A research organisation is not required to reinvest any revenue it may generate into its non-economic activities.
The fact that the shareholders of a research entity are profit seeking has no decisive impact on its classification as a research organisation.
As governments push universities to engage in more collaborative research with industry, the question increasingly arises where to draw the line between economic and non-economic activities. This is because the research carried out by universities in their capacity as “research organisations” can benefit from 100% public funding.
On 13 October 2022, the Court of Justice tackled for the first time ever the meaning of the concept research organisation in its judgment in joined cases C-164/21, Baltijas Starptautiskā Akadēmija and C-318/21, Stockholm School of Economics in Riga.
Two courts in Latvia asked the Court of Justice for a preliminary ruling on the interpretation of Article 2(83) of Regulation 651/2014, the General Block Exemption Regulation [GBER] that lays down the definition of “research organisation”. The same concept appears in the 2014 Commission RDI Framework.
Since educational budgets are constantly under pressure and since governments keep pushing universities to collaborate more closely with industry to develop the technologies of the future, it has become quite important to know where the non-economic activities of universities end and their economic activities start. Most universities are not considered to be undertakings because they are classified as research organisations which carry out educational activities and independent research whose results are widely disseminated. But the moment they collaborate with industry may can become undertakings subject to State aid rules.
Baltijas Starptautiskā Akadēmija [BSA] and Stockholm School of Economics in Riga [SSE] are two higher education institutions governed by private law, in Latvia.
The Latvian Science Council [LSC] is an administrative authority under the control of the Minister of Education and Science. Its mission is to implement the national policy for scientific and technological development. It manages research programmes which are financed primarily by the state budget and EU structural funds.
BSA and SSE appealed against the rejection by LSC of their applications for research funding. LSC rejected the applications on the grounds that BSA and SSE did not qualify as research organisations carrying out independence research.
In the case of BSA, LSC noted that 84% of its turnover consisted of tuition fees. Its legal status was that of limited liability company, seeking to make profits. Moreover, there were no assurances that its shareholders would not benefit from privileged access to its research.
SSE is also a limited liability company established in Latvia. LSC rejected SSE’s application for funding on the grounds that the turnover of SSE’s non-economic activities accounted for only 34% of its overall activities. The share of the economic activities was 66%. LSC concluded that the main activity of SSE was of a commercial nature.
Interestingly, the Commission expressed doubts as to the assessments made by LSC. It considered that the criteria laid down by LSC, according to which the revenue and expenditure linked to economic activities had to be lower than that derived from non-economic activities, would result in a situation whereby private higher education institutions would not be eligible for public research funds, which would be discriminatory.
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The concept of research organisation and the proportion of commercial revenue
The two Latvian courts asked a number of similar questions. The Court of Justice formulated the first question as follows: May an entity governed by private law, which carries out several activities, including research, but derives most of its income from economic activities, such as the provision of teaching services for consideration, be regarded as a “research and knowledge dissemination organisation” within the meaning of the GBER?
In reply, the Court of Justice, first, explained that in interpreting a provision of EU law it is necessary to take account not only of its wording but also of its context and the objectives pursued by the rules of which it forms part. [paragraph 42 of the judgment]
Accordingly, “(43) Article 2(83) of Regulation 651/2014 defines a research and knowledge-dissemination organisation as ‘an entity (such as universities or research institutes, technology transfer agencies, innovation intermediaries, research-oriented physical or virtual collaborative entities), irrespective of its legal status (organised under public or private law) or way of financing, whose primary goal is to independently conduct fundamental research, industrial research or experimental development or to widely disseminate the results of such activities by way of teaching, publication or knowledge transfer’.”
“(44) That provision states, moreover, that where such entity also pursues economic activities the financing, the costs and the revenues of those economic activities must be accounted for separately. It also provides that undertakings that can exert a decisive influence upon such an entity, in the quality of, for example, shareholders or members, may not enjoy preferential access to the results generated by it.”
The Court of Justice considered that it was “(45) clear from a literal interpretation of Article 2(83) of Regulation 651/2014 that the key criterion for the classification of an entity as a research and knowledge-dissemination organisation is the primary goal it pursues, which must consist of either conducting, in complete independence, activities of fundamental research, industrial research or experimental development, or widely disseminating the results of such activities by way of teaching, publication or knowledge transfer.”
