European Union: practitioners’ perspective on state aid and covid-19

In summary

This article provides an overview of the state aid regime adopted by the European Commission to allow member state governments to assist companies affected by the covid-19 pandemic, particularly the Temporary Framework. It introduces the different instruments and procedures under which public funding may be available and discusses some of the main practical issues that have occurred over the course of the implementation of these rules.

Discussion points

• Best options to support companies affected by covid-19
• Pros and cons, procedural implications and practical issues
• Changes to the framework and outlook

Referenced in this article

• Temporary Framework
• SA.56685 (Denmark)
• SA.57539 (Austria)
• SA.63317 (Italy)
• SA.57643 (Estonia)
• SA.57026 (Romania)
• SA.57178 (Romania)
• SA.56809 (Finland)
• SA.56814 (Germany)
• SA.57423 (Latvia)
• SA.57937 (Italy)

As the covid-19 pandemic wrought havoc and governments were forced to impose restrictions on daily life, businesses experienced sharp decreases in liquidity that seriously threatened their ability to meet payment obligations and ensure their long-term viability. In response to this, governments across the European Union sought to come to their assistance, mobilising unprecedented amounts of public resources through subsidised schemes and targeted support measures.

Recognising the need for rapid and decisive action, the Commission tried to assist the member states by expediting approvals, offering dedicated engagement and adopting the Temporary Framework, which set specific thresholds for measures to be deemed compatible with certain state aid rules.

As the impact of the pandemic evolved, the Commission sought to keep pace by adapting those rules: the Temporary Framework has been subject to five sets of amendments to date.

In the wake of the financial crisis in 2008, the Commission adopted a similar approach, also introducing a temporary framework allowing member states to assist ailing financial institutions of systemic importance, despite an obvious risk for serious distortion to the market from the adoption of state aid support at this scale.

In this article, we take a look at the rules for member states seeking to assist struggling companies and what their experience has looked like in practice.

Options for member states to support companies affected by covid-19

The Treaty on the Functioning of the European Union (TFEU) gives member states three legal bases to justify the grant of state aid to companies in need of support because of the pandemic:

• Article 107(2)(b) – aid to make good the damage caused by exceptional circumstances: article 107(2) is an objective concept, meaning that, unlike aid granted under article 107(3), the Commission has no margin of discretion in applying this provision. It is limited to verifying that the compatibility conditions are met.
• Article 107(3)(b) – aid to remedy a serious disturbance in the economy of a member state: traditionally, this legal basis had been accepted by the Commission rather reluctantly; however, despite some initial resistance, in the context of the financial crisis in 2008, the Commission ultimately invoked this provision for the adoption of temporary rules to assist ailing financial institutions and a temporary framework for the ‘real economy’. This same approach has been followed in the context of the pandemic, with the Commission publishing a Temporary Framework to facilitate the adoption of article 107(3)(b) (and some article 107(3)(c)-based) measures.
• Article 107(3)(c) – aid to facilitate the development of certain economic activities or certain economic areas, where the aid does not adversely affect trading conditions to an extent contrary to the common interest: the Temporary Framework provides some specific compatibility rules for certain article 107(3)(c)-based measures, such as aid for research and development. Member states can also rely on the orthodox options under article 107(3)(c), where suitable.

The most appropriate legal basis will depend on a number of factors, including the beneficiary, its financial condition, the nature of the problem that the aid is supposed to address and the form by which the aid is supposed to be granted (direct grants, guarantees, etc).

Member states are also free to grant, without Commission approval, support that does not constitute state aid. Measures that do not qualify as state aid include the provision of loans or state guarantees at market rates, or measures that are available to all companies.

Compensation for damage: rules under article 107(2)(b)

Article 107(2)(b) is designed to allow member states to grant aid ‘to make good the damage caused by natural disasters or exceptional circumstances’. Traditionally it has been used to remedy damages incurred as a result of floods, earthquakes and fires under the ‘natural disaster’ limb. The ‘exceptional circumstances’ limb has been used in the past, for example, to justify support for operating losses incurred by airlines in the wake of the September 2011 attacks on the World Trade Centre in New York.

