Research Handbook on European State Aid Law (Research Handbooks in European Law series) [2 ed.] 1789909244, 9781789909241

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RESEARCH HANDBOOK ON EUROPEAN STATE AID LAW

RESEARCH HANDBOOKS IN EUROPEAN LAW This important series presents a comprehensive analysis of the latest thinking, research and practice across the field of European Law. Organised by theme, the series provides detailed coverage of major topics whilst also creating a focus on emerging areas deserving special attention. Each volume is edited by leading experts and includes specially commissioned chapters from distinguished academics as well as perspectives from practice, providing a rigorous and structured analysis of the area in question. With an international outlook, focus on current issues, and a substantive analysis of the law, these Research Handbooks are intended to contribute to current debate as well as providing authoritative and informative coverage. Forming a definitive reference work, each Research Handbook will be essential reading for both scholars in European law as well as for practitioners and policymakers who wish to engage with the latest thinking and ongoing debates in the field. Titles in this series include: Research Handbook on EU Law and Human Rights Edited by Sionaidh Douglas-Scott and Nicholas Hatzis Research Handbook on EU Tort Law Edited by Paula Giliker Research Handbook on EU Energy Law and Policy Edited by Rafael Leal-Arcas and Jan Wouters Research Handbook on Legal Pluralism and EU Law Edited by Gareth Davies and Matej Avbelj Research Handbook on EU Sports Law and Policy Edited by Jack Anderson, Richard Parrish and Borja García Research Handbook on the EU’s Common Foreign and Security Policy Edited by Panos Koutrakos and Steven Blockmans Research Handbook on EU Economic Law Edited by Federico Fabbrini and Marco Ventoruzzo Research Handbook on European Union Taxation Law Edited by Christiana HJI Panayi, Werner Haslehner and Edoardo Traversa Research Handbook on the Brussels Ibis Regulation Edited by Peter Mankowski Research Handbook on EU Environmental Law Edited by Marjan Peeters and Mariolina Eliantonio Research Handbook on EU Disability Law Edited by Delia Ferri and Andrea Broderick Research Handbook on European State Aid Law Edited by Leigh Hancher and Juan Jorge Piernas López

Research Handbook on European State Aid Law SECOND EDITION

Edited by

Leigh Hancher Professor of European Law, University of Tilburg, the Netherlands; Part-time Professor responsible for EU Energy Law and Policy, Florence School of Regulation, European University Institute, Italy and Senior Advisor at Baker Botts, Brussels, Belgium

Juan Jorge Piernas López Senior Lecturer of EU and International Law, University of Murcia Law School, Spain, and Consultant to The World Bank, Washington DC, USA, and other public institutions

RESEARCH HANDBOOKS IN EUROPEAN LAW

Cheltenham, UK • Northampton, MA, USA

© The Editors and Contributors Severally 2021

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2020950867 This book is available electronically in the Law subject collection http://dx.doi.org/10.4337/9781789909258

02

ISBN 978 1 78990 924 1 (cased) ISBN 978 1 78990 925 8 (eBook)

Contents

List of boxesvii List of contributorsviii Forewordx Prefacexii 1

State aid control from a political science perspective Michelle Cini

2

The market economy operator principle: an economic role model for assessing economic advantage Nicole Robins and Laura Puglisi

3

Taxation and State aid Julia Rapp

40

4

State aid in the energy sector Leigh Hancher and Francesco Maria Salerno

64

5

State aid and free movement Andrea Biondi

87

6

State aid and international trade law Luca Rubini

103

7

State aid and the financial sector: the crisis and beyond Małgorzata Agnieszka Cyndecka

134

8

Material selectivity outside the field of taxation Andreas Bartosch

153

9

EU State aid and arbitration Kai Struckmann, Genevra Forwood, Aqeel Kadri and Irina Trichkovska

163

10

State aid and Brexit George Peretz

183

11

Social services and State aid: new steps towards a more ‘Social Europe’? Delia Ferri

206

12

The private enforcement of State aid law Fernando Pastor-Merchante

226

13

State aid procedures Elisabetta Righini and Flavia Tomat

249

v

1

15

vi  Research handbook on European State aid law 14

State aid to airports and airlines Brian R. Byrne and Ella Adler

269

15

State aid law beyond the EU Juan Jorge Piernas López

297

16

Tax rulings and State aid: musings on recovery Dimitrios Kyriazis

314

17

State aid and EU public procurement: more interactions, fuzzier boundaries Albert Sánchez-Graells