Then the Court observed that, “(46) first, as regards the concept of ‘primary goal’, it should be noted that that is not defined by Regulation 651/2014. It is therefore for the Court to determine its meaning and scope in accordance with its usual meaning in everyday language […] In everyday language, the goal of an entity refers to the objective which it intends to achieve, and the adjective ‘primary’ underlines the greater importance of the goal in question and therefore its precedence over any other goals pursued by the entity.”
“(47) From that point of view, the use of the concept of ‘primary goal’ in Article 2(83) of Regulation 651/2014 suggests that a research and knowledge-dissemination organisation, within the meaning of that provision, may pursue a number of goals and pursue different types of activity, provided that, among those different goals, the pursuit of independent research activities or the wide dissemination of the results of those activities is the primary objective which prevails over any other objectives pursued by that organisation.”
This conclusion of the Court immediately creates a problem of how to reconcile this interpretation with point 19 of the RDI Framework that defines at least three primary activities of research organisations, “in particular”, “education”, “independent R&D”, and “wide dissemination of research results”, without prioritising anyone of them over them others.
“(48) That interpretation, according to which Article 2(83) of Regulation 651/2014 and the concept of ‘primary goal’ on which that provision is based do not preclude a research and knowledge-dissemination organisation from also carrying out other activities, which may be of an economic nature, such as educational activities for consideration, provided that those activities retain a secondary, non-preponderant nature in relation to the primary activities, generally non-economic, of independent research or of dissemination of the results of that research, is borne out by recital 49 of that regulation and point 20 of the 2014 Commission Communication from which it follows that a research organisation or research infrastructure may carry out both economic activities and non-economic activities.”
The 2014 Commission Communication to which the Court referred was the 2014 RDI Framework. Point 20 of the RDI Framework lays down the threshold of 20% for ancillary economic activities. It is puzzling why the Court did not mention this threshold or did not use the concept of ancillarity. What is even more puzzling is that the Court ignored the fact that, as mentioned above, point 19 of the Framework also includes education in the primary goals of research organisations. Of course, that education must be of non-economic nature, while the Court was addressing education for consideration, i.e. of economic nature. But still, the Court could have made a distinction between the two different types of education.
“(49) Secondly, as regards the activities carried out in pursuit of the primary goal of the entity, while the wording of Article 2(83) of Regulation 651/2014 and the use of the coordinating conjunction ‘or’ suggest that research and knowledge-dissemination organisations do not necessarily have to carry out cumulatively research activities and activities of dissemination of results, on the other hand, the expression ‘the results of such activities’ necessarily presupposes that the activities of knowledge dissemination of the organisation may not relate without distinction to the results of any type of research, even without any link to the entity in question, but must concern, at least in part, the results of the research activities carried out by the entity itself.”
Paragraph 49 provides a very important clarification. All too often, publicly subsidised entities claim that the public money they receive falls outside the scope of State aid rules because they disseminate research results. I have always argued that the public subsidies granted to them do not constitute State aid only if the results they disseminate emanate from their own research, not the research of others.
“(50) It follows from those factors that, in order to be classified as a ‘research and knowledge-dissemination organisation’ within the meaning of Article 2(83) of Regulation 651/2014, an entity must conduct independent research activities, possibly supplemented by activities for the dissemination of the results of those research activities.”
This conclusion creates another puzzle. Why would an entity carry out independent research if it would not disseminate the results? The only explanation is that the research functions as an input into its educational activities which, by the way, must be non-economic in nature. In practice, the mission of universities is to create and disseminate knowledge.
“(51) Consequently, establishments devoted exclusively to teaching and training activities which disseminate generally the current state of science cannot be classified as research and knowledge-dissemination organisations. That interpretation is supported by the purpose and general structure of Regulation 651/2014, and of the system which it establishes for aid for research development and innovation, which, as is apparent in particular from recitals 45, 47 and 48 of that regulation, cannot be intended to exempt aid granted to entities dedicated exclusively to teaching and dissemination of generalist knowledge, in no way linked to research activities in which, moreover, they are not engaged.”