On 12 March 2020, the Commission adopted the first article 107(2)(b) state aid decision to address damage caused by the pandemic.^[1]

There are no stand-alone guidelines associated with article 107(2)(b)-based measures. To assist with notifications for covid-19 support based on article 107(2)(b), the Commission published a notification template to help member states understand what information the Commission will require to approve decisions on this basis.

The fifth amendment to the Temporary Framework sought to bring some clarity on the kinds of covid-19 restrictions that might merit article 107(2)(b)-based intervention. For example, the cessation of certain economic activities (eg, the closure of bars, restaurants or non-essential shops), cessations in certain areas (eg, restrictions on flights or other transport to or from certain places or destinations) or the capping of attendance for specific sectors or activities at levels where those caps (owing to social distancing rules or restrictions on capacity in certain commercial spaces) entail the cessation of all or a sufficiently substantial part of the affected activity ordinarily carried on there (eg, entertainment, trade fairs and sporting events).

In line with previous precedent, the Commission has been particularly focused on member states’ ability to satisfy three notable criteria for compatibility with article 107(2)(b).

First, there must be a direct and causal link between the aid granted and the damage resulting from the exceptional circumstance (the pandemic). General support for investment, for example, would not fulfil this criterion. In SA.57539 (Austria),^[2] for example, the Commission referenced the cancelled and rescheduled flights in Austria as a result of the travel restrictions imposed by the Austrian and other governments to establish that direct causality.

The Temporary Framework, again under the fifth amendment, is clear that general economic effects of the pandemic, including declines in demand or in attendance owing to lower aggregate demand or greater consumer reluctance to engage in economic activities because of general restrictions, should be excluded from the calculation of damages being compensated under article 107(2)(b).

Second, the aid must be strictly limited to what is necessary to make good the damage resulting from the pandemic. To meet this criterion, the Commission will expect ‘rigorous quantification’ of the compensation. This requirement has seen the Commission require that state aid support based on estimates of damages be reconciled on an ex post basis by the member state.

In SA.57539 (Austria),^[3] the damages were calculated on the basis of the actual net losses incurred by the beneficiary for the months of April and May 2020, as well as estimates for incomplete months based on revenues, variable costs and fixed costs. The Austrian authorities also committed to conduct an ex post assessment of the beneficiary’s actual net losses based on audited annual accounts and to submit the results to the Commission.

Third, the aid must not result in overcompensation. The Temporary Framework notes that a ‘rigorous quantification of such damage must take place’. The Framework stresses that in view of the prolonged nature of the covid-19 pandemic, economic effects of declines in attendance owing to lower aggregate demand, greater customer reluctance to gather or generally applicable restrictions on capacity, social distancing, etc, cannot be taken into account in the calculation of damage attributable to restrictive measures.

In SA.63317 (Italy),^[4] for example, the Italian authorities verified the compensable damage by reference to the difference to beneficiaries’ EBITDA in 2019 compared with their EBITDA for 2020, restricted to periods of ‘full lockdown’ (ie, only periods during which the relevant activities were prohibited by law).

What are the practical advantages of using the article 107(2)(b) option?

Article 107(2)(b) may be particularly appropriate where beneficiaries are ineligible for other forms of aid or the measures contemplated by the Temporary Framework are unsuitable or inappropriate to remedy the specific issues that a member state is seeking to address. As article 107(2)(b) contains no prescriptions about the form of aid that it can support, it is more flexible than the Temporary Framework. Particular features that may be important are set out below.

No limits on direct grants

Unlike measures granted under article 107(3)(b), there is no limit on the level of direct grants that can be bestowed under article 107(2)(b). The Temporary Framework limits direct grants to €1.8 million per company or €10 million per company for uncovered fixed costs, no such limits apply under article 107(2)(b); therefore, article 107(2)(b) may well be more appropriate for companies who have experienced such serious cash flow impact that they cannot access finance even with a government guarantee under the Temporary Framework or for whom a direct grant in excess of the Temporary Framework limits is deemed more appropriate.

In SA.57643 (Estonia),^[5] for example, Estonia used article 107(2)(b) to grant total direct grants of up to €20 million to four beneficiaries based on damages to the maritime passenger transport sector.

