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Rules regarding State aids

Rules regarding State aids are an integral part of European Union competition law. The objective of those rules is to prevent Member State policies supporting companies from distorting competition within the common market. The framework for these rules is provided by articles 107 and 108 of the TFUE, which deal, respectively, with substantive principles and applicable procedure. Over the years, these fundamental rules were supplemented by extensive secondary legislation and case-law.

As for all other rules originating from European Union law, application as well as compliance with these rules falls under the Member States’ responsibilities. The European Commission’s powers include the monitoring of the proper application of these rules, as well as broad prerogatives in their drafting and application. Because these rules apply specifically to Member States, the Commission has strict control powers over them.

The fundamental principle of State aid rules is provided by article 107, paragraph 1, TFUE: apart from a number of exemptions, aids granted by Member States are incompatible with the internal market (and therefore prohibited) if they affect trade between Member States or distort competition by favoring certain companies or certain productions. Paragraphs 2 and 3 of the same article provides for the applicable exemptions. The Council itself may determine categories of authorized aids. Other than these categories, the European Commission has exclusive competence to determine exemptions following the procedure provided by article 108.

Although apparently simple, the practical application of these notions is extremely complex and specific to that subject. For example, State aid rules have their own definition of what constitutes an “undertaking”, which is much broader than what is covered by the usual definition.

Similarly, the notion of “aid” is interpreted as covering more than just subsidies. It includes positive actions by States, such as subsidies, but also various other State interventions which have the purpose of reducing companies’ costs, thus having similar effect to subsidies (for example, a tax reduction for which only a specific company is eligible, therefore excluding its competitors).

Even the notion of “State resource” itself has an increasingly broader understanding and is therefore increasingly complex to define. It is the source of abundant case-law which is often difficult to interpret. Indeed, only advantages granted using “State resources” can be considered aids under article 107 TFUE. These advantages are sometimes granted directly by the State but can also be so through public or even private bodies created or appointed by the State. It is therefore often the case that aids are granted by Member States through specific regimes, such as allocated taxes or other incentives.The European Commission published a Notice aimed at clarifying the main concepts linked to "State aids" and contributing to a simpler, more transparent and more consistent application of this concept throughout the Union.

It may also be difficult to establish whether a State measure provides an advantage to specific undertakings or productions ( the “specificity” criteria). This question is particularly important (as well as difficult to apply) when it is necessary to evaluate a fiscal measure in order to determine whether it falls under State aid rules (and is therefore subject to the European Commission’s control) or whether it is merely a general measure which falls under the autonomous field of competence of Member States.

As far as fiscal matters are concerned, State aid law can be applicable in two different cases :

  • A State aid measure granted to one or several beneficiaries through a fiscal measure granting an advantage, such as an exoneration,a tax-relief or even a specific depreciation rule.
  • A State aid measure which is financed through a specific tax, this tax being part of the aid scheme.

Specific rules also apply to State measures used to compensate companies for a service of general economic interest (SGEI). If that is the case, such measures should not be considered as distorting competition by providing an advantage to a company but only as providing adequate compensation for services rendered. To fall under this scenario, a measure must meet four cumulative criteria (the so-called “Altmark criteria”, named after a landmark ruling of the Court of Justice of the European Union of 24 July 2003): 1- public service obligations must be clearly defined; 2- the compensation must be calculated in advance in an objective and transparent manner, to avoid it conferring an economic advantage which may favor the recipient undertaking over competing undertakings; 3- the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations (taking into account the relevant receipts and a reasonable profit for discharging those obligations); 4- finally, where the undertaking which is to discharge public service obligations is not chosen pursuant to a public procurement procedure (which would allow for the selection of the tenderer capable of providing those services at the least cost to the community), the level of compensation "needed" must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately equiped so as to be able to meet the necessary public service requirements, would have incurred in discharging these obligations.

In controlling Member States’ compliance with State aid rules, the European Commission must abide by the procedural rules set out by article 108 TFUE and by a Council Regulation (2015/1589) whose specific provisions are the result of the constant evolution of the case-law of the Court of Justice of the European Union.