The conclusion above does not refer to education, teaching or training which are economic in nature. It seems to exclude public universities that do little research in relation to their educational activities from receiving public research grants. Once more, this conclusion seems to contradict point 19 of the RDI Framework.
“(52) Thirdly, as regards the criteria in the light of which the essential condition of the primary goal of an entity must be assessed for the purposes of its classification as a ‘research and knowledge-dissemination organisation’, within the meaning of Article 2(83) of Regulation 651/2014, it should, first of all, be noted that they are not specified in that provision. It must therefore be concluded that, in order to assess an entity’s primary goal, that provision allows for all relevant criteria to be taken into account, such as the applicable regulatory framework or the statutes of the entity in question.”
“(53) In that regard, the Court is asked whether the structure of an entity’s turnover and the proportion of that turnover represented by the revenue from its economic activities are decisive for the purposes of assessing the primary goal which it pursues. More specifically, the referring courts are uncertain whether the fact that an entity earns more than half its revenue from such economic activities necessarily means that it cannot be classified as a ‘research and knowledge-dissemination organisation’, within the meaning of Article 2(83) of Regulation 651/2014.”
“(54) On that point, it must first be noted that Article 2(83) of Regulation 651/2014 does not lay down any requirement as to the structure and origin of the financing of the activities of the entity for the purposes of assessing its primary goal and its classification as a ‘research and knowledge-dissemination organisation’. That provision even states that such a classification must be made without having regard to the way in which the entity is financed or to its legal status under public or private law.”
“(55) Furthermore, the requirement for separate accounting laid down in Article 2(83) of Regulation 651/2014 confirms that a research and knowledge-dissemination organisation may also pursue activities of an economic nature which generate revenue.”
“(56) Finally, […], it must be held that the criterion of the structure of an entity’s turnover and of the respective proportion of that turnover represented by the revenue from its economic activities and those from the, generally non-economic, activities of research and dissemination of the results of that research may, if taken in isolation, give a distorted picture of an entity’s actual activities and of its primary goal, for example by underestimating the real importance of an activity which generates only a small amount of revenue.”
“(57) Accordingly, it must be held that the criterion of the structure of an entity’s turnover and of the proportion of that turnover represented by the revenue from its economic activities cannot be used as the sole decisive criterion for assessing the primary goal of that entity for the purposes of the possible classification of that entity as a research and knowledge-dissemination organisation.”
“(58) However, Article 2(83) of Regulation 651/2014 does not preclude that criterion from being taken into account, in the wider context of an analysis of all the relevant circumstances, as one indication among others of an entity’s primary goal.”
The Court did not provide any guidance on how such a criterion can be used in practice.
“(59) In the light of all the foregoing considerations, […] Article 2(83) of Regulation 651/2014 must be interpreted as meaning that an entity organised under private law which carries out several activities, including research, but the majority of whose revenue comes from economic activities, such as the provision of teaching services for consideration, may be regarded as being a ‘research and knowledge-dissemination organisation’, within the meaning of that provision, provided that it can be established, in the light of all the relevant circumstances of the case, that its primary goal is to conduct, in complete independence, activities of fundamental research, industrial research or experimental development, possibly supplemented by activities for the dissemination of the results of those research activities, by means of teaching, publications or transfers of knowledge. In that context, such an entity cannot be required to earn a certain proportion of its revenue from its non-economic activities of research and dissemination of knowledge.”
It is not clear why the Court of Justice did not also stipulate that the economic and non-economic activities have to be separated. Perhaps it was self-explanatory. It is also unclear what the consequences of this conclusion can be for the 20% threshold of ancillary activities. I wonder whether this conclusion would make it easy for profit-seeking educational institutions to claim that its primary goal is to pursue independent research which costs a lot of money and for this reason it has to earn most of its revenue from commercial teaching. At any rate, the important aspect of the Court’s conclusion is that the proportion of revenue from the non-economic [or economic] activities is irrelevant. In fact, the practice of the Commission has indeed followed this line of reasoning as long as account separation prevents cross-subsidisation. In practice the Commission has correctly given more emphasis to proper account separation than to identification of supposedly primary goals.
