National Authorities Must Recover Aid they Grant Mistakenly

National Authorities Must Recover Aid they Grant Mistakenly - StateAidHub blogpost12 StateAid food bread eu small

Assurances from granting authorities cannot guarantee the legality of State aid. Aid recipients must verify that the aid is granted correctly.



The Commission must stop its misguided policy of not making public the answers it provides to Member States on questions of interpretation of the General Block Exemption Regulation [GBER]. This is one of the consequences of a recent judgment of the Court of Justice which has ruled that aid recipients have to make sure that aid is granted to them correctly. They cannot rely on the assurances of public authorities.

The main issue that led to that judgment was what public authorities should do when they discover that State aid is incorrectly granted. Indeed, a question that is often asked by public authorities is whether they are obliged under EU law to demand repayment of incompatible State aid, in absence of any Commission decision ordering recovery. For example, if a public authority finds out that an aid recipient received aid by submitting false information or that it misused the aid, should that authority try to seek repayment of the aid. Since aid is granted on the basis of a contract or agreement between the public authority and the beneficiary, a breach of contractual obligations should in principle result in the repayment of aid, without the public authority needing a prior Commission decision to that effect. More broadly, Member States are responsible to implement State aid measures correctly, which implies that they should also demand the repayment of aid that is obtained fraudulently or is misused.

The problem is that only the Commission may declare aid to be compatible or incompatible with the internal market. There is always the possibility that incorrectly received or applied aid may still be found by the Commission to be compatible with the internal market.

Until a few weeks ago, the obligation of granting authorities to seek repayment was not explicitly spelled out in the State aid case law. However, on 5 March 2019, the Court of Justice in case C‑349/17, Eesti Pagar v Ettevõtluse Arendamise Sihtasutus, made abundantly clear the consequences of incorrect granting of State aid.1

Eesti Pagar, an Estonian bread-making company, signed a contract on 28 August 2008 for the purchase of a bread production line. The first instalment was paid on 3 September 2008. On 24 October 2008, Eesti Pagar applied for investment aid. The application was approved by “EAS”, the granting authority, on 10 March 2009. The aid was co-financed by the European Regional Development Fund [ERDF]. After an audit in December 2012, EAS discovered the contract of 28 August 2008 and decided to inform Eesti Pagar on 22 January 2013 that the aid lacked incentive effect and that it had to be repaid. Eesti Pagar challenged the repayment request in a local court and the local court submitted to the Court of Justice several questions on how to interpret the provisions of the then GBER [at that time Regulation 800/2008 was in force].

Interestingly, in its defence, Eesti Pagar argued that it could break the contract for only a small penalty.


Question 1: Existence of incentive effect

The Estonian court asked the Court of Justice to explain Article 8(2) of Regulation 800/2008 and in particular whether it was sufficient that ‘work on the project or activity’ had started through an order for equipment before the submission of an aid application, or whether the cost of withdrawing from the contract had to be taken into account.

The Court first explained that “59 notwithstanding the obligation of prior notification of each measure intended to grant or alter new aid, which is incumbent on the Member States under the Treaties and is one of the fundamental features of the system of monitoring in the field of State aid, if an aid measure adopted by a Member State fulfils the relevant conditions provided for in Regulation No 800/2008, that Member State may rely on its being exempted, as laid down in Article 3 of that regulation, from the notification requirement. Conversely, it is apparent from recital 7 of that regulation that State aid not covered by that regulation should remain subject to the notification requirement laid down in Article 108(3) TFEU”.

“62 Under Article 8(2) of Regulation No 800/2008, aid granted to SMEs, within the scope of that regulation, is to be considered to have an incentive effect if, before work on the project or activity in question has started, the beneficiary has submitted an application for the aid to the Member State concerned.”

“63 In that regard, first, it is clear … that such an application must precede the work on the project at issue in order to ensure that the aid is necessary and acts as an incentive to develop further activities or further projects, and, therefore, to ensure that that regulation should not apply to aid for activities in which the beneficiary would already engage under market conditions alone.”

“66 It is the duty of the national authorities to verify, before granting aid pursuant to that regulation, that the conditions, relating to whether that aid acts as an incentive for SMEs, … are satisfied.”

“67 The role of those authorities is confined to verifying whether the aid application has been submitted before the start of work on the project or activity in question and, for that reason, whether the aid is or is not to be considered to have an incentive effect.”

That is, granting authorities do not have to establish the existence of an actual incentive effect. They only need to verify that the aid application is submitted before the start of the project or activity.

Then the Court turned its attention to the meaning of “start of work” and for this purpose it took into account the Commission’s practice according to which “71 aid may only be granted … if the beneficiary has submitted an application for aid and the authority responsible for administering the scheme has subsequently confirmed in writing … that subject to detailed verification, the project in principle meets the conditions of eligibility laid down by the scheme before the start of the work on the project” and that “72 start of work [means] ‘either the start of construction work or the first firm commitment to order equipment, excluding preliminary feasibility studies’.” The Court stressed that beneficiary had to submit the aid application before entering into “a legally binding commitment” to order any equipment.

