STATE AID WHAT TO BE AWARE OF

Transcription

1 STATE AID WHAT TO BE AWARE OF January 2018 Bart A. Creve Partner Erik Bertelsen Partner Sonny Gaarslev Attorney Michael Herbing Attorney, PhD Søren Andersen Chief Economist Mobile: Direct: Mobile: Direct: Mobile: Direct: Mobile: Direct: Mobile: Direct:

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3 STATE AID What to be aware of COMPANY Changes to State aid rules and practices are frequent and swift and continuously affect the legal situation of regulatory authorities and businesses. In this edition of Insight, we will highlight what you particularly need to look out for, and we will provide recommendations for the handling of State aid challenges. Finally, we will give you an overview of the vast body of rules governing the area. Many businesses and regulatory authorities handle matters and processes that are subject to the State aid rules. It is therefore important to recognise situations that might pose State aid issues, which is not always easy if you do not know the rules intimately. Overview of the rules In Denmark, there are two sets of State aid rules: 1. The Danish Competition Act, Part 3a, Sections 11a-c (the Danish Rules). 2. The Treaty on the Functioning of the European Union (TFEU), Articles (the EU Rules). The EU Rules have also spawned a host of regulations and soft-law instruments governing the area. State aid regulation is highly sector-specific: What goes in one sector will not necessarily go in another. Sectors with specific State aid regulation include: Some sectors will also have explicit exemptions from State aid rules. The exemptions have priority over the general State aid rules. There are also one or two general exceptions, which we will explain at the end of this Insight. In terms of deciding if the Danish or the EU Rules apply, what matters is whether the aid can be said to affect trade between EU Member States. When will this be the case? Well, case law adopts a rather broad interpretation of the concept. It generally takes very little for measures to be considered to affect trade, thus falling under the EU Rules. In the vast majority of cases, therefore, the EU Rules will apply. Financial services Agriculture Broadband Public service broadcasting (radio and television) The coal industry Electricity Fisheries and aquaculture Postal services Transportation (air, sea, rail, road), motor vehicles and shipbuilding 3

4 EU Rules Under EU Rules, aid measures must be notified and approved before they can be lawfully adopted and granted. There are exceptions to the rule, however. These will be described later. Where the EU Rules apply, therefore, the general starting point is that there can be no aid except with the prior approval of the European Commission. The authority granting the aid is responsible for reporting it and obtaining approval. The EU Rules are enforced by the European Commission. Once an aid measure is notified, the Commission will consider it to see if it is compatible with the internal market. The assessment of compatibility is crucial, as it will decide whether the aid is compatible and thus allowed or if it is incompatible and therefore prohibited. Approval is usually given on a case-by-case basis, but measures may also be authorised as an overall aid scheme. In such case, the approval will list a set of criteria which future, concrete grants of aid under scheme must meet in order to be considered lawful. The notification procedure is usually initiated by a so-called pre-notification phase (typically lasting up to two months). After the notification is filed, there will be a preliminary examination phase (also typically lasting up to two months). If the European Commission then decides to open a formal investigation procedure, that phase may generally last up to 18 months, but has been known on occasion to extend even longer than that. The time periods are indicative, and if complaints are filed, the procedure may take even longer to conclude. If an authority grants aid without reporting it to the Commission and obtaining approval, the aid will be illegal State aid. Note the difference here between illegal State aid (where aid is granted without the requisite notification and approval) and incompatible State aid (where notified aid is found to be incompatible with the market and thus cannot be authorised). These two terms, although by no means the same, are often confused and used interchangeably. Danish Rules Unlike the EU Rules, the Danish Rules do not require prior approval of aid. The Danish Competition and Consumer Authority may, however, subsequently order the discontinuation of an aid measure, possibly requesting repayment. The body enforcing the Danish Rules is the Danish Competition and Consumer Authority. Since the EU Rules apply to the majority of all aid measures, the Danish Rules have a very limited scope of application. In matters governed by the Danish Rules, it is possible to file a voluntary notification, requesting from the Authority a so-called declaration of non-intervention. The issuing of such a declaration would be proof that a particular measure is not deemed to have an anti-competitive purpose or effect and that therefore no order will be issued against it. To avoid the risk of an order being issued, therefore, the authority may want to request such a declaration before the aid is granted. Pre-notification phase Preliminary investigation phase months Possible formal investigation phase Timeline of typical process under the EU Rules 4