Reinvestment of revenue from the primary activity
Another question that was put to the Court of Justice was whether Article 2(83) of Regulation 651/2014 required research organisations to reinvest the revenue generated by their primary activities in those same activities.
The Court of Justice noted, first of all, “(61) that Article 2(83) of Regulation 651/2014, beyond the obligation to account separately for the financing, costs and revenue of any economic activities conducted by an entity, does not, for the purposes of its classification as a research and knowledge-dissemination organisation, impose any requirement regarding the use, and possible reinvestment, by that entity of its revenue.”
“(62) In that regard, it should be observed, […], that such a requirement to reinvest revenue existed under the previous system of Regulation 800/2008, of which Article 30(1) provided, inter alia, that ‘all profits must be reinvested in these [research] activities, the dissemination of their results or teaching’ and that that requirement was not reproduced in Regulation 651/2014.”
The Court of Justice also addressed the fact that point 19(b) of the RDI Framework requires reinvestment of revenue from knowledge transfer activities into “the primary activities of the research organisation”.
“(63) A requirement to reinvest cannot be inferred from point 19(b) of the 2014 Commission Communication, which, unlike point 19(a) thereof, is not intended to classify the primary activities of research bodies, but relates solely to the classification of knowledge-transfer activities. It is only for the purpose of indicating in what circumstances the latter activities may be classified as ‘non-economic’ that point 19(b) refers to a requirement to reinvest revenue in the primary activities of the research organisation.”
“(64) In the light of all the foregoing considerations, […] Article 2(83) of Regulation 651/2014 must be interpreted as meaning that, in order for an entity to be regarded as a ‘research and knowledge-dissemination organisation’, within the meaning of that provision, it is not necessary that that entity reinvests the revenue generated by its primary activity in that same primary activity.”
The referring Latvian courts asked whether the legal status of the shareholders and members of an entity, and the possible profit-making nature of the activities carried out by them and of the objectives which they pursue, constitute decisive criteria for the purposes of classifying that entity as a research organisation.
The Court of Justice, first, recalled that “(66) Article 2(83) of Regulation 651/2014 expressly provides that the legal status of the entity (organised under public or private law) or its way of financing are irrelevant for the purpose of determining whether it may be classified as a research and knowledge-dissemination organisation. That attests to the intention of the Commission, the author of Regulation 651/2014, not to have regard, for the purposes of classifying an entity as a research and knowledge-dissemination organisation, to formal criteria linked to the legal status and internal organisation of the entity.”
“(67) Secondly, the rule in Article 2(83) of Regulation 651/2014, according to which undertakings which may exercise decisive influence over a research and knowledge-dissemination organisation, for example in their capacity as a shareholder or member, cannot enjoy privileged access to the results which that body produces, suggests that the legal status of the shareholders or members of an entity, and the profit-making nature of their activities or their objectives, cannot be decisive for the purposes of classifying that entity as a ‘research and knowledge-dissemination organisation’, within the meaning of that provision.”
Then the Court of Justice sought to clarify that “(68) that rule concerns only those entities which may be regarded as undertakings. […] an ‘undertaking’, for the purposes of EU law, is any entity which carries out an economic activity consisting of offering products or services on a given market, regardless of its legal status or the profit-making nature of the goal it pursues. Consequently, […], the rule in Article 2(83) of Regulation 651/2014 does not entail any restriction as to the legal status of any shareholders or members of a research and knowledge-dissemination organisation or the profit-making nature, or otherwise, of the activities carried out by those shareholders or members and the objectives which they pursue.”
The Court of Justice concluded that “(69) in the light of all the foregoing considerations, […] Article 2(83) of Regulation 651/2014 must be interpreted as meaning that the legal status of the shareholders and members of an entity and the possible profit-making nature of the activities carried out by them and of the objectives which they pursue do not constitute decisive criteria for the purposes of classifying that entity as a ‘research and knowledge-dissemination organisation’, within the meaning of that provision.”
 The full text of the judgment can be accessed at: