Compensation and State Aid

An event that causes damage for which the state is liable is distinct from the act that confers the right for compensation.

Introduction

The concept of State aid covers all resources that are controlled by the state, regardless of the reason why such resources may be transferred to or put at the disposal of an undertaking.

On 25 January 2022, the Court of Justice confirmed, in case C638/19 P, European Commission v European Food and Others, that the Commission has powers also to examine awards of arbitration tribunals that involve transfer of state resources.

The European Commission had asked the Court of Justice to set aside the judgment of the General Court of June 2019, in cases T624/15, T694/15 and T704/15, European Food and Others v European Commission by which the General Court had annulled Commission decision 2015/1470 on State aid implemented by Romania.

The State aid arose from an arbitral award of about EUR 180 million in favour of brothers Ioan Micula and Viorel Micula, two Swedish citizens residing in Romania. The Micula brothers were the majority shareholders of the European Food Group. They had petitioned an arbitration tribunal to award them compensation on the grounds that they suffered damage as a result of repeal of Romania’s tax incentives for investors when it was adjusting its tax system in order to accede to the European Union. Their claim was based on provisions of the bilateral investment treaty between Sweden and Romania.

Following a formal investigation, the Commission, in March 2015, adopted decision 2015/1470. According to the decision, the payment of the compensation awarded by the arbitration tribunal constituted incompatible State aid that had to be recovered.

The Micula brothers and their companies appealed against the Commission decision. In June 2019, the General Court held that the Commission lacked competence to adopt decision 2015/1470 as the tax incentives were implanted before the accession of Romania to the EU and that there was no advantage as the payment was only compensation.


The full text of the judgment can be accessed at:

CURIA – Documents (europa.eu)


The gravity of this case is underlined by the fact that the judgment of the Court of Justice was rendered by a Grand Chamber.

In a separate development, on 9 February 2022, the Commission announced that it initiated legal proceedings against the UK because the UK Supreme Court in February 2020 enforced an arbitral award ordering Romania to pay compensation to the Micula brothers. One of the claims of the Commission was that the UK Supreme Court, by enforcing the award, had granted State aid in violation of Article 108(3) TFEU.

The notification obligation

The Commission argued that the General Court was wrong to hold that the applicants’ right to compensation was conferred on them on 22 February 2005, when the tax incentives were repealed, i.e. before Romania’s accession to the EU. Rather, that right was conferred when the arbitration tribunal made the award and Romania decided to make the payment, both of which occurred after its accession to the EU. The Commission also disputed the General Court’s finding that EU law was not applicable to the decision of the arbitration tribunal.

The Court of Justice, first, “(109) recalled that Article 108 TFEU establishes a system of prior control of measures that may constitute ‘State aid’ within the meaning of Article 107(1) TFEU. In particular, Article 108(3) TFEU establishes a prior control of plans to grant new aid.”

In fact, the Treaty does not use the word “may” when it lays down the obligation of Member States to notify “plans to grant or alter aid”. Member States are not required to notify measures that do not constitute State aid. However, there is no defence if they implement a measure without first notifying it in the erroneous belief that it is free of State aid. In case of doubt, Member States are free to notify for purposes of legal certainty. But for sure, they are not required to notify any measure for which they may have doubts.

The Court of Justice went on to explain that “(110) the notification requirement is one of the fundamental features of that system of control. Within that system, Member States are under an obligation, first, to notify to the Commission each measure intended to grant new ‘State aid’ or to alter ‘State aid’, within the meaning of Article 107(1) TFEU, and, second, not to implement such a measure, in accordance with Article 108(3) TFEU, until that EU institution has taken a final decision on that measure”.

“(111) That obligation has direct effect on all the authorities of the Member States”.


The press release can be accessed at:

Sincere cooperation and primacy of EU law (europa.eu)


“(112) EU law, and Article 108 TFEU in particular, became applicable in Romania […] from 1 January 2007, the date on which that State acceded to the European Union”.

“(114) In order to determine whether the Commission was competent to adopt the decision at issue under Article 108 TFEU, it was necessary to define the date on which the measure that, according to that decision, gave rise to ‘State aid’, within the meaning of Article 107(1) TFEU, was adopted.”