5 Important points to remember if you are... a granting authority A relatively recent addition, the rule that repayment must be made to the State is intended to avoid the granting of municipal and regional aid without a proper compatibility assessment and in non-compliance with State aid rules. Thus, the legislature was motivated by a desire to create an economic incentive for all granting authorities to be compliant. The express and implied authority for municipal activities The Danish Competition and Consumer Authority cannot order the discontinuation of aid which is covered by the Danish Rules and which is considered lawful under the express and implied authority for municipal activities. In practice, therefore, municipalities and regions will often advise the State Administration about contemplated aid measures, requesting a statement on the lawfulness and compatibility of such measures, including - if the granting authority is a municipality - in relation to the express and implied authority for municipal authorities. The situation may be different if the EU Rules apply, though.... a recipient Early assessment and compliance with State aid rules It is important to sort out early on in the political grant process if an aid measure qualifies as State aid, and subsequently if there is a duty of notification. Once these questions are answered, it is important also to do a compatibility assessment so as to avoid, for example, prematurely confirming the grant in public. A practical example could be to see if the terms of making publiclyowned premises available or guaranteeing a loan are better than the recipient would be able to achieve in a functioning market. If yes, the measure may constitute State aid. It might also be relevant to examine if the measure could adversely affect some of the recipient s competitors or serve to restrict competition generally. Risk of repayment For the recipient, a demand for repayment of State aid may be very burdensome. Not least in situations where aid was granted indirectly (e.g. by making premises available), since in such instances there would be a substantial strain on liquidity and no direct cash grant from which to cover the repayment. In the worst of cases, a claim for COMPANY The Danish Ministry of Economic and Business Affairs has published a State aid Handbook* offering useful guidance on managing the many processes and assessments involved in grants of State aid. Importantly, the granting authority is responsible for notifying the aid measure. To do so requires a certain degree of insight into the Commission s notification system. Municipalities and regions may have a conflict of interest in relation to the State Under the Danish Rules, any claim for repayment accrues to the State, so it is important to keep in mind, as a municipal or regional granting authority, that you will have to some extent a conflict of interest in relation to the State if an order to repay an aid measure is made. * (In Danish) repayment, with interest and compound interest, could prove fatal to an undertaking. Therefore, it is very much in the interest of recipients to make sure that any offer of grants complies with the State aid rules. This may be achieved both by consulting and checking with the granting authority and by undertaking an independent legal and financial assessment of the circumstances in the same way as every granting authority ought to do. 5

6 While the new rules on repayment do to some extent reduce the risk of the recipient being held responsible, there remains a genuine risk, which ought to be duly clarified. Publicity In many instances, potential recipients may want to consider the prospect of publicity before accepting or applying for aid. While there is, of course, nothing wrong with receiving legal and compatible aid, media coverage may take unexpected turns, and the best approach will often be to take steps to handle the situation as early on as possible. It is a different story, of course, if complaints are made or, worse still, a claim for repayment is made. But also in such cases, it is important to adopt a well-considered approach to managing public attention, not least the press. Early and political handling Beneficiaries will often be wise to try to influence the political process early on, the better to tailor-make the aid and mitigate the risk of complaints.... a complainant Investigations before filing your complaint Typically, an enterprise will consider filing a complaint if it is - or expects to be - adversely affected by aid granted to another enterprise. Before filing, it is recommendable to consider how to best document the complaint, by means of, for example, an analysis of the concrete, financial impact and a legal assessment of the circumstances and the overall basis underlying the complaint. In practical terms, the financial analysis could focus on demonstrating the way in which the aid measure would adversely affect the complainant s business (and the business of others, if relevant), restricting competition and leading to, for example, a reduced product range, increased prices, slower product development, and fewer businesses on the market, all of which may adversely affect consumers. Early and political handling Often, a complainant will do well to handle a State aid issue as early on as possible. By influencing the political process in the early stages, uncertainties about the lawfulness and compatibility of a measure can be dealt with and potentially anti-competitive effects avoided. 6

