issues of fact and law does not in fact enable the interested parties to submit their comments on the grounds which led the Commission to initiate the formal investigation procedure and, consequently, ensure the effectiveness of Article 108(2) TFEU.”

The Court of Justice went on to rule that the General Court did not err when it held that, in the absence of a summary in the opening decision of the financing of the milk test by resources from the general budget of the Land of Bavaria, the Commission failed to provide a sufficient explanation.

According to the Court, “(79) only the financing by means of the milk levy was expressly mentioned in the opening decision, […] [while] the financing by means of the general budget of the Land of Bavaria had not been expressly mentioned in that decision.”

The Court concluded that the Commission was “(80) required to define sufficiently the framework of its investigation so as not to render meaningless the right of interested parties to submit their comments. It is thus apparent […] that the financing by means of resources from the general budget of the Land of Bavaria should have been expressly mentioned in the opening decision.”

For this reason it went on to reject the appeals of the Commission.

Conclusion

Both the General Court and the Court of Justice annulled the decision of the Commission on procedural grounds. It is not yet known whether the Commission will re-open the case. Therefore, the question that remains is whether the German measure contained State aid. Germany’s view was that it did not.

It is worth recalling the Commission’s main findings and reasoning. Dairies and milk users derived an advantage because they were relieved from the cost of carrying out compulsory tests. This advantage was not necessarily offset by the levies they paid because there was no one-to-one correspondence between the amount of levies paid by each liable payer and the cost of the tests that were carried out by testing centres on their behalf. The testing centres were not recipients of State aid because they were only remunerated for services they rendered.


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

Draft Decision.docx (europa.eu)

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

CURIA – Documents (europa.eu)


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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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