What is State aid?

Under European law, State aid is prohibited unless it can be authorised by the European Commission as its positive effects exceed its negative impact on the market. Indeed, the Treaty on the Functioning of the European Union (TFEU) provides for a number of policy objectives for which State aid can be considered compatible with the Common Market.

Compatible aid includes, for example, public service compensation, regional aid, RDI aid, aid for climate, energy and the protection of the environment, for important projects of common European interest, etc . The European Commission lays down strict conditions for the compatibility of such aid.

The European legal framework consists of Articles 106, 107, 108 and 109 TFEU, exemption regulations and decisions, frameworks, guidelines and communications designed to assist Member States, undertakings and their legal counsels  to assess the potential existence of in th assassess of State aid and compatibility with the Common Market. European case law also plays a significant role in interpreting the concept of State aid.

Article 107 (1) TFEU establishes the principle of the prohibition of State aid to undertakings and lists the conditions for the existence of such aid.

According to this article, "any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market". 

State aid is thus defined as an advantage in any form whatsoever granted by national public authorities to undertakings on a selective basis. 

State aid is an objective concept. The European Commission has no discretionary power to decide that a measure does not constitute aid if it meets the relevant criteria and its interpretation of this concept is regularly reviewed and even sanctioned by the General Court and the Court of Justice of the EU. 

This concept is also constantly evolving as the liberalisation of certain sectors progresses (telecoms, energy, transport, etc.), and as certain activities are reclassified from non-economic to economic (airports, hospitals, etc.).

However, applying this concept in practice sometimes involves highly complex economic assessments, for example to determine whether a capital injection by the State into a company was made in accordance with the market economy operator principle .

For a public intervention to be classified as State aid within the meaning of Article 107 (1) TFEU, it must meet the following cumulative criteria: 

1. the measure is decided by the State in the broad sense (federal state, region, county, inter-municipal association, State-owned undertaking, chamber of commerce and industry, etc.) and financed by State resources;
2. the measure confers on an undertaking an abnormal economic advantage in any form (subsidy, tax exemption, reduction of social security contributions, capital injection, loan, extension of a concession, etc.);
3. the measure favours certain undertakings or the production of certain goods and is therefore necessarily selective;
4. it distorts (or threatens to distort) competition and affects (or threatens to affect) trade between Member States.

As these criteria are cumulative, if any one of them is not met, then the measure does not constitute State aid and the funds in question fall outside the scope of the European Commission’s control.

In 2016, the European Commission clarified the scope of the State aid rules by publishing its Communication on the notion of State aid . This document, which consolidates European case law, provides guidance on when public spending falls within, or outside, the scope of State aid control and helps public authorities and companies to identify when public support measures can be granted without needing approval under EU State aid rules.

State aid rules apply to public funding granted to undertakings, irrespective of the economic sector in which they operate.

The notion of an undertaking is broadly construed in European law and is not limited to commercial companies. Indeed, the Court of Justice of the European Union has consistently defined undertakings as entities engaged in an economic activity, irrespective of their legal status (public or private) and how they are financed. Rather, the determining factor is that the entity in question carries out an economic activity consisting in offering "products or services on a given market" 1 . Therefore, non-profit organisations and public authorities may be considered as undertakings if they engage in an economic activity. For example, a municipality that feeds electricity into the grid thanks to subsidised photovoltaic panels is subject to State aid rules. 

Public entities, from the central State to inter-municipal associations and public undertakings, must therefore be aware of the legal constraints that apply to their various interventions in favour of undertakings. 

State aid rules apply to subsidies in many sectors, such as manufacturing, telecoms, energy, financial services, transport, logistics, pharma, etc. They also apply to economic transactions between public authorities and undertakings.

State aid rules apply to  all economic sectors but in practice, the Commission focuses on sensitive sectors with overcapacity and on substantial aid. 

However, the public funding of non-economic activities is not subject to State aid rules. 

Indeed, Article 107 (1) TFEU does not apply where the State acts by exercising public power (army, police, air navigation safety, etc.) or where public entities act in their capacity as public authorities (administration services, anti-pollution surveillance, prison management, construction and renovation of roads and bridges, development and revitalisation of public land by public authorities, etc.).

However, if the State decides to introduce market mechanisms for a particular activity, this may transform the nature of this activity into an economic one. This is the case, for instance, with motorway concessions awarded to private companies that levy a fee on users. 

Furthermore, certain sectors that were not considered as of an economic nature have evolved and their public funding may fall under State aid rules, It is for example the case for hospitals, airports, multifunctional infrastructures, sport infrastructures, the development of business parks, etc. 

In the case of illegal aid (not authorised by the Commission or not eligible for an exemption regulation) and incompatible aid (that does not meet the substantive criteria for authorisation), the beneficiary may be required to repay the amount of the aid, plus interest, 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. 

If the unlawful aid can be declared compatible with EU State aid rules, the European Commission will approve the aid without requiring 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 where aid is authorised well after it has been granted to the beneficiary. The  illegality period starts to run from the date of the official act which binds the State towards the beneficiary. Such cases are exceptional. 

Competitors may bring a liability action against both the public authority and the beneficiary of  illegal 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.

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. 

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