Member States Beware: Compliance with the GBER and the SME Criteria has just Become more Difficult

I am grateful to Péter Staviczky for comments on an earlier draft of this article. I am solely responsible for its contents.


The European Commission retains its sole right to assess the compatibility of aid granted on the basis of the GBER.

Criteria defined in national law need not be taken into account by the Commission.

The SME status has to be confirmed on the date of the granting of aid, not on the date of the aid application.

Update on the Temporary Framework

On 2 October 2020 the European Commission proposed to Member States to:

  1. Prolong the Temporary Framework until 30 June 2021.
  2. Extend the scope of the Temporary Framework to cover fixed costs of companies.
  3. Adapt the conditions for recapitalisation measures with respect to the exit of the state from enterprises where the state was an existing shareholder prior to the recapitalisation through independent valuation.

 

The Temporary Framework in a nutshell

Adopted on 19 March [allowing for grants, guarantees and interest subsidies].

Amended on

  • 3 April [to include aid for research, testing and production of Covid-19 related products and wage subsidies]
  • 8 May [to include equity injections (until 30 June 2021) and subordinated debt measures]
  • 29 June [to extend the scope to micro, small and start-up companies that were in difficulty before 31 December 2019].

 

Implementation of the Temporary Framework

As of Friday, 2 October 2020, the European Commission had approved 288 measures [this count excludes many amendments of initial measures] on the basis of:

  • Article 107(2)(b): 31
  • Article 107(3)(b): 243
  • Article 107(3)(c): 22

 

According to Commissioner Margrethe Vestager, the total amount of State aid for Covid-19 has reached “almost EUR 3 trillion”.

 

Introduction

The GBER is the State aid workhorse of Member States. Its correct application affects the legality of more than 95% of all new aid measures. For this reason, the judgment of 9 September 2020 of the General Court in case T-745/17, Kerkosand v Commission, is very important.[1] National authorities should study it carefully. The judgment clarified the obligations of the Commission and Member States, the retroactive application of the GBER, the definition of SMEs and the status of extra national requirements attached to GBER-based measures.

Background

Kerkosand operates a sand quarry and production plant in Slovakia. It complained to the Commission that the Slovak Agency for Innovation and Energy had granted to a competitor, NAJPI, illegal aid amounting to EUR 5 million. Kerkosand argued that the investment of NAJPI was not innovative and that NAJPI was not an SME.

In July 2017, the Commission considered that the aid to NAJPI conformed with the regional aid provisions of the GBER that was applicable at the time the aid was granted [Regulation 800/2008], and also, retroactively, with the current GBER [Regulation 651/2014]. Consequently, it was found to be compatible with the internal market [case SA.38121][2].

The Commission had to apply the current GBER retroactively, according to Article 58, because the Slovak measure failed to fulfil a formal requirement of Regulation 800/2008; i.e. to refer to Regulation 800/2008. But as we will see later, the application of Regulation 651/2014 was not straight forward because in the meantime Slovakia’s regional aid map had changed and the maximum aid intensity dropped from 40% to 25%. Nonetheless, the Commission found that NAJPI was a small enterprise which qualified for an additional 20% bonus, which brought the rate of the maximum allowable aid to 45%.

With respect to the incentive effect of the aid, which was in an individual measure, the Commission clarified in paragraph 57 of its decision that “although not required for SMEs by the GBER 2008 nor by the GBER 2014, Slovakia verified (before granting the individual aid concerned) the incentive effect requirements and provided documentary evidence proving that.”

It should be recalled that under the GBER 2014 ad-hoc aid to a large enterprise must be preceded with verification of its incentive effect. If the recipient is an SME, this task is not necessary. However, I hasten to add that, regardless of whether it is not required by EU rules, the incentive effect of all aid should be established before public money is passed on to any company.

In paragraph 61 of its decision, the Commission noted that “the GBER does not include any requirement of innovativeness as a condition for measures to be exempted as regional investment aid. Such requirement seems to stem only from the national legal basis. Therefore, the question whether the project complied with the requirement of innovativeness is not relevant for the assessment of the project’s compliance with the GBER 2014.”

Then, in paragraph 64 of the decision, the Commission made the following rather surprising statement [but please note that it came before the judgments in the Eesti Pagar (C-349/17) and BMW (C-654/17 P) cases]. “In light of the foregoing assessment, the Commission has accordingly found that the aid scheme SA.28652 (X518/2009) introduced by the Slovak Republic falls under Regulation (EC) 800/2008 and that the individual financing granted on the basis of that scheme and analysed in the present Decision, in particular the regional aid that NAJPI received for its investment project „Úprava zlievarenských a sklárskych pieskov“, complies with that scheme and with Regulation (EC) 651/2014. Therefore, those measures are block exempted and the Commission is hence not competent to examine them on the basis of the preliminary investigation procedure foreseen in Article 4 Regulation (EU) 2015/1589.”

