Presumed v Actual Compatibility of State aid with the Internal Market

Presumed v Actual Compatibility of State aid with the Internal Market - StateAidHub blogpost36 GBER BMW

State aid granted on the basis of the GBER may not be considered as authorised by the Commission. The task of Member States is to ensure that all of the requirements of the GBER are fulfilled. In particular, Member States must confirm the incentive effect of aid to large enterprises.

Introduction[1]
 
In March 2019, the Court of Justice delivered a powerful message to aid recipients in its “Eesti Pagar” [C-349/17] judgment: The assurances of national authorities are worthless. To be more precise, the Court said that assurances by national authorities do not create reasonable expectations as to the lawfulness of State aid.It follows that undertakings need to ensure that the granting authorities apply the relevant rules correctly.The “Eesti Pagar” judgment strengthens the self-enforcing aspect of the EU State aid control system. Undertakings have to check whether national authorities understand and implement correctly the General Block Exemption Regulation [GBER], which is the pillar of the decentralised State aid system. In this respect, the judgment exposed the folly of the European Commission which still insists not to make public the guidance it provides to national authorities on the interpretation of the GBER. It undermines its own objective of making national authorities more responsible because it weakens the oversight that can be exercised by those who stand to lose from incorrect implementation of the GBER – the aid recipients themselves.On 29 July 2019, the Court of Justice, in its judgment in case C-654/17 P, BMW v European Commission, delivered another powerful message, this time to national authorities: They may not use the GBER to avoid the consequences of individual assessment of State aid.[2]The gist of the case is rather simple. The individual notification threshold of regional aid was in that case EUR 22.5 million [the aid ceiling for the region in question was 30% which implied a notification threshold of EUR 22.5 million = (EUR 50 million x 30%) + (EUR 50 million x 30% x 50%) = EUR 15 million + EUR 7.5 million = EUR 22.5 million]. The aid that was proposed to be granted by Germany was EUR 45.3 million. The Commission approved aid of only EUR 17 million. BMW argued that had Germany kept the aid just below EUR 22.5 million, it would not have to notify it and BMW would have been able to receive legally, on the basis of the GBER, an additional EUR 5.5 million!The Court rejected that argument because, even on the basis of the GBER, Germany would still have to assess the need for aid, just like the Commission did, and would not be at liberty to grant more than was strictly necessary.The “BMW” judgment dealt with the previous GBER [Regulation 800/2008]. The then GBER required confirmation of the incentive effect of all State aid granted to large enterprises. The important question that arises in relation to the current GBER [Regulation 651/2014] is whether Member States are still under the same obligation to check the incentive effect of the aid, given that the current GBER requires such checks only in the case of ad hoc aid. I will return to this question at the end of this article.

Background

BMW appealed against the judgment of the General Court in case T-671/14, BMW v European Commission. In that judgment, the General Court upheld Commission decision 2016/632 which, as explained above, prohibited part of the State aid that Germany proposed to grant to BMW for a new plant in Leipzig.

BMW chose to build a new plant to produce the i3 and i8 models in Leipzig instead of Munich. The whole project was EUR 392 million and the foreseen amount of aid was EUR 45.3 million resulting in an aid intensity of about 12%. The Commission allowed only part of the aid [i.e. EUR 17 million] because it had concluded that the additional aid that Germany was willing to grant [i.e. EUR 28.3 million] lacked incentive effect. That is, it considered that the difference in costs between Leipzig and Munich was only EUR 17 million.

In this case, the Court of Justice also had to deal with complex procedural issues, counter-appeals and the admissibility of intervention in support of BMW by the Land of Saxony [Freistaat Sachsen]. This article does not deal with those issues.

Distortion of competition and the balancing of the positive and negative effects of State aid

BMW argued that the Commission applied incorrectly Article 107(3) TFEU because it failed to examine the extent of distortion of competition. Even the full amount of the aid would not cause excessive distortion of competition.