Aid to undertakings in difficulty

Certain undertakings may be excluded from the Temporary Framework if they qualified as ‘undertakings in difficulty’ on 31 December 2019. Given almost universal eligibility for aid under the Temporary Framework, this criterion is a key ‘safety feature’ of the Temporary Framework to address the potentially highly distortive character of these aid measures.

In SA.57026 (Romania),^[6] for example, Blue Air already qualified as an undertaking in difficulty on 31 December 2019 and so was excluded from support under the Temporary Framework. As such, Romania designed a support mechanism based dually on article 107(2)(b) and the guidelines on state aid for rescuing and restructuring non-financial undertakings in difficulty 2014 (the Rescue and Restructuring Guidelines) under article 107(3)(c) to grant a combination of two public guarantees to the airline.

The Commission has made clear that state aid granted under article 107(2)(b) is not rescue aid or restructuring aid. This means that companies that have already received aid under the Rescue and Restructuring Guidelines can still be eligible for article 107(2)(b) state aid support.

Aid to financial institutions

Financial institutions are also precluded from the Temporary Framework; however, aid to banks to compensate for direct damage as a result of the covid-19 pandemic can be introduced on the basis of article 107(2)(b).

Support based on article 107(2)(b) does not exclude the possibility that a beneficiary can also benefit from state aid based on another option, including the Temporary Framework, provided the two measures are not targeted at the same eligible costs.

Are there any disadvantages?

Meeting the causality and damages limitation threshold means that article 107(2)(b) is more suited to targeted individual and sectoral measures than general measures, and will often require commitments from the member state to carry out individualised ex post damages assessments and volunteer strict assessment criteria to isolate the causal damages.

Given the exceptional nature of article 107(2)(b) measures, these requirements are subject to rigorous scrutiny, which can have timing implications for clearance. SA.57026 (Romania)^[7] took 127 days from registration to approval, and SA.57178 (Romania)^[8] took 84 days from pre-notification to approval. This is far in excess of the average time frames for Temporary Framework-based decisions.

Granting state aid under article 107(3)(b) and the Temporary Framework

Article 107(3)(b) generally allows for the grant of state aid ‘to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a member state.’ The Commission has made clear that covid-19 can very much be considered a ‘serious disturbance’; therefore, in the wake of the pandemic, it quickly adopted a framework of additional, temporary state aid measures that it will consider compatible with article 107(3)(b).The rationale behind the Temporary Framework is to provide a clear set of rules to assist member states in designing schemes that can be rapidly cleared so that companies suffering liquidity shortfalls get the support they need quickly.

State aid that can be approved under the Temporary Framework

The Temporary Framework sets out a range of possible state aid measures based on articles 107(3)(b) and 107(3)(c).

Direct grants, repayable advances and tax advantages

Such aid cannot exceed €1.8 million, with lower thresholds for fisheries and aquaculture and agriculture undertakings. The Commission is seeking to incentivise member states to choose repayable forms of aid; thus, it has made provision for repayable advances, guarantees and loans to be converted into grants, if required, prior to 31 December 2022.

Guarantees on investment and working capital loans

Guarantee premiums must be set to a minimum level depending on the size of the undertaking, with limits on the level of loan principal that can be guaranteed for loans with a maturity beyond 31 December 2021.

Subsidised interest rates for loans

Loans can be granted at a reduced interest rate, provided certain credit risk margins are met depending on the size of the undertaking and the maturity of the loan. There are limits on the level of the loan principal for loans with a maturity beyond 31 December 2021, and loan contracts should be generally limited to a maximum of six years.

Short-term export credit insurance

Short-term export credit insurance can be granted where cover for otherwise marketable risks has temporarily become unavailable owing to the covid-19 pandemic.

Tax or social security contribution deferrals

Deferrals can be granted until 31 December 2021, and the end date for the deferral should not go beyond 31 December 2022.

Wage subsidies to avoid lay-offs

These must be granted subject to the condition that the employees are maintained in continuous employment for the entire period to which the wage subsidy relates. The subsidy may not exceed 80 per cent of gross monthly salaries and must be time-limited.

Recapitalisation and subordinated debt

Recapitalisation can take the form of equity or hybrid debt/equity instruments and can only be granted to undertakings that would otherwise go out of business, or face serious difficulties maintaining operations, and that cannot access financing on affordable terms on their own.