With respect to Eesti Pagar’s argument that it could easily withdraw from the contract, the Court made a distinction between a “conditional” contract which is concluded on condition that aid can be obtained in order to fund the project and “76 an unconditional commitment, which must, as a general rule, be considered to be legally binding irrespective of any costs of resiling from the contract.”

Therefore, “77 economic considerations such as those associated with the costs of resiling cannot be taken into account by a national authority when an unconditional and legally binding commitment has been made.”

The Court does not elaborate this point further, but it is quite important. The cost of getting out of a contract is irrelevant, even if the cost is low. This is because the signing of a binding [i.e. unconditional] contract reveals that the partners intend to undertake the project without aid.

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Question 2: Obligation to recover unlawful aid

The referring Estonian court asked whether the granting authority had to recover on its own initiative aid that it had incorrectly granted on the basis of the GBER.

The Court of Justice reiterated that “86 only if an aid measure adopted by a Member State fulfils the relevant conditions provided for in Regulation No 800/2008 may that Member State rely on its being exempted, …, from the notification requirement, and conversely, State aid not covered by that regulation is to remain subject to the notification requirement laid down in Article 108(3) TFEU.” “87 It follows that, …, the granting of that aid was in breach of the notification requirement and must, therefore, be considered to be unlawful.”

“88 The prohibition on implementation of planned aid laid down in the last sentence of Article 108(3) TFEU has direct effect and that the immediate enforceability of the prohibition on implementation referred to in that provision extends to all aid which has been implemented without being notified”.

“89 It is the task of the national courts to ensure that all appropriate action, in accordance with their national law, to address the consequences of an infringement of the last sentence of Article 108(3) TFEU, particularly as regards both the validity of measures giving effect to the aid and the recovery of financial support granted in disregard of that provision, the essence of their task being, consequently, to adopt the appropriate measures to cure the unlawfulness of implementation of the aid, so that the aid does not remain freely available to the beneficiary until such time as the Commission’s decision is made”.

“90 Any provision of EU law that satisfies the conditions required to have direct effect is binding on all the authorities of the Member States, that is to say, not merely the national courts but also all administrative bodies, including decentralised authorities, and those authorities are required to apply”.

“92 It follows that, where a national authority finds that aid which it has granted pursuant to Regulation No 800/2008 does not satisfy the conditions laid down to qualify for the exemption provided for by that regulation, it is the duty of that authority, mutatis mutandis, to comply with the same obligations as those referred to in paragraph 89 of the present judgment, including that of recovering on its own initiative the aid that was unlawfully granted.”

It is clear, therefore, that the issue at hand is not the incompatibility of the aid, which requires a prior Commission decision, but the illegality of the aid – i.e. its non-notification – which can be remedied through its recovery.

“94 As regard the legal basis for such recovery, … Article 108(3) TFEU obliges the national authorities to recover on their own initiative aid which they have unlawfully granted, including where Regulation No 800/2008 has been misapplied. Those considerations are equally applicable to aid that is co-financed from a structural fund”.


Question 3: Protection of legitimate expectations

Next, the Estonian court asked whether Eesti Pagar could have entertained legitimate expectations about the legality of the aid that had been granted to it by a decision of a national authority. The reply of the Court of Justice should give a cause for concern to all aid recipients.

“97 The right to rely on the principle of the protection of legitimate expectations presupposes that precise, unconditional and consistent assurances originating from authorised, reliable sources have been given to the person concerned by the competent authorities of the European Union.”

“98 Undertakings to which aid has been granted may not, in principle, entertain a legitimate expectation that the aid is lawful unless it has been granted in compliance with the procedure laid down in [Article 108], and furthermore, an economic operator exercising due care should normally be able to determine whether that procedure has been followed. In particular, where aid is implemented without prior notification to the Commission, with the result that it is unlawful under Article 108(3) TFEU, the recipient of the aid cannot have at that time a legitimate expectation that its grant is lawful”.

Then the Court stressed that “99 only if an aid measure adopted by a Member State satisfies the relevant conditions laid down by Regulation No 800/2008 is that Member State exempted from its obligation to notify aid and that, conversely, the granting of aid pursuant to that regulation, although the conditions laid down for eligibility with respect to that regulation were not satisfied, was a breach of the notification requirement, and such aid must be considered to be unlawful.”

The Court went on to reiterate that “101 a national authority granting aid pursuant to Regulation No 800/2008 cannot be regarded as being vested with the power to adopt a final decision finding that there is no obligation to notify the aid applied for to the Commission, under Article 108(3) TFEU.”

“103 It follows, second, that, where a national authority grants aid while misapplying Regulation No 800/2008, its doing so is an infringement of both the provisions of that regulation and of Article 108(3) TFEU.”

“104 The principle of the protection of legitimate expectations cannot be relied upon against an unambiguous provision of EU law; nor can the conduct of a national authority responsible for applying EU law, which acts in breach of that law, give rise to a legitimate expectation on the part of an economic operator of beneficial treatment contrary to EU law”.