The Court of Justice, first, noted in paragraphs 75-76 of its judgment that the General Court took into account the Commission Communication of 2009 on the assessment of regional aid granted to large investment projects [LIPs]. The General Court found that only EUR 17 million had an incentive effect and was proportional [which was the difference between the cost of investment in Leipzig and Munich (the alternative investment site)] and that it dismissed BMW’s complaint that the Commission had failed to examine the existence of a distortion of competition. According to the General Court, the Commission could presume that the amount exceeding EUR 17 million would have a negative effect due to the distortion of competition and that, in line with the 2009 Communication, the Commission was obliged to balance the positive and negative effects of State aid only after finding that the aid was necessary.

Then the Court of Justice reiterated that the Commission has exclusive competence in assessing the compatibility of aid with the internal market and that it enjoys wide discretion whose exercise involves complex economic and social analysis. In exercising that discretion, the Commission may adopt guidelines from which it may not deviate as it would violate the principles of equal treatment and reasonable expectations. [paragraphs 79-82]

The Court noted, in agreement with BMW’s views, that the Commission could not waive, by means of the guidelines, the exercise of the discretion conferred on it by Article 107(3) TFEU. Accordingly, the adoption of guidelines [in this case the 2009 Communication on LIPs] did not relieve the Commission of its obligation to examine the specific exceptional circumstances that a Member State invokes when it requests the direct application of Article 107(3) TFEU. [paragraph 83]

As may be recalled, according to the judgments in case C-526/14, Kotnik [which concerned the bail-in of bank investors and creditors in Slovenia] and case C-431/14 P, Greece v Commission [which concerned aid to farmers affected by the financial crisis] Member States may always request the Commission to assess an aid measure directly on the basis of the Treaty if they can demonstrate that the measure falls outside the relevant guidelines, which implies that exceptional conditions apply to the aid.

However, the Court went on to point out that neither BMW, nor Freistaat Sachsen showed that Germany had invoked specific circumstances justifying the direct application of Article 107(3) TFEU to this case. [paragraph 84] The Court also found that the General Court was correct in considering that there was no need for the Commission to examine the balance between the positive and negative effects of State aid for the amount of aid that was not necessary and therefore not proportional for the objective it sought to achieve. For aid to be proportional it must be kept to the minimum of what is necessary for the investment to take place. [paragraphs 85-87]

In other words, the Court of Justice said that even if the positive effects from the total amount of the intended aid [i.e. EUR 45.3 million] could in theory outweigh the negative effects, the aid still had to be limited to what was the minimum amount necessary [i.e. EUR 17 million].

Then in paragraph 88, the Court of Justice made a neat statement. The condition relating to the incentive effect of the aid coincides with the condition of the proportionality of the aid, since the amount of the aid that is considered to satisfy the latter condition corresponds precisely to the amount required as an incentive effect.

The Court also stressed that aid which exceeds the amount necessary for an investment to be made in an assisted region cannot be declared compatible with the internal market just because it does not have negative effects on competition. [paragraph 89]

This is an important statement. Regardless of the actual impact on competition, Member States may not grant unnecessary aid.

Nonetheless, since the aid in question did not satisfy the principle of proportionality, the Commission could infer that it distorted competition [unfortunately the Court does not say whether this kind of distortion is excessive or unnecessary or intolerable or contrary to the common interest]. [paragraph 90] Furthermore, the Commission was not required, for the purpose of assessing the compatibility of the aid, to define the relevant market and to determine the position held by BMW on that market [in order to establish whether competition would be distorted]. [paragraph 91]

In a nutshell, unnecessary aid is never compatible with the internal market, regardless of its actual impact on competition. The assessment of the impact on competition and the balancing between the positives and negatives are carried out only in relation to necessary aid.

