Seventh Report of Session 2019–21 Contents

2COVID-19: Application of EU State aid rules to coronavirus support schemes11

These EU documents are politically important because:

  • they relax the usual restrictions EU State aid law imposes on taxpayer- funded support for companies in the context of the coronavirus crisis. The UK has agreed to remain subject to those laws until the end of the post-Brexit transition period.

Action

  • Write to the Minister for Small Businesses (Paul Scully MP) to request further information on the effect EU State aid rules have had on the Government’s COVID-related support to British businesses.
  • Drawn to the attention of the Business, Energy & Industrial Strategy Committee, the Treasury Committee and the Northern Ireland Affairs Committee.

Overview

2.1The 2020 coronavirus pandemic, and the measures imposed by governments across the globe to contain its spread, have had a devastating knock-on economic impact in the UK and elsewhere. The European Union has implemented a number of policies in a bid to support its Member States in addressing this crisis.12 A key element of the EU’s policy response has been a ‘Temporary Framework‘ granting an unprecedented level of flexibility in the way that the European Commission assesses compliance of taxpayer-funded interventions to support businesses — such as grants, loan guarantees and tax breaks — with European ‘State aid’ laws.

2.2As we set out in our special COVID-19 Report of 26 March 2020, this Temporary Framework — and the EU’s policy response to the coronavirus more generally — remain of direct interest to the UK, even though it ceased to be an EU Member State on 31 January 2020:

2.3The Government has confirmed it was consulted on the substance of the Temporary Framework before the Commission formally adopted it. A second amendment to the Framework, relaxing EU State aid rules further, was sent to Member States and the UK on 9 April, but has not yet been published. Based on information published by the European Commission, and taking into account an Explanatory Memorandum on State aid submitted by the Minister for Small Business (Paul Scully MP) on 23 April, we have seen no evidence that the Government has been constrained by EU rules in establishing the coronavirus-related support schemes it deemed necessary to date for businesses, workers and the self-employed.15 However, given the clear continued UK interest in this area of EU policy, we have assessed the European Commission’s approach to flexibility in applying EU State aid rules in the context of the coronavirus pandemic in more detail below.

The EU’s “Temporary Framework” for State aid

EU State aid rules

2.4European State aid law is a subset of EU competition legislation.16 These rules are a matter of primary EU law, set out at high-level in the Treaty on the Functioning of the European Union (TFEU) itself, and supplemented by numerous pieces of implementing legislation and guidance.17

2.5In summary, Article 107 TFEU ordinarily prohibits governmental authorities in the EU — be they national, regional or local — from providing an implicit or explicit subsidy18 to individual businesses or sectors where this “distorts or threatens to distort competition” and “affects trade between Member States” (subject to certain exceptions, as described further below).19 To fall within the scope of the rules, the government support measure has to entail a selective advantage not available to all businesses equally. The EU rules do not restrict policies open to all businesses, such as a reduction in corporation tax or changes in employment legislation.

2.6Monitoring the application of these rules is one of the core functions of the European Commission. With certain exceptions,20 Article 108 TFEU requires all government schemes within the EU and the UK that qualify as State aid to be notified to, and approved by, the Commission. The latter has extensive autonomous powers21 to block, or demand adjustments to, support measures it considers in breach of State aid law.22 For aid already granted to businesses, subsequently ruled by the Commission to be unlawful, Member States can be ordered to recover the aid from the recipients with interest added.23 Ultimately, EU countries and the UK, as well as individual businesses, can challenge the Commission’s State aid decisions before the EU Court of Justice (CJEU) to test their validity. Equally, the Commission can take Member States — and for the time being the UK Government24 — to the Court if they fail to enforce its decisions in this area.25

Exemptions from EU State aid rules

2.7As noted, EU law contains a number of exceptions to the general prohibition on State aid.26 As set out in detail in legislation like the General Block Exemption Regulation and the “De Minimis” Regulation, Member States can provide certain types of government support in the wider public interest — for example in economically-underdeveloped regions or for the benefit of small businesses — without having to seek European Commission approval.27 In addition, there are certain safeguards to allow more intensive government support for businesses in times of emergency. These have become particularly relevant in recent months because of concerns that EU State aid rules as normally applied could hinder the rapid implementation of support schemes for businesses affected by the coronavirus crisis.

EU State aid rules during the coronavirus crisis

2.8On 13 March 2020, the European Commission published a policy paper setting out its “coordinated economic response to the COVID-19 outbreak”. In a section on State aid, this recognised the importance of financial assistance from national Governments in the EU (and the UK) to “support citizens and companies, in particular SMEs, facing economic difficulties” due to the pandemic. It notes that countries subject to EU law can provide support to businesses without having to seek Commission approval, including by making available funds to all companies equally (such as the UK’s Coronavirus Job Retention Scheme to pay for 80 per cent of furloughed employees’ income) or measures that fall within the General Block Exemption Regulation.