Capital injections should be at a price that does not exceed the undertaking’s average share price over the 15 days before the request is made. Recapitalisation measures must include a step-up mechanism increasing the remuneration of the state to incentivise the beneficiary to buy back the equity.

Aid for uncovered fixed costs

Aid can be granted in the form of direct grants, guarantees and loans for uncovered fixed costs incurred between 1 March 2020 and 31 December 2021 to undertakings that suffer a decline in turnover of 30 per cent or more during that period. The aid should not exceed €10 million per undertaking.

Eligible recipients of state aid under the Temporary Framework

In principle, any undertaking in any sector can be provided with liquidity support under the Temporary Framework provided:

• they are not a financial institution; and
• were not already in financial difficulty on 31 December 2019.

Companies that only began to experience financial difficulty owing to the pandemic are, therefore, eligible for support, as are any micro or small enterprises that were already in difficulty on 31 December 2019, provided they are not subject to insolvency proceedings and have not previously received any rescue or restructuring aid.

Notwithstanding the prohibition on aid to financial institutions, the Temporary Framework is clear that state aid in the form of guarantees or subsidised interest rates channelled through banks as an intermediary will be considered aid to the banks’ customers, not to the banks themselves. Where aid measures are channelled through banks or other financial institutions, those institutions should be able to demonstrate that the aid is being administered via a mechanism that ensures the advantages are passed on, to the largest extent possible, to the final beneficiaries in the form of higher volumes of financing, riskier portfolios, lower collateral requirements, lower guarantee premiums or lower interests rates than those it would be able to offer without the state aid measure.

Duration of the Temporary Framework

The Temporary Framework was originally due to expire on 31 December 2020. It has since been extended multiple times, most recently until 30 June 2022. Depending on the future impacts of the pandemic, it is within the Commission’s power to extend it further if circumstances so require.

Member states’ use of the Temporary Framework

Temporary Framework-based measures account for the vast majority of covid-19 decisions adopted thus far. Predominantly, the measures have been sectoral or general schemes; however, there are also examples of targeted individual cases, such as SA.56809 (Finland),^[9] which involves a dedicated state guarantee to Finnair to enable it to access a €600 million loan to cover its working capital needs.

The range and form of measures adopted varies widely. There is no shortage of schemes ranging into the billions, with Germany, for example, implementing a mammoth €500 million scheme in SA.56814 (Germany).^[10] On the other end of the scale, member states have also introduced smaller, targeted measures, such as Latvia’s €800,000 direct grant scheme for tour operators that repatriated stranded clients.^[11]

Direct grant and guarantee based measures have been the most popular forms of state aid adopted under the Temporary Framework. Member states have introduced several large schemes of general application but as member states are free to set the limits on these schemes’ operation at a national level, they may not always be suitable for large enterprises with significant financial needs. If individual beneficiaries’ needs exceed the limits set by national schemes, member states may prefer to introduce beneficiary specific measures under the Temporary Framework.

Process for getting state aid approval under the Temporary Framework

The Commission services have been making a concerted effort to clear cases much quicker than typical state aid cases, with simpler measures being cleared in a matter of days (eg, SA.57397 (Netherlands),^[12] which was cleared just two days after notification). The Commission has published a template notification form for measures based on the Temporary Framework. DG Competition has also set up a dedicated mailbox and telephone line to assist member states.

Practical limitations to using the Temporary Framework

The Temporary Framework encompasses a broad range of measures but does not cover every form of measure that might be suitable. It does not include state aid to credit or financial institutions or to undertakings (other than small and medium-sized enterprises) that were in difficulty before 31 December 2019, so member states will need to rely on other legal bases to adopt measures to assist those undertakings.

There is also something of a limitation in the Temporary Framework in terms of the maximum limits placed on direct grants.

Alternatives for granting state aid under article 107(3)(b)

The Temporary Framework provides guidance for the measures that it contemplates directly, but for member states looking to provide support not contemplated by the Temporary Framework, article 107(3)(b) may still be applicable. There have been a small number of measures adopted on the basis of article 107(3)(b) since the pandemic began.