Perhaps a comment is in order at this point. EU courts have referred to the “balancing” that must be carried out by the Commission in a number of recent judgments [e.g. Oresund bridge, Fehmarn Belt, Hinkley Point C]. I am not aware of any case where the Commission found the aid to be necessary and proportional, but concluded that the negative effects outweighed the positives. In fact, the Commission has stated the opposite in a several case: that if the aid is necessary and proportional, the negative effects are presumed to be minimised and that, in compliance with Article 107(3)(c), the “aid does not adversely affect trading conditions to an extent contrary to the common interest”. When an aid measure contains elements which are not strictly necessary for the achievement of a given public policy objective, they can be considered as unnecessary distortions of competition [just like unnecessary restrictions in the case of Article 101(3)] and will not be approved by the Commission. Therefore, the question arises whether any balancing is needed at all if the aid is necessary and proportional and is granted without any superfluous restrictions or discriminatory provisions? Or, to put it in different words, can aid that is necessary and proportional for the achievement of a legitimate public policy objective ever be contrary to the common interest?

There seem to be two such categories of measures. First, some guidelines such as the regional aid guidelines consider aid measures with “manifest negative effects” [e.g. anti-cohesion effects caused by induced relocation] as in principle incompatible with the internal market. For example, regardless of its necessity and proportionality, aid that incentivises relocation from a less prosperous region is presumed to result in an overall negative balance.

Second, Commission authorisation of restructuring aid and of aid to financial institutions has been in most cases conditional. The aid recipients must reduce their market profile and operations so as to minimise the impact of the aid on competition. Even when the aid is necessary and the amount is proportional, beneficiary undertakings are expected to “compensate” competitors for the aid they receive. The extent of such compensatory measures very much depends on the discretion of the Commission and its assessment of the strength of competition in the market. Without compensatory measures, the overall balance is not positive.

On the basis of these two categories of measures [and there are many individual cases that fall in these two categories] we may infer that in reality what the Commission calls balancing is not actual balancing. Unnecessary and/or disproportional aid and aid accompanied with unnecessary restrictions is always incompatible and no balancing is required. Balancing is another word for the Commission’s “trimming” of aid measures to remove features or elements that harm competitors. This balancing encompasses what may be thought of as “concessions” that aid granting authorities and aid receiving undertakings need to make in order to compensate other Member States and undertakings. Therefore, in reality balancing is a third criterion that is used in some instances to reduce the negative impact of State aid.


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Could the aid have been granted on the basis of the GBER?

BMW claimed that the General Court and the Commission committed errors because the Commission was not entitled to conclude that aid exceeding EUR 17 million was incompatible with the internal market, given that the individual notification threshold laid down in Article 6(2) of the then GBER [Regulation 800/2008] for regional aid granted to large investment projects was EUR 22.5 million which was higher than the approved amount of EUR 17 million.

BMW argued that State aid should always be considered compatible as long as it remains below the threshold triggering the notification requirement, so that the granting Member State should have the opportunity to grant aid amounts up to that threshold. Otherwise, there is discrimination in favour of aid recipients for whom the aid is not notified and who can receive aid up to the threshold. BMW also contended that by adopting the GBER, the Commission transferred responsibility to Member States to assess the compatibility of aid up to the notification threshold.

Article 6(2) of Regulation 800/2008 stipulated the following: “Regional investment aid awarded in favour of large investment projects shall be notified to the Commission if the total amount of aid from all sources exceeds 75% of the maximum amount of aid an investment with eligible costs of EUR 100 million could receive, applying the standard aid threshold in force for large enterprises in the approved regional aid map on the date the aid is to be granted.”

On the basis of the calculation of the threshold, as defined in Article 6(2) [EUR 100 million x 30% x 75%] [which is equivalent to the calculation presented earlier], the trigger for individual notification in this case was EUR 22.5 million, as already mentioned. BMW claimed that Germany could have granted an additional EUR 5.5 million, had it chosen to use the then GBER.

The Court of Justice rejected BMW’s arguments. It first observed that Member States are obliged by Article 108(3) TFEU and Article 2 of the Procedural Regulation [now Regulation 2015/1589] to notify all new aid to the Commission. However, this obligation is waived only when an aid measure fulfils the relevant conditions of the GBER. State aid not covered by the GBER remains subject to the notification requirement. [paragraph 128]

Then it pointed out that in this case it was clear that the aid exceeded the relevant threshold for individual notification under Article 6(2) of the then GBER and that, for this reason alone, it was excluded from the scope of that Regulation. [paragraph 129]