2.9Moreover, the Commission paper goes on to refer to three specific provisions in the EU Treaty relating to State aid during exceptional circumstances, which allow for further waivers or flexible interpretation of the EU’s usual restrictions on publicly-funded support for businesses:

2.10With respect to the substance of what types of exceptional State aid these three Treaty Articles allow, it seems useful to provide more context. At first glance, the safeguards have similar functions and may even overlap in how they allow derogations from the EU’s usual rules. The question of their legal interpretation, and their limits, has become acutely important in the context of the coronavirus pandemic, to give Member States — and businesses — legal certainty about the compatibility of government support they grant and receive respectively with EU rules (since any unlawful State aid can be subject to recovery orders from the Commission, which are ultimately under the jurisdiction of the EU Court of Justice).

2.11In practice, Article 107(2)(b) TFEU allows countries to use public funds to compensate companies that have suffered losses as a direct consequence of the COVID-19 outbreak itself (but not the lockdown restrictions imposed by Governments), after the Commission formally declared the pandemic to be an “exceptional occurrence”.28 This provision has been used, for example, by Denmark and France to compensate organisers of large-scale events and airlines.

2.12By contrast, Article 107(3)(c) TFEU, on the “development of certain economic activities or of certain economic areas”, can be used under certain conditions29 by countries to prevent specific companies or sectors from collapsing (where there is a specific public interest in doing so).30 For example, it is part of the legal basis for the EU’s “Regional Aid“ programme, where businesses in poorer areas of Member States can receive more government support.31 On 3 April 2020, the Commission announced32 that it would expand the permitted use of this Article to allow for direct aid to companies active in the fields of researching, testing and manufacturing COVID-19 related medical and protective goods. This possibility has been used by Luxembourg and the Czech Republic.

Article 107(3)(b) TFEU: serious economic disturbances

2.13The exemptions from the usual EU State aid permitted under Article 107(3)(b) TFEU are potentially the most far-reaching, because its scope — referring to a “serious disturbance in the economy” — is wide, unlike Article 107(2)(b) which is linked to a specific “disaster” or “occurrence”, and the exemptions its permits are not explicitly limited to measures which do not affect “trading conditions”, unlike Article 107(3)(c). Consequently, there is a high threshold with respect to the impact of any ‘economic disturbance’ before Member States can use this Article to justify exceptional State aid measures.33 Before 2020, Article 107(3)(b) had been used only once previously, following the financial crisis of 2008.34

2.14The coronavirus has now triggered a second activation: on 13 March 2020, the European Commission stated that it considered the “serious disturbance” threshold to have been met for Italy (which by that point had seen over 1,000 COVID-related deaths). That day it also said it was “preparing a special legal framework” on how it would apply this temporary exceptional flexibility in EU State aid rules in practice for those countries that needed it.35

2.15By 17 March, the Commission said the COVID-19 outbreak “pose[d] the risk of a serious downturn affecting the whole economy of the EU” and “even healthy undertakings […] can struggle in these exceptional circumstances”,36 requiring “well-targeted public support is needed to […] counter the damage inflicted on healthy undertakings and to preserve the continuity of economic activity during and after the COVID-19 outbreak”.37 It therefore declared that all EU Member States (and by extension the UK) would be allowed to call on Article 107(3)(b). That same day, the Commission announced that it had sent the Member States a “draft proposal for a State aid Temporary Framework” indicating what type of government support it would consider permissible under Article 107(3)(b), which was formally published on 19 March.38 EU State aid rules were subsequently relaxed on 3 April, when the Commission published an amendment to the Temporary Framework widening the scope of the exemptions already contained in the original two weeks earlier and specifically allowed taxpayer support for businesses involved in the manufacture of medical equipment. A second amendment to the Framework, concerning the ability of Governments to directly recapitalise individual businesses, was announced by the Commission on 9 April but is still being finalised in consultation with the EU’s national governments.

2.16The exceptional government support schemes for businesses permitted under the Framework, which must still be notified individually to the European Commission for approval, are described further below.

The Temporary Framework for State aid

2.17The purpose of the Temporary Framework is to set out the conditions under which Member States and the UK39 can expect rapid Commission approval for various types of exceptional State aid schemes notified under Article 107(3)(b), allowing them to be implemented at speed. It is worth reiterating that EU State aid rules, and therefore the Framework, only apply to government support schemes that are selective (i.e. available, in law or in practice, only to certain companies or sectors) and subject to the approval requirement. It therefore does not apply measures available to all businesses equally, like the UK’s Coronavirus Job Retention and Self-Employment Income Support schemes, or to State aid schemes which are exempt from having to be notified to the Commission (such as support below the “de minimis“ threshold of €200,000 (£x) or less to an individual business over a three-year period).

