The Commission Notice on the notion of State aid – an overview

As the final act of the "state aid modernisation" initiative launched in 2012, the European Commission published a  Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union (2016/C 262/01) (hereinafter: Notice).

The notice is intended to give guidance on what can be considered as illegal State aid under the Treaty rules. It reflects the case law of the European courts and the decision-making practice of the EU Commission. It helps national courts, granting authorities and entities, which are operating in the market to decide whether subsidies potentially amount to State aid, which may therefore need to be exempted for a pre-defined policy objective (e.g. protection of the environment). Illegal State aid exists and is prohibited if all of the five the criteria of Article 107 para. 1 TFEU are fulfilled. These criteria are:

Criteria of State aid

• Granting an advantage to undertakings engaged in an economic activity
• Financing by the State
• Limiting the aid to certain sectors, regions or undertakings (selectivity)
• Causing at least a potential distortion of competition and
• Affecting interstate trade

If these criteria are fulfilled, there is State aid. It may nevertheless be considered as compatible with the common market if it falls under an exception or can be exempted following notification or because it is in line with the General Block exemption regulation.  
The approach, which involves first deciding whether all the constituent criteria for State aid are present, allows the lawyer to conclude that the granting of aid is legally permissible without further examination of possible exemptions from the general principle that State aid is prohibited.
However, while the Notice contains helpful explanations on some aspects, it remains vague on others, making it difficult in some cases to make a legally sound assessment. This depends to some extent on whether or not case law exists on the individual concepts and their interpretation and assessment.

Granting an advantage to undertakings engaged in an economic activity

The first criterion focuses on the distinction between an economic and a non-economic activity. In addition to the general demarcation characteristics defined by the European courts, the notice gives detailed guidance on non-economic activities such as "social security", "health care", "education and research activities" and "culture and conservation of cultural heritage including nature conservation". These areas, which initially appear to be an exercise of public powers, can in some cases involve economic activity and therefore be subject to the rules. The position of such activities in markets varies considerably from one Member State to another.
The so-called Market Economy Operator Test (MEOT) also plays an important role. If the public authorities act on the market like a market investor, there is no aid present because there is no advantage.

Financing by the State

The EU Commission interprets the criterion of financing through state resources broadly, considering the origin of the resources used to be irrelevant and regards state control of the resources as decisive. In the current decision by the EU Commission of 28 May 2018 on the exemption of German companies from grid charges, the EU Commission held that the state exercises control over the income (exchanged between private companies) from the levy by regulating the mechanism by a legal act pursuant to § 19 StromNEV although the European Courts are tending to put a break on this expansive approach.

Limiting the aid to certain sectors, regions or undertakings (selectivity)

As far as selectivity is concerned, the EU Commission deals in detail with tax questions, in particular the possibility of tax amnesties, advance tax rulings and tax settlements. Selectivity must always be considered in the context of the granting of an advantage, i.e. whether one or certain beneficiaries obtain an advantage, which would not be available more generally.

Causing at least a potential distortion of competition

In principle, any granting of a financial advantage to a company can distort competition. The EU Commission excludes distortion of competition only in very limited exceptional cases. Because State aid is not subject to economic analysis like other areas of competition law this criterion is not one which should be invoked if a lawyer is trying to exclude State aid.

Affecting interstate trade

The prerequisites to assume that barriers to trade between states are present are also low. In particular, even is the amount of aid is small or a small company receives aid, these circumstances do not preclude the presence of impermissible aid. Although cases of purely local impact do usually not impact interstate trade the proof required for only local impact can only be provided on the basis of numerous indications which make it a complex task to achieve legal certainty.

Financing of infrastructure

In the Notice, the EU Commission has dedicated a few pages to the topic of infrastructure financing. The increasing market liberalisation and privatisation of formerly exclusively state-financed infrastructure (airports, broadband, energy or research infrastructure) has led to a rethinking. State financing of infrastructure is still possible, but the private operator must pay a market price for its use.

Conclusion

Overall, the Notice provides a good overview of the case law of the European Courts and, in part, of the decision-making practice of the EU Commission. However, for an assessment   of some criteria, the EU Commission would like to take the situation in the specific member state into account. This considerably increases the time and effort involved in arguing that case law of the European Courts are to be transferred to cases taking place in other Member States.