Kerkosand’s main arguments before the General Court were that the Commission applied the GBER incorrectly and that it should not have refused to assess thoroughly the Slovak measure.

Alleged infringement of procedural Regulation 2015/1589

The General Court stressed that, by adopting block exemption regulations, the Commission does not delegate to national authorities its control and decision-making powers in matters of State aid but fully retains its supervisory power, under Article 108 TFEU and Article 12(1) of Regulation 2015/1589. [para 38]

Then the Court went on to recall the relevant principles.

First, it is only when an aid measure fulfils all relevant requirements of Regulation 651/2014 that Member States are exempt from the notification requirement. By contrast, if the aid does not fulfil all requirements, it is granted in breach of the notification obligation and must be considered to be illegal. [para 40]

Second, it is for the Commission, under Article 12(1) of Regulation 2015/1589, to examine either on its own initiative or in the context of a complaint whether such aid has been granted in breach of Regulation 651/2014. [para 41]

Third, block exemption regulations cannot in any way weaken the Commission’s supervisory power. [para 42]

Fourth, it follows that, by adopting Regulation 651/2014, the Commission has not conferred any final decision-making power to national authorities as regards the scope of the exemption from the notification obligation and as regards the assessment of the conditions laid down by the GBER. National authorities are in this respect on the same level as the potential beneficiaries of aid and have to ensure that their decisions comply with that regulation, so that, when a national authority grants aid by wrongly applying the regulation, it does so in disregard both of the provisions of that regulation and of Article 108(3) TFEU. [para 43] [Emphasis added. This is how the General Court phrased in French the underlined text: “lesdites autorités se trouvant à cet égard sur le même plan que les bénéficiaires potentiels d’aides et devant s’assurer que leurs décisions se conforment audit règlement”]

Fifth, when a Member State considers that aid meets the conditions laid down in Regulation 651/2014, the aid has, at most, a presumption of compatibility with the internal market. The conformity of the aid with the Regulation may be called into question both before a national court and before the Commission. [para 44]

Sixth, Regulation 651/2014 does not affect the exclusive competence of the Commission to assess the compatibility of aid under Article 107(3) TFEU. The Commission therefore retains the sole right to declare such aid compatible with the internal market. [para 45]

On the basis of the above six principles, the General Court rejected a number of counter-arguments advanced by the Commission to support the view that it had no competence to carry out a preliminary examination to determine whether the aid fulfilled the conditions for exemption under Regulation 651/2014. [paras 46-50]

Next the General Court proceeded to examine whether the Commission should have taken a decision according to Article 4 of Regulation 2015/1589 not to raise objections to the aid.

Regional aid provisions

Kerkosand claimed that the Commission failed to check whether the aid was compatible with the internal market according to the regional aid guidelines [RAG] and in particular with the conditions for avoiding overcapacity on the market.

The General Court rejected that claim because the purpose of the GBER is to provide to the Member States and aid recipients an exhaustive set of rules in a directly applicable exemption regulation. Any other interpretation would undermine the very purpose and the direct applicability of the GBER and undermine legal certainty. According to recital 7 of Regulation 651/2014 only State aid which is not covered by the Regulation remains subject to the notification obligation. [paras 63-64]

These principles also apply when the Commission verifies whether national authorities have correctly applied the provisions of a block exemption regulation. [para 65]

The General Court pointed out that the criterion of preventing overcapacity on the market is not mentioned as a condition for exemption of regional investment aid in the context of Article 14 of Regulation 651/2014. Kerkosand could not demand that national authorities or the Commission had to take account of the possible creation of such overcapacity. [para 66]

Indeed, if the Commission would apply the requirements for compatibility laid down in the various guidelines to aid granted on the basis of the GBER, most if not all aid measures would be found to be incompatible with the internal market, as the requirements of the guidelines differ from those of the GBER.

The General Court also clarified that if, however, the Commission were to find that the national authorities had incorrectly applied the conditions of a block exemption regulation, so that, the aid should have been notified under Article 108(3) TFEU, it would have to assess the compatibility of that aid on the basis of Article 107(3) TFEU, by taking into account the additional criteria of the RAG. [para 68]

Article 107(3)(a) TFEU and bloc exemption regulations do not require the absence of a distortion of competition; this is a criterion of the concept of aid in Article 107 (1) TFEU. Moreover, for Article 107(3)(a) TFEU, unlike Article 107(3)(c) TFEU, it is not even necessary to examine whether the trading conditions are affected in a manner contrary to the common interest. [para 69]

And, like the guidelines which bind the Commission, the GBER also binds the Commission so that when it assesses a measure that has been implemented on the basis of the GBER, it may not deviate from its provisions. [paras 71-72]

Classification of the beneficiary company as an SME

Kerkosand alleged that the Commission failed to apply Article 6(3)(a) of Regulation 651/2014, given that, according to Kerkosand, the aid in question was in reality ad hoc aid granted to a large undertaking. Kerkosand claimed that the Commission did not verify that the beneficiary was indeed an SME [as defined in Annex I of the GBER], given that it was linked to other companies via natural persons.