329

Index347

Boxes 2.1 The Ryanair Charleroi case

17

2.2 The EDF case19 2.3 The FIH case

20

2.4 The Citynet Amsterdam case

22

2.5 The Port of Salerno case

23

2.6 The Munich Airport case

25

2.7

26

State guarantee on loans to shipping companies in the Netherlands

2.8 The Starbucks case28 2.9 The Ciudad de la Luz case

32

2.10 The Frucona Košice case

35

2.11 The ING case

36

2.12 The NordLB case

37

vii

Contributors

Ella Adler, Baker Botts (Brussels) LLP Andreas Bartosch, Rechtsanwalt, Partner, Bartosch EU Law Andrea Biondi, Professor of European Law and Director of the Centre of European Law at King's College London, Academic Associate, 39 Essex Chambers, London Brian R. Byrne, Baker Botts (Brussels) LLP Michelle Cini, Professor of European Politics and Head of School, University of Bristol, School of Sociology, Politics and International Studies Małgorzata Agnieszka Cyndecka, Associate Professor, University of Bergen Delia Ferri, Professor of Law at Maynooth University and Co-Director of the ALL Institute Genevra Forwood, White and Case LLP, Brussels office Leigh Hancher, Professor of European Law, University of Tilburg, Part-time Professor responsible for EU Energy Law and Policy, Florence School of Regulation, of the EUI, Florence and Senior Advisor at Baker Botts Aqeel Kadri, White and Case LLP, Brussels office Dimitrios Kyriazis, Head of Law Faculty, New College of the Humanities Fernando Pastor-Merchante, Assistant Professor of Law at IE University George Peretz, QC (England and Wales), BL (Ireland), Monckton Chambers Juan Jorge Piernas López, Senior Lecturer of EU and International Law, University of Murcia Law School, Spain, and Consultant to the World Bank and other public institutions Laura Puglisi, Consultant in Oxera’s state aid team, based in Brussels Julia Rapp, Deputy Head of Unit in Unit H5, State aid and Tax Planning Practices, DG Competition, European Commission Elisabetta Righini, Partner with Latham & Watkins, Brussels and Visiting Professor at the Centre of European Law, King’s College London Nicole Robins, Partner and Head of Oxera’s Brussels office Luca Rubini, University of Birmingham Law School, Reader in International Economic Law, Deputy Director of the Institute of European Law Francesco Maria Salerno, Managing Partner of Gianni, Origoni, Grippo, Cappelli & Partners Brussels office

viii

Contributors  ix Albert Sánchez-Graells, Professor of Economic Law and Member of the Centre for Law and Enterprise, University of Bristol Law School Kai Struckmann, White and Case LLP, Brussels office Erika Szyszczak, Emeritus Professor (Law), University of Sussex Flavia Tomat, Member of the Legal Service of the European Commission Irina Trichkovska, White and Case LLP, Brussels office

Foreword

I was delighted when Leigh and Juan agreed to take over this project and produce a second edition of the Research Handbook on European State Aid Law. There are very good comprehensive text books and a dedicated European State Aid Law Quarterly journal commenting on new developments and recent cases. State aid articles and commentaries permeate other competition law and general journals. But there is also room for a collection of essays exploring in depth the wider inter-disciplinary implications of using state aid in the modern economy. EU law State Aid law and policy has come of age. Increasingly we see State Aid as one of the topics for the training of national lawyers and judges in the EU and also capacity building in Associated States. State Aid (or anti-subsidy clauses) in international trade treaties are now firmly on the agenda and the EU has extended its reach to include State Aid provisions in trade agreements made with neighbouring states. Whether this will also reach into any future trade agreement between the EU and the UK remains to be seen. Foolishly I told Leigh and Juan it was a good time to produce a second edition. Many of the pertinent issues for the first edition in 2011, for example, the effects of the temporary use of State Aid in the banking and financial crisis, or the modernisation of financing services of general economic interest had been worked through and matured. There were new approaches to giving aid for infrastructure projects and new ideas around aid for environmental and energy projects. An even more dramatic approach could be seen in the mission of the Commissioner for Competition, Margrethe Vestager, to extend the scrutiny of state aid into areas such as sport and taxation. But life for the EU state aid lawyer does not stand still. As this collection of essays came to fruition the EU faced a new, bigger and different challenge: the necessity to adapt the State Aid rules to meet the devastating economic impact of the Covid-19 pandemic. Having the experience of the earlier financial crisis the European Commission acted swiftly. Now the longer term issues are filtering through. Writing in May 2020 the realisation of the distortions that State Aid may bring to the Internal Market are openly discussed. These may be in the form of different levels of state aid being used across the EU, or the preference for shoring up of certain sectors, or individual companies. Displacement and deadweight loss issues are the common concerns of economists. Displacement occurs when firms are subsidised selectively; the firms that are subsidised then have a competitive advantage over unsubsidised firms and are more likely to survive at their expense. Deadweight loss arises where employers are subsidised to carry out activities that they would have carried out or to retain employers in enterprises that would have closed anyway. Already, there are concerns that some Member States may be willing, and able, to subsidise certain sectors. For example, the airline industry in their own state, at the expense of other carriers. There are now calls from France and Germany to adapt the competition rules and to develop national industrial champions to compete in the global markets. These are the challenges to test the mettle of the European Commissioner for Competition. But there are other conversations to be had, of the wider significance for European society. Forms of State Aid will be necessary to build the future. The question arises of how the EU State Aid rules will evolve and whether the EU can tolerate allowing the wealthier Member x

