De minimis aid underpins “off-the-shelf” financial instruments which leverage private investment and at the same time ensure that all aid is passed on to the final beneficiary.
One of the most convenient aid instruments is de minimis aid. It can be used for any purpose [apart from promotion of exports or on condition that domestic products are favoured] and can be granted without any prior approval by the Commission. De minimis aid can also be incorporated in financial instruments, such as loans and guarantees, to leverage involvement of private investors. This leveraging of private investment is an attractive option for Member States because it multiplies the amount of funds for the support of SMEs.
While the provision of a simple grant of EUR 200,000 is a relatively easy task, the calculation of the aid amount incorporated in a financial instrument can be very tricky. Moreover, it is not obvious how aid can be prevented from spilling over to other potential beneficiaries. As is well known, State aid rules apply to both direct and indirect beneficiaries. Therefore, a question often raised by public authorities is how to avoid granting aid to the financial intermediaries which implement financial instruments that contain de minimis aid intended for the SME final beneficiaries.
This article provides guidance, first, on how to calculate an amount of de minimis aid in loans and, second, on how to calculate the amount of aid in loans when the aid exceeds the de minimis ceiling but can be granted on the basis of the GBER.
The requirements of the de minimis aid regulation
It is instructive to start by recalling the relevant provisions in the de minimis aid regulation. Aid can be considered to be de minimis only if it is transparent. For the transparency of loans, article 4 of regulation 1407/2013 lays down the following three cumulative conditions:
- The beneficiary must not be subject to collective insolvency proceedings. In case of large undertakings, the beneficiary must have credit rating of at least B-.
- The loan must be secured by collateral covering at least 50% of the loan.
- The loan may not exceed either EUR 1 million (or EUR 0.5 million for road freight transport) over five years or EUR 0.5 million (or EUR 0.25 million for road freight transport) over 10 years.
Alternatively, the gross grant equivalent of the aid can be calculated on the basis of the relevant reference rate.
The above conditions imply that Member States may grant an interest-free loan of up to EUR 1 million for a period of less than five years to an SME, provided that the SME in question is not in insolvency proceedings and can put up a 50% collateral. Incidentally, this amount and time period suggest that the assumed market rate of interest is roughly 4%.
If Member States deviate from the conditions laid down by the regulation, they must calculate the de minimis aid amount in a low-interest loan or in a loan of a larger principal using the reference rate laid down from time to time by the Commission for each Member State.
Although the focus of this article is on loans, for the sake of completeness, here are the requirements in relation to guarantees, which are laid down in article 4 of the de minimis regulation. They are also three:
- The beneficiary must not be subject to collective insolvency proceedings. Large undertakings must have credit rating of at least B-.
- The guarantee must not exceed 80% of the underlying loan.
- The guaranteed amount must not exceed EUR 1,500,000 [EUR 750,000 for road freight transport] for five years or EUR 750,000 [EUR 375,000 for road freight transport] for 10 years.
As alternative options, the regulation offers Member States two possibilities. The gross grant equivalent can be calculated on the basis of i) the safe-harbour premiums laid down in a Commission notice or ii) a methodology that has been notified to and approved by the Commission.
Loans where the aid is de minimis
Knowing how to calculate the de minimis amount is especially important if Member States choose to deploy structural funds for the purpose of supporting enterprises. Structural funds can indeed be used for that purpose and Commission Implementing Regulation 964/2014 on the application of the Common Provisions Regulation for structural funds [Reg 1303/2013] provides guidance on how de minimis aid may be granted through financial instruments [the so-called off-the-shelf instruments].
ERDF money may be used to leverage participation by financial intermediaries in the granting of loans. In this case, the loans cannot be interest-free. The financial intermediary or any other private investor must earn money from somewhere in order to be willing to participate in a public measure that supports investment in SMEs.
Now, Member States have to square the circle. They have to offer low-cost finance to SMEs and at the same time incentivise private sector participation. In fact, they also have to solve a third problem. They have to prevent any aid intended for SMEs from inadvertently benefiting financial intermediaries or private investors.
In order to prevent any aid leakage to the financial intermediaries, the Implementing Regulation outlines constructions of financial instruments which ensure that, first, all aid is passed on to the final beneficiaries and that, second, the aid amount remains below the de minimis ceiling. To understand how the leveraging works without the financial intermediary receiving any aid, consider the following example where the minimum required rate of private involvement is 30% [warning: the following examples are inspired by the Implementing Regulation, but do not copy its models which are more complicated].