“105 It follows that it can be immediately ruled out that, in a situation such as that in the main proceedings, a national authority, such as EAS, could have caused a beneficiary of aid wrongly granted pursuant to Regulation No 800/2008, such as Eesti Pagar, to hold a legitimate expectation that that aid was lawful.”

The implication of this conclusion of the Court is that assurances by national authorities are worthless. Undertakings receiving aid must first verify that it is granted either after approval by the Commission or in full compliance with a bloc exemption regulation. They must also check that the granting authority has interpreted correctly the provisions of such a block exemption regulation. If the granting authority misinterprets or misapplies the provisions of the regulation, by definition it would not be aware of its mistake, unless it is intentional which is a different matter altogether. Inevitably, the granting authority would not by itself notify the aid to the Commission. Consequently, an aid recipient has to check that the granting authority has acted correctly. In order for the aid recipient to be able to do that, it must have a pretty good knowledge of the regulation and its interpretation by the Commission.


Question 4: Limitation period applicable to the recovery of illegal aid

The Commission can order recovery of incompatible aid that was granted up to ten years earlier. This 10-year period is interrupted whenever the Commission asks the granting Member State for information relating to the aid measure or transmits to that Member State its concerns about the aid. In this connection, the Estonian court asked whether the same limitation period could be applied to recovery of illegal [i.e. non-notified] aid by national authorities.

The Court of Justice first noted that because of absence of EU legislation on the recovery procedure, illegal or unlawful aid had to be recovered according to national law.

The Court also noted that the 10-year limitation period stipulated in the EU’s procedural regulation could not be applied by analogy to national authorities.

Since in this particular case, the aid was co-financed by EU structural funds, the Court observed that the then structural fund regulation laid down a period of four years for the correction of irregularities resulting from mistakes of the granting authorities and also of the aid recipients.

At this point, the Court stressed again that “120 it is primarily the duty of the applicant for aid to ensure that it satisfies the conditions laid down by Regulation No 800/2008 so that it can qualify for aid that is exempted under that regulation, and consequently the granting of aid that is contrary to those conditions cannot be regarded as being exclusively the result of an error committed by the national authority concerned.”

“121 The same is true where that authority has been informed by the beneficiary of the aid at issue of circumstances that entail the infringement of a provision of EU law; that does not, in itself, have any effect on the classification of an ‘irregularity’”.

“122 Further, the definition of an ‘irregularity’, …, also covers intentional irregularities or irregularities arising out of negligence”.

On the basis of the above reasoning, the Court of Justice concluded that “128 where a national authority has granted aid from a structural fund while misapplying Regulation No 800/2008, the limitation period applicable to the recovery of the unlawful aid is, …, four years, … or, [if the relevant structural fund regulation is not applicable], the period laid down by the applicable national law.”

In this particular case, the Court of Justice pointed out that the limitation period started to run on 10 March 1999 when the aid was granted and was interrupted by the letter of the granting authority of 22 January 2013. The period from March 2009 to January 2013 was shorter than four years so Eesti Pagar cannot avoid repayment of the aid.


Question 5: The rate of interest for recovery

When the Commission orders recovery of incompatible aid, it also instructs the Member State concerned to charge interest. The rate of interest that is used to determine the present value of aid amounts granted several years earlier is the base rate for the Member State in question plus 1%. The Estonian court asked whether interest should also be charged on illegal aid recovered by national authorities and whether the same formula should be used to determine the applicable rate of interest.

Because the purpose of recovery is to remove the illegal advantage enjoyed by the aid recipient, the Court concluded that “132 from the aid recipient’s point of view, the undue advantage will also have consisted in the non-payment of the interest which it would have paid on the aid amount in question, had it had to borrow that amount on the market during the period of the unlawfulness, and in the improvement of its competitive position as against the other operators in the market while the unlawfulness lasts”.

“134 A national authority is therefore bound, under Article 108(3) TFEU, to order the beneficiary of the aid to pay interest in respect of the period of unlawfulness”.

With regard to the appropriate rate of interest, the Court of Justice rejected the idea that the formula used by the Commission could be applied by analogy to aid recovered by national authorities.

“141 In this case, …, while unlawful aid must be recovered in accordance with the rules of the applicable national law, the fact remains that Article 108(3) TFEU requires those rules to ensure full recovery of the unlawful aid and that, therefore, the beneficiary of that aid must be ordered to pay, inter alia, interest for the whole of the period over which it benefited from that aid and at a rate equivalent to that which would have been applied if the beneficiary had had to borrow the amount of the aid at issue on the market within that period.

This conclusion of the Court of Justice results in more punitive consequences for recipients of illegal aid. This is because the recovery rate used by the Commission [base rate + 1%] is likely to be much lower than the rate a company pays when it borrows money from a bank, as the risk premium charged by banks would in most cases exceed 1%. A quick glance at the Commission’s 2008 communication on reference and recovery rates shows that only companies with credit rating AAA and BBB with normal to high collateral pay less than 1% risk premium. The majority of companies in Europe would have to pay more than 1%. Illegal aid can seriously damage the health of a company.


1 The full text of the judgment can be accessed at:



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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