EU State aid law flexibility in response to the COVID-19 pandemic

Posted - 20.05.2020


Now reading : EU State aid law flexibility in response to the COVID-19 pandemic

Article 107(1) TFEU contains a general prohibition of aid granted by a Member State or through State resources which distorts competition and trade within the European Union (the "EU") by favouring certain companies or the production of certain goods. However, under certain circumstances, such aid may be considered compatible with the internal market by the European Commission (the "Commission"). This might be the case when measures adopted by a Member State are necessary to remedy a serious disturbance in its economy (Article 107(3)(b) TFEU) or facilitate the development of certain economic activities or of certain economic areas (Article 107 (3)(c) TFEU). 

On 20 mars 2020, the Commission published its Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, which was further expanded firstly in early April and subsequently in May 2020 (the "Temporary Framework"- see consolidated version here). In the Temporary Framework, the Commission sets which types of temporary State aid measures it considers compatible with the internal market under points (b) and (c) of Article 107, paragraph 3, TFEU. The Temporary Framework is justified by the current exceptional circumstances and will be applied until 31 December 2020.

  • The existing framework

The Temporary Framework complements possibilities for financial relief already available to Member States outside of state aid control. For instance, Member States can make generally applicable changes in favour of businesses, regarding wage subsidies or tax deferrals or financial support directly to consumers. Also, Member States can design support measures in line with the General State Aid Block Exemption Regulation No 651/2014 without requiring Commission involvement. In addition, Member States can notify aid within the framework of the Commission's Rescue and Restructuring State aid Guidelines. 

Furthermore, on the basis of Article 107(2)(b) TFEU, which declares aid granted to make good the damage caused by natural disasters or exceptional occurrences to be compatible with the internal market, Member States can grant damage compensation to undertakings in sectors particularly hit by the outbreak. The Commission has already approved several Member States' measures on this basis.

  • Specific characteristics of the Temporary Framework

On the basis of the Temporary Framework, several types of State aid measures can be temporarily qualified as compatible with the internal market because they are viewed as necessary to remedy a serious disturbance in the economy in accordance with Article 107(3)(b) TFEU, such as:

  • direct grants, tax and payment advantages, repayable advances, guarantees, loans and equity not exceeding 800 000 euros per undertaking;
  • state guarantees for loans taken by companies from banks for a limited period and loan amount; 
  • subsidised interest rates for a limited period and loan amount;
  • debt instruments subordinated to ordinary senior creditors in the case of insolvency proceedings up to certain ceilings;
  • state guarantees and reduced interest rates provided to undertakings facing a sudden liquidity shortage directly or through credit institutions and other financial institutions as financial intermediaries;
  • short-term export credit insurance provided by the State where needed;
  • targeted aid in the form of deferrals of tax and/or of social security contributions for specific sectors particularly affected by the COVID-19 outbreak;
  • targeted aid in the form of wage subsidies for employees to avoid layoffs during the COVID-19 outbreak.

The Commission recognises that when aid in the form of public guarantees or reduced interest rates is channelled through banks, its objective is not to preserve or restore their viability or liquidity. Nevertheless, certain safeguards will need to be applied to make sure that distortions to competition between banks are limited.

In addition, the following types of measures can be viewed as facilitating the development of certain economic activities or of certain economic areas in accordance with Article 107(3)(c) TFEU:

  • aid for COVID-19 relevant research and development in the form of direct grants, repayable advances or tax advantages;
  • aid for testing and upscaling infrastructures in the form of direct grants, tax advantages, repayable advances and no-loss guarantees;
  • investment aid for the production of COVID-19 relevant products in the form of direct grants, tax advantages, repayable advances and no-loss guarantees.

Moreover, Member States may adopt recapitalisation measures, notably in the form of equity and/or hybrid capital instruments, to support non-financial undertakings, as part of schemes or in individual cases, if the following conditions are satisfied:

  • the intervention must be necessary, appropriate, temporal and proportional, which means that (i) no other appropriate solution is available for the undertaking, (ii) without the State intervention the undertaking would face serious financial difficulties; (iii) the State intervention must be in the common interest (for example to avoid significant loss of employment); (iv) the intervention cannot go beyond what is necessary to ensure the viability of the company and to restore its capital structure in place before the outbreak, and (v) the undertaking shall be encouraged to buy out its shares acquired by the Member State according to the exit strategy developed by the undertaking and the Member State;
  • dividends and share buybacks are banned and restrictions on management remuneration apply; 
  • the aid is not used to pursue aggressive commercial expansion of the undertaking or to support economic activities of integrated companies that were in economic difficulties prior to 31 December 2019;
  • the Member State receives appropriate remuneration for its intervention.

Member States are obliged to notify to the Commission plans to introduce measures under the Temporary Framework. The Commission verifies whether the conditions necessary to approve the aid measure are met. Member States must also publish relevant information on each individual aid granted under the Temporary Framework and maintain detailed records. Moreover, if recapitalisation aid is granted, Member States have to publish details on the identity of the companies that have received aid and the amount of aid. Furthermore, beneficiaries, other than SMEs, have to publish information on the use of the aid received, including on how the aid supports the company's activities in line with EU and national obligations linked to the green and digital transformation.

  • Luxembourg State aid measures

In this context, the Commission has already approved several financial support measures for the Luxembourg economy:

-    A €300 million scheme to support companies affected by the coronavirus outbreak to be in line with EU State aid rules (see the Commission's decision here);
-    a loan guarantee scheme to further support the economy during the coronavirus outbreak (see Commission decision here);
-    a €30 million scheme to support research and development and investments in the production of coronavirus-relevant products (see the Commission's decision here).

More information on the details of the financial assistance measures adopted in support of the Luxembourg economy can be found in other sections of this COVID-19 dedicated webpage.

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