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State Aid: COVID-19 Temporary Framework

Introduction

Due to the COVID-19 pandemic, several Member States have implemented measures to contain the spread of the virus that “have an immediate impact on both demand and supply, and hit [companies] and employees, especially in the health, tourism, culture, retail and transport sectors”.[1] Therefore, countries have decided to financially support industries and people.[2]

Such support may amount to State aid if it distorts or threatens to distort competition by favouring particular industries or companies. State aid is defined as “an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities” so far as it likely affects trade between Member States and distorts competition.[3] Nevertheless, State aid is or may be deemed compatible with the internal market under certain scenarios including:

  • Under Article 107(2)(b) of the Treaty on the Functioning of the European Union (TFEU) “to make good the damage caused by…exceptional occurrences”.[4] The European Commission (EC) concluded in its 12 March 2020 decision that “the COVID-19 outbreak qualifies as an ‘exceptional occurrence’ for the purpose of Article 107(2)(b)”;[5] and
  • Under Article 107(3)(b) of the TFEU “to remedy a serious disturbance in the economy of a Member State” and Article 107(3)(c) of the TFEU “to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest”.[6]

This article provides a summary of the EC’s COVID-19 Temporary Framework as of 29 May 2020.

Summary of COVID-19 Temporary Framework

The EC adopted a Temporary Framework (TF) in light of the COVID-19 outbreak under Article 107(3)(b) TFEU on 19 March 2020, a First Amendment to the TF under Articles 107(3)(b) TFEU and 107(3)(c) TFEU on 3 April 2020, and a Second Amendment to the TF under Article 107(3)(b) TFEU on 8 May 2020 so that Member States can “use the full flexibility foreseen under State aid rules to support their economy and help overcome the extremely difficult situation triggered by the Coronavirus outbreak”.[7]

The TF is valid until 31 December 2020, with the exception of recapitalisation measures being extended until 1 July 2021, and sets out the compatibility conditions that the EC will apply in principle when assessing proposed aid measures by Member States.[8] The following types of State aid measures are allowed—subject to conditions—under this TF, where these measures can be categorised into four categories:[9]

  • Providing financial support for undertakings
    • Direct grants, repayable advances and tax advantages
    • State guarantees for loans
    • Subsidised interest rates for loans and aid in the form of subordinated debt
    • Short-term export-credit insurance
  • Promoting investment into COVID-19 relevant research, testing and production
    • Aid for COVID-19 relevant research and development
    • Aid for testing and upscaling infrastructures for COVID-19 relevant products
    • Aid for investment in the production of COVID-19 relevant products
  • Preserving employment
    • Deferrals of tax and/or social security contributions
    • Wage subsidies for employees to avoid lay-offs during the COVID-19 outbreak
  • Offering recapitalisation measures[10]

In line with general State aid regulations, these aid measures must be (i) directly linked to the damage caused by the COVID-19 outbreak; and (ii) proportionate, that is, compensation should not exceed what is necessary to make good the damage and recapitalisations must “not exceed the minimum needed to ensure the viability of the beneficiary, and should not go beyond restoring the capital structure of the beneficiary to the one predating the COVID-19 outbreak”.[11] There are further conditions imposed primarily intended to limit the potential negative consequences of the allowed aid measures to the level playing field within the internal market. Below are a few examples of such conditions:

  • Undertakings that were in financial difficulty as of 31 December 2019 cannot be beneficiaries to the aforementioned aid measures under the TF;[12]
  • The TF links the subsidised loan amounts or guarantees allowed to undertakings to the scale of their economic activity by reference to their wage bill, turnover, and liquidity needs. For example, for loans with a maturity beyond 31 December 2020 the amount of the loan cannot exceed 25 per cent of the total turnover of the beneficiary in 2019;[13]
  • When the aforementioned aid measures are meant to be channelled through financial intermediaries (e.g., banks), the TF stipulates that any indirect advantage to the intermediary must be minimised;[14]
  • For COVID-19 R&D projects that started before 1 February 2020 only “the additional costs in relation to the acceleration efforts or the widened scope shall be eligible for aid”;[15] and
  • When receiving recapitalisation “beneficiaries must not engage in aggressive commercial expansion financed by State aid or…tak[e] excessive risks”, where recapitalisation “should only be considered if no other appropriate solution can be found and [will] be subject to stringent conditions…because such instruments are highly distortive for competition between undertakings”.[16]

When notifying State aid schemes[17] under the TF to the EC, Member States must provide evidence that all the conditions specified under the TF are being respected.[18]

 

Conclusion

As of 29 May 2020, over 100 State aid schemes have been approved across several Member States by the EC under the TF.[19] Although the EC has via the TF communicated general guidelines on the types of aid measures that it will consider compatible with the internal market, the measures are nevertheless designed by the individual Member States themselves.