Foreword  xi States to invest in their own industries and people, or whether the EU must concurrently look at other wealth and social re-distribution ideas in conjunction with the State Aid rules. One early idea, put forward by Alfonso Lamadrid de Pablo and José Luis Buendía was the use of a “European Solidarity Fund” which could be the beginnings of a new approach. It really gives me great pleasure that this collection of essays provides a modern snapshot of the way in which State Aid continues to be a central aspect of EU integration. It will be a bridge to the next phase of testing whether the infrastructure currently in place is solid but flexible enough to hold the EU together. Erika Szyszczak Professor Emerita, University of Sussex

Preface

We are very pleased to have been entrusted with the weighty task of putting together a second edition of this Research Handbook. For the first edition Erika Szyszczak had collected not only an excellent set of essays but also furnished the state aid community with a handbook that became staple reading for many courses on European state aid law. Almost a decade later we are continuing on this path – simultaneously offering a collection of thought-provoking essays by established experts as well as a range of coverage designed to introduce students into the fascinating subject matter that is EU state aid law. We are grateful that many of the first edition authors were prepared to come on board for the second edition. Several authors were also kind enough to give permission for their original texts to be updated by new contributors. In addition, we have included several new topics that have emerged as major issues of controversy in recent years. The second edition maintains an interdisciplinary approach, with Chapter 1 examining State aid control from a political science perspective (Michelle Cini) and Chapter 2 analysing the market economy operator principle as an economic role model for assessing the legal criterion of economic advantage (Nicole Robins and Laura Puglisi). In this second edition we are also very pleased to introduce two new themes and new authors – Chapter 9 on EU State aid and arbitration (Kai Struckmann, Genevra Forwood, Aqeel Kadri, and Irina Trichkovska), and Chapter 10 on State aid and Brexit (George Peretz). Both topics have been extensively discussed in recent literature and many questions as to how the application of the state aid rules might evolve remain open. Several chapters are devoted to the increasingly complex issue of the relationship between taxation and state aid, providing different perspectives on the theme – Chapter 3 on Taxation and State aid (Julia Rapp) and Chapter 16 on Tax rulings and State aid: musings on recovery (Dimitrios Kyriazis). Chapter 8 examines the related but equally controversial topic of selectivity outside the field of taxation (Andreas Bartosch). Given the evolution in both the case law and Commission decision practice, several sectors deserve special emphasis. This is the case for the energy sector – discussed in Chapter 4 (Leigh Hancher and Francesco Salerno) and the airlines and airport sector, analysed in Chapter 14 (Brian R. Byrne and Ella Adler). The chapter on State aid and the financial sector: the crisis and beyond (Małgorzata Agnieszka Cyndecka) offers a timely evaluation of how the regime adopted in the light of the financial crisis of 2008 has evolved. Although we have not been able to include a separate chapter on the package of measures adopted to deal with the Covid-19 crisis, the insights gained from 2008 are invaluable to addressing the current challenges, as Dr Cyndecka points out, the legal challenges related to the pandemic are also raised in a number of chapters in this volume. The focus of this edition is also broadened to include social services and State aid: new steps towards a more ‘Social Europe’? in Chapter 11 (Delia Ferri). Controversies over the division of competences between the EU and Member states abound in this sensitive area. A comprehensive analysis of EU state aid law also necessitates a careful examination of the interaction of the Treaty articles on free movement as well as public procurement. We are xii

Preface  xiii delighted to include a first edition author – Andrea Biondi – on the former subject (Chapter 5), as well as to welcome a new author – Albert Sánchez-Graells – on the latter topic (Chapter 17). Although the focus of this handbook is primarily on EU law, the international dimension of subsidy control is of increasing importance and this is examined in Chapter 6 State aid and international trade law (Luca Rubini), and in Chapter 15 State aid law beyond the EU (Juan Jorge Piernas López). No analysis of State aid law would be complete without a focus on the procedural dimension. We have included two chapters which reflect both the current trends and challenges in this area. Chapter 12 focuses on the private enforcement of State aid law (Fernando Pastor-Merchante) and Chapter 13 provides a concise overview of State aid procedures (Elisabetta Righini and Flavia Tomat). We would like to thank all the contributors for giving their valuable time to making sure this project went very smoothly. Finding time to write in addition to caring for families, pursuing professional careers and dealing with the normal pressures of life is always challenging. This book has largely been produced during the months of lockdown. We are especially grateful that our contributors and publishers have persevered to deliver this second edition in such difficult times. We would also like to express our gratitude to Kim Schuurman of Tilburg University for her formidable editing skills. Leigh Hancher, Tilburg Juan Jorge Piernas López, Murcia

