Coronavirus (COVID-19) - the EU State Aid Framework and the De Minimis Exemption
The UK and most EU member states have implemented national support measures to help businesses weather the disruption caused by the Coronavirus (COVID-19) pandemic. Many of these support measures fall within the scope of the EU's state aid regime, which still applies to the UK during the current transition period.
We explore below how the European Commission has managed state aid rules in the context of the Coronavirus pandemic, to ensure that member states can quickly and legitimately provide much-needed support to businesses. We also explore how the De Minimis Block Exemption interacts with aid provided in light of Coronavirus.
What is state aid and why is it restricted?
This section may assist those who are unfamiliar with the concept of state aid. Certainly, many business in the UK will be receiving state aid for the first time. The Treaty on the Functioning of the European Union (TFEU) prohibits member states from granting aid that distorts competition and trade within the European Union (EU). Article 107 refers to "state aid" as any aid granted by a member state or through state resources. This includes e.g. local authorities and LEPs. Both the European Commission (the Commission) and the European Court of Justice (the ECJ) have broadly interpreted the term to include a wide range of different aids.
State aid rules form part of the EU's competition law regime. The EU seeks to restrict the provision of state aid by member states to the extent that aid would distort (or threaten to distort) competition by favouring certain businesses or the production of certain goods. Thus, to be caught, there must be a 'selective' or discriminatory element to the support, in contrast to (say) tax measures which are available to all businesses in a particular country. Offending aid must also be capable of affecting trade between member states, although that test is usually regarded as quite a low hurdle.
Article 107 of the TFEU sets out those forms of state aid which are automatically deemed compatible with the internal market (i.e. permitted forms of aid) and also includes a list of aid which may be compatible. This includes aid to remedy a serious disturbance in the economy of a member state.
Under Article 108 TFEU, where a member state wishes to grant state aid, the relevant member state must give notice to the Commission of its proposals. The Commission then carries out an assessment and determines whether or not the grant of aid is compatible with the internal market. Where state aid is incompatible, the member state must stop or alter the aid within a timescale set by the Commission, and may have to claw back unlawful aid. In normal times, that process takes months or years.
Are there any exemptions to state aid rules?
Under Article 109 of the TFEU, the Commission may adopt regulations relating to state aid, including regulations implementing exemptions to the notification requirement. To date, the Commission has adopted a number of block exemptions as these help to reduce the number of notifications it receives under Article 108.
Many of the block exemptions apply to particular industries only; for example vehicle manufacturing and agriculture. However, the Commission has also adopted two block exemptions which generally apply across all industries, other than those which have dedicated block exemptions. These are: (1) the "De Minimis Aid Exemption Regulation" which covers aid provided to a single undertaking up to the value of €200,000 over a three-year period, and (2) the General Block Exemption Regulation (GBER) which covers certain categories of aid (e.g. R&D, SMEs and regional aid).
How has the Commission responded to the Coronavirus (COVID-19) pandemic in light of state aid rules?
Article 107(3)(b) of the TFEU states that the Commission may find that state aid to remedy a serious disturbance in the economy of a member state is compatible with the internal market.
On 13 March 2020, the Commission published a Communication on the co-ordinated economic response to the COVID-19 outbreak, describing the outbreak as a major shock to the global and European economy.
In relation to state aid, the Communication outlined those national support measures which member states can adopt without infringing existing state aid rules and without the need to notify the Commission (these include measures applicable to all undertakings regarding wage subsidies and suspension of corporate and value added taxes). The Commission also stated that, at the time of publishing, it considered that such a serious disturbance to the economy was present in Italy to enable the Commission to approve additional national support measures in line with Article 107(3)(b) of the TFEU.
On 19 March 2020, the Commission announced the adoption of a Temporary Framework (the Framework) to support the economies of member states in light of the Coronavirus (COVID-19) pandemic. The Framework acknowledges that many of the containment measures adopted by member states to stem the spread of the virus (such as social distancing, travel restrictions and lockdown) will cause liquidity issues and significant damage to many undertakings (particularly SMEs). It further acknowledges that the outbreak poses the risk of creating a serious downturn affecting the whole of the EU economy and states that "well-targeted" public support is needed to counter economic damage.
