Indirect Advantage

Indirect Advantage - Untitled design 30

Introduction

It is an established principle in the State aid case law that Article 107(1) TFEU applies both to direct and possibly indirect aid beneficiaries. Yet, it is not always easy to identify any indirect beneficiaries.

On 15 November 2023, the General Court, in case T-167/21, European Gaming and Betting Association v European Commission, faulted the latter for failing to take into account whether indirect beneficiaries could be classified as undertakings and whether the money they received would have to constitute State aid.1

The European Gaming and Betting Association [EGBA] sought the annulment of Commission decision in case SA.44830 concerning the prolongation of gambling licences in the Netherlands. In that decision, the Commission found that no State aid had been granted to gambling operators by the extension of the period of validity of their licences.

In the Netherlands, gambling activities may be carried out only according to a system of exclusive authorisations, or licences. The organisation or promotion of gambling is prohibited unless an administrative authorisation has been issued to that effect.

EGBA is a non-profit association whose members are European online gaming and betting operators. In March 2016, it lodged a complaint with the Commission alleging that unlawful and incompatible State aid had been granted by the Netherlands to six entities operating lotteries and other betting and gambling activities such as sports betting, horse race betting, lotteries and casinos.

After examining the complaint and assessing information it obtained from the Netherlands, the Commission took the view that the extension of the licences of the incumbent operators did not confer an advantage. Therefore, it considered that the contested measure did not constitute State aid within the meaning of Article 107(1) TFEU.

Under Dutch law, the profits of gambling operators are regulated and they are required to channel their revenue to charitable causes. The Commission considered that, if a Member State granted an exclusive right to an economic operator or extended that right and did not allow that right holder to collect more than the minimum return necessary to cover its operational and capital costs from exercising the right, plus a reasonable profit, that measure did not confer an advantage on the beneficiary. In such circumstances, the beneficiary of the exclusive right could not be considered to have enjoyed a benefit that it could not have obtained under normal market conditions.

The Commission found that the licence holders were required to pay all the proceeds of their gambling activities, namely their revenue after deducting the expenditure relating to awarded prizes and reasonable costs, to bodies that serve the common interest and, therefore, those operators could not make a profit or could only make a profit that was not higher than a reasonable profit.

There are two peculiar aspects of the decision of the Commission. First, in a number of other cases involving regulatory activities, the Commission held that when the state acts as a regulator, it does not need to maximise the revenue from regulatory fees, on condition that the policy objective pursued by regulation can be better achieved through lower fees and that regulatory permits or licences are granted on the basis of transparent and objective criteria. What is peculiar in this case is that although the Commission decision referred to the possibility that the Netherlands acted in its regulatory capacity, it did not examine that in any detail and chose instead to focus on the absence of advantage. It seems to me inherent in the granting of exclusive rights that the recipients of such rights enjoy an advantage not available to their competitors and that whether they make only reasonable profit is irrelevant since the exclusive rights enable them to earn profits which are protected from competition. The decisive element is whether the rights are awarded on the basis of objective and transparent criteria. Perhaps, in the case of the Netherlands, they were not.

The other peculiar aspect of the Commission’s decision is that it referred to the case law concerning the Club Loutraki case [T-58/13 and C-131/15 P]. That case was about exclusive rights for the operation of games of chance. Yet, in that case, the Commission examined whether the Greek government acted as a market operator that sought to maximise the revenue from the fee it charged. In the case of Dutch gambling licences, the Dutch government supposedly acted as a regulator that did not aim to maximise its revenue from the licence fees.

Infringement of the procedural rights of interested parties?

EGBA claimed their procedural rights were infringed because the Commission failed to open the formal investigation procedure.

The General Court, first, recalled the relevant case law.

“(29) The lawfulness of a decision not to raise objections, based on Article 4(3) of Regulation No 2015/1589, depends on whether the assessment of the information and evidence which the Commission had available to it during the preliminary examination procedure should

objectively have raised doubts as to the compatibility of an aid measure with the internal market, given that such doubts must lead to the initiation of a formal investigation procedure in which the interested parties referred to in Article 1(h) of that regulation may participate”.

“(30) That obligation is confirmed by Article 4(4) of Regulation 2015/1589, under which the Commission is required to initiate a formal investigation procedure where doubts are raised as to the compatibility with the internal market of the measure in question, without having any discretion in that regard”.

“(31) When an applicant seeks the annulment of a decision not to raise objections, that applicant essentially contests the fact that the Commission adopted the decision in relation to the aid at issue without initiating the formal investigation procedure, thereby infringing the applicant’s procedural rights. In order to have its action for annulment upheld, the applicant may rely on any plea capable of showing that the assessment of the information and evidence which the Commission had available to it during the preliminary examination phase of the measure notified should have raised doubts as to the compatibility of that measure with the internal market. The use of such arguments cannot, however, have the consequence of changing the subject matter of the application or of altering the conditions of its admissibility. On the contrary, the existence of doubts concerning that compatibility is precisely the evidence which must be adduced in order to show that the Commission was required to initiate the formal investigation procedure under Article 108(2) TFEU”.

“(32) Evidence of the existence of doubts as to the compatibility of the aid at issue with the internal market, which requires investigation of both the circumstances in which the decision not to raise objections was adopted and its content, must be adduced by the applicant seeking the annulment of that decision on the basis of a body of consistent evidence”.

“(33) In particular, if the examination carried out by the Commission during the preliminary examination procedure is insufficient or incomplete, this constitutes an indication of the existence of serious difficulties in the assessment of the measure at issue, which should have triggered the Commission’s obligation to initiate the formal investigation procedure”.