Since the aid measure in question was notified by Germany, it fell within the exclusive competence of the Commission to assess its compatibility. [paragraphs 131-132] Contrary to BMW’s claim, the Commission did not, by adopting Regulation 800/2008, transfer to Member States its competence to assess the compatibility of State aid whose amount did not exceed the individual notification threshold in Article 6(2) of that Regulation. [paragraph 133]

With Regulation 800/2008, the Commission exercised in advance the powers conferred to it by Article 107(3)(c) with respect to aid that fulfils all conditions of that Regulation. [paragraph 135]

When an application for State aid is submitted to a public authority, that public authority only has to verify whether the requested aid fulfils all the conditions of the Regulation. [paragraph 137] In other words, granting authorities do not assess the compatibility of the aid with the internal market, they only assess its conformity with the GBER. It is only when the aid fully complies with the Regulation that Member States are relieved of the obligation to notify it. If it is not fully compliant, then it is illegal. [paragraphs 138]

By adopting Regulation 800/2008, the Commission conferred no power of final decision to national authorities regarding the extent of the exemption from the notification obligation. Those authorities are at the same level [“même plan” in the French version of the judgment. It is not clear what “same level” means here] as the aid beneficiaries and must ensure that their decisions are in conformity with the Regulation. Consequently, when a national authority grants aid by wrongly applying Regulation 800/2008, it does so in violation of the provisions of the Regulation regarding notification. [paragraphs 142-143]

The Court of Justice stressed that where a Member State considers that aid meets the conditions laid down in Regulation 800/2008, that aid has at most a presumption of compatibility with the internal market [“présomption de compatibilité avec le marché intérieur”]. The conformity of such aid with those conditions can be called into question both before a national court or a national authority and before the Commission. [paragraph 144] In other words, the opinion of the granting authority is not definitive. The competitors of an aid recipient can challenge the legality of the aid – i.e. the correctness of the implementation of the GBER by the granting – before a national court.

At this point, the Court recalled that it is impossible for a national authority to create legitimate expectations for the recipient of aid that the aid is lawful when in fact it is wrongly granted on the basis of incorrect implementation of Regulation 800/2008. Indeed, given the mandatory nature of the Commission’s review of State aid under Article 108 TFEU, undertakings receiving aid cannot, in principle, have a legitimate expectation of the legality of the aid, unless it has been granted in accordance with the procedure laid down in that Article. [paragraph 145]

This is an important statement the consequence of which is rather self-evident. Aid recipients cannot rely on the assurances of granting authorities. They must form their own opinion as to the legality of the aid they receive and in order to do that, they need to have sufficient State aid expertise of their own.

Regulation 800/2008 does not affect the exclusive competence of the Commission to assess the compatibility of aid granted under that Regulation. The Commission alone has the right to declare such aid compatible with the internal market, regardless of whether the amount of aid exceeds or not the individual notification threshold in Article 6(2) of that Regulation. [paragraph 146]

Regulation 800/2008 provides that aid that fulfils its conditions is compatible with the internal market. However, it cannot be inferred that such aid is authorised as existing aid or as aid  authorised by the Commission. National authorities check the conformity of the aid with the Regulation but cannot decide on its compatibility with the internal market. Therefore, whenever a Member State considers that aid meets the conditions laid down in Regulation 800/2008, the aid cannot be considered, by that fact alone, authorised by the Commission as compatible aid with the internal market. Only a decision adopted by the Commission under Article 107(3) TFEU, pursuant to Article 7(3) of Regulation 659/1999, after assessment of the aid can constitute such an authorisation. [paragraphs 147-153]

Consequently, the fact that the amount of aid falls below the threshold for individual notification cannot confer any right to a company to receive such aid. [paragraph 154]

Indeed, the provision that the amount of the aid not exceeding that threshold is exempt from notification and is compatible with the internal market is purely procedural in nature, and in no way does it reflect an assessment by the Commission under Article 107(3) TFEU regarding the compatibility of the aid with the internal market and the necessity of the aid. [paragraph 155]

