The Commission Must Act in Accordance with the Principle of Proportionality

The opening of a formal investigation obliges Member States to suspend implementation of their State aid measures.

Update on Temporary Framework:

Number of approved and published covid-19 measures, as of 7 August 2020: 241*

Legal basis: Article 107(2)(b): 25; Article 107(3)(b): 203; Article 107(3)(c): 18

Four Member States have implemented 15 or more covid-19 measures each: Belgium, Denmark, Italy & Poland.

– Average number of measures per Member State: 8.6

– Median number of measures per Member State: 11

– Mode number of measures per Member State: 6

* Excludes amendments to previously notified measures

Introduction

A question that is often asked is whether Member States should notify their non-aid measures to the European Commission. The answer which is too readily given is “no”. Legally it is a correct answer. The notification obligation in Article 108(3) TFEU refers to “plans to grant or alter aid”. In other words, it covers new aid or a substantial modification that turns existing aid into new aid.

That answer is simple but also too simplistic. It ignores risks from potential legal challenges from those who do not qualify for public support or those who finance the public support measure. Notification to the Commission and a decision by the Commission that the measure in question is indeed free of State aid creates legal certainty. Otherwise the measure is vulnerable to proceedings before national courts.

Hungary’s turnover taxes are a case in point. Companies that were liable for those taxes initiated cases before national courts which eventually reached the Court of Justice via references for preliminary ruling. [See C‑75/18, Vodafone; C‑323/18, Tesco-Global; C‑482/18, Google Ireland. The judgments were reviewed here on 17 March 2020: https://www.lexxion.eu/en/stateaidpost/has-an-economic-myth-become-a-legal-fact-the-case-of-turnover-taxes/]

Interestingly, the Commission also opened formal investigations which led to negative decisions which, however, have been successfully appealed. [See T-20/17, Hungary v European Commission. An appeal by the Commission before the Court of Justice is pending in case C-596/19 P.]

Could Hungary have avoided all these legal hurdles if it had notified its measures to the Commission? Probably not because the Commission was convinced that the turnover taxes constituted State aid. But in other cases the information provided by Member States can persuade the Commission of the absence of aid.

Nonetheless, Hungary’s experience suggests that if the Commission is not informed beforehand and believes that a Member State is trying to “hide” something or that it is uncooperative, it may also adopt suspension injunctions in addition to opening the formal investigation procedure. A suspension injunction enables the Commission to start infringement proceedings, in case of on-compliance by the Member State concerned. But, as we will see below, Hungary successfully appealed against those injunctions too!

C‑456/18 P, Hungary v European Commission[1]

Hungary asked the Court to set aside the judgment of the General Court in cases T-554/15 and T-555/15, Hungary v Commission. In that judgment, the General Court dismissed the appeal against Commission decision SA.41187 [health contribution of tobacco industry businesses] and decision SA.40018 [food chain inspection fee]. In both cases the Commission initiated the formal investigation procedure in July 2015 and at the same time ordered the suspension of the measures. Eventually, in July 2016, the Commission found both Hungarian measures to contain incompatible State aid [decisions 2016/1846 and 2016/1848, respectively].

Both measures were based on turnover taxes. Because those taxes were progressive and because the Commission did not find any justification in the objectives of the taxes for the variation in tax rates and tax bands, it concluded that they constituted State aid in favour of those undertakings that were taxed at lower rates.

Before the conclusion of the Commission investigation, Hungary brought an action against the suspension injunctions by the Commission. The General Court dismissed that action in the cases mentioned above.

Hungary argued that suspension injunctions were not consistent with Treaty on the Functioning of the European Union [TFEU]. On 4 June 2020, the Court of Justice set aside the judgment of the General Court and annulled the decisions of the Commission on the grounds that the Commission failed to justify properly the reasons for the injunctions.

Obligations of Member States and the powers of the Commission to order suspension of a State aid measure

The Court of Justice began its analysis by recalling the obligation of Member States not to put into effect any State aid measure before authorisation by the Commission.

“(30) Article 108(3) TFEU obliges the Member States to notify the Commission of any plans to grant or alter State aid.”