The European Commission has exclusive powers to rule on the compatibility of an aid, after having heard all "interested parties". As such, all Member States have an obligation to notify any creation or modification of an aid, whether individual or through a general scheme. When an aid is granted without having been previously notified to the Commission, in violation of these rules, it is automatically illegal whether or not it would be compatible with the internal market. An illegal aid should normally be reimbursed by the beneficiary. When the Commission has knowledge of an illegal aid (usually through a complaint), it can rule that this aid is compatible or incompatible.

The Commission takes a great number of practical enforcement actions, on individual aids and on general schemes which are submitted to it, but also, increasingly, by way of “block exemption” regulations similar to the ones found in competition law applicable to certain categories of agreements between undertakings (article 101, paragraph 3). Individual aids as well as general schemes which are included in the scope of these regulations do not need to be notified to the Commission and can be implemented by Member States directly. The scope of these regulations includes, for example, regional aids, aids to the agricultural sector, environmental aids as well as “de minimis” aids for amounts which are presumed not to distort competition within the internal market.

The Commission has also published a number of guidelines which, without being mandatory, allow Member States to know the Commission’s position and to have a better assessment of the way in which it will evaluate aids.

When the Commission acquires knowledge of an aid which has not been notified, and deems that aid incompatible, it decides that the illegal and incompatible aid must be abolished and that the beneficiaries must reimburse the amounts received, with interest, over a period of up to ten years. Even if the Commission finds that the aid is compatible, this aid has been until then illegal and the beneficiaries should therefore reimburse at least the interests for the amounts they have received prior to the decision findingtha aid compatible.

Member States courts have a crucial role to play in these mechanisms. Even if they do not have the power to rule on the compatibility or incompatibility of a State aid (only the Commission does have this power, under review by the Court of Justice), the direct effect of the rule prohibiting a State aid without prior authorization by the Commission gives these courts the crucial duty to draw every practical consequence of the illegality of a State aid.

In practice, the courts’ crucial role which arises from the direct effect of the illegality of unauthorized aids and its consequence, the obligation to reimburse, is often complex. This is especially the case when the Commission is at the same time presented with the question of that aid’s compatibility. The intricate connection between these rules has led to abundant and very technical case-law in which economic considerations are very important. The obligation to reimburse an aid which was awarded for a long period of time often creates a very difficult financial situation for the beneficiary, sometimes leading to insolvency. The complexity of certain aid schemes also makes it difficult to establish with a sufficient degree of certainty whether a specific aid should have been notified to the Commission or not.

In France, recovery of aids by their very nature can involve both administrative and judicial tribunals.

A specific aspect of this domain is that the Commission’s decisions are addressed to Member States and not to the beneficiaries. The latest have a number of procedural prerogatives, allowing them to submit their observations during the procedure. Their role is however very limited even though they are the main stakeholders, especially when aids they have received are ruled illegal and must be reimbursed.

Using its great experience of European Union State aids law, COUTRELIS & ASSOCIES has, over the years, developed a unique expertise in this complex subject and was involved in a number of landmark cases. The firm represents French, European and international clients in every aspect of procedures involving State aids. In particular, the firm has assisted beneficiaries in justifying the compatibility of an aid or in verifying whether aids they have received fall under authorized schemes or block exemptions. The firm also assists clients who have to reimburse illegal aids.

The firm represents competitors of aid beneficiaries who have suffered damages because of the existence of these aids. In these cases, the firm assists its clients as "interested parties" in procedures before the European Commission, the Court of Justice of the European Union and the national courts, in order to obtain the suspension of illegal aids and be awarded damages as relief for the illegal payment of these aids.

Through its experience and practice, the firm is closely interested in this matter and is very involved in discussions concerning the European Commission's State aid policy.

Thus, the firm regularly publishes in specialized journals in this area. In addition, COUTRELIS & ASSOCIES is the correspondent for EStAL (European State Aid Law Quarterly) for France.

In addition, the Firm is an active member of the French Association of Lawyers Practicing Competition Law (Avocats Pratiquant le Droit de la Concurrence - APDC) and leads the "Europe" working group which recently wrote Observations on the Commission's draft Communication Notice on the recovery of unlawful and incompatible State aid.

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