State aid

State aid—generally

The European Union Rules (EU rules) on state aid prohibit member states from granting aid or assistance which distorts or threatens to distort competition and inter-state trade. Therefore whenever a public body or publicly-funded body (such as a quango) provides financial support to an undertaking they need to consider carefully whether such support constitutes state aid, particularly given that the European Commission (the Commission) is obliged to claw back any illegally granted state aid (and relevant interest on such aid).

However the EU also recognises that state aid may be a necessary element of government policy where for example it wants to attract inward investment into underdeveloped regions (often known as 'assisted areas') or to encourage investment in high technology industries.

Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) contains the basic prohibition on the grant of state aid, whereas TFEU, art 7, paras (2), (3) describe the type of state aid that the EU may allow. For a measure to constitute state aid, it must:

1. •

   be a form of assistance by or through a public body or publicly funded body (such as a quango)

2. •

   confer an advantage on an undertaking (an undertaking is a commonly used EU term that describes an entity which is engaged in economic activity and where there is a market in comparable goods or services. An undertaking does not have to be profit-making provided that any activity it carries out is one which, in principle, has commercial competitors. Undertakings can include charities, higher education institutions and even public sector bodies where they are engaged in economic activity)

3. •

   be selective in its nature such as one that targets particular locations, undertakings or types of undertaking only

4. •

   distort or threaten to distort competition, and

5. •

   relate to an activity that is tradeable between member states and has the potential to affect trade (so even if an undertaking is not involved in exporting itself there is deemed to be an effect on trade if the relevant goods or services are subject to trade between member states)

The Commission and the European Courts interpret the application of the above tests broadly.

State aid can take many direct and indirect forms. Examples include:

1. •

   subsidies

2. •

   grants

3. •

   loans

4. •

   guarantees

5. •

   indemnities

6. •

   tax exemptions

7. •

   preferential interest rates, and/or

8. •

   provisions of goods or services on preferential terms or reduced rates

State aid may also apply where a state's tax revenues are involved even if there is no loss to the state as such. Examples include:

1. •

   temporary or permanent tax exemptions

2. •

   reduced tax rates

3. •

   tax credits

4. •

   favourable tax rules, and/or

5. •

   rescheduling of tax repayments

Notification

The Commission controls and monitors state aid and member states must (subject to certain exemptions set out in this Practice Note) notify and seek approval from the Commission before granting state aid so that the Commission has the opportunity to either approve or refuse to approve the proposed measure. Notification can be a lengthy process. Even straightforward cases can take between six to nine months to process with complex cases taking even longer. Public authorities typically seek to get around the approval process by relying on exemptions such as those set out in the General Block Exemption Regulation (GBER) (as amended—see below).

General Block Exemption Regulation

Until 30 June 2014, Commission Regulation (EC) 800/2008 of 6 August 2008 (declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty GBER I provided for the automatic approval by the Commission of a specified range of measures which did not need to be notified to the Commission provided that all of the relevant provisions in the GBER I were complied with. Any state aid granted under the GBER I) had to be notified to the Commission within 20 working days of the aid being granted.

From 1 July 2014, a new Commission Regulation has been applied—EU 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of arts 107–108 of the Treaty (GBER II) (subject to any transitional provisions which apply under GBER II, art 58).

The GBER II, art 1(1) authorises state aid in the following areas, including:

1. •

   regional aid

2. •

   aid to SMEs in the form of investment aid, operating aid and SMEs' access to finance

3. •

   aid for environmental protection

4. •

   aid for research and development and innovation

5. •

   training aid

6. •

   recruitment and employment aid for disadvantaged workers and workers with disabilities

7. •

   aid to make good the damage caused by certain natural disasters

8. •

   social aid for transport for residents of remote regions

9. •

   aid for broadband infrastructures

10. •

    aid for culture and heritage conservation

11. •

    aid for sport and multifunctional recreational infrastructures, and

12. •

    aid for local infrastructures

The list of categories has increased in the GBER II in comparison with the GBER I.

There are exceptions to the GBER II such as:

1. •

   aid to export-related activities

2. •

   aid contingent upon the use of domestic over imported goods, and

3. •

   aid to undertakings in difficulty

For more details (including on other exceptions that may apply), see GBER II, arts 1(2)–1(5).

The GBER II also contains detailed provisions that must be complied with on:

1. •

   maximum aid or ('intensity') rates (which have increased in the GBER II in comparison with the GBER I)

2. •

   notification thresholds

3. •

   eligible costs, and

4. •

   types of activity that can be supported

The De minimus Regulation

Commission Regulation (EC) 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimus aid (De minimus Regulation) sets out types of aid where Commission approval is not required. The UK government recommends that other forms of exemption (such as the GBER or a specifically approved scheme) be relied upon in the first instance and the de minimus exemption be used as a 'back-up' for where there are no other options. Typically the total de minimus aid which can be given to a single recipient is €200,000 over a three-year fiscal period (De minimus Regulation, art 3(1)).

State aid—generally

The European Union Rules (EU rules) on state aid prohibit member states from granting aid or assistance which distorts or threatens to distort competition and inter-state trade. Therefore whenever a public body or publicly-funded body (such as a quango) provides financial support to an undertaking they need to consider carefully whether such support constitutes state aid, particularly given that the European Commission (the Commission) is obliged to claw back any illegally granted state aid (and relevant interest on such aid).

However the EU also recognises that state aid may be a necessary element of government policy where for example it wants to attract inward investment into underdeveloped regions (often known as 'assisted areas') or to encourage investment in high technology industries.

Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) contains the basic prohibition on the grant of state aid, whereas TFEU, art 7, paras (2), (3) describe the type of state aid that the EU may allow. For a measure to constitute state aid, it must:

1. •

   be a form of assistance by or through a public body or publicly funded body (such as a quango)

2. •

   confer an advantage on an undertaking (an undertaking is a commonly used EU term that describes

State aid—generally

The European Union Rules (EU rules) on state aid prohibit member states from granting aid or assistance which distorts or threatens to distort competition and inter-state trade. Therefore whenever a public body or publicly-funded body (such as a quango) provides financial support to an undertaking they need to consider carefully whether such support constitutes state aid, particularly given that the European Commission (the Commission) is obliged to claw back any illegally granted state aid (and relevant interest on such aid).

However the EU also recognises that state aid may be a necessary element of government policy where for example it wants to attract inward investment into underdeveloped regions (often known as 'assisted areas') or to encourage investment in high technology industries.

Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) contains the basic prohibition on the grant of state aid, whereas TFEU, art 7, paras (2), (3) describe the type of state aid that the EU may allow. For a measure to constitute state aid, it must:

1. •

   be a form of assistance by or through a public body or publicly funded body (such as a quango)

2. •

   confer an advantage on an undertaking (an undertaking is a commonly used EU term that describes