1. State aid control from a political science perspective Michelle Cini

I. INTRODUCTION1 European State aid rules and decision-making has always been politically sensitive. In contrast to antitrust or mergers, State aid control is ‘… the privileged dialogue between the Commission, national governments and favoured firms’.2 The relationship between the Commission and Member States lies at its heart, however, with firms playing only an indirect role. Given their strong distributive element, State aid measures and EU responses to those measures also have the potential to attract considerable public attention. For elite actors, however, reference to the politics of State aid control has pejorative overtones. In order to assure the credibility of EU State aid control the Commission seeks to avoid political conflicts about individual decisions. For decades, the Commission has sought to commit itself to strict State aid control by developing an increasingly complex system of soft and hard rules.3 More recently, the strengthening of economic analysis in the handling of individual cases was partly justified as an additional means of minimising the potential for political interference. This has meant that for many years now political conflict about individual State aid decisions has become the exception rather than the rule, such that even during the recent financial and economic crisis, the Commission managed to sustain a rule-based approach and to temporally limit the exceptions made. Nevertheless, EU State aid control remains inherently ‘political’4 in at least three respects: first, competition policy in general, and State aid control in particular, are horizontal policies which touch upon a broad variety of goals other than competition, for example, innovation, environmental protection, regional development. Balancing these different goals against each other and setting priorities involves political judgement. Second, the enforcement of EU State aid rules heavily depends on their general acceptance by, and the cooperation of, Member State governments. In order to develop EU State aid control and given its limited own resources, the Commission needs to be sensitive to what is politically feasible at the level of Member States, realising that the policy ‘… restrains the ability of democratically elected governments to

1 This chapter updates Michael Blauberger’s excellent contribution to the first edition of this volume. The author would like to thank Prof. Blauberger for allowing much of his earlier work to be carried over into this chapter. 2 Hussein Kassim and Bruce Lyons, ‘The new political economy of EU State aid policy’ (2013) 13(1) Journal of Industry, Competition and Trade 1, 11. 3 Francis Rawlinson, ‘The role of policy frameworks, codes, and guidelines in the control of State aid’ in Ian Harden (ed), State Aid: Community Law and Policy (Köln: Bundesanzeiger Verlagsgesellschaft 1993), 57. 4 Kassim and Lyons (n 2) 1.

1

2  Research handbook on European State aid law invest and subsidise as they wish’.5 Third, on a different scale, State aid policy opens a window on the relationship between the neoliberal state and the market,6 as well on new forms of economic patriotism that may be gleaned from the design of the state aid regime.7 For a long time, political scientists interested in European integration tended to neglect this policy field. This might be viewed as part of a wider (albeit relative) neglect of State aid issues in other cognate academic disciplines. … political scientists have typically regarded the EU’s state aid policy as too technical, legal scholars often do not regard the state aid rules as part of competition law, and while economists have examined the justifications for industrial policy, they have only recently considered the regulation of state aid to be worthy of serious interest.8

In 2005, a bibliometric survey on all articles on EU policies published in three major political science journals between 1994 and 2004 identified competition policy as one of the major under-researched policy areas. By 2009, State aid control was among those subfields that accounted for an overall increase in political science research on EU competition policy,9 though it still remains something of a ‘poor relation’ compared to other EU policy areas.10 This chapter provides an overview of the contributions of political scientists to the study of EU State aid control. It centres around two broad sets of questions. Part II focuses on the historical development, institutions and the politics of State aid control at the European level; Part III addresses the domestic impact of the policy. Part IV concludes by identifying gaps in the literature and desiderata for further research.

II.

THE EVOLUTION OF EUROPEAN STATE AID CONTROL

The following two subsections discuss a first strand of literature which concerns the actors and institutions involved in State aid control, the drivers of the policy’s evolution and the political tensions that emerge where objectives other than competition are incorporated into the EU’s rule- and decision-making. II.i

The Drivers of EU State Aid Control

The evolution of EU state aid control can be divided into three phases. 1958–1991 has been labelled ‘the dark ages’, a period when only limited action was taken; 1992–2004 was a period

ibid. William Davies, ‘When is a market not a market? “Exemption”, “externality” and “exception” in the case of European State aid rules’ (2013) 30(2) Theory Culture and Society 32. 7 Ben Clift, ‘Economic patriotism, the clash of capitalisms, and State aid in the European Union’ (2013) 13(1) Journal of Industry, Competition and Trade 101. 8 Kassim and Lyons (n 2) 2. 9 Yannis Karagiannis, ‘Political analyses of European competition policy’ (2010) 17(4) Journal of European Public Policy 599, 8. 10 Kassim and Lyons (n 2) 2; Fiona Wishlade, ‘When policy worlds collide: tax competition, state aid and regional economic development in the EU’ (2012) 34(6) Journal of European Integration 585, 585. 5 6