If a Member State “(31) does not suspend the implementation of the measure at issue in order to comply with the duty under the last sentence of Article 108(3) TFEU and Article 3 of Regulation No 659/1999 not to put new aid or the alteration of existing aid into effect before authorisation is obtained from the Commission […], the Commission has the power […], to adopt a decision requiring it to suspend such implementation until the final decision as to the compatibility of the aid”. [Regulation 659/1999 was the previous procedural regulation.]

A Member State may not suspend the implementation of a measure in two situations: after notification to the Commission or before any notification, perhaps because it considers the measure to be free of State aid [or simply because it wants to circumvent State aid control].

But the Court stressed that “(33) in every situation, initiation of the formal investigation procedure in respect of a measure which the Commission presumes to be new aid obliges the Member State concerned to suspend implementation of the measure”.

Therefore, regardless of whether a Member State believes that its measure is free of State aid and that, as a result, it is not obliged to notify it, once the Commission opens a formal investigation, that Member State has to suspend the implementation of the measure. Although it referred later on to the possibility, albeit slim, that the measure in question may not contain State aid, it is a bit puzzling that the Court did not refer more explicitly and in more detail to that possibility at this point given that over the past decade about 50 investigations have been concluded with a finding of no aid.

The Court confirmed that “(34) it is true that it is required in both situations to suspend implementation of the measure at issue. Nevertheless, only non-compliance with a suspension injunction enables the Commission, pursuant to Article 12 of Regulation No 659/1999, to bring an action for a declaration of failure to fulfil obligations directly before the Court”.

“(35) The Court has held that the suspension injunction may be adopted at the same time as the decision to initiate the formal investigation procedure or may be subsequent thereto […]. A suspension injunction may in particular be adopted after the initiation of the formal investigation procedure where the Member State concerned did not, when that procedure was initiated, suspend implementation of the measure under investigation.”

Then the Court turned its attention to the case at hand. “(36) In the two cases which gave rise to the judgment under appeal, Hungary brought actions before the General Court challenging suspension injunctions adopted at the same time and by the same decision as the initiation of the formal investigation procedure in respect of the two criticised tax measures.”

“(39) It should be recalled that, as provided in Article 11(1) of Regulation No 659/1999, ‘the Commission may, after giving the Member State concerned the opportunity to submit its comments, adopt a decision requiring the Member State to suspend any unlawful aid until the Commission has taken a decision on the compatibility of the aid with the [internal] market (hereinafter referred to as a “suspension injunction”)’.”

“(40) It is apparent from the very wording of that provision that the Commission has a power and not an obligation to adopt a decision imposing a suspension injunction […]. Consequently, as it is not in a situation where its powers are circumscribed, it has a discretion in deciding whether to adopt such a measure. Where the Commission has a discretion, it must, when exercising it, observe the general principles of EU law”.


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Compliance with the principle of proportionality

Whatever the Commission decides to do must respect the principle of proportionality.

“(41) According to settled case-law, the principle of proportionality, which is one of the general principles of EU law, requires that acts adopted by EU institutions do not exceed the limits of what is appropriate and necessary in order to attain the legitimate objectives pursued by the legislation in question; where there is a choice between several appropriate measures, recourse must be had to the least onerous, and the disadvantages caused must not be disproportionate to the aims pursued […]. That principle is recalled in Article 5(4) TEU and in Article 1 of the Protocol (No 2) on the application of the principles of subsidiarity and proportionality, annexed to the EU Treaty and the [FEU Treaty].”

“(42) It follows from the foregoing that a suspension injunction adopted pursuant to Article 11(1) of Regulation No 659/1999 must observe the principle of proportionality, that is to say, not exceed the limits of what is appropriate and necessary in order to attain the objective pursued by that provision. As has been noted in paragraph 33 of the present judgment, the power conferred on the Commission to issue such injunctions to the Member States has the objective of ensuring compliance with the prohibition on putting aid plans into effect until the final decision on their compatibility. It is supplemented by the Commission’s power to refer the matter directly to the Court, within a shorter timescale, in order for it to find a failure to fulfil obligations consisting in the putting into effect by a Member State of a measure suspected of constituting unlawful aid.”