2.18The Commission’s Temporary Framework as it stands sets out conditions for seven types of exceptional publicly funded support under Article 107(3)(b) to ensure their compatibility with EU State aid rules.40 The first five of these were originally announced on 19 March, whereas the last two were added by the amendment of 3 April. In summary, the different types of State aid the Commission has said it will allow (and the section of the Framework in which they are described) are:

2.19The Framework also sets out some general, ‘horizontal’ rules applicable across all types of support granted under it by EU Member States and the UK:

2.20The Commission’s Framework is not definitive, in the sense that it does not exhaustively list all the types of support EU Member States and the UK can grant to businesses to deal with the fallout of the pandemic. If a country wanted to implement a scheme that does fall within the scope of EU State aid rules, but goes beyond the parameters set out in the Framework, the European Commission can still approve it (but the assessment to reach a decision would most likely take longer, and the scheme may be rejected as incompatible with EU law even during the pandemic).55 Neither the Framework, nor any approvals made by the Commission pursuant to it, will prevent businesses from lodging legal challenges against selective government support given to their competitors (a situation made more likely where Member States support businesses differently to weather the current crisis, for example in the aviation industry).56

2.21Changes to the text of the Temporary Framework itself are also likely. As noted, on 9 April, the Commission said that it circulated a second draft amendment to the Framework to the Member States (and presumably the UK) for consultation. This would set rules for direct government recapitalisation of individual businesses by acquiring equity in them as a “last-resort” measure.57 Although the Commission said it aimed to publish and start applying this change the “next week” after it was announced, i.e. by 17 April at the latest, [as of 6 May it has not announced the outcome of its consultation process].

2.22This delay appears to have been caused by the discussions around State aid waivers having become linked to the EU’s negotiations on what fiscal support to offer its Member States to spend on mitigation of, and recovery from, the current crisis (as discussed elsewhere in this Report). More specifically, the relaxation of State aid rules is of less help to countries — like Spain and Italy — whose borrowing costs are higher and who are therefore constrained in how much they can spend, while it gives governments with more fiscal room — like Germany, the Netherlands and Austria — increased opportunities to support their businesses. This increases the risk of an asymmetrical economic recovery within the EU. The former group of Member States is likely to push for a more restrictive approach to State aid while fiscal divergence remains significant, whereas the latter are known to have asked the Commission to go further in relaxing restrictions on Government support.58

2.23The Committee will assess any further amendments to the Temporary Framework in due course, and report them to the House as necessary.

The Government’s position

2.24As noted, the UK has left the EU but agreed to remain bound by EU competition laws for the duration of the post-Brexit transition period set out in its Withdrawal Agreement. On 23 April 2020, a Minister at the Department for Business, Energy and Industrial Strategy (Paul Scully MP) submitted an Explanatory Memorandum on the Temporary Framework, including the amendment of 3 April. This confirmed that the European Commission consulted the Government on the original draft Framework, and the subsequent amendment, at the same time as the 27 remaining Member States, although “the Government did not offer views”.

UK coronavirus schemes notified to the European Commission

2.25For the duration of the transition period, the Government is observing its legal obligation under Article 108 TFEU to continue to notify support schemes within the scope of EU State aid law to the European Commission. The Treasury Committee and Business, Energy and Industrial Strategy Committee are pursuing their own detailed inquiries into the Government’s coronavirus support for businesses; given our Committee’s remit, we limit ourselves here to assessing the implication of the EU’s Temporary State Aid Framework for those schemes.

2.26The Minister in his Memorandum explained that the UK had notified three separate support schemes under the Temporary Framework to the Commission, which approved all of them without requesting modifications:

2.27In his Explanatory Memorandum, the Minister notes that the UK “may make further notifications” to the European Commission (i.e. ask for approval of additional support schemes that fall within the scope of EU State aid law). However, he did not indicate if any such schemes are actively under preparation. The Government can also establish further support measures for businesses in the scope of the aforementioned “umbrella scheme” without needing new Commission approval.65

Impact of EU State aid rules on the Government’s coronavirus response

2.28Based on the Minister’s Explanatory Memorandum, and on information published by the European Commission, there is no indication that the Government’s preferred way of providing public support to businesses affected by the coronavirus crisis to date has been impeded by EU laws. In particular, the Minister’s Memorandum did not refer to a claim — reported by the Times on 16 April66 — that the Treasury capped the limit of its loan guarantee for small businesses under the CBILS at 80 per cent of the value of the loan, and not any higher, because of “EU state aid rules”. We note in this respect that the Temporary Framework in any event seems to permit such guarantees to cover the full principal where the loan amounts to €800,000 (£700,000) or less, and 90 per cent in other cases. On 27 April, the Treasury also launched the “Coronavirus Bounce Back Loan“ which offers a 100 per cent guarantee, but only for loans up to £50,000.67