State aid control from a political science perspective   3 of ‘reformation’, also viewed as part of a wider ‘public turn’ in EU competition policy;11 by contrast, the period after 2005 was one of ‘maturation’.12 The latter entailed an overhaul of procedures and rules by former Commissioner Neelie Kroes. It was also marked by the onset of the financial crisis in 2008. The Commission’s strategic framing of the State aid issue played a significant role in the transformation of the policy in the 1980s and 1990s. As a policy entrepreneur, the Commission framed the issue of State aids in relation to market integration in the 1980s and in relation to Economic and Monetary Union (EMU) in the 1990s. In the 1980s, the integrated market argument was crucial; in the 1990s, the Commission argument was all about Member State budgets and the ‘tightening belts’ needed to qualify for EMU. These framings helped to shape the interests of Member States and economic actors, constructing State aid control as the solution to a policy problem.13 It was especially important that Member States were brought into the process; the Commission was successful in convincing national actors that it was in their interest to have a strong State aid policy at EU level.14 Indeed, the Commission-Member State relationship lies at the heart of EU State aid policy. State aid control needs to be understood as a policy that rests on political agreement between Member States and the EU institutions, a synergistic relationship of cooperation and cooptation, ‘… more accurately described by mutual adjustment than political conflict’.15 Alongside individual Decisions, the Commission’s main instruments to promote State aid control are Guidelines and Frameworks which clarify the distinction between compatible and incompatible aid. This particular ‘soft law approach’16 was developed out of necessity after the refusal of Member State governments to adopt Council legislation back in 1966 and 1972.17 This soft law is an entry point for politics within the policy.18 What first appeared to be a weakness, however, developed into a strength of EU State aid control. While the Commission still has a strong interest in securing broad Member State approval for its rules through consultations and multilateral meetings, no Council vote or domestic transposition is required as in the case of normal secondary law. Moreover, despite significant controversies about their legal basis and character, the Commission’s soft rules have become de facto and even de jure binding upon Member States. In order to ‘convince’ individual Member States to accept new rules, the Commission repeatedly employs a strategy that was described elsewhere as ‘divide and conquer’.19 If a broad majority of Member States accepts new or revised Guidelines, the 11 Umut Aydin and Kenneth P Thomas, ‘The challenges and trajectories of EU competition policy in the twenty-first century’ (2012) 34(6) Journal of European Integration 531, 533. 12 Kassim and Lyons (n 2). 13 Umut Aydin, ‘Issue framing in the European Commission: State aid policy and the single market’ (2014) 12(2) Comparative European Politics 141, 141. 14 ibid 155. 15 Nikolaos Zahariadis, ‘Discretion by the rules: European State aid policy and the 1999 Procedural Regulation’ (2010) 17(7) Journal of European Public Policy 954, 966. 16 Michelle Cini, ‘The soft law approach: commission rule-making in the EU’s State aid regime’ (2001) 8(2) Journal of European Public Policy 192. 17 Kostas Lavdas and Maria M Mendrinou, Politics, Subsidies, and Competition. The New Politics of State Intervention in the European Union (Cheltenham: Edward Elgar 1999) 29f. 18 Mitchell P Smith, ‘Autonomy by the rules: the European Commission and the development of State aid policy’ (1998) 36(1) Journal of Common Market Studies 55. 19 Susanne K Schmidt, ‘Only an agenda setter? The European Commission’s power over the council of Ministers’ (2000) 1(1) European Union Politics 37, 46f.

4  Research handbook on European State aid law Commission may threaten governments which refuse their approval to open formal investigations concerning all existing aid covered by the new rules.20 The obligatory character of State aid soft law became particularly obvious during the accession preparations of the Central and Eastern European countries. According to the third Copenhagen criterion, candidate countries had to comply with the acquis communautaire and in the field of State aid, the acquis was defined broadly, to include not only legislation, but all sorts of Commission Communications as well as the jurisprudence of the European Courts. It is important to stress that the Commission enjoys broad discretion in matters of State aid control. Somewhat paradoxically, this discretion has been shown to be further strengthened through the introduction of new rules, as in the case of the 1999 Procedural Regulation, an initiative that one might expect to have limited the Commission’s freedom to act.21 Even so, the Commission is said to confront a dilemma of discretion, resulting from the fact that its discretionary capacity is broad, this can sometimes leave the institution in a rather vulnerable position.22 One example of the Commission’s use of its discretion is in agenda-setting where it is able to choose the timing of the revision of State aid Guidelines and Frameworks. Cini and McGowan23 describe in detail how the Commission took the opportunities of the single market initiative in the late 1980s and of the Lisbon Agenda in 2005 to systematically revise its State aid Guidelines and Frameworks. Conversely, when the financial crisis led to a huge increase in rescue and restructuring measures, the Commission apparently feared a detrimental effect on ongoing consultations and postponed the revision of the Guidelines on rescue and restructuring aid until 2012.24 At the same time, the Commission’s adoption of soft law in the context of the financial crisis, which took the form of four crisis communications ‘… represented an important change in the goals of this sub-policy in comparison to the pre-crisis period’.25 Yet, once the urgency of the crisis disappeared in 2009, the Commission reverted to its ordinary decision-making, forcing the banking sector to be restructured, as under pre-crisis rules. The Commission was therefore able to ‘safeguard its exclusive competence in State aid control’.26 Undoubtedly, the Commission’s best ally in promoting the integration of EU State aid control in cases of Member State resistance is the Court of Justice of the European Union

