State Aid Rules in the UK after Brexit: Alignment or Divergence?

The current rules will apply at least until 31 December 2020.

Introduction

On Saturday, 1 February 2020, the United Kingdom will no longer be a Member of the European Union. Will it then have to abide by EU State aid rules?

According to the Agreement on the Withdrawal of the UK from the EU, the whole of the UK will remain subject to state aid rules until 31 December 2020, which is the end of the “transition period”, while in Northern Ireland the rules will apply at least until 31 December 2024.”

As for the future relationship between the two sides, the Political Declaration that accompanies the Withdrawal Agreement expresses their commitment to “prevent distortions of trade and unfair competitive advantages. To that end, the Parties should uphold the common high standards applicable in the Union and the United Kingdom at the end of the transition period in the areas of State aid […]”.

Yet, the signs so far are not propitious. The Prime Minister, Boris Johnson, is quoted as having said to the Commission President, Ursula von der Leyen, who visited him on Wednesday, 8 January 2020, that “Britain would ‘not align’ with the bloc’s rules.”[1] The previous day it was reported that the UK government intended to diverge from the EU’s regulatory regime, despite objections by its industry.[2] Ten days later the Chancellor of the Exchequer, Sajid Javid, said in an interview that “there will not be alignment, we will not be a rule-taker”.[3] Apparently, the UK government believes that it needs a different State aid regime to “protect British industry after Brexit” and make it “faster and easier” for the government to “protect jobs in struggling industries”.[4]

The EU takes these statements seriously. It is reported that, according to “senior European diplomats”, “EU member states are determined to curtail Britain’s ability to hand out state money to prized industries as a key price for agreeing a trade deal”. They added that “State aid is going to be a critical area in the negotiations.” “We will need to see some form of dynamic alignment in this area.”[5]

Perhaps, the implications of the Withdrawal Agreement have not sunk in yet. This article explains the provisions of the Agreement on State aid and considers the possible reasons for which the UK may be incentivised to continue to align itself to EU rules in the future.

Implementation of the Agreement

Article 126 of the Agreement stipulates that “there shall be a transition or implementation period, which shall start on the date of entry into force of this Agreement and end on 31 December 2020.”

After that date, the Agreement defines rights for citizens to move and reside in the EU and the UK, which extend over their lifetime.

The Agreement also provides for a special treatment of Northern Ireland and, according to Article 185, “the Protocol on Ireland/Northern Ireland shall apply as from the end of the transition period.”

Application of EU State aid rules

The Agreement refers explicitly to State aid at two places: i) in Part Three on separation provisions and ii) in the Protocol on Ireland/Northern Ireland.

The first reference to State aid is in Article 87, in Chapter 1 on Judicial Procedures, of Title X on Union Judicial and Administrative Procedures of Part Three that defines the separation provisions.

Article 87 stipulates that:

“1.If the European Commission considers that the United Kingdom has failed to fulfil an obligation under the Treaties or under Part Four of this Agreement [that lays down the rules on the transition period and related arrangements] before the end of the transition period, the European Commission may, within 4 years after the end of the transition period, bring the matter before the Court of Justice of the European Union in accordance with the requirements laid down in Article 258 TFEU or the second subparagraph of Article 108(2) TFEU, as the case may be. The Court of Justice of the European Union shall have jurisdiction over such cases.”

“2.If the United Kingdom does not comply with a decision referred to in Article 95(1) of this Agreement, or fails to give legal effect in the United Kingdom’s legal order to a decision, as referred to in that provision, that was addressed to a natural or legal person residing or established in the United Kingdom, the European Commission may, within 4 years from the date of the decision concerned, bring the matter to the Court of Justice of the European Union in accordance with the requirements laid down in Article 258 TFEU or the second subparagraph of Article 108(2) TFEU, as the case may be. The Court of Justice of the European Union shall have jurisdiction over such cases.”

In other words, the UK will remain responsible until 31 December 2024 for illegal State aid or misused State aid that was granted before 31 December 2020.

Article 92 in Chapter 2 of Title X, Part three, refers to ongoing administrative procedures, and provides that:

“1.The institutions, bodies, offices and agencies of the Union shall continue to be competent for administrative procedures which were initiated before the end of the transition period concerning: (a) compliance with Union law by the United Kingdom, or by natural or legal persons residing or established in the United Kingdom; or (b) compliance with Union law relating to competition in the United Kingdom.”