2.29The Commission’s State aid register shows that several EU countries have been granted approval for COVID-related loan guarantee schemes with larger guarantees (and loan limits) than their UK counterparts.68 To ensure Parliament has a full picture of the impact the Temporary Framework has had on the Government’s efforts to support businesses to weather the current crisis, we have asked the Minister to clarify if the 80 per cent limit on the CBILS and CLBILS guarantees was a Government policy choice (and no higher limit was put to the Commission for approval), or somehow the result of an EU legal requirement. We are also seeking a more general confirmation that the Government has not decided to abandon any specific forms of business support because of concerns they would have been rejected by the European Commission under EU State aid rules.

Implications of the Temporary Framework under the Ireland/Northern Ireland Protocol

2.30Aside from the direct relevance the EU’s approach to Government support for businesses throughout the UK for the duration of the post-Brexit transition, they are of even greater importance to Northern Ireland specifically. This is because, under the Protocol on Ireland/Northern Ireland in the Withdrawal Agreement, EU legislation that affects trade in goods (such as customs procedures and food safety standards) will continue to apply in and to Northern Ireland beyond the end of the transition period. This arrangement is therefore due to take effect on 1 January 2021.69 The ultimate aim is to avoid the need for any customs and regulatory infrastructure on the land border on the island.

2.31As part of this the unique approach, Northern Ireland will also remain subject to certain EU State aid laws. More specifically, the first paragraph of Article 10 of the Protocol reads:

“The provisions of Union [State aid] law listed in Annex 5 to this Protocol shall apply to the United Kingdom […] in respect of measures which affect that trade between Northern Ireland and the Union which is subject to this Protocol.”

2.32Annex 5 of the Protocol then goes on to enumerate comprehensively the EU’s body of State aid law as it stood in October 2019 (when the Withdrawal Agreement was agreed), including Articles 107 and 108 TFEU, the General Block Exemption Regulation, and numerous formal Communications from the European Commission on how it interprets and applies these rules in practice. The Temporary Framework, having only been created after the UK had already left the EU, is not listed in the Annex. However, Article 13 of the Protocol provides for a mechanism for it to be added, provided both the UK and EU agree to do so.70 The European Commission is also currently reviewing the entire body of EU State aid rules with the aim of “streamlining and simplifying” them by the end of 2021,71 a process we intend to scrutinise more closely in the coming months given its potential impact under the Northern Ireland Protocol.

2.33The exact implications of the State aid provisions of the Protocol are still the subject of debate. It is generally accepted that the Article keeps government support granted to Northern Irish businesses involved in the supply chain for all types of goods72 within the EU’s legal framework for assessing and approving State aid, potentially indefinitely.73 This is in line with the way the Protocol more generally requires the continued application of EU rules on the production of and trade in goods in Northern Ireland. However, because the Article 10 applies to all “measures which affect trade between Northern Ireland and the Union which is subject to this Protocol”, the view has been expressed that the legal text also implies continued constraints under EU State aid law on government support to businesses involved in trade in goods in the rest of the UK,74 even beyond the end of the transition period.75

2.34For example, Colin Murray, of the University of Newcastle Law School, has told our counterparts in the House of Lords that “any [State aid] support for a […] business based in Sheffield but which has aspects of its production, subsidiaries or sales activity in Northern Ireland would thus, prima facie, be subject to [Article 10]”. The Government has said it “does not believe” this effect can be imputed to the Protocol, but to our knowledge has not offered any detailed explanation as to how it arrived at that conclusion.76 Any disagreement between the Government and the EU on the scope of the applicability of EU State aid rules under Article 10 could become subject to the dispute resolution systems set out in the Withdrawal Agreement, including — as a last resort — a binding arbitration process.

2.35Irrespective of the exact scope of Article 10, any State aid within its ambit would have to continue to be notified to, and approved by, the European Commission. That will include, in any event, subsidies and the like for businesses in Northern Ireland that are part of a supply chain for goods. An exemption is made for agricultural subsidies for Northern Irish farmers, which — below a certain level — will not be subject to Commission scrutiny under State aid rules, provided the UK and EU have jointly agreed on that threshold.77 The EU has to assess UK schemes notified under Article 10 against the same standards as applied to the 27 remaining EU Member States, with its decisions ultimately subject to the jurisdiction of the CJEU. The Protocol also specifically requires the Commission, where examining a State aid scheme under Article 10, to keep the Government “fully and regularly informed of the progress and outcome of the examination of that measure”.