It follows that aid, not exceeding the threshold for individual notification, not only could not be equated to an existing aid authorised by the Commission, but, moreover, it could not be considered compatible with the internal market unless it fulfilled all of the substantive conditions of Regulation 800/2008 and especially the incentive effect in Article 8(3)(e) of that Regulation. [paragraph 158]

Assessment of the compatibility of the whole amount of aid

The Court of Justice concluded that aid in excess of the individual notification threshold had to be assessed for its entire amount, including the part that did not exceed the threshold, as “new aid” in the meaning of Article 1(c) of Regulation 659/1999. In those circumstances, the compatibility of the aid in question with the internal market had to be assessed, as regards the whole of its amount, in the context of an individual notification on the basis of the Commission guidelines. [paragraphs 160-161]

Then the Court acknowledged, in agreement with BMW’s counter-argument, that the substantive criteria set out in Regulation 800/2008 also had to be taken into account for the assessment of the compatibility of aid in the context of an individual notification. If a Member State notifies to the Commission aid that complies with the conditions laid down in Regulation 800/2008, the Commission is obliged to approve the aid. [paragraph 164]

But the Court went on to reject BMW’s counter-argument because the assessment of the compatibility of aid with the internal market in this particular case did not vary according to whether it took place on the basis Regulation 800/2008 or the 2009 Communication. BMW could not receive a larger amount of aid under the Regulation than what could be authorised by the Commission in the context of an individual notification. [paragraph 165]

For regional investment aid to be declared compatible with Article 107(3), it must be necessary for the investment and the achievement of the objectives of Article 107(3). Consequently, in accordance with Article 107(3) TFEU, the requirements relating to the incentive effect and proportionality of the aid in points 21, 22, 25 and 33 of the 2009 Communication corresponded, in essence, to the condition concerning the incentive effect of the aid contained in Article 8(3)(e) of Regulation 800/2008. [paragraphs 166-167]

These are the relevant provisions of Article 8 of Regulation 800/2008:

“(3) Aid granted to large enterprises, covered by this Regulation, shall be considered to have an incentive effect if, in addition to fulfilling the condition laid down in paragraph 2, the Member State has verified, before granting the individual aid concerned, that documentation prepared by the beneficiary establishes one or more of the following criteria, …

(e) as regards regional investment aid referred to in Article 13, that the project would not have been carried out as such in the assisted region concerned in the absence of the aid.”

The Court of Justice concluded that the necessary amount of aid that was compatible with the internal market under the 2009 Communication was the same as that which conformed with the provisions of Regulation 800/2008. [paragraph 168]

The Commission correctly considered that the aid in question was compatible with the internal market to the extent that it did not exceed the amount corresponding to the difference between the net costs of the investment in Leipzig and those of an investment in Munich, since that difference represented the amount necessary for the investment to be made in the assisted region. [paragraph 172]

Therefore, BMW could not plead infringement of the principle of non-discrimination on the grounds that its competitors would be entitled to obtain, without notification to the Commission, an aid amount not exceeding the threshold for individual notification under Article 6(2) of Regulation 800/2008. That argument was based on the erroneous assumption that such aid would necessarily fulfil all the other substantive conditions of the Regulation, including that relating to the incentive effect of the aid. [paragraph 174]

It also followed that BMW did not suffer unfavourable treatment because of the choice made by Germany to notify the aid in question to the Commission. [paragraph 175]

On the basis of the above reasoning, the Court of Justice dismissed the action for annulment of brought by BMW.

A few concluding thoughts

This is an important judgment. It repeats and strengthens the findings of the Court of Justice in the “Eesti Pagar” case that assurances by national authorities do not create legitimate expectations for aid recipients. But now the Court of Justice has gone further. It places national authorities at the “same level” as undertakings. The task of national authorities is to check compliance with the provisions of the GBER. They too cannot entertain any legitimate expectations. Only an actual Commission decision can do that.

In essence the Court of Justice has made a distinction between the presumed compatibility of State aid under the GBER and the actual compatibility of State aid after a Commission decision.