[…]

“3.For the purposes of this Chapter: (a) an administrative procedure on State aid governed by Council Regulation (EU) 2015/1589 shall be considered as having been initiated at the moment at which the procedure has been allocated a case number; […]”

[…]

“5.In an administrative procedure on State aid governed by Regulation (EU) 2015/1589, the European Commission shall be bound in relation to the United Kingdom by the applicable case law and best practices, as if the United Kingdom were still a Member State. In particular, the European Commission shall, within a reasonable period of time, adopt one of the following decisions: (a) a decision finding that the measure does not constitute aid pursuant to Article 4(2) of Regulation (EU) 2015/1589; (b) a decision not to raise objections pursuant to Article 4(3) of Regulation (EU) 2015/1589; (c) a decision to initiate formal investigation proceedings pursuant to Article 4(4) of Regulation (EU) 2015/1589.”

Next, Article 93 on new State aid provides that:

“1.In respect of aid granted before the end of the transition period, for a period of 4 years after the end of the transition period, the European Commission shall be competent to initiate new administrative procedures on State aid governed by Regulation (EU) 2015/1589 concerning the United Kingdom. The European Commission shall continue to be competent after the end of the 4-year period for procedures initiated before the end of that period. Article 92(5) of this Agreement shall apply mutatis mutandis. The European Commission shall inform the United Kingdom of any new administrative proceedings on State aid initiated under the first subparagraph of this paragraph within 3 months of initiating it.”

In other words, the Commission will remain competent to complete a State aid procedure when the procedure is initiated before 31 December 2020. It will also remain competent to launch a State aid procedure until 31 December 2024 when the aid is granted before 31 December 2020.

The second place in the Agreement that refers to State aid is the Protocol on Ireland/Northern Ireland. The Protocol is composed of 19 Articles and seven Annexes. Article 10 of the Protocol defines how State aid affecting the trade of Northern Ireland is to be treated. Annex 5 of the Protocol lists the EU rules on State aid and Annex 6 lays down specific arrangements for determining the amount of public subsidies that may be granted to agricultural activities.

Article 10 reads as follows:

“1. The provisions of Union law listed in Annex 5 to this Protocol shall apply to the United Kingdom, including with regard to measures supporting the production of and trade in agricultural products in Northern Ireland, in respect of measures which affect that trade between Northern Ireland and the Union which is subject to this Protocol.”

“2. Notwithstanding paragraph 1, the provisions of Union law referred to in that paragraph shall not apply with respect to measures taken by the United Kingdom authorities to support the production of and trade in agricultural products in Northern Ireland up to a determined maximum overall annual level of support, and provided that a determined minimum percentage of that exempted support complies with the provisions of Annex 2 to the WTO Agreement on Agriculture. The determination of the maximum exempted overall annual level of support and the minimum percentage shall be governed by the procedures set out in Annex 6.”

“3. Where the European Commission examines information regarding a measure by the United Kingdom authorities that may constitute unlawful aid that is subject to paragraph 1, it shall ensure that the United Kingdom is kept fully and regularly informed of the progress and outcome of the examination of that measure.”

It is clear that all of EU State aid rules, which are listed in Annex 5, in conjunction with Article 10, will apply to Northern Ireland. Moreover, as laid down in Article 185 of the Agreement, according to which “the Protocol on Ireland/Northern Ireland shall apply as from the end of the transition period”, EU rules will remain in force also after the end of the transition period.


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Termination clause: “Democratic consent”

However, under certain conditions, the application of EU State aid rules to the trade of Northern Ireland after the end of the transition period may be brought to an end. Article 18 of the Protocol lays down what is in essence a termination procedure which is labelled “democratic consent” in Northern Ireland. Article 18 provides that:

“1. Within 2 months before the end of both the initial period and any subsequent period, the United Kingdom shall provide the opportunity for democratic consent in Northern Ireland to the continued application of Articles 5 to 10.”

Since Article 10 concerns State aid, it follows that the process of obtaining “democratic consent” covers also the application of EU State aid rules.

Article 18(5) defines the “initial” and “subsequent” periods as follows:

“For the purposes of this Article, the initial period is the period ending 4 years after the end of the transition period. […], the subsequent period is the 4 year period following that period”.

Therefore, at minimum, EU State aid rules will apply to the trade of Northern Ireland until 31 December 2024. If democratic consent is secured at that point in time, State aid rules will apply for another four-year period until 31 December 2028 and so on.

