i) State Aid Can Be Attributed to the State even when Granted via Faulty Procedures ii) Who Can Challenge a Commission Decision Authorising State Aid?

casino-gambling
For a measure to constitute State aid, it must, among other things, be attributed to a decision of the state. When a State aid granting decision is made in contravention of the procedural rules of an organisation controlled by the state, the decision can still be attributed to the state, unless it can be shown that the state would have opposed it, had it been aware of it. A company can appeal against a Commission decision on State aid only when it is directly and individually concerned. Companies do not gain legal standing on the grounds that their commercial interests are likely to be harmed by State aid granted to their competitors.

Introduction
 
This article reviews recent judgments on Dutch and Danish State aid measures. The issue at hand in the Dutch case was whether a guarantee given by the director of a state-controlled entity could be imputed to the state. The Danish cases concerned reduction of gambling taxes and whether the competitors of those who benefited from the tax reduction could challenge the Commission decision that authorised them.I. Imputability: C‑242/13, Commerz Nederland v Havenbedrijf Rotterdam[1]

In 2003 Commerz, a Dutch financial institution, provided credit facilities to RDM, a company also based in the Netherlands, after receiving a guarantee from Havenbedrijf Rotterdam – the Rotterdam port authority – which is a department of the municipality of Rotterdam. When RDM could not repay the credit, Commerz asked the Havenbedrijf to honour the guarantee. The Havenbedrijf refused on the grounds that the guarantee was State aid that had not been notified to the Commission and therefore was null and void.

In a previous case, C‑275/10, Residex v Gemeente Rotterdam, the Court of Justice ruled in December 2011 that the grantor of a guarantee that contained illegal [i.e. non-notified] State aid was not obliged to honour the guarantee.[2] Residex had granted a loan to RDM also on the basis of a guarantee from the municipality of Rotterdam. In both cases, the guarantees were in the form of a decision by the director of the Havenbedrijf.

In both cases, Havenbedrijf and Gemeente Rotterdam argued that the director acted ultra vires and beyond the boundaries of his authority. He deliberately kept the provision of the guarantees secret and failed to seek the approval of the supervisory board. In fact he was in the meantime dismissed. The issue at hand in the present case was whether his decisions could be attributed to the municipality.

In its judgment of 17 September 2014, the Court of Justice first explained the principle that “imputability to the State, […] may not be inferred from the mere fact that [guarantees] have been provided by a public undertaking controlled by the State. Even if the State is in a position to control a public undertaking and to exercise a decisive influence over its operations, actual exercise of that control in a particular case cannot be automatically presumed. It is also necessary to examine whether the public authorities must be regarded as having been involved, in one way or another, in the adoption of those measures” [paragraph 31 of the judgment].

Such possible involvement “cannot be demanded that it should be demonstrated, on the basis of a precise inquiry, that in the particular case the public authorities specifically incited the public undertaking to take the aid measures concerned. The imputability to the State of an aid measure taken by a public undertaking may be inferred from a set of indicators arising from the circumstances of the case and the context in which that measure was taken” such as “the compass of the measure, its content or the conditions which it contains” [paragraphs 32 & 33].


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On the basis of the information submitted to the Court of Justice concerning the organisational links between Havenbedrijf and the municipality of Rotterdam, the Court thought that “public authorities were involved or that it was unlikely that they were not involved in the provision of such guarantees” [paragraph 35].

The Court of Justice added crucially that “the fact that the sole director of the public undertaking acted improperly does not, of itself, exclude such involvement” [paragraph 38]. However, because the director not only acted improperly but also kept the guarantees secret and because the municipality of Rotterdam, would have opposed the guarantees, had it been aware of them, the Court of Justice concluded that it was for the referring national court “to establish or exclude the involvement of the municipality of Rotterdam in the provision of those guarantees” [paragraph 38].

The Court ruled that “for the purposes of determining whether or not the guarantees provided by a public undertaking are imputable to the public authority controlling that undertaking, the following are relevant […]: on the one hand, that the sole director of the company providing those guarantees acted improperly, deliberately kept the provision of those guarantees secret and disregarded the undertaking’s statutes and, on the other, that that public authority would have opposed the provision of the guarantees, had it been informed of it. […] those circumstances could, in themselves, exclude such imputability only if it may be inferred that the guarantees at issue were provided without the involvement of that same public authority” [paragraph 39].

In a nutshell, a decision to grant State aid can be imputed to the state even if the person who decides acts improperly and outside the boundaries of his or her authority, unless it can be shown that the aid would have been opposed by the responsible public authority had it been aware of it.

The Court of Justice did not get into more detail how that could be achieved in practice because it left it to the referring national court to apply those principles. But the judgment creates a puzzle. If the person who approves aid acts improperly, how is it possible for the decision approving the aid to remain in line with public policy objectives? By definition, the person who approves it acts in contravention of the relevant rules must be acting outside the scope of public policy. Well, not necessarily. To understand the practical implications we need to consider the following.

As the Court explained, imputability follows when two criteria are satisfied: control or ownership by the state [so that state resources are used] and involvement by the state in the aid-granting decision. The second criterion does not require involvement of the state in each and every aid-granting decision. It is sufficient to establish that the state has put in place such procedures that the person approving the aid can only act in line with the public policy objectives of the authority that controls the aid grantor or employs the person who approves the aid.

