State aid and procedure

State aid regulation on procedure provides for the rules ensuring the legality  of State aid and the legal means to challenge them before the European Commission, which is responsible for ensuring that State aid does not distort competition within the Single Market.

Under EU law, State aid is regulated by Article 108 TFEU and by Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 TFEU, and Commission Regulation (EC) 794/2004 of 21 April 2004 implementing Council Regulation (EU) 2015/1589 laying down detailed rules for the application of Article 108 TFEU. 

Who is responsible for the notification?

Under Article 108 (3) TFEU, any project of  aid  must in principle be notified in advance by the Member State concerned to the European Commission.

Can aid be granted before it has been formally authorised by the Commission? 

No, Article 108 (3) TFEU provides that Member States may not implement new State aid measures before they have been approved by the Commission. This is known as the "standstill obligation". Any proposed aid measure put into effect without Commission’s prior approval is illegal. 

The notification procedure allows the Commission to assess whether the notified aid can be declared compatible with the internal market.

Is prior notification compulsory?

No aid project may be granted to the beneficiary before its formal authorisation, unless it qualifies for exemption under a Regulation or Decision, which allow certain categories of aid to be automatically declared compatible with the internal market without formal authorisation from the Commission. If an aid meets all the criteria laid down in these regulations/decisions, it is deemed compatible with the internal market and need not be notified before being granted, but must only be notified to the Commission ex post on the basis of a summary sheet. Examples are the General Block Exemption Regulation, the De Minimis Regulation or the SGEI Exemption Decision.

What is the notification procedure?

Official notifications are made through the Permanent Representations of the Member States to the Commission using a specific software, SANI. This procedure is preceded by a pre-notification process, the purpose of which is to submit the file to the Directorate-General for Competition (DG Comp). In order to verify that the file is complete and to facilitate the subsequent procedure, it is strongly recommended to have prior contact with the Commission services. The official notification must then be made on the basis of a notification form. 

Following the prenotification,, the Commission may issue a positive decision within a two-month period as of the complete notification. In more complex cases, however, it is common for the Commission to consult the Member State concerned and submit requests for information, which extend the two-month period accordingly. 

If the Commission expresses serious doubts as to the compatibility of the aid, it must then open a formal investigation procedure. This procedure is adversarial, as the other Member States and any interested party (beneficiary of the measure, its competitors, associations, etc.)  may submit observations to the Commission based on the decision to initiate the procedure published in the Official Journal. The Commission then adopts its final decision. 

What is the consequence of non-compliance with the notification procedure?

If no notification is made before aid is granted or in the even of a late notification, the aid is illegal and may be subject to a recovery order, issued either by the European Commission or a national court seised by an aggrieved competitor, on the basis of the direct effect of Article 108 (3) TFEU. Although the Commission has the power to order the Member State concerned to suspend or even recover an illegal aid while investigating on its compatibility, it usually wait until the end of the procedure concluding to the incompatibility of the aid to impose its recovery. If the aid is compatible, the Commission does not sanction the infringement of the stand-still obligation by the Member State concerned. 

Indeed, Article 108(3) of the TFEU has direct effect in national law, meaning that any national judge/court may find that an aid measure is unlawful (for failure to obtain formal approval by the Commission) and must therefore order its repayment by the beneficiary. 

The lawfulness and the compatibility of an aid measure are different legal concepts. There is an fundamental distinction between them.

The notion of legality of an aid measure is a procedural concept. It concerns whether aid has been granted in accordance with the procedural rules (see above). This notion must therefore be distinguished from whether or not the aid can be authorised based on substantive criteria. The legality or illegalityof an aid measure can be determined either by the Commission or by a national court.

The notion of compatibility of an aid measure refers to the possibility (or not) of authorising an aid measure or not, in particular with regard to its objective and the criteria for its authorisation laid down by the European Commission. The assessment of the compatibility of an aid measure is in principle an exclusive competence of the Commission. 

These two concepts are independent of each other, so that it is possible for State aid to be both compatible and illegal, just as it is possible for State aid to be compatible and legally granted, or incompatible and illegal.