20 See Cini (n 16) 201f for a detailed study of the Commission’s strategic behaviour vis-à-vis Germany and Spain when these two countries refused to accept a new framework on State aid to the motor vehicle industry in 1989. A more recent example is Germany’s initial refusal to accept the revised Guidelines on regional aid which had been accepted by all other 24 EU Member States in 2006. The heading of the Commission’s Press Release (IP/06/851) showed quite openly the punitive character of its response: ‘State Aid: 24 Member States Accept New Regional Aid Guidelines (2007–2013); Commission Opens Formal Investigation against Germany’. 21 Nikolaos Zahariadis, ‘Discretion by the rules’ (n 15) 954. 22 Thomas Doleys, ‘Managing the dilemma of discretion: the European Commission and the development of EU State aid policy’ (2013) 13(1) Journal of Industry, Competition and Trade 23. 23 Michelle Cini and Lee McGowan, Competition Policy in the European Union (Basingstoke/New York: Palgrave Macmillan 2009) 177–80. 24 See the Commission’s Communication of 2 July 2009 [2009] OJ C 156/3. 25 Marco Botta, ‘Competition policy: safeguarding the Commission’s competences in State aid control’ (2016) 38(3) Journal of European Integration 265, 265. 26 ibid; see also, Thomas Doleys, ‘Managing State aid in a time of crisis: Commission crisis communications and the financial sector bailout’ (2012) 34(6) Journal of European Integration 549.

State aid control from a political science perspective   5 (CJEU).27 First and foremost, the European Court of Justice (ECJ) decisively supported the Commission in interpreting broadly the State aid prohibition and, thus, often helped to counter Member States’ ‘creative’ efforts to circumvent EU State aid control. The CJEU does not always support the Commission, however.28 Yet even Commission ‘defeats’ in individual cases may have an empowering effect in the long run. If the Commission applies State aid rules too softly in an individual case, other Member State governments or competitors of the beneficiary can dispute the Decision in court.29 As a result, the very threat of a negative court judgment can empower the Commission externally vis-à-vis Member States as well as internally (DG COMP or the Legal Service) to apply EU rules strictly. Moreover, the ECJ significantly helped to improve the Commission’s access to information in State aid cases, for example, by confirming the Commission’s competence to make a negative decision where incomplete information was provided by a Member State. Finally, the most powerful tool of EU State aid control, the Decision to order recovery of illegally granted aid, was invented by a Court ruling in 1973. Once again, the Commission was sensitive as regards the political feasibility of tighter State aid control and it did not make use of its new power before 1984.30 Working alongside the EU institutions, private complainants have also played a significant, if ambivalent, role in the evolution of EU State aid policy.31 Private complaints help the Commission to detect non-notified State aid measures, and have been especially important in trade disputes over the grant of aid.32 Yet, the flipside of this third-party involvement in State aid cases has been the Commission’s chronic excess of workload. Dissatisfied with the Commission’s treatment of their complaints, private parties have repeatedly challenged State aid decisions before the CJEU or the General Court.33 Thus, private complaints both empower and constrain the Commission. DG COMP’s efforts to regulate the procedure of State aid control in the late 1990s was partly a response to the increasing workload caused by private party involvement.34 Similarly, the expansion of Block Exemption regulations was largely justified by the Commission as a means of better focusing its regulatory capacities on the most critical cases, thereby making a virtue of necessity. II.ii

The ‘Politics’ of EU State Aid Policy?

In principle, competences appear to be clearly allocated between the European and domestic levels in the field of State aid. While the Commission controls Member State aid in order to prevent distortions of competition within the internal market, Member States keep the autonomy to design their own State aid policies, as long as this does not violate EU competition

27 Smith, ‘Autonomy by the rules’ (n 18) 66f; Aydin, ‘Issue framing in the European Commission’ (n 13). 28 Dirk Lehmkuhl, ‘On government, governance, and judicial review: the case of European competition policy’ (2008) 28(1) Journal of Public Policy 139, 144f. 29 Smith, ‘Autonomy by the rules’ (n 18) 66. 30 ibid 68. 31 Aydin, ‘Issue framing in the European Commission’ (n 13). 32 Chad Damro, ‘EU State aid policy and the politics of external trade relations’ (2013) 13(1) Journal of Industry, Competition and Trade 159. 33 Mitchell P Smith, ‘How adaptable is the European Commission? The case of State aid regulation’ (2001) 21(3) Journal of Public Policy 219, 228f. 34 ibid 231.