Every organisation has at least two sets of rules: i) the rules that define the objectives it pursues and the methods or instruments for achieving those objectives and ii) the rules that lay down internal decision-making procedures. A decision to grant State aid is attributed to the state when the objectives of the aid-granting organisation are aligned to those of the state. But such decisions are not automatic. They still have to be approved according to the organisation’s internal procedures.

What the Court of Justice appears to have ruled is that even if a decision is made without first being approved through the right channels, it does not follow that, had it been properly approved, the outcome would have been necessarily different. This is likely the reason why the Court added that it had also to be shown that the controlling authority would have objected to the decision, had it been aware of it. In other words, the Court was making a distinction between substance and procedure. Even when a decision deviates from established procedure it can still be attributed to the state if the state would approve or accept it had it been procedurally sound.

II. Rights of competitors of aid recipients

State aid decisions are addressed to Member States. Aid recipients who have to pay back incompatible state aid routinely appeal against Commission decisions ordering a Member State to recovery it. Their appeals are normally admissible because they are directly and individually concerned.

The situation is much more difficult for competitors of undertakings which receive aid approved by the Commission. Naturally, their commercial interests are harmed when the companies they compete against benefit from public subsidies. However, the judgments reviewed in this article show how difficult it is for competitors of aid beneficiaries to prove that they are directly and individually concerned.

On 26 September 2014, the General Court rendered its judgments in two almost identical cases: T-615/11, Royal Scandinavian Casino Århus v European Commission, and T‑601/11, Dansk Automat Brancheforening v European Commission.[3] Both appeals sought the annulment of Commission Decision 2012/140. In that Decision, the Commission authorised aid in the form of lower taxes on online gambling in Denmark. In both cases the Commission was supported by Denmark, Malta, Betfair Group (UK), and the European Gaming and Betting Association. That the Commission was supported by Denmark is not surprising. Nor is it surprising that the Commission was supported by the online betting company Betfair and the European Gaming and Betting Association. The support of Malta is perhaps less obvious. But the reason is that Malta has a large and growing number of registered companies that offer internet gambling services.

Royal Scandinavian Casino Århus is one of seven major casinos in Denmark. Dansk Automat Brancheforening is an association of companies licensed to install and operate gaming machines (slot machines) in places such as restaurants and pubs.

The regulatory context in Denmark

In 2007, Denmark decided to change its legislation on gambling and replace the public monopoly in gambling with a regulated and partially liberalised regime. In the new system the organization and provision of games would be taxable. The relevant law defined several tax rates for different games of chance, depending on whether they were offered online or offline. Holders of a license to operate games in physical casinos had to pay a basic fee of 45% of gross gaming revenues. However, holders of a license to operate games in an online casino had to pay a tax of only 20% of gross gaming revenues. Holders of licences for operation of games on slot machines in amusement arcades and restaurants had to pay a fee of 41% of gross gaming revenues.

The Commission Decision

By Decision 2012/140 of 20 September 2011, the Commission found that the differentiated tax system contained State aid but that it was compatible with the internal market.

In particular, the Commission concluded, first, that the imposition of a lower tax for online games, constituted state aid for operators of those games established in Denmark. The measure was selective to the extent that it differentiated between the operators of online games and physical casinos that, in light of the objective of the measure, they were in comparable factual and legal circumstances. According to the Commission, the Danish authorities did not establish that the apparent selectivity could be justified by the logic of the tax. Hence the measure was selective in the meaning of Article 107(1).

Second, the Commission concluded that the aid was compatible with the internal market because the law on gambling taxes led to liberalization of the market and allowed gambling operators in Denmark and foreign online operators to offer their services in Denmark. The aid was proportional because the 20% tax on gross gaming revenues for online operators was not lower than required to achieve the objectives of the relevant gambling law.

Incidentally, it is not clear from the text of the Decision how the Commission reached the conclusion that the reduction of the tax rate by more than 50% [from 45% to 20%] was proportional. The reason why it was thought to be necessary, despite the fact that online gambling was the fastest growing segment of the gambling market, was to induce foreign gambling operators to obtain a licence in Denmark.

The judgments

The only issue examined by the General Court was whether the appeal was admissible. It would be admissible if the two applicants could show that they were directly and individually concerned. The Court recalled the principles laid down in the Telefónica case, C-274/12 P, and then explained that in the field of State aid, undertakings are considered individually affected by a Commission decision addressed to a Member State in the event that their market position is substantially impacted by the aid in question. Indeed the two applicants who were affected by the operation of online casinos had taken an active role in the proceedings before the Commission and submitted complaints and other information to the Commission.

However, the General Court ruled that the mere fact that an aid measure was likely to have some influence on the competitive relationship in a market and that an undertaking was competitor of the aid recipient was not sufficient for that undertaking to be regarded as individually concerned. A company cannot rely solely on its status as a competitor of the beneficiary or on the fact that it is likely to experience a decline in revenues, significant financial losses or a significant decrease in market share as a result of the granting of aid.

 

 


 

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

http://curia.europa.eu/juris/document/document.jsf?text=guarantee%2BRotterdam%2Bstate%2Baid&docid=157804&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=530678#ctx1

[2] The text of this judgment can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=guarantee%2BRotterdam%2Bstate%2Baid&docid=116122&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=530678#ctx1

[3] The texts of the two judgments can be accessed respectively at:

http://curia.europa.eu/juris

and

http://curia.europa.eu/juris/document/document.jsf?text=&docid=158050&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=444462

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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 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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