2.36At present, there is no overlap between the European Commission’s Temporary Framework and the entry into force of the Northern Irish Protocol. Until the end of transition, EU State aid rules apply throughout the UK equally, and the Framework applying those rules flexibly is only due to remain active until 31 December 2020. Given the Irish Protocol is scheduled to take effect the day after, the Minister in his Explanatory Memorandum noted that “there should not be any [specific] impact under the Northern Ireland Protocol”. However, the Commission has said that it “may review [the Framework] before that date on the basis of important competition policy or economic considerations”, implying an extension is possible. We are therefore seeking clarification from the Minister if the Temporary Framework — if extended beyond the end of 2020 — would need to be explicitly added to Annex 5 of the Northern Ireland Protocol in order for its flexibilities to be available in respect of State aid measures within scope when the Protocol takes effect.

2.37If the Framework were still in force when the transition period ends, the implications would still be limited: after all, it allows substantially more State aid than is ordinarily the case under EU rules, reducing the scope for friction between the European Commission and the UK with respect to government support for businesses within the scope of Article 10 of the Protocol. Although it is not yet clear if the Government intends to pursue a more ‘interventionist’ State aid approach78 after the transition period ends, the implications of Article 10 of the Protocol are likely to be more significant after the Temporary Framework expires. At that point, the potential gulf between what the types of State aid the Government would like to provide, and what the EU considers permissible under the Protocol, would be much wider.

2.38With respect to the actual scope of Article 10 of the Protocol, and the extent to which UK support measures implemented outside of Northern Ireland could fall within its ambit, we note that our counterparts in the House of Lords on 3 April 2020 put a number of questions to the Minister in relation to EU State aid under the future UK-EU relationship (and under the Protocol in particular). In light of the Government’s response, due by 15 May, we will consider whether to pursue this matter further in the context of our scrutiny of the Commission’s on-going review of EU State aid rules.

Action

2.39The Committee is grateful for the Minister’s helpful Explanatory Memorandum, and the subsequent clarifications provided by his officials, on the Temporary State Aid Framework and the application of EU State aid rules to the Government’s package of support measures for businesses affected by the COVID crisis.

2.40We have taken note of the fact that the Government did not propose any amendments to the Temporary Framework when it was still in draft, implying support for the new flexible interpretation of EU State aid rules being applied by the European Commission. Moreover, it has seen no evidence that the UK has been prevented from offering the support to businesses it considered appropriate because of those rules. We make no judgement on the merits of the Government’s schemes, which would be beyond our remit and remains a matter for other Committees of this House.

2.41In light of its above assessment of the Temporary Framework and the Government’s Explanatory Memorandum, the Committee has written to the Minister for Small Businesses, as shown in the Annex to this Report, asking him in particular to clarify to what extent the Framework has been a help or hindrance to the UK’s efforts to support businesses, and whether any further government-backed schemes are being prepared that would require European Commission approval under EU law. The text of that letter is shown below.

2.42The Committee is also drawing the EU’s Temporary Framework for State aid, and its implications for the UK, to the attention of the Business, Energy & Industrial Strategy Committee, the Treasury Committee and the Northern Ireland Affairs Committee.

Letter from the Chair to the Minister for Small Businesses (Paul Scully MP)

The Temporary Framework for EU State aid rules

Thank you for your helpful Explanatory Memorandum of 23 April 2020 on the significant relaxation of EU State aid laws in the context of the COVID-19 crisis by means of the European Commission’s “Temporary Framework” of 19 March, and its subsequent amendment of 3 April. We have noted that the Government did not provide any comments to the Commission when the Framework was sent to you in draft on 17 March, implying the UK supported it fully.

To date, the Commission has approved four coronavirus-related “State aid” schemes under the Temporary Framework, three of which you referred to in your Memorandum. We aware that the EU is finalising a further change to the Temporary Framework as regards direct recapitalisation of struggling businesses as a last resort measure, which we will consider in detail when it is published.

In your Memorandum, you did not raise any concerns about the limitations European State aid rules have placed on the Government in establishing its various support schemes for businesses hit by the pandemic and the subsequent lockdown measures. In particular, you did not refer to a claim reported in the press that the decision to cap the loan guarantee under the Coronavirus Business Interruption Loan Scheme (CBILS) to 80 per cent of the loan value was made to ensure compliance with EU law.

The Committee also discussed the potential implications of the Temporary Framework under Article 10 of the Protocol on Ireland/Northern Ireland in the Withdrawal Agreement, if the Framework were still to be in effect when the post-Brexit transitional period ends.

Based on a more extensive assessment of the EU’s approach to State aid rules in the current crisis, as set out in our Report of 7 May 2020,2 we are seeking some further clarifications from you with respect to the Government’s engagement with the Commission on the substance of the Framework, and as regards the latter’s implications for the UK’s COVID-related support measures for companies (including the Coronavirus Business Interruption Loan Scheme (CBILS)).