There are multiple elements to the TF for COVID-19, including support for undertakings (e.g., grants, loans, deferrals of payments, subordinated debt, and recapitalisation measures), investment for COVID-19 relevant products (e.g., for R&D, testing/upscaling, and production), and preserving employment (e.g., subsidies for employees’ wages). It is, however, important for undertakings to ensure any support they get is approved within the schemes approved under either the TF or the EU State aid regulations. If not, then undertakings risk having to repay the aid received in the future.[20]

The views expressed in this report are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research. This article was first published by Competition Policy International.

 


[1] European Commission, “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak”, 19 March 2020 (“Original TF”), ¶ 3, https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_temporary-framework.pdf.

[2] Financial Times, “How major economies are trying to mitigate the coronavirus shock”, 30 March 2020, https://www.ft.com/content/26af5520-6793-11ea-800d-da70cff6e4d3.

[3] European Commission, “State aid control”, https://ec.europa.eu/competition/state_aid/overview/index_en.html.

[5] European Commission, “Notification under Article 107(2)(b) TFEU”, https://ec.europa.eu/competition/state_aid/what_is_new/Notification_template_107_2_b_PUBLICATION.pdf.

[7] European Commission, “Coronavirus Outbreak – List of Member State Measures approved under Article 107(2)b TFEU, Article 107(3)b TFEU and under the Temporary State Aid Framework” (“List of Measures”), https://ec.europa.eu/competition/state_aid/what_is_new/State_aid_decisions_TF_and_107_2_b_and_107_3_b.pdf, accessed on 29 May 2020; European Commission, “Amendment to the Temporary Framework for State aid Measures to support the economy in the current COVID-19 outbreak”, 3 April 2020 (“First Amendment to the TF”), https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_1st_amendment_temporary_framework_en.pdf; European Commission, “Amendment to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak”, 8 May 2020 (“Second Amendment to the TF”), ¶ 3, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020XC0513(01)&from=EN.

[8] Original TF, ¶¶ 19, 39; Second Amendment to the TF, ¶ 40. The extension for recapitalisation matters is since “solvency issues may materialise only at a later stage as this crisis evolves”. See European Commission, “State aid: Commission expands Temporary Framework to recapitalisation and subordinated debt measures to further support the economy in the context of the coronavirus outbreak”, 8 May 2020, https://ec.europa.eu/commission/presscorner/detail/en/ip_20_838.

[9] Original TF; First Amendment to the TF; Second Amendment to the TF.

[10] This last category was introduced because otherwise viable non-financial undertakings may “face longer-term solvency issues” since “emergency measures put in place to control the spread of the COVID-19 outbreak have resulted in a decrease or even suspension of [these undertakings’] production of goods and/or the provision of services, as well as a significant demand shock. The resulting losses will be reflected in a decrease of undertakings’ equity and will negatively affect their ability to take on loans from financial institutions.” See Second Amendment to the TF, ¶ 4.

[11] Original TF, ¶¶ 18–19; Second Amendment to the TF, ¶ 6.

[12] Original TF; First Amendment to the TF; Second Amendment to the TF.

[13] Original TF, ¶¶ 25, 27; First Amendment to the TF, ¶¶ 15, 16.

[14] Original TF, ¶¶ 30–31.

[15] First Amendment to the TF, ¶ 18.

[16] Second Amendment to the TF, ¶¶ 7, 37.

[17] An ‘aid scheme’ is defined as “any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and any act on the basis of which aid which is not linked to a specific project may be awarded to one or several undertakings for an indefinite period of time and/or for an indefinite amount”. See European Commission, “EU Competition Law Rules applicable to State Aid”, 15 April 2014, Article 1(d), https://ec.europa.eu/competition/state_aid/legislation/compilation/state_aid_15_04_14_en.pdf.

[18] Original TF, ¶ 19.

[19] List of Measures, accessed on 29 May 2020.

[20] European Commission, “Recovery of unlawful aid”, https://ec.europa.eu/competition/state_aid/studies_reports/recovery.html.

Copyright ©2020 Cornerstone ResearchNational Law Review, Volume X, Number 216

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About this Author

 Gerhard Dijkstra Competition Policy Consultant
Manager

Gerhard Dijkstra consults on matters related to competition policy. Mr. Dijkstra has evaluated coordinated, vertical, and unilateral effects, as well as geographic markets analysis. He has extensive experience in merger control, Article 101 investigations, abuse of dominance cases, and market studies. Mr. Dijkstra has worked on high-profile merger cases under investigation by, among others, the European Commission and UK Competition and Markets Authority (CMA), as well as non-merger matters involving the CMA, and damages assessments in cartel cases.

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