Scope of application of State aid rules to the trade of Northern Ireland

There is no sectoral or activity-based restriction on the application of Article 107(1) TFEU. It follows that EU State aid rules should in principle apply to all sectors of the economy and all types of activity that affect the trade of Northern Ireland. Indeed Annex 5 of the Protocol that lists the relevant State aid rules in fact replicates all existing EU rules which have both horizontal and sectoral scope.

However, Article 10(1) of the Protocol limits its scope to “measures which affect that trade between Northern Ireland and the Union which is subject to this Protocol.” [Emphasis added]. However, no Article of the Protocol lays down any explicit definition of trade that “is subject to this Protocol”. Only Article 5 contains specific provisions on the “movement of goods”.

Therefore, the possibility cannot be excluded that the scope of the Protocol is narrower than that of Article 107(1) TFEU.

At the same time, it should be noted that Article 10 does not refer to State aid granted to undertakings in Northern Ireland. It refers to “trade between Northern Ireland and the Union” , which can be indirectly affected by State aid granted to UK undertakings established outside Northern Ireland. The implications of a possible indirect effect on the trade of Northern Ireland are examined in section 7 below.

In conclusion, it appears that Article 10 can be subject to both a narrow interpretation [i.e. it concerns aid affecting only trade subject to the Protocol] and a wide interpretation [i.e. it concerns aid that affects both directly and indirectly the trade between Northern Ireland and the EU].

Continued jurisdiction of the Court of Justice

Despite the fact that one of Brexit’s aims is to free the UK from the jurisdiction of the Court of Justice, Article 12(4) of the Protocol provides that:

“As regards […] Articles 7 to 10, the institutions, bodies, offices, and agencies of the Union shall in relation to the United Kingdom and natural and legal persons residing or established in the territory of the United Kingdom have the powers conferred upon them by Union law. In particular, the Court of Justice of the European Union shall have the jurisdiction provided for in the Treaties in this respect. The second and third paragraphs of Article 267 TFEU shall apply to and in the United Kingdom in this respect.” [Article 267 TFEU establishes a procedure by which national courts may request guidance from the Court of Justice on the interpretation of EU law.]

It follows that for as long as the Protocol remains in force, the Court of Justice will continue to be the ultimate arbiter of the application of EU State aid rules with respect to the trade between Northern Ireland and the rest of the EU.

Moreover, according to Article 4(5) of the Agreement “in the interpretation and application of this Agreement, the United Kingdom’s judicial and administrative authorities shall have due regard to relevant case law of the Court of Justice of the European Union handed down after the end of the transition period.” [Emphasis added].

How will the Agreement influence the application of EU State aid rules in the rest of the UK after 31 December 2020

It is worth speculating how the application of EU State aid rules to the trade of Northern Ireland may affect subsidies granted in the rest of the UK, in the absence of any future agreement between the EU and the UK that would regulate that matter.

It is clear that the UK will have to conform with EU State aid rules when it grants State aid to companies based in Northern Ireland. Such aid will have a direct impact on the trade of Northern Ireland and the EU. But the important question that arises is whether it will have to conform with those rules after the transition period when it grants aid to companies based in the rest of the UK?

If it wants to maintain a level-playing-field between companies in Northern Ireland and elsewhere in the UK and avoid the emergence of a two-region aid regime, then it will have to stick to the present set of rules and follow the evolution of the EU’s own regime.

It should be noted that there is nothing in the EU regime that compels a Member State to grant aid. Member States are free to grant less aid than the maximum aid intensities allowed by the various regulations and guidelines or to grant no aid at all. The UK may, therefore, decide to reduce the amount of aid that it grants to companies outside Northern Ireland.

But apart from granting less aid, would it be able to grant aid on different terms and conditions and for purposes not allowed by the present or future rules so that such aid would not conform with EU rules?

The answer to this question depends on how such non-conforming aid would affect trade between Northern Ireland and the EU. State aid can impact on cross-border trade directly or indirectly. If, for example, non-conforming aid increases UK exports to Northern Ireland inducing as a result North Irish companies to divert sales from their domestic market to the Republic of Ireland or if non-conforming aid harms exports of North Irish companies to the rest of the UK inducing them to divert their exports to the EU or non-conforming aid harms in any other way North Irish companies, there will be an indirect effect on trade that would be sufficient for the application of Article 107(1) TFEU.

It follows that if the UK grants aid breaching the de minimis threshold and on different terms than those in the EU, there will be no legal certainty as to the conformity of that aid with Article 10 of the Protocol and, consequently, with Article 107 TFEU.