In particular, we ask you to write to us by 20 May to:

As part of the regular scrutiny process, we will expect further Explanatory Memoranda from you on any future amendments to the EU’s Temporary State Aid Framework.


11 EU Documents: “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak” and the “Amendment to the Temporary Framework”; Commission numbers: C(2020)1863 and C(2020) 2215; Legal base: Article 107 TFEU; Department: Business, Energy & Industrial Strategy; Devolved Administrations: consulted; ESC number: 41148.

12 See for more information our Report of 26 March 2020 on the EU’s general policy response to the coronavirus.

13 As given effect domestically by sections 1A and 1B of the European Union (Withdrawal) Act 2018.

14 Article 132 of the Withdrawal Agreement provides for the possibility of an extension of the transition period until no later than 31 December 2022. Parliament has legislated to prevent the Government from agreeing to such an extension under section 15A of the European Union (Withdrawal) Act 2018.

15 See the section of this chapter on the Government’s position on the Temporary Framework for more information.

16 Aside from State aid, EU competition law also covers the activities of private companies that affect competition, such as mergers, cartels and monopolies.

17 The rules are set out both in ‘hard’ law — notably Articles 107 and 108 of the Treaty on the Functioning of the EU, and supplementing Regulations approved by the Member States, and in policy papers — ‘Communications’ — drawn up by the European Commission to clarify how it normally interprets these rules in practice to determine types of government support which are, and are not, compatible with EU State aid law.

18 An explicit subsidy would be cash grant to a company. An implicit subsidy might be a loan on terms more favourable than available commercially.

19 Norway, Iceland and Liechtenstein, as non-EU Members of the European Economic Area, have agreed to apply State aid rules equivalent to the competition rules in the EU under the EEA Agreement. For those three countries, the competition rules in the EEA Agreement are enforced by the EFTA Surveillance Authority (ESA).

20 Under the Block General Exemption Regulation, certain types of State aid do not have to be notified to the Commission (and, by extension, do not need to be approved by it). This includes government support for things like rural broadband, cultural subsidies. Similarly, under the De Minimis Regulation, support for businesses below a threshold of €200,000 over a three-year period is exempt from notification and approval.

21 The Commission is autonomous in this respect because its State aid decisions, unlike most other types of legally-binding acts which it can adopt, do not need to be approved (or can be blocked) by the Member States before they take effect.

22 Notifiable public support measures must normally be submitted to the EU before being implemented, although the Commission can decide to waive that requirement. Any State aid schemes drawn to the Commission’s attention by parties other than the responsible Member State, or notified only after they have already been implemented, is considered “non-notified aid”.

23 Where a Member State had not formally notified the State aid measure to the Commission, the latter can still decide whether it is lawful or not under EU rules (for example because it has been drawn to its attention by a third party, such as a business).

24 Under Article 87 of the Withdrawal Agreement, the European Commission can initiate infringement procedures against the UK, for breaches of EU law committed before the end of the transition period, until four years after the transition ends.

25 There are currently two pending State aid infringement procedures before the Court of Justice, both against Greece (cases C-11/20 and C-51/20).

26 EU law permits State aid for a number of specific purposes, for example, government aid to “promote culture”, or subsidies for services of “general economic interest“ (like commercially non-viable airports serving remote regions). For aid within the scope of the General Block Exemption Regulation, the EU has waived the requirement for Member States to seek Commission approval for exempted schemes altogether. Similarly, government support to individual businesses amounting to €200,000 or less over any three-year period — known as the “de minimis“ threshold — is also exempt from having to be notified to the Commission.

27 In the UK, this so-called “Regional Aid” is available principally in Cornwall, West Wales, Tees Valley, the sparsely-populated areas of western Scotland, and all of Northern Ireland.

28 The Commission first concluded that the COVID-19 outbreak qualifies as an “exceptional occurrence” for the purpose of Article 107(2)(b) TFEU in its Decision of 12 March 2020 on a Danish State aid scheme compensating organisers of large-scale events for the mass cancellations triggered by the pandemic.

29 In particular, rescue or restructuring aid granted to businesses under Article 107(3)(c) is subject to the “one time, last time“ principle, under which this type of government support can only be offered once every 10 years.

30 Subject to European Commission approval, Article 107(3)(c) normally allows for “urgent and temporary [government] assistance in the form of loan guarantees or loans” to companies facing bankruptcy or liquidity challenges under the EU’s Rescue & Restructuring Aid Guidelines. Typically, support for smaller companies can be more generous. Justifications of “common interest” could include for example high levels of unemployment in the area where the company employs its workers, or the company provides a service of general economic interest.

31 Regional aid under Article 107(3)(c) TFEU is less generous than under Article 107(3)(a) TFEU, as the latter is specifically for areas where GDP is below 75 per cent of the EU average.