7 Concrete recommendations for... granting authorities 1. Consider if existing schemes may be comprised by State aid regulations. 2. Check to see if aid can be granted under the exemptions. 3. Be mindful that any claim for repayment of aid granted might accrue to the State rather than the granting authority.... recipients 1. Do an independent investigation to ascertain whether an aid measure is comprised by the State aid rules, and consider engaging in a dialogue with the granting authority about the best way to design the aid. 2. Note that you may face a claim for repayment. You may have to complete a project even if the aid is withdrawn. 3. Think about your media handling should you receive unfavourable publicity. Stay up-to-date Rules and practice on State aid issues are developing fast, and keeping track of the current state of affairs can be a challenge. We offer regular newsletters on State aid issues, describing new rules, case law, trends, etc., of particular relevance to a Danish or Danish-oriented audience. The newsletter is released in Danish and English versions. Click here to subscribe: en.kromannreumert.com/sign-up. Our assistance Kromann Reumert employs some of the leading legal specialists on State aid in the country. We have extensive experience representing both granting authorities, recipients, and complainants from a range of different sectors. We are also experienced in the political sphere and in handling the PR-related aspects of a given case. If you have any questions in relation to the issues dealt with in this issue of Insight or in relation to a particular aid scheme, we are always available for a talk please contact partner Bart A. Creve, Attorney Sonny Gaarslev, or Attorney and PhD Michael Herbing.... complainants 1. Consider if you want to contact one or more authorities about the measure. 2. Make sure you have comprehensive documentation for the effect of the measure on your business and others, including economically, and consider requesting access to documents. 3. Be mindful that a complaints procedure may be a protracted affair. 7

8 Important State aid rules State aid rules and regulations are both comprehensive and complex. To bring about some clarity, we have singled out the most important rules and will describe them over the following pages. Since the EU Rules are the ones most frequently applicable, we will take them for our basis. The Rules will be explained in the three main categories into which a State aid process can typically be divided: Consideration, design, and arrangement Approval and implementation After aid is granted Consideration, design, and arranging of aid When is a measure to be regarded as State aid? There are a number of criteria which all must be met in order for a given measure to qualify as State aid at all: 1. Imputability to the State and financing through State resources (public sector funding) The principle of imputability is about the aid measure being imputable to the State (or other public-sector bodies, e.g. municipalities and regions), meaning that the decision to grant must have been made by such authority. The criterion that the aid must be financed through State resources means the aid must be granted out of public funds (not just State resources, but also resources of intra-state entities like municipalities or regions). Aid can be direct (as in a good old bag of money ) or indirect. Indirect State aid could be, for example, the granting of a tax benefit, duty exemption, etc., or where an authority elects to sell a public property below market value to a private undertaking. It is, therefore, a broad category, where the important element is whether any funds go out of the public treasury. 2. Selective economic advantage The selectivity criterion is about whether the scheme only aids some enterprises (or sectors) among a larger target group (often a group of competitors), i.e. where X benefits, but Y and Z do not. The criterion that the aid must confer an economic advantage implies that the recipient must achieve some sort of financial gain, directly or indirectly, which could not have been achieved on normal market conditions. This means the aid will qualify as an economic advantage only if it goes beyond what the recipient could have achieved on normal market conditions, e.g. by raising a loan in the bank or attracting new investors as an alternative to receiving the aid. See the fact box on page 10 for an elaboration of these economic considerations. 3. Effect on competition The criterion of an effect on competition (the so-called appreciability test ) means the aid must distort or potentially distort competition on the market. 4. Effect on trade The effect on trade criterion is used only under the EU Rules. It is a relatively low threshold, but the decisive factor is whether the aid could potentially or does in fact affect a market which is not merely national in scope. For all practical purposes, since the effect on trade criterion is used only under EU Rules, it will be the assessment of whether there is an effect on trade or not (see above) that decides if the EU Rules or the Danish Rules will apply. The other assessments of the measure will be largely the same under both sets of rules. The European Commission has published a Notice on the notion of State aid as a practical tool for assessing the above criteria. The Notice offers general guidelines and concrete examples, but is not binding on the Commission, nor on the national authorities. Ultimately, the final interpretation of the rules falls to the European Court of Justice, hearing the cases brought before it. The possibility of granting aid without prior approval If a measure is found to constitute State aid, there are basically two ways of granting it without the need for approval under State aid rules. Any granting of aid under these two exemptions, however, require compliance with a number of formal requirements. One of the most important requirements - for aid granted under the block exemp- 8

