State aid: Levelling the playing field or moving the goalposts?

Between COVID-19 and the ever-present countdown to 31 December 2020, it is very easy to be consumed by immediate priorities and pressing issues of business continuity.

However, it is worth taking a step back briefly to consider a core principle of trade between EU Member States, and other States with which the EU has a close relationship, which has become increasingly prominent as a sticking point in the Brexit negotiations. The principle in question? State aid.

To further complicate matters, the European Commission unveiled plans on 17 June 2020 to take a tougher line on subsidised foreign companies in the EU market. Under this proposal, the Commission seeks to “safeguard critical EU companies” in strategic industries such as pharma and agri-food so that they do not fall victim to “hostile takeovers conducted by large dominant players.”

It is clear that the Commission’s rules with regard to subsidies and State aid are often far stricter than those of other jurisdictions, where such rules may not even exist or may not be enforced. This is sure to create further friction between the EU and third countries – including the United Kingdom if no agreement can be made on the future relationship.

What is State aid?

State aid is an EU concept defined in the Treaty on the Functioning of the European Union as “aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods”¹. In other words, State aid is public spending (or public revenues foregone) which benefits favoured businesses or sectors within a country’s economy, where such spending risks distorting the Single Market. As a result, there is a blanket prohibition on State aid, albeit one which has a great many exceptions.

‘Aid’ is widely interpreted and generally includes any advantage conferred from state resources – including loans, tax subsidies and the use of a state assets by beneficiaries at better-than-market rate.

Aid can be provided not just by direct government investment but by any entity considered to be a state body or resource, such as local authorities and state-owned or controlled enterprises e.g. NHS Trusts. Public-private joint ventures can also be considered potential providers where their activities are directed by the State.

What is the current State aid regime?

In high-level terms, the current EU State aid regime (applicable to the UK until 31 December 2020) operates as follows:

• There is a general prohibition on the grant of State aid;
• If one of the conditions for State aid is not met, the measure is not State aid, and therefore not subject to the State aid rules. For example, because furlough payments were granted to all UK employees, the measure was not selective and therefore not State aid, despite being one of largest State subsidies for business ever granted by the UK Government (if not the largest, but in exceptional circumstances given COVID-19).
• State aid can still be permitted if it qualifies for exemption. The most common exemptions used are:
  • The General Block Exemption Regulation (GBER) – which exempts Member States from having to notify certain agreed categories of support e.g. regional aid, R&D, environmental aid and access to finance for SMEs; and
  • The De Minimis provision – i.e. aid not exceeding EUR200,000 over a period of three years.
• If State aid is unlawfully granted, the Member State must rectify the distortion to competition created in the Single Market by recovering the State aid, plus compound interest.

State aid is a highly technical area of law, and whilst a partial exemption of some kind is usually available for the vast majority of commercial activities a responsible government would wish to subsidise, potential recipients of State aid should always seek specialist legal advice.

EU Guidance on State aid procedures can be found here.

Why is State aid relevant to my business?

• Given how broadly State aid is defined, the State aid rules are likely to apply to any commercial project that has benefitted from government loans, grants, enhanced capital allowances or other non-market advantage.
• Misunderstanding the applicability of State aid or misapplying the criteria could have severe consequences for the time and cost projections of a given project or venture, as a result of unlawful State aid needing to be repaid. In a worst case scenario, it could remove viability all together.
• Subsidies granted by other EU Member States may afford benefitting companies an unfair advantage in both the EU, and further afield.
• Conversely, for organisations which rely on State aid, or which operate in sectors that the UK Government wishes to subsidise going forward, a tightening or loosening of the current rules would mean significant changes to strategic and operational decisions. Large scale State aid schemes operating in the UK include the Regional Growth Fund, the Enterprise Investment Scheme, the British Capacity Market scheme, the Coronavirus Business Interruption Loan Scheme, and Innovate UK.
• The Commission is also considering new rules prohibiting mergers subject to EU merger clearance from being subsidised by foreign governments (see comments above on screening FDI), and already asks notifying merging parties what support they have received from governments (whether in the EU or otherwise) as a matter of course as part of its assessment process.
• Approximately 80% of State aid in the UK is currently granted through the GBER system: this system is currently slated to be demolished for aid granted from 1 January 2021, with no currently published plans for its replacement.
• Both complaints to the Commission, and the ability to pursue judicial review (see below) provide a path to challenge State aid given to competitors, where there are valid procedural objections. However, these claims are rare.

Is it possible to challenge a decision or refusal to grant aid?

Yes, since the provision of State aid is assessed and executed by entities owned or controlled by the state, it is possible to challenge a decision via judicial review.

There are three grounds for judicial review: illegality, procedural unfairness, and irrationality, i.e. a challenge would be based on the way in which a decision was made, rather than the substance of the decision itself.

Why is State aid a political issue?

State aid at the time of writing remains a large bone of contention in the UK-EU trade negotiations. The explanation is multi-faceted but hinges largely on the EU’s reluctance to disadvantage the future interests of European players, pitted against the UK Government’s promise that an autonomous Westminster should be able to invest freely in chosen industries.

EU perspective

The prohibition on EU Member States, EFTA Member States²  and other states with close geographic and trade relationships with the EU from distorting inter-state trade by the provision of financial assistance to their own domestic players is a fundamental principle of the common market.

The EU’s position in the negotiations is that the UK should not benefit from tariff-free trade unless it agrees to abide by the existing EU principles on State aid i.e. agree to maintain a level playing field where no competitor is, in effect, on an uphill or downhill run to goal.