33 In its judgement of 15 December 1999 in Joined Cases T-132/96 and T-143/96, the EU’s Court of First Instance stated that to qualify as a “serious disturbance”, an event “must affect the whole or an important part of the economy of the Member State concerned, and not merely that of one of its regions or parts of its territory”.

35 In its paper of 13 March, the Commission said: “The Commission’s assessment for the use of Article 107(3)b for other Member States will take a similar approach of the impact of the COVID-19 outbreak on their respective economies. This is a live and developing situation. The Commission is constantly monitoring the situation across the EU, in close contact with Member States.”

36 European Commission document C(2020) 1863, para. 8.

37 The Commission has also noted that a coordinated EU-wide approach to the types of support Governments offer to their businesses “avoids harmful subsidy races, where Member States with deeper pockets can outspend neighbours”.

38 [The Government has confirmed that it was consulted on the substance of the Temporary Framework before it was finalised, given that the UK is affected by it as if still an EU Member State during the post-Brexit transition period.]

39 For Norway, Iceland and Liechtenstein, as per the EEA Agreement the EFTA Surveillance Authority will apply the compatibility conditions set out in the Temporary Framework to State aid granted in those countries.

40 The Framework also contains three types of permitted State aid under Article 107(3)(c) TFEU with respect to grants to companies whose activities are in the public interest. These are described in paragraph 13.

41 Lower caps apply for support to businesses in the fisheries and agriculture sectors.

42 According to the Commission, “Member States can also give, up to the nominal value of €800,000 per company, zero-interest loans or guarantees on loans covering 100% of the risk, except in the primary agriculture sector and in the fishery and aquaculture sector, where the limits of €100,000 and €120,000 per company respectively, apply.”

43 The European Commission has said: “Under the amended Temporary Framework, guarantees can cover 100% of the risk of loans with a nominal amount of up to €800,000. Loans can be granted directly to the companies or via credit institutions and other financial institutions acting as financial intermediaries.”

44 The guarantee premium is calculated using basis points, by reference to the size of the loan and the size of the beneficiary (e.g. whether it is a small or large business.

45 Any government support for banks themselves is beyond the scope of the Temporary Framework, as a specific EU legal framework applies under the Bank Recovery & Resolution Directive (BRRD).

46 On 27 March 2020, the European Commission amended its Short-Term Credit Export Insurance Communication, which sets out how Member States’ export support of this nature is usually assessed for compatibility with EU State aid rules, to allow governments to provide such insurance for exporters for a larger number of countries.

47 For sections 3.6, 3.7 and 3.8 of the Temporary Framework, see above on support under Article 107(2)(b) TFEU.

48 As examples of types of support allowed under this category, the Commission refers to “deferral of payments due in instalments, easier access to tax debt payment plans and of the granting of interest free periods, suspension of tax debt recovery, and expedited tax refunds”. As noted, tax deferrals available to all companies equally are not within the scope of EU State aid law.

49 The Temporary Framework states that selective wage subsidy schemes will be considered compatible with EU State aid law if it is”granted over a period of not more than twelve months” and subject to the condition that “the benefitting personnel is maintained in continuous employment for the entire period for which the aid is granted”. The level of support, on a monthly basis, should in principle be below 80 per cent of the monthly gross salary (including employer’s social security contributions) of the benefitting personnel.

50 Paragraph 20 of the Temporary Framework, as amended.

51 In addition, Member States cannot give a company support described in paragraph 13 separately for the research, testing and manufacturing phases of the production process of medical equipment respectively, if this would result in the company being given duplicate support for the same activities.

52 The Temporary Framework notes that “the aid may be granted to undertakings that were not in difficulty (within the meaning of the General Block Exemption Regulation) on 31 December 2019 […] but that faced difficulties or entered in difficulty thereafter as a result of the COVID-19 outbreak”.

53 As noted, under Article 87 of the Withdrawal Agreement, the European Commission can initiate infringement procedures against the UK until four years after the transition ends.

54 Given the speed at which the Commission is approving unprecedented State aid schemes amounting to billions of euros, it cannot be ruled out that there will be future legal challenges to decisions it has taken in recent weeks.

55 If a country provides subsidies or other forms of support within the scope of EU State aid law without seeking Commission approval where it should have done so, the Commission can still investigate and still declare it incompatible (resulting in the need to recover the support from the recipients). Any non-notified government support granted after 1 February 2020 will be assessed for compatibility with the exceptional measures set out in the Temporary Framework.

56 For example, Irish airline Ryanair has said it intends to launch a legal challenge against other EU countries’ support for its competitors under EU State aid rules.

57 The Commission said that recapitalisation measures should be “subject to clear conditions as regards the State’s entry, remuneration and exit from the companies concerned, strict governance provisions and appropriate measures to limit potential distortions of competition”.