NAJPI’s total investment cost was EUR 12.5 million. The amount of aid was EUR 5 million which corresponded precisely to 40% aid intensity. When the aid was granted, NAJPI’s investment was in an Article 107(3)(a) area where the maximum aid intensity for large companies was 40%. However, when the Commission assessed the applicability of Regulation 651/2014, the Slovak regional aid map had changed and the maximum allowable aid for large companies was only 25%. Therefore, whether NAJPI was an SME was a critical issue. The Commission agreed with the Slovak authorities that NAJPI was a small enterprise that could receive additional aid of 20%.

In fact, the Commission did examine the links between NAJPI and other companies and concluded that because the links were via two personal shareholdings and because the other companies in which those persons held managerial positions were in different sectors [not “adjacent” as defined in Annex I], they could not be considered to be partner or linked enterprises in the meaning of the SME definition. Even if the data of both NAJPI and NOVA, the company owned by the majority shareholder, were taken together, they would still quality as a small enterprise. [para 57 of the Commission decision] [Conveniently, on p.15 of its decision, the Commission also summarised the relevant points concerning shareholding by individual persons in the seminal case C-110/13, HaTeFo and in Commission decision SA.18184 on Nordbrandenburger Umesterungs Werke.] Although the shareholders of NAJPI held management positions in other sectors, the problem was that the Commission did not examine in sufficient detail those sectors.

Since the classification of a company as an SME is time sensitive, the General Court, first, established the date that the Slovak authorities should have confirmed whether NAJPI was an SME. The relevant date is the date on which the aid applicant acquires a legal right to the aid. Under Slovak law, aid is granted on the basis of a contract. However, it does not become legal binding on the date the contract is signed. In Slovakia contracts with public authorities become binding one day after they are published in the Slovak register of contracts. In this case this happened on 7 November 2013.

NAJPI changed ownership in mid-2013. Slovak authorities took into account the latest financial statements which were available at the time and which corresponded to the previous two financial years. However, the General Court noted that the 2015 User Guide on the SME definition states that in the case of takeovers or mergers, it is the data resulting from the transaction that must be taken into account. [paras 89-90]

This point is very important in practice. Neither the granting authorities, nor the aid recipients can claim legitimate expectations on the basis of information that is submitted at the time of the aid application. The legality of the decision to grant State aid is dependent on the validity of information at the time of the granting of the aid. Therefore, granting authorities must require aid recipients to confirm that the data and all the other information in their application remain valid on the date they sign their agreement or the date the agreement comes into force, whichever is relevant in the legal order of each Member State.

The General Court noted, in paragraph 83 of the judgment, that for two companies, the Slovak authorities were not able to provide information to the Commission and that the Commission accepted the assurances of the Slovak authorities that there were no relations between NAJPI and those two companies. In addition, the Commission could not find any links via sale or purchase agreements.

The General Court concluded that the Commission should have verified the veracity of the information submitted by the Slovak authorities and especially whether NAPJI was an SME on the date the aid was granted. [paras 93-98]

For these reasons, the General Court upheld this part of the appeal.

Compliance with national provisions

As mentioned earlier, Kerkosand also faulted the Commission for not verifying whether the aid met the criteria laid down by the aid scheme in question, in particular the innovative nature of the investment project.

The Commission argued that it was not required to declare incompatible with Regulation 651/2014 measures meeting all the conditions of the Regulation for the sole reason that such measures contravened additional criteria under national law. The innovative nature of the aid in question was not required by the GBER. [para 101]

The General Court agreed with the Commission and rejected this plea of Kerkosand. The Commission is not obliged to check compliance with extra national requirements. [para 102]

Conclusion

Nevertheless, the General Court annulled Commission SA.38121 because the Commission did not verify to the requisite standard whether NAJPI was an SME on the date the aid was granted.


[1] The full text of the judgment, in languages other than English, can be accessed at:

http://curia.europa.eu/juris/fiche.jsf?id=T%3B745%3B17%3BRD%3B1%3BP%3B1%3BT2017%2F0745%2FJ&oqp=&for=&mat=CONC.AIDE%252Cor&lgrec=en&jge=&td=%3BALL&jur=C%2CT%2CF&etat=clot&dates=%2524type%253Dpro%2524mode%253D1M%2524from%253D2020.08.21%2524to%253D2020.09.21&pcs=Oor&lg=&pro=&nat=or&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&language=en&avg=&cid=3716158

[2] The text of Commission decision SA.38121 can be accessed at:

https://ec.europa.eu/competition/state_aid/cases/262705/262705_1927879_158_2.pdf


Photo by Arek Socha on Pixabay.