However, Article 3 of Regulation 800/2008 states: “Aid schemes fulfilling all the conditions of Chapter I of this Regulation, as well as the relevant provisions of Chapter II of this Regulation, shall be compatible with the common market …”. Also, “ad hoc aid fulfilling all the conditions of Chapter I of this Regulation, as well as the relevant provisions of Chapter II of this Regulation, shall be compatible with the common market …”.

Similar wording is used by Regulation 651/2014 in Article 3: “Aid schemes, individual aid granted under aid schemes and ad hoc aid shall be compatible with the internal market …”.

The two regulations do not use soft words such aid is “deemed”, “considered” or “presumed” to be compatible. They use the strong word aid “shall” be compatible. Moreover, regulations are binding in their entirety, also on the Commission.

Of course aid granted on the basis of the GBER has to comply with all of its requirements. In the “BMW” case, the aid did not satisfy Article 8(3)(e) of Regulation 800/2008. But under Regulation 651/2014, the individual verification of the incentive effect of aid to large enterprises is required only when the aid is ad hoc, not when it is granted in the context of a scheme.

Article 6(3)(a) of Regulation 651/2014 provides that:

“Ad hoc aid granted to large enterprises shall be considered to have an incentive effect if, in addition to ensuring that the condition laid down in paragraph 2 is fulfilled, the Member State has verified, before granting the aid concerned, that documentation prepared by the beneficiary establishes that the aid will result in one or more of the following:

(a) in the case of regional investment aid: that a project is carried out, which would not have been carried out in the area concerned or would not have been sufficiently profitable for the beneficiary in the area concerned in the absence of the aid.”

The Court of Justice has also stressed in paragraph 164 that, in the event of notification, the Commission is bound to find aid to be compatible with the internal market if it fulfils all of the conditions of the GBER. BMW lost its case because the previous GBER had a stricter condition in Article 8(3)(e) than the current GBER.

Therefore, the following questions arise. First, what is the legal value of the phrase “aid shall be compatible with the internal market” in Article 3 of the GBER if aid granted on the basis of the GBER can now only be “presumed” to be compatible?

Second, will the “BMW” judgment incentivise Member States to notify to the Commission for purposes of legal certainty measures which conform with the GBER?

Third, given that the compatibility of measures based on the GBER is now only presumed, can the Commission refuse to formally authorise notified measures which conform with the GBER? Since July 2014, the unofficial practice of the Commission has been to inform Member States that notified measures appear to conform with the GBER so that Member States should implement them without any formal approval by the Commission.

Fourth, the purpose of the State aid modernisation was to reduce the administrative burden of notification on Member States and the Commission. If the “BMW” judgment increases the number of notifications and since the Commission must necessarily find GBER-conforming measures compatible with the internal market, will the Commission return to the era of formalistic approval of such measures?

Fifth, if the Commission finds out that an aid award is excessive [the amount of aid is larger than what is strictly needed by the company] even though it formally satisfies all of the requirements of the GBER can it prohibit it?

Sixth, may a Member State scale back aid to a large enterprise, granted in the context of a scheme, so that it formally complies with all of the requirements of the GBER and remains below the individual notification threshold?

If the answer is in the affirmative, how difficult is it for Member States to set up aid measures in the form of schemes in order to grant what would otherwise be ad hoc aid? Would it just be a “coincidence” if a large enterprise is the first aid applicant and happens to exhaust most of the budget of that scheme?

Seventh, can Member States withdraw a notification if they sense that the Commission will authorise only a smaller amount and then proceed to grant aid up to the notification threshold on the basis of the GBER and in full compliance with the requirements of the GBER?

——————————————-

[1] I am grateful to Peter Staviczky for insightful comments on an earlier draft.

[2] The full text of the judgment in languages other than English can be accessed at:

http://curia.europa.eu/juris/fiche.jsf?id=C%3B654%3B17%3BPV%3B1%3BP%3B1%3BC2017%2F0654%2FJ&oqp=&for=&mat=or&lgrec=en&jge=&td=%3BALL&jur=C%2CT%2CF&num=c-654%252F17p&dates=&pcs=Oor&lg=&pro=&nat=or&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&language=en&avg=&cid=5999693.

[Photo credit: Photo by Jaddy Liu on Unsplash]

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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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