“(34) In addition, the lawfulness of a decision not to raise objections at the end of a preliminary examination procedure falls to be assessed by the EU Courts, in the light not only of the information available to the Commission at the time when the decision was adopted, but also of the information which could have been available to the Commission”.

“(35) However, the information which ‘could have been available’ to the Commission includes that which seemed relevant to the assessment to be carried out in accordance with the case-law cited in paragraph 29 above and which could have been obtained, upon request by the Commission, during the administrative procedure”.

“(36) The Commission is required to conduct a diligent and impartial examination of the contested measures, so that it has, when adopting the final decision establishing the existence and, as the case may be, the incompatibility or unlawfulness of the aid, the most complete and reliable information possible for that purpose available to it”.

“(37) However, although the Court of Justice has held that, when the existence and legality of State aid is being examined, it may be necessary for the Commission, where appropriate, to go beyond a mere examination of the facts and points of law brought to its notice, it cannot be inferred from that case-law that it is for the Commission, on its own initiative and in the absence of any evidence to that effect, to seek all information which might be connected with the case before it, even where such information is in the public domain”.

“(38) It follows that the Court’s review of the lawfulness of a decision not to open the formal investigation procedure on account of the absence of serious difficulties will go beyond simple consideration of whether there has been a manifest error of assessment. A decision adopted by the Commission without initiating the formal investigation procedure may be annulled on account of the failure to initiate the inter partes and detailed investigation required under Article 108(2) TFEU, even if it is not established that the Commission’s assessments as to the substance were wrong in law or in fact”.

Existence of an indirect advantage?

EGBA contended that the extension of the licences conferred an indirect advantage to the entities which received money from the gambling operators and that some of those entities may have been undertakings.

The General Court, first, noted that “(44) it is clear from the Netherlands legislation on gambling submitted to the Commission for assessment that part of the proceeds generated by gambling activities had to be remitted, by the licence holders, exclusively to bodies that serve the common interest as designated in the licences. In those circumstances, the Commission could not be unaware of the existence of such an obligation in the Netherlands legislation in question.”

“(45) Moreover, in the contested decision, the Commission based its analysis that there was no advantage for the licence holders specifically on their obligation to remit part of their proceeds to bodies that serve the common interest, … In paragraph 49 of the contested decision, the Commission stated that the granting of special or exclusive rights without adequate remuneration in line with market rates can constitute foregoing State revenues and the conferral of an advantage. In addition, it is apparent from paragraph 54 of the contested decision that, according to the Commission, the fact that the contested measure makes the granting of licences for gambling activities subject to the obligation on those licence holders to remit part of the proceeds of those activities exclusively to bodies that serve the common interest ensures that those licence holders will not collect more than the minimum return necessary to cover their costs, plus a reasonable profit. Therefore, given the obligation on the licence holders to remit part of their proceeds to bodies that serve the common interest, the Commission concluded that the contested measure did not confer an advantage and therefore did not constitute State aid within the meaning of Article 107(1) TFEU”.

“(46) Accordingly, when the contested decision was adopted, the Commission had information on the contested measure available to it which should have led it to examine whether the Netherlands legislation on gambling was designed in such a way as to channel

the proceeds generated by the activity of the licence holders in question towards, primarily, the bodies that serve the common interest designated by those licences.”

“(47) It should be borne in mind that it has previously been held that, when examining a measure, the Commission could have to consider whether an advantage could be regarded as being indirectly granted to operators other than the immediate recipient of the transfer of State resources. In that regard, the EU Courts have also accepted that an advantage granted directly to certain natural or legal persons could constitute an indirect advantage, hence State aid, for other legal persons who were undertakings”.

“(48) In that connection, it must, moreover, be stated that paragraph 115 of the Commission Notice on the notion of State aid specifies that an indirect advantage can be conferred on undertakings other than those to which State resources have been directly transferred. In addition, paragraph 116 of that notice states that the notion of ‘indirect advantage’ covers the situation in which the measure is designed in such a way as to channel its secondary effects towards identifiable undertakings or groups of undertakings. The Commission should therefore have sought to ascertain whether the contested measure conferred an indirect advantage on bodies that serve the common interest.”

“(49) However, the Court can only observe that, despite the fact that the Commission had been informed of that part of the Netherlands legislation on gambling, the contested decision remained silent in that regard.”

“(50) Moreover, regarding the Commission’s argument that, by requiring the licence holders to remit part of their proceeds to bodies that serve the common interest, the Netherlands authorities pursue goals directly related to public policy and public morality, it must be emphasised that, in the contested decision, the Commission failed to examine whether the bodies associated with the contested measure were undertakings or pursued public service objectives.”

“(51) As a result, the Court finds that, for the purposes of adopting the contested decision, the Commission did not examine whether the contested measure conferred an indirect advantage on the bodies to which the licence holders had to remit part of their proceeds. So doing, it excluded, without further details, that that issue could give rise to serious difficulties in the classification of the contested measure as State aid which the formal investigation procedure alone could have resolved. Due to the complete absence of appropriate investigation by the Commission at the preliminary examination stage of whether the contested measure conferred an indirect advantage on those bodies, while the remittance of part of the proceeds generated by the activity of the licence holders to bodies that serve the common interest designated by those licences constituted one of the main features of the legislation at issue, the fact that this issue was not examined in the contested decision does not make it possible to rule out the existence of serious difficulties in that connection.”

On the basis of the above reasoning, the General Court proceeded to annul the Commission decision.

Epilogue

It is unlikely that the Commission will appeal this judgment. It will now have to re-open the case and examine whether the many cultural and sports organisations that received funding from the proceeds of games of chance had in fact engaged in economic activities.

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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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