It should be noted that a national judge is required to sanction illegal aid, without regard to its possible compatibility. The European Commission, by contrast, must examine whether the unlawful aid brought to its attention can be declared compatible, even ex post. 

Therefore, a State's failure to comply with the notification obligation does not automatically render aid measures incompatible with the EU internal market. Unlawful aid may still be authorised by the Commission at a later stage on the basis of an assessment of the substantive criteria.

It is likely that the Commission will open an investigation procedure

The Commission opens formal investigation procedures with respect public interventions either following a formal notification from a Member State, or following a complaint from a competitor, or on its own initiative following the publication of press releases.

In the first two cases, the Commission is required to carry out an analysis of the State financial interventions submitted to its scrutiny and to draw the legal consequences in the event of illegality and incompatibility of these measures with Articles 107 and 108 TFEU.

In the absence of notifications or complaints, the Commission sometimes investigates aid granted to undertakings on its own initiative if it has doubts as to whether it was granted in compliance with State aid rules.

Recovery of unlawful and incompatible State aid

If an aid measure is declared illegal (not authorised by the Commission or not eligible for an exemption regulation) and incompatible (not meeting the substantive criteria for authorisation), the beneficiary may be required to repay the amount of the aid to the entity that granted it, following a negative decision by the Commission or a judgment by a national court to which a competitor has referred the case. 

For reasons of legal certainty, EU law provides for a limitation period after which recovery of the aid can no longer be ordered. This period is ten years from the date on which the aid was granted.

It should be noted that Member States must comply with final Commission decisions and recover from the beneficiary any aid granted in breach of the TFEU.

Article 16 of Council Regulation 2015/1589 (which sets out the procedures for the application of European Union (EU) State aid rules) stipulates that such recovery must include interest calculated on the basis of the reference rate set by the Commission, payable from the date on which the illegal aid was at the disposal of the beneficiary until the date of its recovery. It is intended to neutralise the benefit derived from the aid by the beneficiary during that time. The recovery of an illegal aid measure aims to restore the previous situation. It is therefore not a financial penalty or a fine.

The Commission does not impose fines or periodic penalty payments on the beneficiary or supplier of the aid. Its decisions merely prescribe the recovery of the aid without laying down detailed rules. Recovery of the aid must therefore be carried out in accordance with the procedures laid down in national law.

If the illegal aid is declared compatible with EU State aid rules, the European Commission will authorise it without imposing the recovery of interest for the period during which the aid was illegal. Only national courts, seised for instance by a competitor, have the possibility to order the recovery of interest for the period of illegality if an aid measure is authorised long after being granted to the beneficiary. The period of illegality runs from the date of the official acts binding the State towards the beneficiary. Such cases are exceptional. 

Damages can be claimed

Competitors may bring a liability action against both the public authority and the beneficiary of unlawful aid, as granting and accepting illegal aid constitutes a fault. However, such actions are rare due to the difficulty in demonstrating the link between such fault and a potential damage.

However, we are seeing an increase in national procedures relating to State aid initiated by competitors, as the issue can be raised in both administrative and commercial disputes, and national litigation may in some cases be quicker than a European Commission investigation. 

4. How can CMS help you?

CMS lawyers represent both public authorities and private companies on all aspects of State aid rules.

This includes:

• Legal assessment of possible State aid and its compatibility; 
• Setting up aid schemes;
• Assisting public authorities in notifying State aid to the European Commission;
• Assisting public authorities or beneficiaries in State aid investigations by the European Commission drafting and lodging complaints with the European Commission; 
• Litigation before national and EU courts.

The CMS State Aid Practice Area Group comprises 40 State aid law specialists practising State aid law in 17 jurisdictions located in 20 cities in Europe and beyond – all committed to assist you. 

The CMS State Aid Practice Area Group comprises 40 State aid law specialists practising State aid law in 17 jurisdictions  located in 20 cities in Europe and beyond – all committed to assist you. 

Find your local contact person in our brochure CMS State Aid Group.