6  Research handbook on European State aid law law. However, as the Commission has gained in confidence, increasing formalisation and expansion into wider areas of activity has followed.35 Studies of the politics of State aid policy consistently warn against treating the Commission as a unitary actor and try to investigate the internal dynamics between different Directorates-General or even within DG COMP. In one of the earliest contributions on the policy aspects of EU state aid control, Lavdas and Mendrinou36 traced the evolution of the Commission’s approach towards aid for small and medium-sized enterprises (SMEs), showing how the former DG III (Internal Market and Industrial Affairs) and DG IV (Competition) sought to accommodate their differing policy objectives. As a result, the authors argued, the Commission became more and more permissive towards aid for SMEs while the overall control of national state aid was tightened.37 There have also been tensions between industrial and competition policy objectives in the regulation of so-called ‘innovation aid’.38 Another field which traditionally involves tensions between different DGs and policy objectives is regional policy.39 When the Commission presented its Regional Aid Guidelines in 1998, one commentator questioned whether this was still competition policy or ‘cohesion policy by the back door’: ‘This presentation of the Guidelines is notable for a number of reasons. First, it makes no mention of the perceived need to control regional aid in the context of distortions of competition … Second, it is very much concerned with the substance of regional policy’.40 As of 2017, the most challenging field of regional development concerned cohesion policy and not national regional aid.41 Even so, critics have argued that EU State aid policy has led the Member States to shift their policy away from addressing inequalities to reinforcing success, arguing that State aid policy has ‘… challenged the capacity of nation states to pursue the objective of territorial cohesion through various types of public policy’.42 From these authors’ perspectives, the competition dimension of State aid control tends to trump cohesion goals where conflicts between the two goals are identified. The case of Madeira has been used to demonstrate how disadvantaged regions are unable to benefit from differing regional corporate income tax rates, because these differential rates would be treated as State aid if they were not in line with the tax rate in Portugal as a whole. This case shows how ‘… the Commission has not succeeded in making State aid policy more coherent with the regional policy objectives of the Community’.43 Wishlade, ‘Policy worlds’ (n 10) 585. Kostas A Lavdas and Maria M Mendrinou, ‘Competition Policy and Institutional Politics in the European Community: State Aid Control and Small Business Promotion’ (1995) 28(2) European Journal of Political Research 171. 37 Lavdas and Mendrinou, ‘Competition Policy’ (n 36) 190. 38 Michael Blauberger, ‘Of “good” and “bad” subsidies: European state aid control through soft and hard law’ (2009) 32(4) West European Politics 719, 732. 39 Cini and McGowan (n 23) 182f. 40 Fiona Wishlade, Regional State Aid and Competition Policy in the European Union (The Hague: Kluwer Law International 2003) 89. 41 Fiona Wishlade, ‘State aid control of regional development policy at 60: harder and sharper, but not yet crystal clear?’ (European Policies Research Centre, University of Strathclyde, Glasgow, 2017). 42 Claire Colomb and Conçalo Santinha, ‘European Union competition policy and the European territorial cohesion agenda: an impossible reconciliation? State aid rules and public service liberalization through the European spatial planning lens’ (2012) 22(3) European Planning Studies 459, 475. 43 Wishlade, ‘Policy worlds’ (n 10) 544. 35 36

State aid control from a political science perspective   7 It is not only in regional aid that policy tensions have been found. For example, they have been found in the field of public service broadcasting where online media engagement in receipt of State subsidy has fallen foul of the EU State aid rules.44 In the Netherlands, an interesting case involved the concept of ‘green services’, which were challenged by the Commission under the State aid rules, raising questions about the viability of agri-environment schemes at national level. The issue at the heart of this case was the public funding element of the proposed scheme, which the EU interpreted as State aid to farmers. After a long period of misunderstanding, a compromise was eventually found which allowed a revised version of the initiative to go ahead.45 These examples have been interpreted as evidence of an evolving European model of ‘good’ State aid policy.46 Although State aid policy is not harmonised at the EU level, the Commission has adopted the Council’s plea for ‘less and better targeted aid’ as its own reform slogan. Most explicitly, the Commission’s State Aid Action Plan (SAAP) of 2005 defined substantive ‘key priorities’ for well-targeted aid and called for ‘a modernised state aid policy in the context of the Lisbon strategy for growth and jobs’.47 The policy considerations of the Commission are also present in its ‘balancing test’. In line with the jurisprudence of the CJEU, the balancing test requires all national State aid measures to be justified in terms of the ‘common interest’ of the EU.48 The implications of this approach, as well as its limits, became most obvious during the reform of the Regional Aid Guidelines in the context of the Eastern enlargement. According to the Commission’s original proposal, State aid should have been restricted to the most underdeveloped regions from a European perspective.49 After strong opposition from some ‘old’ Member States, the Commission returned to a less radical approach which continues to allow regional aid to be directed to these countries’ least developed regions. It can only be speculated, whether the Commission’s initial proposal was deliberately radical in order to yield concessions by some Member States or whether the Commission was partly surprised by the force of their opposition.50 The second element of the Commission’s balancing test, the so-called ‘incentive effect’ was also perceived as unwarranted interference into national State aid policy; even so, it was subsequently introduced into state aid practice.51 To sum up, EU-level State aid control impinges on the capacity of Member States to develop their own industrial (and other) policies. The Commission has increasingly developed its own model of what it considers to be the acceptable face of national state aid. Yet, our understanding of how these policy objectives are defined internally by the Commission as 44 Peter Humphreys, ‘EU State aid rules, public service broadcasters’ online media engagement and public value tests: the German and UK cases compared’ (2010) 1(2) Interactions: Studies in Communication and Culture 171. 45 Pieter Zwaan and Henri Goverde, ‘Making sense of EU state aid requirements: the case of green services’ (2010) 28(5) Environment and Planning C: Government and Policy 768. 46 Blauberger, ‘“Good” and “bad”’ (n 38). 47 Commission, ‘State Aid Action Plan. Less and Better Targeted State Aid: A Roadmap for State Aid Reform 2005–2009’ (Consultation document) COM (2005) 0107 final.  48 ibid 4. 49 Fiona Wishlade, ‘Competition and cohesion – coherence or conflict? European Union regional State aid reform post-2006’ (2008) 42(5) Regional Studies 753, 756–59. 50 ibid 759. 51 Damien J Neven and Vincent Verouden, ‘Towards a more refined economic approach in State aid control’ in Wolfgang Mederer, Nicola Pesaresi and Marc van Hoof (eds), EU Competition Law Volume IV: State Aid (Deventer: Claeys & Casteels 2008) Ch 4, 1.51.

