The Temporary Framework Allows Member States to Grant Aid only to SMEs 

The Temporary Framework Allows Member States to Grant Aid only to SMEs  - Untitled design

Introduction 

Although discrimination is in general prohibited in the EU, the fact remains that in the field of State aid Member States may grant State aid only to certain companies and may also decide how much aid to grant. 

That the granting of State aid relies solely on the discretion of Member States has recently been re-confirmed by the General Court. Bastion Holdings, a Dutch hotel operator, appealed against three separate Commission decisions authorising State aid granted by the Netherlands on the basis of the 2020 Temporary Framework. On 10 May 2023, the General Court delivered three separate judgments dealing with each of those decisions: T-102/21, Bastion Holdings v European Commission concerning SA.59535, T-289/21 concerning SA.62241 and T-513/21 concerning SA.63257. All three Commission decisions had assessed amendments to the original Dutch measure SA.57712 that had also been approved by the Commission. Because the three judgments are very similar, this article cites only the relevant text of case T-102/21.1 

The original measure was amended because the TF was revised, widened and extended several times and because as the economic crisis caused by covid-19 deepened the Dutch government, like all other governments, granted progressively larger amounts of aid and for increasingly different purposes. For example, initially aid aimed to address liquidity problems, while as the pandemic persisted, public subsidies shifted to supporting fixed costs, retention of employees, recapitalisations, etc. 

The main objective of the Dutch measure was to support SMEs. Bastion Holdings, being a large enterprise, was excluded from the measure and its subsequent versions. It lodged its appeals primarily on the grounds that it was also harmed by covid-19. In this respect, it claimed that it was legally and factually comparable to SMEs. 

 

Excessive distortion 

Bastion argued that the measure in question, by excluding large enterprises, it caused excessive distortion in the internal market. 

The General Court, first noted, that “(29) the principle of proportionality requires the measures imposed by the acts of the EU institutions to be appropriate to achieve the objective pursued and not to exceed the limits of what is necessary for that purpose. As a general principle of EU law, the principle of proportionality is a criterion for the lawfulness of any act of the EU institutions, including decisions taken by the Commission in its capacity as competition authority. It is not acceptable for aid to include arrangements, in particular as regards its amount, whose restrictive effects exceed what is necessary to enable the aid to attain the objectives permitted by the TFEU”. 

“(30) In addition, the fact that the inevitable consequence of the aid itself is often protection and therefore some partitioning of the market in question, as far as concerns the production of undertakings which do not derive any benefit from it, cannot imply that the aid produces restrictive effects which exceed what is necessary to enable it to attain the objectives permitted by the Treaty”. 

“(31) It is clear from the general scheme of the Treaty that the procedure under Article 108 TFEU must never produce a result which is contrary to the specific provisions of the Treaty. Accordingly, State aid, certain conditions of which contravene other provisions of the Treaty, cannot be declared by the Commission to be compatible with the internal market. Similarly, State aid, certain of the conditions of which contravene the general principles of EU law, such as the principle of equal treatment, cannot be declared by the Commission to be compatible with the internal market”. 

“(33) In the present case, it should be borne in mind that the aid measure at issue consists in direct grants to undertakings affected by the COVID-19 outbreak in order to ensure that they continue to have sufficient liquidity. Thus, the viability of the undertakings in receipt of the aid is not undermined and therefore the continuity of their economic activity during and after the outbreak is preserved. In addition, in order to be considered compatible with the internal market, the aid scheme must meet the criteria established by the temporary framework.” 

“(34) The Commission found that the normal functioning of the credit markets was seriously disturbed by the COVID-19 outbreak, which affected the wider economy and the real economy of the Member States. Furthermore, […] the lockdown measures adopted by the Member States affect undertakings and that the aid measures are justified, for a limited period, in order to remedy the liquidity shortage faced by those undertakings and to ensure that the disruptions caused by the outbreak of COVID-19 do not undermine their viability, especially that of SMEs.” 

“(35) The hotel sector in the Netherlands was seriously affected by the COVID-19 outbreak and by the measures adopted in that context by the national authorities, and that aid measures such as those covered by the contested decision are necessary to remedy this.” 

“(36) Accordingly, it must be found that the objective of the aid scheme at issue satisfies the conditions set out by Article 107(3)(b) TFEU, since the existence of both a serious disturbance in the Netherlands economy because of the COVID-19 outbreak and significant negative effects of the latter on several sectors of activity including the Netherlands hotel sector is established to the requisite legal standard in the contested decision.” 

“(38) It follows from the contested decision, […], that one of the eligibility criteria for that aid scheme is that the undertaking requesting the aid must be an SME carrying out its activity in the sectors specifically mentioned in the contested decision, including that of hotel accommodation services.” 

 

Principle of equality of treatment 

Bastion claimed that the principle of equal treatment was violated by its exclusion from the aid measure. 