The majority of those have been related to the provision of guarantees on credit insurance activities, which are not covered by the Temporary Framework. Although they are adopted directly, the Commission has referenced the Temporary Framework requirements ‘by analogy’ in assessing the compliance of those measures with article 107(3)(b) when carrying out its assessments (eg, SA.57937 (Italy));^[13] therefore, the Temporary Framework’s requirements remain relevant, and it would likely be difficult for member states to clear a measure of this nature without complying with the Temporary Framework’s rules.

Options for granting covid-19-related state aid under article 107(3)(c)

Article 107(3)(c) generally allows for state aid ‘to facilitate the development of certain economic activities or of certain economic areas’. It is the basis of most orthodox state aid rules, and the Commission has acknowledged that it also has a role to play in states’ covid-19 management.

The Temporary Framework very much focuses on article 107(3)(b) measures; however, it also lays out the conditions for the grant of the following forms of covid-19 targeted aid.

Aid for covid-19 relevant research and development

Member states can provide aid for research and development projects carrying out covid-19 and other antiviral relevant research. The projects include research into vaccines, medicinal products and treatments, medical devices and hospital/medical equipment, disinfectants, protective clothing and equipment, and process innovations for efficient production of required products. Member states can provide up to 100 per cent of the eligible costs for fundamental research, and 80 per cent for industrial research and experimental development (although this can be increased if more than one member state is supporting the project, or it is carried out on a cross-border, collaborative basis). These projects will be automatically deemed to have an incentive effect if they started as of 1 February 2020 or they have received the Covid-19 Seal of Excellence under the Horizon 2020 SME-instrument.

Investment aid for testing and upscaling infrastructure

Aid for the construction or upgrade of testing and upscaling infrastructure needed to deploy covid-19 relevant products can be granted in the form of direct grants, tax advantages or repayable advances. There is an automatic presumption of incentive effect from 1 February 2020.

The projects must be completed within six months of the date of grant; otherwise, 25 per cent of the aid awarded (in the form of direct grants or tax advantages) must be reimbursed, unless delay was owing to factors beyond the beneficiaries’ control.

Aid intensity can reach up to 75 per cent of the eligible costs, although, there is scope to increase this for collaborative or multi-member state efforts. These grants are exempt from the €1.8 million limit for individual undertakings in receipt of general covid-19 support.

Investment aid for the production of covid-19 relevant products

Relevant products for these purposes include medicinal products (including vaccines) and their treatments; their intermediates; active pharmaceutical ingredients and raw materials; medical devices, hospital and medical equipment (including ventilators, protective clothing and equipment as well as diagnostic tools) and necessary raw materials; disinfectants and their intermediary products and raw materials; and data collection and processing tools. There is an aid intensity limit for 80 per cent of the eligible costs, subject to the provision that this can be increased for cross-border efforts and subject to the six-month limit and incentive effect presumption from 1 February 2020.

Undertakings in difficulty

The Temporary Framework is explicit that member states seeking to support undertakings facing financial difficulty can adopt measures based on article 107(3)(c), in particular on the basis of the Rescue and Restructuring Guidelines.

Further, the Commission has introduced changes to some of the existing sectoral state aid rules for article 107(3)(c)-based measures to ensure that undertakings that only experienced financial difficulties owing to the pandemic are not excluded from receiving support under those instruments, including the Guidelines on Regional Aid 2014, the Framework for state aid for research development and innovation 2014, the Guidelines on state aid for environmental protection and energy 2014 and the Communication on state aid to promote the execution of important projects of common European interest 2014.

Article 107(3)(c) Direct measures

Direct clearances under article 107(3)(c) without reference to either the Temporary Framework or sectoral guidelines are also possible, although comparatively much rarer.

Non-state aid options for covid-19 support

In its Communication on the coordinated economic response to the covid-19 outbreak of 13 March 2020, the Commission set out the various options available to member states outside the scope of EU state aid control.

No aid measures that are not selective or do not provide aid to undertakings

The Communication gives the example of measures that apply to all undertakings regarding wage subsidies, suspension of payments of corporate and value added taxes and social security contributions. As such schemes apply to the whole economy, they are not ‘selective’ and thus are not considered state aid. The Communication also gives the example of direct financial support paid to consumers, for example, for cancelled tickets not reimbursed by the operators.

