In focus: State aid

Dec 01, 2020

State aid has emerged as a major area of disagreement between the EU and UK in the trade talks.  The EU wants the UK to be bound by current EU rules, while the UK wants sovereignty over its State aid regime.  Will an agreement be reached? Let’s look at the key elements.

What is State aid?

State aid is defined as an advantage in any form given to entities using taxpayer-funded resources which has the potential to distort competition and affect trade. Within the EU, the rules are enforced by the European Commission.  There are exceptions but generally, State aid is banned in the EU because of its anti-competitive effects.  The measures must be selective; therefore, countrywide tax measures are exempt, for example, but specific tax advantages to a segment of businesses are not.

Why is State aid banned in the EU?

A company that receives support from government can gain an advantage over its competitors. For example, a viable company could be put out of business because its competitors received unfair subsidies from the State.  Therefore, the EU generally prohibits State aid unless it is justified by reasons of general economic development. For example, in some cases government intervention might be necessary for a well-functioning economy to offset market failure. This has particularly been seen with the advent of the COVID-19 pandemic.

Who implements and enforces State aid rules in the EU?

The European Commission is responsible for implementing State aid rules, primarily the Directorate-General (DG) for Competition. The Commission, as well as the courts of Member States, are responsible for enforcing State aid rules.

How is State aid determined?

Article 107(1) of the Treaty establishing the European Community sets out the criteria – all of which must be met – for State aid to be permissible. The aid must:

  • be granted by the State or through State resources (this can be through grants, tax reliefs, guarantees, providing goods and services on preferential terms or by the government holding all or part of a company).
  • confer an advantage to the recipient.
  • be selective and favouring certain undertakings (e.g. to specific companies or industry sectors or to companies located in specific regions); and
  • be an activity that is tradeable between EU Member States.

If one or more than one of these conditions is not met, then the matter is not State aid.

The EU’s State aid rules allow governments to offer some types of subsidies to business. According to EU data, in 2018, Member States spent €120.9 billion (0.76 percent of GDP) on State aid at EU level (excluding aid to agriculture, fisheries and railways). This was an increase of about €5 billion on 2017 levels. In 2018, the UK spent 0.4 percent of GDP on State aid, while Ireland spent one of the least (in and around 0.2 percent of GDP).

How are new aid measures notified?

Generally, the EU rules require prior notification of all new aid measures to be reported to the European Commission. The Commission will then decide whether the measure can be put in place. There are some exceptions to mandatory notification (for example, de minimis aid not exceeding €200,000 per undertaking over any 3-year period, among other exceptions).

When the Commission is notified, a preliminary investigation is triggered.  The Commission must then decide whether:

  • there is no State aid, and the measure may be implemented.
  • the aid is compatible with EU rules because its positive effects outweigh distortion of competition; or
  • serious doubts exist as to the compatibility of the notified measure with EU State aid rules.

This will prompt the Commission to begin an in-depth investigation. The measure may not be implemented until the investigation has concluded.

Why is State aid such a sticking point in the Brexit negotiations?

The UK is bound by the EU’s State aid rules until the end of the Brexit transition period. After that, the UK could adopt a different approach depending on the terms of the trade deal agreed with the EU. The UK’s size and proximity to the EU means that the risk of UK subsidies (i.e. State aid) harming EU trade and distorting competition is much greater than with other jurisdictions.

The EU had stated that a future deal should include obligations for the UK to adopt EU State aid rules with the European Court of Justice (ECJ) acting in the event of a dispute.  This would mean that the UK would have to set up a counterpart to the ECJ to enforce the rules. During the negotiations, the EU negotiators have reportedly reduced their alignment requirements but would still like the UK to set out how their equivalent regime would work and how disputes would be dealt with. The EU’s Chief negotiator Michel Barnier has said:  “How can we conclude a long-term economic partnership agreement between sovereign partners without knowing which system of state aid or subsidies the UK will put place?”

The UK has stated that it is willing to accept obligations that are similar to those that are agreed between the EU and Canada as part of their trade agreement – the EU-Canada Comprehensive Economic and Trade Agreement – CETA. This would mean that the two jurisdictions would follow the WTO’s anti-subsidy agreement and provide for some additional information sharing.  The UK has reservations about the role of the ECJ, saying it is too restrictive of the UK’s future autonomy.

What if an agreement is not reached?

If no deal is reached, the UK will not have a replacement regime in place on 1 January 2021 beyond the default WTO requirements. The Protocol on Ireland/Northern Ireland will mean that Northern Ireland will still be subject to EU State aid rules next year in relation to goods. This will bring its own complications in instances where companies with a presence in both Northern Ireland and Great Britain receive a UK government subsidy in respect of its Great British operations. Its competitors in the EU (including Ireland) could argue that this falls under State aid rules, in which case the subsidy might need to be notified to the European Commission for approval.