With well-targeted aid in mind, the Framework sets out those types of support which member states may provide under the existing state aid rules to ensure the liquidity of undertakings and access to finance. The types of support set out include notifiable and non-notifiable measures:
- Non-notifiable measures:
Those measures outside the scope of EU state aid rules as detailed in the Communication of 13 March. These include measures which are applicable to all undertakings regarding wage subsidies; suspension of corporate and value-added taxes and social welfare contributions; and financial support provided directly to consumers for cancelled services or tickets not reimbursed by operators.
Support measures designed in line with the GBER.
- Notifiable measures:
On the basis of Article 107(3)(c) of the TFEU, member states can notify the Commission of aid designed to meet acute liquidity needs and support undertakings facing financial difficulty due to (or aggravated by) the Coronavirus outbreak.
On the basis of Article 108(2)(b) of the TFEU, member states can notify the Commission of aid designed to compensate undertakings in sectors particularly hit by the outbreak and/or by organisers of cancelled events for damages suffered due to and directly caused by the outbreak.
Additional temporary measures
The Framework goes on to acknowledge that the Coronavirus (COVID-19) pandemic has caused such a "serious disturbance" to the economies of member states that Article 107(3)(b) will apply in principle.
On this basis, the Framework sets out additional measures of state aid which the Commission will temporarily consider compatible with the internal market under Article 107(3)(b) of the TFEU.
To rely on any one of the temporary measures put in place by the Commission, the member state in question will need to comply with certain conditions (as outlined under the Framework) and notify the Commission in accordance with Article 108 of the TFEU. Those temporary measures envisaged under the Framework include the following:
Direct grants, repayable advances or tax advantages (provided they do not exceed the gross value of €800,000 per undertaking).
Guarantees on loans at prescribed premiums (providing the amount loaned does not exceed: (1) double the annual wage bill of the beneficiary in 2019, or (2) 25% of the total turnover of the beneficiary in 2019).
Subsidised interest rates for loans at prescribed rates (again, providing the amount loaned does not exceed: (1) double the annual wage bill of the beneficiary in 2019, or (2) 25% of the total turnover of the beneficiary in 2019).
Guarantees and loans channelled through credit or other financial institutions.
Short-term export credit insurance.
The Framework states that the temporary measures will remain in place until 31 December 2020. The EU hopes that the Framework will not only assist member states in considering the compatibility of proposed measures, but that it will also support the approval process so that notifications can be dealt with as quickly as possible by the Commission.
The De Minimis Aid Exemption
The UK Government has outlined an extensive package of financial assistance for UK businesses following the Coronavirus (COVID-19) outbreak.
As the UK remains in the Brexit transition period, EU state aid rules will still apply to the support package, meaning that the Government has needed to manage each element within EU state aid rules.
Some of the support offered to UK businesses, such as the Small Business Grant Fund (SBGF), is explicitly provided as de minimis aid under the De Minimis Aid Exemption Regulation and therefore falls outside the scope of EU state aid rules.
However, where a business has already received de minimis aid over the course of the previous three years, receipt of the SBGF may take the business above the €200,000 threshold permitted by the block exemption. Where this is the case, it is likely that the business can still receive the grant. However, the Government would need to rely on the Framework (as opposed to the block exemption) so as to avoid infringing state aid rules.
Where the Government provides aid as de minimis aid, they (or your local authority) will ask you to complete a de minimis declaration form. If you have received any other form of support which is de minimis aid in the previous three years, you must declare this within the declaration form.
Where receipt of the SBGF would take you over the de minimis aid threshold, you should speak to your local authority (or other provider of support) to discuss whether the grant will still be available to you under the Framework.
Other types of Government support are instead provided under the new Framework, such as the Retail, Hospitality and Leisure Grant (RHLGF). Where an undertaking receives aid under the Framework, they may receive only up to €800,000. Importantly, that aid will be provided either under the Framework or under an existing block exemption (such as the De Minimis Aid Exemption Regulation).
However, in general, the arrangements are considered discretely. Hence, aid provided under the Framework will not count as de minimis aid (and, therefore, it will not count towards an undertaking's de minimis threshold) and vice versa.
If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Ian Holyoak or Pip Collison in Michelmores' Commercial team.
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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.