UK perspective

A cornerstone of the Vote Leave campaign was the ability for UK businesses to benefit from targeted and freely-defined subsidies or other assistance where necessary to promote regional or sectoral growth.

Effect on Northern Ireland

Under the terms of the Northern Ireland Protocol, EU State aid measures will continue to apply where UK Government support of businesses in Northern Ireland can be said to “affect” EU-Northern Ireland trade. However, the broad application of these measures may mean that aid provided to businesses in Great Britain with a presence in Northern Ireland is also captured.

For example, in early 2020, the UK Government was considering granting a bailout to the struggling airline Flybe. Because Flybe had recently been granted a bailout by the UK Government, this would in all likelihood have been prohibited had it been notified to the Commission (whose guidance states that a bailout should be a one-off in the short-medium term³  in all but exceptional circumstances: such as the COVID-19 pandemic). Several commentators suggested that rescuing businesses like Flybe was exactly the sort of thing that the UK Government should be funding once freed from the shackles of the EU State aid rules. However, because Flybe also flew to Northern Ireland, and had (or could have) customers who travelled from the Republic of Ireland to board these flights, trade between Northern Ireland and the EU would have been affected by the bailout. This would have meant that the second bailout of Flybe would still have been prohibited under the State aid rules.

In effect, unless the Internal Market Bill enters into force as currently drafted, UK businesses undertaking economic activity in Great Britain but also retaining a presence in Northern Ireland will have to understand, and may still have to comply with, EU restrictions on State aid.

More on the Northern Ireland Protocol and the impact of the UK Internal Market Bill here.

What are the likely positions after 31 December 2020?

EU involvement

Until the end of the transition period, the UK continues to be bound by EU State aid law, including any legislative amendments or substantive case law. The Commission will also retain jurisdiction over State aid granted before the end of the transition period – i.e. the ability to investigate any such aid - for a four-year period.

UK position

In the absence of a EU-UK free trade agreement (FTA), i.e. a ‘deal’, the UK Government’s position on the application of State aid principles from 1 January 2021 is two-fold:

• The UK will have its own autonomous subsidy control regime based on the WTO framework (more below); and
• The UK will continue to negotiate bi-lateral or multi-lateral FTAs with other countries, which will govern the State aid provisions applicable between the UK and that country.

Effect on Northern Ireland

Two events have the potential to alter the application of State aid principles to EU-NI trade:

• An EU-UK FTA, which will set out the applicable future State aid measures; and
• In the absence of a deal, the implementation of the UK Internal Market Bill and the use of the Government’s power to “set out [its own] interpretation” of State aid rules in Northern Ireland⁴.

In relation to NI-third country trade, Northern Ireland would be bound by the terms of any bilateral or multilateral third country FTA negotiated and secured by Westminster.

WTO subsidy regime

In a no-deal scenario, Britain’s trading relationship with the EU reverts to the baseline created by both parties’ membership of the WTO (sometimes referred to as “WTO terms” or “Australia style”)⁵; more of that here. In relation to subsidies, this means that:

• Export subsidies (i.e. subsidies contingent on export performance) and local content subsidies (i.e. subsidies contingent on the use of domestic over imported goods) will continue to be prohibited as a result of the UK’s international law commitments;
• Actionable subsidies (i.e. subsidies which result in other WTO Members being able to take unilateral actions such as imposing additional tariffs or bringing challenges at the WTO) are likely to be prohibited or controlled, given their potential to affect the UK’s trading relationship abroad; and
• All other subsidies would, in principle, be permitted.

It is worth remembering, however, that the EU and Australia are about to conclude a more comprehensive trading deal following challenging years of WTO terms.

Predictions?

Sources close to EU negotiators suggest that an acceptable position on State aid is especially important to EU stakeholders as well as the other key battleground; fisheries.

Whilst a deal is conceptually possible, particularly in the light of the Prime Minister’s statement on 16 October 2020, we continue to advise our clients to prepare for a no-deal Brexit and the application of WTO trading terms.

How we can help you

DLA Piper’s team of trade and competition lawyers and government affairs professionals in London and Brussels are here to assist you both in your current commercial priorities and your future preparations.

Our market-leading practice has a strong track record of supporting funding bodies, aid recipients and those who feel their interests have been adversely impacted by unlawful aid awarded to their competitors.

With our full service and global capabilities, we can help you adapt your commercial or project funding strategies to the changing State aid environment.

Coming up next in the DLA Piper Trade Truths series

Irrespective of whether the UK leaves the EU with a deal or not, there will be a significant change to the UK’s trading relationship with the rest of the world and its interaction with multilateral, international organisations. Our next edition of Trade Truths will look at how Brexit will impact the UK’s interaction with the World Trade Organisation (WTO) as well as shedding light on the election of the new WTO Director-General, and what this means for the UK’s post-Brexit future.

¹ Article 107, TFEU
² Norway, Iceland and Liechtenstein
³ While many EU Member States’ flag carrier airlines have been saved from financial ruin by State aid bailouts on multiple occasions, they have usually managed to go bust with sufficient infrequency so to comply with the State aid rules.
⁴ United Kingdom Internal Market Bill - Explanatory Notes, para. 60.
⁵  Even though, in reality, Australia has bilateral agreements with the EU which goes beyond a “bare bones” WTO-only relationship and is seeking a trade agreement with the EU.