Assume that a public authority commits funds of EUR 2,666,666 to a scheme that promotes investments in SMEs. Following the commitment of the public authority, a financial intermediary participates with an extra amount of EUR 1,333,333 which is 50% of the public contribution. The total amount becomes then EUR 4 million. The private participation is 33% [= 1,333,333/4,000,000] which exceeds the minimum required rate of 30%.
A sub-commercial loan of EUR 4 million, say, at a rate of interest of 2% and with duration of one year is offered to an undertaking that carries out an eligible investment. The financial intermediary has assessed the market rate of interest that it should charge on the loan to be 6%. This is the rate that reflects the credit worthiness and the collateral that can be offered by that undertaking. This implies that the interest that would have to be paid by the beneficiary undertaking would have been EUR 240,000 [= 4,000,000 x 0.06]. Instead it pays only EUR 80,000 [= 4,000,000 x 0.02]. However, the financial intermediary is paid the full market rate of interest on its own participation in the loan; i.e. EUR 80,000 [= 1,333,333 x 0.06].
The financial intermediary obtains no advantage from this transaction because it assumes the same risk as the public authority and receives no extra interest above the market rate.
The final beneficiary receives only de minimis aid. When it repays the loan at the end of the year, it pays EUR 80,000 instead of EUR 240,000 in interest. It obtains a benefit of EUR 160,000. This amount is below the de minimis ceiling of EUR 200,000. Therefore, it too receives no State aid in the meaning of Article 107(1) TFEU.
Loans where the aid is GBER compatible
Several provisions of the GBER [e.g. Article 39 on energy efficiency projects in buildings] require aid to be granted in the form of equity, loans or guarantees. The aid must be channelled through a fund or financial intermediary, which must pass it on to the final beneficiaries [in the case of Article 39 the beneficiaries are building owners or tenants]. The financing from the fund or financial intermediary must be in the form of a loan or guarantee to the final beneficiaries. In the case of Article 39, for example, the nominal value of the loan may not exceed EUR 10 million per project. The guarantee may not exceed 80% of the underlying loan. The repayment by the final beneficiary may not be less than the nominal amount of the loan. This means that the aid can be at maximum the amount of the interest on the loan. The aid must leverage additional private investment reaching at minimum 30% of the total financing provided to the project. To understand how the leveraging works without the financial intermediary receiving any aid, considering the following example.
Assume that a public authority commits funds of EUR 5,850,000 to promote investments in energy efficiency projects. Then, a financial intermediary participates with an extra amount of EUR 3,150,000 which is 35% of the total available funding of EUR 9,000,000.
A sub-commercial loan of EUR 9 million, at a rate of interest of 3.5% and with duration of one year is offered to an undertaking that invests in energy efficiency in buildings. The financial intermediary has assessed the market rate of interest that it should charge on the loan to be 10%. This is a relatively high rate because, in this case, the project is considered to be risky, say, because the beneficiaries may not be able to generate sufficient savings to afford to pay back the loan. This implies that the interest amount that would have to be paid by the beneficiary undertaking at market terms would have been EUR 900,000 [= 9,000,000 x 0.10]. Instead it pays only EUR 315,000 [= 9,000,000 x 0.035]. However, the financial intermediary is paid the full market rate of interest on its own participation in the loan; i.e. EUR 315,000 [= 3,150,000 x 0.10].
The financial intermediary obtains no advantage from this transaction because it only receives the market rate of interest for the level of risk of the project it finances.
However, the final beneficiary receives aid amounting to EUR 585,000 [= 900,000 – 315,000]. This amount can be granted on the basis of the GBER. [It cannot be granted as de minimis aid because it exceeds the de minimis ceiling of EUR 200,000.]
Guarantees where the aid is de minimis
Assume a company needs a loan of EUR 2 million but can offer sufficient collateral [e.g. a plot of residential land] for only EUR 0.5 million. Without collateral, a bank charges, say, 7% on the loan, but with collateral or a guarantee, the interest rate drops to 4%. At 7%, the loan would cost the borrower EUR 140,000 for a year. At 4%, the cost of the loan would drop to EUR 80,000, a saving of EUR 60,000, which can be considerable for a small enterprise.
A public authority may then provide a free guarantee that covers the remaining EUR 1.5 million [which is 75% of the loan and therefore less than the maximum threshold of 80%], on condition, of course, that the small enterprise is not involved in insolvency procedures. Without the guarantee, the borrower would not take out the loan as it would be too expensive. With the guarantee, the public authority concerned manages to leverage extra bank finance to the benefit of the small enterprise.
The bank receives no State aid because it charges a lower commercial rate which, however, reflects the lower risk it bears. All the advantage flows to the borrower which benefits from de minimis aid.