No aid measures that provide no advantage

Although not contemplated by the Communication, support measures that conform to market rates in, for example, the provision of loans or state guarantees at market prices also fall within the category of ‘no aid’ measures.

Services of general economic interest

Services of general economic interest (SGEI) are economic activities that public authorities identify as being of particular importance to citizens that would not be supplied (or would only be supplied under different conditions) without state intervention. These services are performed under a public service obligation (PSO).

The Commission has acknowledged that to the extent that covid-19-related emergency activities fall within the public remit, the public funding of such activities will not fall under state aid rules. To qualify as no aid, measures such as this are traditionally assessed against the criteria in the Altmark judgment of 2003.

In recognition that the exceptional circumstances of the pandemic means that member states may urgently wish to put in place public services to respond to specific needs or to replace commercial services that have become available owing to the outbreak, the Commission has published an overview on the state aid rules on PSOs for air transport, land transport and the maritime sector to assist member states with making such assessments.

The Commission has also decided to extend the SGEI De Minimis Regulation, the regulation setting out the conditions under which support granted for the provision of SGEIs will not be considered state aid, by a further three years, until 31 December 2023. The SGEI De Minimis Regulation has also been adjusted to include a temporary basis on which companies that entered into financial difficulties as a result of the covid-19 pandemic can still receive support.

De minimis aid

Support that falls under the thresholds set by the De Minimis Regulation also does not require Commission approval. This can include support of up to €200,000 over three years in most sectors, subsidised loans of up to €1 million and subsidised guarantees on loans of up to €1.5 million. The De Minimis Regulation, which was due to expire on 31 December 2020, has been extended until 31 December 2023 to provide ‘predictability and legal certainty’ during this tumultuous time. Companies that became undertakings in difficulty because of the pandemic will also be allowed to benefit from de minimis aid for a limited time.

Block-exempted aid

Support can also be granted in line with the requirements of the General Block Exemption Regulation (GBER), without needing to consult the Commission. The GBER usually excludes companies in difficulty; however, the Commission has changed the rules to ensure that companies that entered into difficulty because of the pandemic can still be eligible for GBER support. The Commission has also acknowledged that, owing to the pandemic, it may not be possible for companies that have previously received regional investment aid under the GBER to avoid job losses.

Companies that have received such aid will often have committed not to ‘relocate’ (ie, not to have any job losses in other establishments in the European Economic Area that perform the same activity as the subsidiary that received aid). The Commission has, therefore, introduced targeted changes to the GBER rules to ensure that companies that have had to temporarily or permanently lay off staff will not be deemed to have breached the relocation commitments that they gave when the aid was received (which would ordinarily require the aid be repaid).

Challenges been brought against covid-19 state aid

A number of appeals have been lodged against decisions of the Commission authorising the granting of state aid in the context of the pandemic. Ryanair has been a particularly active litigant, challenging support measures to its competitors by various member states.

As at the time of writing, in 2021, the General Court has rendered 11 judgments on appeals brought by Ryanair against state aid authorised by the Commission under the Temporary Framework. Of those 11 cases, eight have been dismissed in their entirety and were based on grounds such as violations to state reasons, violations of the applicant’s procedural rights, misapplications of article 107(2)(b) of the TFEU and article 107(3)(b) and manifest errors of assessment in the Commission’s review of proportionality of the aid. The three appeals that were upheld were also based on similar grounds; however, the General Court held that the annulment of those decisions is to be suspended until the adoption of new decisions by the Commission.

Outlook for the future

In terms of general outlook, the overall level of state aid granted thus far has already well exceeded the trillion euro mark and is likely to continue at least through the winter. The potential distortive effects of state aid at this scale in light of the quasi universal eligibility for aid but de facto exclusion of companies with greater resources and higher resilience is more than significant.

Arguably this is justifiable given that the objective of the support under the Temporary Framework is ‘remedying a serious disturbance to the economy’ as a whole rather than aiding individual undertakings; however, the longer this specific regime remains in place, the bigger the issue may become. This may come to be made particularly clear as different member states’ capacities to finance large scale measures start to impact the speed with which national economies begin to recover.

^*Kai Struckmann previously worked at White & Case LLP and has since moved to Deloitte Legal as leader of the EU Law & State Aid Center of Excellence.

Notes