Diarmaid Gavin: State aid rules during the COVID-19 pandemic
Ronan Daly Jermyn partner Diarmaid Gavin and trainee Kate Murphy explore the European Commission’s response to the coronavirus pandemic.
On 19 March 2020, the European Commission adopted a temporary framework for state aid measures to support the economy of member states in the current Covid-19 outbreak.
The purpose of the temporary framework is to set out conditions under which the Commission will consider temporary state aid measures compatible with the Treaty on the Functioning of the European Union (TFEU) and provide a framework for the rapid approval of measures notified by member states compared with the traditional approval processes.
Since its adoption, several national state aid measures have been quickly approved by the Commission, pursuant to the temporary framework, including a scheme implemented to assist companies in Ireland with the economic repercussions of COVID-19. In this article, we provide an overview of how the temporary framework operates.
EU state aid rules
EU state aid rules are designed to ensure that competition in the internal market is not distorted by member states providing unfair advantages to their own industries.
State aid is the use of state funding or state-funded resources to provide an advantage on a selective basis to businesses that distorts competition and affects trade between member states. The provisions on state aid are contained in Articles 107-109 TFEU.
State aid is generally prohibited under the TFEU unless it is compatible with the internal market. Certain limited categories of state aid are automatically deemed compatible pursuant to Article 107(2) TFEU (e.g. social aid to consumers or aid in the case of natural disasters). Article 107(3) TFEU contains five categories of aid that may be deemed compatible by the Commission (which includes aid to remedy a serious disturbance in the economy). In these cases, the proposed aid measure must either be notified to the Commission for approval or fall under the Commission block exemption providing pre-approval for certain types of aid meeting certain conditions.
The temporary framework
The temporary framework was adopted by the Commission pursuant to Article 107(3)(b) TFEU, which provides that “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” may be considered compatible by the Commission.
The temporary framework does not automatically exempt state aid measures adopted to support businesses affected by COVID-19 but rather, as noted above, sets out conditions under which the Commission will consider temporary state aid measures compatible with the TFEU. Member states are still required to notify their proposed measures to the Commission for approval, but with the objective that proposed measures meeting the conditions of the temporary framework can be approved rapidly.
The Commission has two common goals for managing the economic impact of COVID-19 through the adoption of the temporary framework:
- That businesses have the liquidity to keep operating, or to put a temporary freeze on their activities, if needs be, and that support reaches the businesses that need it; and
- That support for businesses in one Member State does not undermine the unity that Europe needs, especially during a crisis.
The temporary framework provides for five types of aid which can be granted by member states prior to 31 December 2020:
- Direct grants, selective tax advantages and advance payments up to €800,000 to a company to address its urgent liquidity needs;
- State guarantees on loans taken out by companies from banks;
- Subsidised loans to companies;
- Build on banks’ existing lending capacities and use them as a channel for support to businesses, in particular to small and medium sized companies. The Temporary Framework makes clear that such aid is considered as direct aid to the banks’ customers, not to the banks themselves and gives guidance on how to ensure minimal distortion of competition between banks; and
- Short-term export credit insurance where needed.
The temporary framework applies in addition to measures already available to member states under the state aid rules.
In a statement by the Executive Vice-President, Margrethe Vestager, she stated that “the new framework does not replace but complements the toolbox with many other possibilities already available to member states in line with state aid rules”. The temporary framework is therefore an additional means of approving aid to companies who have been affected by the COVID-19 outbreak.
The temporary framework will remain in effect until 31 December 2020 but will be reviewed before that date.
The Irish scheme
On 31 March 2020, the Commission approved a €200 million scheme to support companies in Ireland affected by the COVID-19 outbreak in line with the EU state aid rules. The Commission found that the Irish scheme is in line with the temporary framework, as the maximum aid amount per company does not exceed €800,000.
The support, in the form of repayable advances, will be accessible to undertakings that:
- Experience, or expect to experience, a decline in turnover of at least 15 per cent compared to their revenue before the COVID-19 outbreak;
- Employ 10 or more full-time employees; and
- Operate in certain manufacturing sectors and/or internationally traded sectors.
The Commission concluded that the Irish scheme was necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a member state, in line with Article 107(3)(b) TFEU and the conditions set out in the temporary framework, and that these measures would contribute to managing the economic impact of Covid-19.
The Irish scheme is similar to measures implemented across other member states and approved by the Commission under the temporary framework and pursuant to Article 107(3)(b) TFEU, to provide necessary liquidity to businesses in those member states, such as:
- €130 million Danish guarantee scheme for SMEs with export activities affected by the coronavirus outbreak;
- €1.2 billion French scheme for small enterprises in temporary financial difficulties due to the coronavirus outbreak; and
- €20 billion Spanish guarantee scheme for companies and self-employed workers affected by the coronavirus outbreak.