Tags

Über

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.

Zusammenhängende Posts

25. Aug 2020
State Aid Uncovered von Phedon Nicolaides

The Non-economic Nature of Certain IT Services for Higher Education

Publicly funded educational services are not economic in nature. Activities intrinsically linked to public tasks are not economic in nature. Update on Temporary Framework: Number of approved and published covid-19 measures, as of 21 August 2020: 262* Legal basis: Article 107(2)(b): 28; Article 107(3)(b): 220; Article 107(3)(c): 20 Four Member States have implemented 16 or more covid-19 measures each: Belgium, […]
14. Jul 2020
State Aid Uncovered von Phedon Nicolaides
report

2019 Competition Report

The Annual Competition Report is a useful document, but it should provide more information on the results of the ex post evaluations and ex post monitoring. Update on Temporary Framework: Number of approved and published COVID-19 measures, as of 10 July 2020: 202* Legal basis: Article 107(2)(b): 20; Article 107(3)(b): 171; Article 107(3)(c): 17 Six Member States have implemented 11 […]
11. Jun 2020
Guest State Aid Blog von Erika Szyszczak

When State Aid Gets Political

We are happy to receive a guest comment on the EU – UK post-Brexit trade negotiations from Professor Emerita, Erika Szyszczak, who is a Fellow of UKTPO at the University of Sussex. This is a longer version of an earlier Blog published on the UKTPO website. Control over State aid is a stumbling block for the future of an EU […]
02. Jun 2020
State Aid Uncovered von Phedon Nicolaides
euro coins

i) Investor-State Arbitration ii) Recovery of Incompatible State Aid iii) State Aid Scoreboard 2019

Member States abolish bilateral investment treaties between themselves. When the Commission orders recovery of incompatible State aid, interest has to be added to the recoverable amount for the whole period of illegality regardless of any national limitation rules. In 2018, Member States granted EUR 121 billion to industry and services, EUR 6.3 billion to agriculture and EUR 50 billion to […]
27. Apr 2020
State Aid Uncovered von Phedon Nicolaides
corona virus poster

Identification of Undertakings in Difficulty

A company is in difficulty if, in practice, its accumulated net losses exceed 50% of its subscribed capital, regardless of whether the subscribed capital is formally written down. The classification of a company as being in difficulty is independent of the sector in which it operates and of whether a private investor would be willing to invest in it. Temporary […]
21. Feb 2020
State Aid Uncovered von Phedon Nicolaides

From Waste to Energy

State aid to incentivise the use of waste to produce energy must be individually notified. Introduction Waste management is an increasingly important aspect of policies aiming to prevent environmental degradation and slow down climate change. As the market for recycling expands and waste management becomes more profitable, there is also a higher risk of harm to competition by State aid. […]
10. Dez 2019
State Aid Uncovered von Phedon Nicolaides

Retroactive Application of the GBER

When an aid scheme is adjusted by limiting the eligible beneficiaries, it becomes “new” aid and must be notified to the Commission. The GBER can be applied retroactively to aid that was granted before it came into force.   Introduction In July 2016, Dilly’s Wellnesshotel wrote legal history for being the first undertaking to contest the application of the General […]
14. Nov 2019
State Aid Uncovered von Phedon Nicolaides

Risk Finance

Risk finance measures for the support for large enterprises or SMEs which operate for longer than seven years fall outside the GBER and must be notified individually to the Commission. Introduction Since the State aid modernisation and the new rules that were introduced in 2014, only a handful of risk finance measures [7-8?] have been notified to the European Commission […]
01. Okt 2019
State Aid Uncovered von Phedon Nicolaides

Enforcement of State Aid Rules by National Courts

Private enforcement has increased, but damages for illegal granting of State aid have been successfully claimed in just one case. Introduction   According to the annual competition report that was published in July, Member States use the GBER to implement 96% of their new aid measures.[1] This impressive outcome should be seen in conjunction with the recent rulings of the Court […]
03. Sep 2019
State Aid Uncovered von Phedon Nicolaides

Presumed v Actual Compatibility of State aid with the Internal Market

State aid granted on the basis of the GBER may not be considered as authorised by the Commission. The task of Member States is to ensure that all of the requirements of the GBER are fulfilled. In particular, Member States must confirm the incentive effect of aid to large enterprises. Introduction[1]   In March 2019, the Court of Justice delivered […]