State aid: EU General Court annuls Commission's decision relating to German deposit on beverages packaging

On 9 June 2021, following Dansk Erhverv’s request for annulment on 23 January 2019, the General Court of the EU annulled the Commission's decision of 4 October 2018 relating to alleged State aid for German beverage border shops.

Following a complaint by the Danish trade association Dansk Erhverv alleging incompatible State aid being granted to businesses in northern Germany that were selling to customers domiciled in Denmark, the Commission assessed whether the contested measures, namely not collecting the deposit (including VAT) and not imposing a fine on undertakings that did not collect the deposit through the competent authorities, constituted State aid within the meaning of Article 107(1) TFEU. At the end of its preliminary investigation, the Commission concluded that not charging a deposit on certain beverages packaging sold by German border businesses to customers domiciled in Denmark did not constitute State aid.

The cross-border aspect of the case is attracting attention, as it is the federal German “VerpackV regulation”, transposing EU Directive 94/62, that established a deposit system whereby the deposit (including VAT) must be collected at every stage of the sales chain and must be refunded after the packaging has been returned, subject to an administrative fine of up to EUR 100,000 if the relevant business does not comply.

In its application for annulment of the Commission's decision, Dansk Erhverv claimed that its procedural rights had been violated. More substantially, the Danish trade association argued that the Commission insufficiently examined (i) the compatibility of exemption from the deposit with EU and German law, (ii) the VAT revenue forgone by the German state and (iii) the German state’s failure to impose a fine on businesses that did not comply with the obligation to charge the deposit.

Judgment of the General Court

The European Commission must take into consideration the TFEU objectives when verifying the aid’s compatibility but not when assessing its mere existence

In its judgment, the General Court initially pointed out that a distinction must be made according to whether the Commission decides on the compatibility of aid with the internal market or whether it rules on the mere qualification of aid. Indeed, the preliminary step before evaluating an aid’s compatibility is determining whether the measure in question constitutes aid in the first place within the meaning of EU State aid rules. The General Court further stated that, in the context of waste and recycling management of beverages packaging being sold, Article 11 TFEU provides that environmental protection requirements must be integrated into the definition of and when putting into effect the EU's policies and activities.

Following this line of reasoning, when a measure constituting State aid does not comply with other provisions of the TFEU, those provisions may be relied on to challenge the legality of a decision declaring the measure compatible. However, the infringement of other provisions of the TFEU does not have an impact on the qualification of State aid which only depends on the fulfilment of the conditions set out in Article 107(1) TFEU.

Furthermore, the General Court reiterated that provisions of the TFEU that do not explicitly refer to the national laws of Member States must be interpreted autonomously and uniformly to ensure legal consistency throughout the EU. Concerning the legality of national measures, it confirmed that these must be reviewed in the light of national law by the competent courts and not by the European Commission when carrying out its assessment in State aid procedures.

The Commission could apply a novel legal criterion in assessing the existence of an advantage

According to the General Court, the Commission could indeed refer to the interpretation of the relevant national legislation and the practice of the competent enforcement authorities in order to examine whether the failure to impose a fine could be regarded as an advantage for the German businesses concerned, financed through State resources.

In line with the Commission’s assessment, difficulties in interpreting a certain rule prevent the non-imposition of a fine being regarded as an exemption from a fine. This situation clearly differs from one where the State utilises its discretionary margin to exempt an undertaking from the payment of a fine.

Because of the uncertain scope of the rule in this case, deciding that there has been an infringement of the rule and therefore imposing a fine are both problematic. In any event, the criterion seems to consist of whether or not there is a clear and existing obligation on the business that entails the risk of a fine when it does not comply with the rule in question.

On this point, the General Court further pointed out that “difficulties in interpreting the applicable rules” can only prevent the finding of State resources when these are temporary and form part of a process of gradual clarification of the rules. However, the Commission, in its decision, neither referred to the temporary nature of these difficulties nor to the fact that the rules were in a process of being gradually clarified.

As the Commission concluded that the condition relating to State resources was not fulfilled without examining whether the difficulties of interpretation on which it was based were temporary and inherent to the gradual clarification of the rules, the General Court found that it had erred in law.

Conclusion and next steps

In summary, this case provides additional clarifications on the qualification of aid, which has become more complex in recent years, and on how State aid rules affect European directives. Following the judgment, the Commission will have to re-examine the German state measure in the light of the General Court’s position. This could influence the outcome of the procedure if the Commission is not able to respond to the General Court’s criticism.

In terms of technicalities, the General Court confirmed that before assessing an aid’s compatibility with the internal market and thus in order for provisions contained in the TFEU other than purely State aid rules to come into play, it must first pass the strict hurdle of whether the State measure qualifies as aid. In assessing the aid’s mere existence, non-compliance with other objectives of the TFEU is not relevant.

Apart from the requirement to prove the existence of an advantage in whatsoever form granted to an undertaking, the distortion of competition and the impact on trade between Member States, the Commission has to demonstrate that a transfer of State resources occurs in order conclude to the existence of State aid. The Commission, in meeting the standard of proof, should increasingly focus its attention on the temporary nature and the process of gradual clarification of the rules concerned when dealing with similar unclear rules in the future, or the current case’s possible appeal.