What are the limits of state aid in COVID-19 circumstances?

What are the limits of state aid in COVID-19 circumstances?

Author: Matjaž Verbič

Apart from health concerns and issues related to the functioning of the health care system, helping businesses and individuals who are hit by the crisis is one of the key priorities in the wake of the Coronavirus Outbreak (COVID-19) and the emergency declared. In the current situation, the economy is facing a supply shock due to supply chain disruptions, a shock in demand due to lower consumer demand, the negative effects of uncertainty on investment plans and the effect of liquidity constraints on companies.

One possible solution to mitigate the crisis is state aid to companies, which is in principle prohibited by EU law. The Treaty on the Functioning of the European Union (TFEU) namely provides in Article 107 (1) that 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 rules allow state aid in certain circumstances: For example, Article 107 (3) (b) of the TFEU provides for an exemption in the form of aid to promote the implementation of an important project of common European interest or to remedy a serious disturbance in the economy of the Member States. State aid is also compatible with the internal market when it is intended to recover damage caused by natural disasters or exceptional events (Article 107 (2) (b) TFEU).

In response to the COVID-19 outbreak, the European Commission (EC) published on 13 March 2020 a “Communication on Coordinated economic responses to the COVID-19 outbreak” in which the EC stated that the outbreak of the COVID-19 epidemic represents a remarkable and unpredictable event that has a profound impact on the economy and, as such, an exceptional event within the meaning of the above mentioned exception in the TFEU. On this basis, Member States may take measures that benefit all businesses (e.g. tax deferrals or subsidizing part-time work in all sectors) and these do not fall under state aid rules. Businesses may also be awarded compensation by the State for damage directly caused by the COVID-19 outbreak. This can be useful to support particularly affected sectors such as transport, tourism, hospitality and retail.

Furthermore, on 19 March 2020, the EC, on the exception of Article 107 (3) (b) TFEU, adopted the “Temporary Framework to enable Member States to further support the economy in the COVID-19 outbreak. Under this Commission’s Communication, Member States may, under certain conditions, grant five types of state aid, namely (i) direct grants, selective tax advantages and advance payments not exceeding EUR 800,000.00 per undertaking, (ii) state guarantees for loans taken by companies from banks, (iii) subsidised public loans to companies, (iv) safeguards for banks that channel state aid to the real economy, and (v) short-term export credit insurance. The Commission also resorted to a similar measure, i.e. temporary mechanism, in 2008 at the outbreak of the global financial crisis.

This temporary State aid mechanism will remain in force until December 2020; the aid referred to above may therefore be notified by the end of the year. In addition, the EC has set up a special coronavirus response group to assist in coordination and assistance.

EU State aid rules therefore provide for various exemptions that allow national governments to support companies affected by the current COVID-19 pandemic crisis. For the effective application of these exemptions, it is essential for governments and businesses to take into account the parameters set out in State aid rules at an early stage of the procedure. Therefore, it is important that companies considering state aid get appropriate state aid advice early enough in the process.