When was the State aid granted? The difference between the damage that creates liability and the acquisition of the right for compensation

“(115) State aid must be regarded as being ‘granted’, within the meaning of Article 107(1) TFEU, on the date on which the right to receive it is conferred on the beneficiary under the applicable national legislation”.

“(116) In the present case, […], the General Court considered that the right to receive the compensation granted by the arbitral award, the payment of which, […], gave rise to the grant of State aid, arose and began to produce its effects when Romania repealed, allegedly in breach of the BIT, the tax incentives scheme at issue. According to the General Court, that award is only an ancillary element of that compensation, since, by merely determining the exact damage suffered by the arbitration applicants as a result of that repeal, it constitutes the mere recognition of a right which arose at the time of that repeal, whereas the payments made subsequently represent only the enforcement of that right.”

“(117) In that regard, it should be noted that, admittedly, as the General Court found, […], the compensation granted by the arbitral award, since it is intended to compensate for the damage which the arbitration applicants claim to have suffered as a result of the repeal by Romania of the tax incentives scheme at issue, allegedly in breach of the BIT, has its origin in that repeal, which constitutes the event giving rise to the damage for which that compensation was granted.”

“(119) It should, however, be recalled that the objective of the rules established by the FEU Treaty in relation to State aid is to preserve competition in the internal market”.

“(120) To that end, the FEU Treaty, in particular Article 108 TFEU, conferred on the Commission, […], the power to determine whether a measure constitutes ‘State aid’ within the meaning of Article 107(1) TFEU and, therefore, conferred on it the power to ensure that measures meeting the conditions laid down in that provision are not implemented by the Member States or are implemented by them only after such measures have been declared compatible with the internal market.”

“(122) It should also be borne in mind that the concept of ‘advantage’, which is intrinsic to the classification of a measure as State aid, is an objective one, irrespective of the motives of the persons responsible for the measure in question. Accordingly, the nature of the objectives pursued by State measures and their grounds of justification have no bearing whatsoever on whether such measures are to be classified as State aid. Article 107(1) TFEU does not distinguish between the causes or the objectives of State aid, but defines them in relation to their effects”.

In the paragraph quoted above, the Court of Justice cited its 2021 judgment in case C362/19 P, Commission v Fútbol Club Barcelona, paragraph 61. Interestingly, in that judgment, three paragraphs later, the Court held that “(64) when assessing the existence of an advantage in relation to Article 107(1) TFEU, the Commission has a duty to carry out a global assessment of the aid measure at issue”. This raises the question, not considered by the Court in present case, whether the damage suffered by the Micula brothers and the European Food Group before Romania’s accession to the EU was relevant to the determination of the existence of advantage, regardless of whether the eventual award was made by an arbitration tribunal [but see below paragraph 133 of the present judgment].

In addition and perhaps more importantly, advantage is a benefit that is not available to undertakings under “normal” market conditions. “Normal” means the state of the market before state intervention. But if the state is liable for damage any payment is not abnormal, as a private company in the same situation would also have to provide the same compensation.

The case on Fútbol Club Barcelona concerned favourable tax treatment of certain football clubs in Spain. Paragraph 61 of the judgment in case Fútbol Club Barcelona referred to case C81/10, France Télécom v Commission, paragraph 17. That case concerned a special tax treatment of France Telecom. In turn, that judgment cited case C409/00, Spain v Commission, paragraph 46. This latter case concerned subsidies for the purchase of commercial vehicles. What becomes evident from following the trail in the case law is that all instances in which the Court held that the objective of the measure at issue was irrelevant to the concept of advantage involved measures of public policy where the state acted as public authority. The present case is different. The state is not acting as a public authority pursuing a public policy objective but as a party that complies with its contractual obligations.

Nonetheless, the Court skirted around this fundamental difference and went on to identify “(123) the decisive factor for establishing the date on which the right to receive State aid was conferred on its beneficiaries by a particular measure is the acquisition by those beneficiaries of a definitive right to receive that aid and to the corresponding commitment, by the State, to grant that aid. It is at that date that such a measure is liable to distort competition and affect trade between Member States, within the meaning of Article 107(1) TFEU.”