58 The Austrian Government, for example, has requested that: countries should be allowed to start applying COVID-related State aid measures before having sought Commission approval; the €800,000 limit on direct aid for smaller businesses should be raised above €800,000; and the fee banks must pay to make use of loan guarantee schemes should be waived.

59 The CBILS loan guarantee scheme was approved by the European Commission on 25 March under State aid reference SA.56792. The formal Decision with details of the information provided to the Commission is not yet available as of 22 April. It falls under section 3.2 of the Temporary Framework as a loan guarantee.

60 The grant component of the CBILS loan scheme, based on Section 8 of the Industrial Development Act 1982, was approved by the European Commission on 25 March under State aid reference SA.56794. It falls within section 3.1 of the Temporary Framework as a direct grant.

61 The UK umbrella COVID scheme was approved by the European Commission on 6 April under State aid reference SA.56841. It falls within sections 3.1, 3.2, 3.3, 3.4, 3.6, 3.7 and 3.8 of the Temporary Framework.

62 In his Explanatory Memorandum, the Minister notes that “the UK’s approval decision [for the umbrella scheme] does not require any particular intervention but will enable public authorities to take immediate action within scope to support businesses, without having to further notify the European Commission”.

63 Officials at the Department for Business, Energy & Industrial Strategy (BEIS) have clarified that the CBILS, the loan guarantee scheme for smaller businesses, could also have been set up under the umbrella scheme but was ready before the latter was in place; it was therefore notified, and approved, separately.

65 The only types of support that are theoretically permitted by the Framework, but not covered by the three UK schemes, are tax-payer funded export credit insurance (section 3.5), deferral of company taxes and national insurance contributions (section 3.9) and selective wage subsidies (section 3.10). Any such schemes would require separate approval from the Commission.

66 The Times, “Banks are blaming EU for their loan failures“ (16 April 2020).

67 This scheme is in principle outside the scope of EU State aid rules because it does not meet the “de minimis” threshold of €200,000 of support per business over a three-year period.

68 These include for example Poland, Italy and Germany.

69 See also the above footnote on the possibility of an extended transition period, which would delay the entry into force of the Northern Ireland Protocol.

70 See Article 13(4) of the Protocol.

71 This timetable may of course slip as a result of the coronavirus crisis.

72 As the Protocol also covers the Single Electricity Market for the island of Ireland, the State aid provisions will also apply to the production and sale of electricity. The impact of Article 10 on services is not definitely established but likely to be low because trade in services is not regulated by the Protocol.

73 The Protocol will initially be in effect for a four-year period from the end of the transition period. At that point, it will be renewed for a further four years provided a majority of members of the Northern Ireland Legislative Assembly vote in favour of this. This process is to be repeated every four years for as long as the Protocol is in effect.

74 See for example oral evidence provided by George Peretz QC to the House of Lords Select Committee on the EU Internal Market Sub-Committee on “The level playing field and state aid”, Thursday 5 March 2020, Q17. He told that Committee: “I have no evidential basis for this, but I have a hunch that, when the UK Government signed up to that, they did not quite understand what they were signing up to. When a number of us in the state aid community saw that provision, there was a certain amount of jaw-dropping. I am not entirely certain that it was understood by the Government at the time.”

75 At the end of the transition period, EU law will mostly cease to be applicable in Great Britain. Aside from the requirements of the Irish Protocol, there are some other provisions of the Withdrawal Agreement that also require the UK to continue applying EU law beyond the end of the transition. These include notably the application of the EU’s Social Security Coordination Regulations to EU citizens in scope of the “citizens’ rights” section of the Agreement, and the continued application of certain EU laws in the UK’s Sovereign Base Areas in Cyprus.

76 On 11 March 2020, the Minister for the Cabinet Office ( Rt Hon. Michael Gove MP) was asked if the wording of Article 10 meant that “businesses that are trading out of England into Northern Ireland, and then on to the European Union […] are going to be subject to the full panoply of [EU] state aid regulations”. He responded the Government “do not believe so” and that “the effective working of the protocol is a matter for the Joint Committee to resolve”. That is, clearly, not a categorical reassurance that Article 10 of the Protocol will not create legal restrictions on government support for businesses in Great Britain which are part of a supply chain for goods. See: Committee on the Future Relationship with the European Union, Oral evidence: Progress of the negotiations on the UK’s Future Relationship with the EU, HC 203, Wednesday 11 March 2020, Q25.

77 See paragraph 2 of Article 10 of the Protocol. If the UK and EU do not reach agreement on the threshold for agricultural support, all such subsidies will be subject to State aid scrutiny in Northern Ireland.

78 The European Commission’s latest Competition Policy Report, published in July 2019, includes a “State Aid Scoreboard“ which showed that the UK typically spends less as proportion of GDP on State aid schemes than Germany and France.




Published: 14 May 2020