What is State aid?
State aid is defined as any advantage that a private entity (such as a company) receives from public authorities. During the COVID-19 pandemic, there has been a lot of media coverage on the financial aid that the UK Government and Member States of the European Union have been providing to businesses to help them survive the damaging impact that the pandemic is having on the economy. This financial aid is State aid.
There are two broad types of State aid:
- Direct aid is when a business receives money from public funds, for instance through a grant.
- Indirect aid is when a business receives another form of benefit, such as the granting of a tax benefit.
The UK Government has implemented both direct and indirect State aid measures since the start of the pandemic.
Is State aid lawful?
State aid has an important role to play in the economy. During the current pandemic, State aid is helping many businesses and frontline charities stay afloat and keep operating. However, outside of the pandemic, State aid has been very successful in assisting with initiatives such as promoting economic growth in an underdeveloped area, promoting culture and heritage conversation and providing funds for public transport.
State aid (especially in times of crisis), is frequently used by Member States as a protectionist tool, where it may be used to protect or support businesses or industries of that Member State in preference to competitors. As a result of the potential distortions of competition, the granting of State aid is carefully regulated by the European Commission. Aid that is granted without being provided under an exemption or having been approved by the European Commission following the notification process, is considered unlawful State aid. The implications of receiving unlawful State aid are discussed below.
After the Brexit transition period, it is expected that the UK's Competition and Market Authority will fulfil the role of deciding which State aid measures in the UK are lawful.
What are the main developments since the outbreak of the COVID-19 pandemic?
In recognition of the global shock to the economy that the COVID-19 pandemic has created, the European Commission adopted a Temporary Framework to enable Member States to grant aid to businesses in order to support the economy. As the pandemic evolves, the European Commission has amended and has considered further amending the Temporary Framework to enable Member States to grant aid to businesses in order to support the economy. As the pandemic evolves, the European Commission has amended and has considered further amending the Temporary Framework.
However, there has been suggestions that the European Commission should take further and more radical measures to help Member States deal with the ongoing situation. For instance, Austrian Finance Minister Gernot Bluemel has called for State aid rules to suspended during the pandemic.
What are the potential consequences of receiving incompatible State aid?
The European Commission has wide ranging investigative and decision making powers. If the European Commission concludes that a business has received unlawful State aid, then it can require the Member State that granted the State aid to recover those funds from the beneficiary. It can be potentially very damaging for a company to repay the aid. This is because many businesses would have already used the funds or relied on the tax benefit when considering their liquidity. Furthermore, interest can also be recovered on top of the initial benefit that was granted. It is worth noting that there are very limited defences available - even the risk of insolvency is not a permitted defence.
The limitation period for the European Commission to order the recovery of unlawful State is ten years. Therefore if a business receives unlawful State aid then it can be a potential liability for a significant period.
We are already seeing high-profile challenges in relation to the granting of State aid in the context of the COVID-19 crisis. For example, it has been reported that Ryanair is considering legal action in relation to State aid measures proposed by France. The underlying complaint is that France is granting State aid, in the form of tax measures, that excludes airlines registered in other Member States.
The possible Ryanair challenge helpfully illustrates the risks that may arise in the use of State aid during the COVID-19 crisis, and highlights the need for businesses to consider:
- the application of the State aid rules when receiving any advantage, whether directly or indirectly, from public funds and,
- the impact of aid packages and developments which they may not be eligible for on their business.
Once we are through the crisis, we are likely to see increased and specific due diligence around the receipt and use of State aid in the context of mergers and acquisition and any uncertainly around the lawfulness of State aid could lead impact on the valuation of a business or potential indemnities.