“(43) In the light of that objective, adoption of a suspension injunction is justified where, after initiation of the formal investigation procedure, the Member State concerned has failed to suspend implementation of the measure under investigation, as has been stated in paragraph 35 of the present judgment. However, it may also be appropriate to adopt a suspension injunction at the same time as the decision to initiate the formal investigation procedure, in a situation where there is sufficient evidence for the Commission to presume that the Member State concerned does not have the intention of suspending implementation of the measure under investigation – as it is obliged to do by the initiation of the formal investigation procedure – and to anticipate that an action for a declaration of failure to fulfil obligations will consequently have to be brought before the Court.”

“(47) It follows from the foregoing that the Commission did not fail to have regard to the obligation on the institutions to observe the principle of proportionality in all their acts. Therefore, the fourth part of the first ground of appeal must be dismissed.”

Obligation to state reasons

Then the Court of Justice turned its attention to the Hungarian complaint that the General Court erred in law in its assessment of the statement of reasons for suspension injunctions.

First, the Court reiterated its standard position that “(57) the statement of reasons […] must be appropriate to the measure at issue and must disclose clearly and unequivocally the reasoning followed by the institution which adopted that measure in such a way as to enable the persons concerned to ascertain the reasons for it and to enable the competent court to review its legality.”

“(59) Where, as in this instance, the suspension injunction is adopted at the same time as the decision to initiate the formal investigation procedure, the grounds that prompt the Commission to issue it necessarily relate to foreseeing that the Member State concerned will not suspend implementation of the measure at issue despite initiation of the investigation procedure. As has been stated in paragraph 34 of the present judgment, the only additional effect of the suspension injunction compared with the effects of initiation of the formal investigation procedure is to enable the Commission, if the Member State concerned does not comply with its obligation to suspend implementation of the measure under investigation, to bring an action for failure to fulfil obligations directly before the Court, pursuant to Article 12 of Regulation No 659/1999.”

“(60) Thus, the General Court correctly pointed out, in paragraph 135 of the judgment under appeal, that, ‘in a situation such as that in the present case, in which the suspension [injunction] is inserted into a decision to initiate the formal investigation procedure, having regard to the Commission’s wide discretion under Article 11(1) of Regulation No 659/1999 and the specific legal effect produced by a suspension [injunction] under Article 12 of that regulation, the decision adopting such an [injunction] must make it clear why, according to the Commission, the Member State concerned was not going to comply with the obligation arising from Article 108(3) TFEU and suspend the implementation of the measures examined following initiation of the formal investigation procedure’.”

“(61) By the third plea in its application before the General Court, Hungary contended that the reasons stated for the suspension injunctions at issue were insufficient, since the Commission had not set out the grounds justifying adoption of the injunctions.”

The Court of Justice went on to rule that the reasoning of the General Court was faulty.

Unlike the view taken by the General Court, the Court of Justice considered that “(63) a Member State is perfectly entitled to defend itself by asserting that the measure in question does not constitute aid. Consequently, it cannot be deduced therefrom that there is an increased risk that the Member State will not respect the legal effects of Article 108(3) TFEU, in particular where, as here, the question of law concerned is a contentious one.”

Once more, we see that even if a Member State believes that its measure, which is under investigation by the Commission, is free of State aid, it must, nonetheless, suspend it. The Court of Justice regarded protestations by a Member State that a measure is free of State aid as not sufficient proof that that Member State would not suspend it.

The General Court held the view that absence of formal comments by the Member State concerned was evidence of its unwillingness to cooperate with the Commission. In contrast, the Court confirmed that Member States are not obliged to submit comments to the Commission. “(65) Consequently, the fact that Hungary did not make any comments concerning the possible adoption of a suspension injunction was not sufficient to justify the Commission’s fear that it would implement the measures at issue.”

And it concluded that “(66) if that previous conduct on Hungary’s part was a decisive indication for the Commission, it should have mentioned it in the decisions at issue, which was not the case.”

Since the Court of Justice did not consider that the Commission had any strong indication of Hungary’s unwillingness to suspend its measures, it annulled both the judgment of the General Court and the Commission decisions.


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

http://curia.europa.eu/juris/document/document.jsf?text=&docid=226975&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=3907399


Photo by Mohamed Hassan on Pixabay.

 

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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 presently holds positions at the College of Europe and the University of Maastricht. 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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