The General Court, first, examined the purpose of the measure and confirmed that “(36) the objective of the aid scheme at issue satisfies the conditions set out by Article 107(3)(b) TFEU, since the existence of both a serious disturbance in the Netherlands economy because of the COVID-19 outbreak and significant negative effects of the latter on several sectors of activity including the Netherlands hotel sector is established to the requisite legal standard in the contested decision.” 

Next, the Court examined who was eligible to receive support from the scheme. “(38) One of the eligibility criteria for that aid scheme is that the undertaking requesting the aid must be an SME carrying out its activity in the sectors specifically mentioned in the contested decision, including that of hotel accommodation services.” 

Then the Court went on to examine Bastion’s argument that the aid measure was inappropriate because large enterprises were excluded from the benefit of the aid and, therefore, it was discriminatory. 

The Court recalled that “(46) observance of the principle of equality of treatment requires that comparable situations must not be treated differently and that different situations must not be treated in the same way unless such treatment is objectively justified”. 

“(47) The elements which characterise different situations, and hence their comparability, must in particular be determined and assessed in the light of the subject matter and purpose of the EU act which makes the distinction in question. The principles and objectives of the field to which the act relates must also be taken into account”. 

“(48) It follows from the temporary framework, […], that, while it is true that the outbreak of COVID-19 affected all undertakings, SMEs were particularly exposed to a severe lack of liquidity. In that context, well-targeted public support, granted in particular by the Member States, was considered necessary to support in particular SMEs in order to ensure that sufficient liquidity was available on the market in order to counter the damage inflicted on healthy undertakings and to preserve the continuity of economic activity during and after the COVID-19 outbreak. Accordingly, State aid was justified and could be declared compatible with the internal market on the basis of Article 107(3)(b) TFEU, for a limited period, to remedy the liquidity shortage faced by undertakings, and ensure that the disruptions caused by the outbreak of COVID-19 did not undermine their viability, especially of SMEs.” 

“(49) It should therefore be noted that the temporary framework, […], recognises that SMEs are in a particular situation compared to larger undertakings, even though larger undertakings may also be included in an aid scheme.” 

“(50) It is also necessary to note that […] not only were SMEs particularly affected by the COVID-19 outbreak, but they represented almost all of the registered companies and provided 71% of the employment.” 

“(51) Accordingly, it must be found that SMEs and large enterprises, such as Bastion, were not in a comparable situation both as regards the provisions of the temporary framework of State aid measures seeking to support the economy in the context of the COVID-19 outbreak and as regards the circumstances characterising the Netherlands economy.” 

“(54) It should be recalled that the grant of public funds under Article 107(3)(b) TFEU presupposes that the aid provided by the Member State concerned, even though it is in serious difficulty, is capable of remedying the disturbances in its economy, which presupposes that the situation of the undertakings likely to enable the economy to recover and, in particular, to contribute to maintaining employment is taken into account as a whole. Bearing in mind that the resources which may be allocated by the Member State concerned are finite and must therefore address priorities, it cannot be forgotten that that Member State had to take into consideration first of all the undertakings which, although smaller than the applicants, represent the category covering almost all the economic actors in the national territory, which was an even more vital issue for the preservation of stable economic growth and sustainable employment.” 

“(55) In addition, it does not follow from either Article 108(3) TFEU or Article 107(3)(b) TFEU that Member States are obliged to make good the entirety of the damage caused by an exceptional occurrence, such that they likewise cannot be required to grant aid to all of the victims of that damage”. 

 

The amount of the aid was inadequate 

Next, the General Court examined Bastion’s argument that the amount of aid was insufficient to address the needs of all enterprises that were harmed by covid-19. Bastion’s aim was to show that the Dutch government should have granted more aid, covering large enterprises too. 

In reply, the General Court noted that “(57) there is no obligation for the Member States to grant aid intended to remedy a serious disturbance in the economy within the meaning of Article 107(3)(b) TFEU. More specifically, first, while Article 108(3) TFEU requires Member States to notify their plans as regards State aid to the Commission before they are put into effect, it does not, however, require them to grant any aid […] Secondly, an aid measure may be directed at remedying a serious disturbance in the economy, in accordance with Article 107(3)(b) TFEU, irrespective of the fact that it does not remedy that disturbance in its entirety. Consequently, it does not follow from either Article 108(3) TFEU or Article 107(3)(b) TFEU that Member States are obliged to remedy in its entirety a serious disturbance in their economy.” 

 

Conclusions  

The judgment confirmed that Member States are at liberty to choose to whom they grant State aid and to decide how much aid they grant. Since the existence of discrimination depends on the objective of the aid measure, it is rather impossible for undertakings to prove illegal exclusion from the benefit of the aid is the purpose of the measure is to support only a particular class of undertakings. 

 

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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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