“(124) In the present case, it must be noted that the right to compensation for the loss which the arbitration applicants allege to have suffered as a result of the repeal, allegedly in breach of the BIT, of the tax incentives scheme at issue was granted only by the arbitration award. It was only upon the conclusion of the arbitral proceedings brought for that purpose by the arbitration parties, on the basis of the arbitration clause in Article 7 of the BIT, that the arbitration applicants were able to obtain actual payment of that compensation.”

“(125) It follows that, even if, as the General Court pointed out on numerous occasions in the judgment under appeal, the repeal, allegedly in breach of the BIT, of the tax incentives scheme at issue constitutes the event giving rise to the damage, the right to the compensation in question was granted solely by the arbitral award issued by that court, which, having upheld the claim brought by the arbitration applicants, not only found the existence of that right, but also quantified the amount thereof.”

“(126-127) It follows that the General Court erred in law when it held, […], that the State aid covered by the decision at issue was granted on the date of repeal of the tax incentives scheme at issue. Consequently, the General Court also erred in law when it held, […], that the Commission lacked competence to adopt the decision at issue under Article 108 TFEU.”

Is compensation for damage an advantage?

In response to several counter-arguments put forth by the applicants, the Court of Justice noted, inter alia, that “(133) as regards the argument that the compensation awarded by the arbitral award seeks, in part, […], to make good the damage which the arbitration applicants claim to have suffered during a period prior to Romania’s accession to the European Union, that argument must also be rejected as irrelevant.”

“(134) That fact, […], is not such as to call into question the Commission’s competence to adopt the decision at issue under Article 108 TFEU, since, […], the right to that compensation was actually granted after that accession, by the adoption of the arbitral award.”

So, in the two preceding paragraphs, the Court of Justice considered the damage to be irrelevant not because it was of no significance to the concept of advantage but simply because the Court was concerned solely with the competence of the Commission to examine the award.

“(135) In that respect it is irrelevant that the Commission would not have been competent under that provision to monitor, before Romania’s accession to the European Union, the tax incentives scheme at issue if it had not been repealed by Romania. It suffices to note in that regard that, by the decision at issue, the Commission examined, in the light of the rules of the FEU Treaty on State aid, not that tax incentives scheme, which had been repealed before that accession and was moreover no longer in force, […], but the payment of damages made pursuant to the arbitral award issued after that accession.”

Status of arbitration awards

Then the Court of Justice explained the relevance of the 2018 Achmea judgment [C-284/16].

“(138) In that judgment the Court held that Articles 267 and 344 TFEU must be interpreted as precluding a provision contained in an international agreement concluded between two Member States under which an investor from one of those Member States may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept”.

“(139) By concluding such an agreement, the Member States which are parties to it agree to remove from the jurisdiction of their own courts and, therefore, from the system of judicial remedies which the second subparagraph of Article 19(1) TEU requires them to establish in the fields covered by EU law disputes which may concern the application or interpretation of EU law. Such an agreement is, therefore, capable of preventing those disputes from being resolved in a manner that guarantees the full effectiveness of that law”.

“(141) [In the present case] the arbitral tribunal before which that dispute was brought does not form part of the EU judicial system which the second subparagraph of Article 19(1) TEU requires the Member States to establish in fields covered by EU law, which, with effect from Romania’s accession to the European Union, replaced the mechanism for resolving disputes that might concern the interpretation or application of EU law.”

“(142) First, that arbitral tribunal is not a ‘court or tribunal of a Member State’ within the meaning of Article 267 TFEU and, second, the arbitral award delivered by that court is not subject, in accordance with Articles 53 and 54 of the ICSID Convention, to any review by a court of a Member State as to its compliance with EU law.”

“(145) In those circumstances, since, with effect from Romania’s accession to the European Union, the system of judicial remedies provided for by the EU and FEU Treaties replaced that arbitration procedure, the consent given to that effect by Romania, from that time onwards, lacked any force.”

Conclusion

The Court of Justice set aside the judgment of the General Court and returned the case back to the General Court. We need to wait to find out whether compensation confers an advantage in the meaning of Article 107(1) TFEU. Given the fact that the Court of Justice made a distinction between the time of the damage and the time of award of aid, will the General Court consider that there was a valid claim, before Romania’s accession to the EU, which can be honoured without giving rise to State aid because it conferred no advantage after Romania’s accession to the EU?

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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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