9 tion - calls for registration with the European Commission (if the EU Rules apply). State aid rules cannot, therefore, be entirely disregarded simply because the aid falls under any of these two exemptions. De minimis aid If the aid is below a certain threshold, it will generally be presumed to not affect competition on the market. It will then qualify as so-called de minimis aid, not subject to the State aid rules. Aid may be granted under the de minimis rules if the aggregate amount is EUR 200,000 or less over a period of three financial years per recipient (all government assistance received will be accumulated). Additionally, there are special rules for certain sectors. Aid granted under the de minimis rules is based on statements of truth and therefore not required to be registered - instead, the undertakings guarantee the correctness of the statements. Block exemption Aid may also fall under the rules of the so-called block exemption, in which case it will be considered compatible with the market. Aid falling under the block exemption will therefore be considered preapproved. Recently extended, the block exemption now allows for aid to e.g. ports, airports, etc., but there are also a number of sector-specific block exemptions, for example within the area of fisheries and aquaculture. Common for all, however, is that there are for each aid category a number of requirements to be met in order for the aid to be comprised. Approval and implementation Elements in the compatibility assessment The compatibility assessment is known also as the balance test. It involves a balancing of the positive and negative effects that an aid measure (i.e. a measure which constitutes State aid under the criteria) is expected to entail. As for the positive effects, special importance is attached to the purpose of the aid, including whether the aid measure is suitable for its purpose and whether it is proportionate (i.e. is it adequate for its purpose or is it excessive?). Another key element is that State aid will be allowed if it serves to correct market failure (also called incentive effect), as in the case of, for example, the so-called regional aid programme, which permits aid for the purpose of reviving periferal regions. As for the negative effects, special importance is attached to the distorting of competition that the aid may cause. This might be in relation to other enterprises who are in direct competition with the recipient and will be at a disadvantage, which will ultimately reduce the product range to the detriment of consumers. The balance test is done by weighing the positive and negative effects against each other. The test is best done if it is possible to quantify both the positive and the negative effects in monetary terms, which is, to a wide extent, an economic exercise. If the positive effects significantly outweigh the negative, the aid will be compatible with the market. Intended to prevent any unnecessary distortion of competition, the compatibility assessment is closely linked to the overall objective of EU law to avoid local favouritism, so-called protectionism. 9

10 Economic State aid law Many elements of State aid law are of a decidedly economic nature Parts of the balance test certainly are, not least the test applied to decide if a given measure entails an economic advantage, which is a precondition for qualifying as State aid in the first place. Known as the market economy operator (MEO) test, the test seeks to determine whether a public or private enterprise has been awarded an economic advantage compared to what it (or, in theory, a corresponding enterprise in a corresponding market) would have been able to obtain under normal market conditions. The idea behind the MEO test is that an aid measure entails an economic advantage only if it offers something more than a market economy operator - say, a bank or an investor - would offer under normal market conditions. In practice, therefore, a public authority can take precautions to not award an economic advantage by not purchasing at a price above the market price under normal market conditions and by not setting sales prices below market value under normal market conditions. An economic advantage may also exist outside normal buy or sell situations. e.g. where the advantage consists of issuing guarantees on favourable terms, lending of funds on favourable terms of interest, letting of premises below market rent, or setting a low transfer price. In the context of State aid, the definition of economic advantage is broad. In practice, establishing the relevant market price may be difficult. It is important to see if a price can be established, for example, on the basis of the market price of a comparable service. If this is not feasible, another way of determining the market price might be to enlist the aid of one or more independent experts. These might be experts who can assess what the cash price or rent payable for a given building would be on normal market conditions. After aid is granted Complaints over State aid decisions Decisions by the European Commission can be appealed to the General Court and, ultimately, to the Court of Justice of the European Union. Decisions by the Danish Competition and Consumer Authority can be appealed to the Danish Competition Appeals Tribunal and, ultimately, to the courts. Before lodging a complaint, one should consider how best to substantiate and document the complaint, legally and economically. Repayment In some cases, there may be, for the granting authority and the recipient alike, a risk of repayment, which, if materialised, can have grave consequences for both, and for the projects on the receiving end of the aid. For aid implemented too early (illegal State aid) but subsequently approved (compatible State aid), market interest (so-called illegality interest ) will be payable for the period in which the aid was unlawfully implemented. For aid implemented too early (illegal State aid) and not subsequently approved (incompatible State aid), the full amount must be repaid, including interest (and compound interest) for the period from granting until repayment is made. The applicable interest levels are adjusted regularly to reflect developments in the general economy, but in both cases the amounts may be substantial. It is important, therefore, to clarify as early on as possible whether notification is required and whether the aid is compatible. Under the Danish Rules, repayment of aid always goes to the State, whether the funds were granted out of a municipal or regional budget or not. At this point, it is uncertain whether aid granted under the EU Rules is repayable to the granting authority or to the State. 10

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