The big unknown: Enforcement

But there is another, possibly more significant, source of uncertainty. After the end of the transition period, State aid rules in the UK will be enforced by a UK authority – the Competition and Markets Authority [CMA]. Although the various guidelines and communications limit the discretion of the Commission and of the CMA, they do not eliminate it. The Withdrawal Agreement provides for a procedure to settle disputes, but this procedure will be irrelevant for cases where the compatibility of State aid will have to be determined quickly, as for example, when a company needs rescue aid or a bank needs a state guarantee to support recapitalisation. The Withdrawal Agreement does not say what happens when the Commission and the CMA reach different conclusions on whether an aid measure that is notified to the CMA indirectly impacts or not on the trade of Northern Ireland with the EU and, if it does, whether it is compatible or not.

Political commitment

Nevertheless, the UK is expected to align itself to EU rules. Part XIV of the Political Declaration on the future relationship between the EU and the UK, that accompanies the Withdrawal Agreement, refers to the need to maintain a “level playing field for open and fair competition”.

In particular paragraph 77 of the Declaration states the following:

“Given the Union and the United Kingdom’s geographic proximity and economic interdependence, the future relationship must ensure open and fair competition, encompassing robust commitments to ensure a level playing field. The precise nature of commitments should be commensurate with the scope and depth of the future relationship and the economic connectedness of the Parties. These commitments should prevent distortions of trade and unfair competitive advantages. To that end, the Parties should uphold the common high standards applicable in the Union and the United Kingdom at the end of the transition period in the areas of State aid, competition, social and employment standards, environment, climate change, and relevant tax matters. The Parties should in particular maintain a robust and comprehensive framework for competition and State aid control that prevents undue distortion of trade and competition”.

On the same date that Ursula von der Leyen visited Boris Johnson at 10 Downing Street, she gave a speech at the London School of Economics, her alma matter. She spoke of the future relationship between the EU and the UK and she reminded her audience that “without a level playing field on environment, labour, taxation and State aid, you cannot have the highest quality access to the world’s largest single market. The more divergence there is, the more distant the partnership has to be.”[6]

Conclusions

During the transition period that ends on 31 December 2020, the current State aid regime will apply to the UK and the Commission and the Court of Justice will remain competent up to 31 December 2014 to deal with State aid that is granted before 31 December 2020.

EU state aid rules will continue to apply to Northern Ireland, and the Commission and the Court of Justice will retain their competence to deal with cases of State aid for as long as the Protocol on Ireland/Northern Ireland is in force. At minimum, it will remain in force until 31 December 2024.

In order to avoid distortions between Northern Ireland and the rest of the UK and to honour the commitment made in the Political Declaration for a level playing field between the UK and the EU, the UK may find it expedient, if not necessary, to align itself to the EU’s current or future State aid regime.

However, the Withdrawal Agreement does not establish arrangements for speedy resolution of disputes in case of divergent assessments of whether UK aid affects the trade of Northern Ireland and whether such aid should be authorised or not. The normal dispute settlement procedure will be too slow and too late.

At any rate, if the UK decides to deviate from the EU regime, it will have to take account of the distortions that will be created both in its internal trade with Northern Ireland and the external trade with the EU. As the Commission President said in her LSE speech “with every choice comes a consequence. With every decision comes a trade-off.” Will the UK industry, as a whole, benefit from a different State aid regime or will it be confronted with counter-measures by the EU?

———————————————–

[1] Financial Times, 9 January 2020, Boris Johnson tees up fight over fishing in talks with EU leaders.

[2] Financial Times, 8 January 2020, No 10 vision of fast-track trade deal at odds with industry: PM’s view on regulatory divergence criticised as it would bring friction at border: “Boris Johnson will on Wednesday put himself at odds with some of Britain’s most successful industries when he sets out his plan to secure a fast-track trade deal with the EU that would see Britain diverge from the Brussels rule book.”

[3] Financial Times, 17 January 2020, Forget staying close to EU after Brexit, chancellor tells business.

[4] Financial Times, 29 November 2019, Tories promise new State aid system after Brexit.

[5] Financial Times, 27 January 2010, Brussels to fight tough on State aid in post-Brexit talks.

[6] Ursula von der Leyen, “Old friends, new beginnings: building another future for the EU-UK partnership”, speech at the London School of Economics, 8 January 2020. It can be accessed at: https://ec.europa.eu/commission/presscorner/detail/en/speech_20_3.

[Bild von Elionas2 auf Pixabay]

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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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