8  Research handbook on European State aid law well as in exchange with Member State governments remains rather anecdotal, reliant more on media commentary than on academic research. We now turn to address the question of the EU influence on national State aid policies.

III.

THE EU IMPACT ON NATIONAL STATE AID POLICIES

A second strand of political science research on EU State aid control identifies its domestic impact, analyses the ways by which the Commission influences the design of national State aid policies and discusses alternative explanations for the observable trends. III.i

Empirical Evidence and Competing Explanations

Studies on the domestic impact of EU State aid control either follow a quantitative approach, investigating the development of State aid levels and objectives, or they analyse more qualitatively individual cases and processes of national policy adjustments. As regards quantitative studies, various political scientists base their analysis on data from the EU State aid Scoreboard and the Commission’s register of State aid cases.52 The Commission’s Scoreboard provides the most complete and up-to-date dataset on State aid. Studies largely confirm the Commission’s own observation of a downward trend in State aid expenditure during the 1990s and most of the 2000s as well as a redirection of State aid towards horizontal objectives in recent years.53 Quantitative studies differ, however, insofar as they attribute changes in national State aid policies only partly to European influences. Most sceptical as regards EU impact, Zahariadis54 deduces from his comparison of State aid expenditures in EU Member and non-Member countries in the early 1990s that increasing trade linkages rather than formal EU membership explain State aid discipline.55 This speaks to broader analysis of the EU competition regime in which it is argued that the advancement of the policy was driven by three factors: interdependence; global cooperation in competition rules; and, more recently, the fall-out from the post-2008 financial crisis.56 Other accounts of State aid expenditure focus on socio-economic,

52 Mitchell P Smith, ‘Integration in small steps: the European Commission and Member-State aid to industry’ (1996) 19(3) West European Politics 563; Nikolaos Zahariadis, ‘Why State subsidies? Evidence from the European Community countries, 1981–1986’ (1997) 41(2) International Studies Quarterly 341; Dieter Wolf, ‘State aid control at the national, European, and international level’ in Michael Zürn and Christian Joerges (eds), Law and Governance in Postnational Europe. Compliance beyond the Nation-State (Cambridge: Cambridge University Press 2005); Umut Aydin, ‘Promoting industries in the global economy: subsidies in OECD countries, 1989 to 1995’ (2007) 14(1) Journal of European Public Policy 115; Nikolaos Zahariadis, State Subsidies in the Global Economy (Basingstoke: Palgrave 2008); Michael Blauberger, ‘Compliance with rules of negative integration. European State aid control in the new Member States’ (2009) 16(7) Journal of European Public Policy 1030. 53 Commission, ‘State Aid Scoreboard. Autumn 2008 Update’ COM (2008) 751 final; Botta, ‘Competition policy’ (n 25). 54 Nikolaos Zahariadis, ‘The political economy of State subsidies in Europe’ (2002) 30(2) Policy Studies Journal 285, 296. 55 Xun Cao, Aseem Prakash and Michael D Ward, ‘Protecting jobs in the age of globalization: examining the relative salience of social welfare and industrial subsidies in OECD countries’ (2007) 51(2) International Studies Quarterly 301. 56 Aydin and Thomas (n 11) 533.

State aid control from a political science perspective   9 institutional and party-political factors such as high levels of unemployment,57 leftist governments,58 the relative power of the Member State and the Commission,59 or political pathologies such as weak governments and lack of transparency.60 Franchino and Mainenti61 use national data on state aid expenditure to show how electoral institutions matter in distributive decision-making,62 and more specifically how legislators in higher magnitude districts (those with more elected members) spend more than those in lower magnitude districts, controlling for ballot control, party-based voting and pooling. They conclude that where politicians need to cultivate a personal vote, spending on State aid is likely to be higher than in districts where they do not. These accounts do not explain the long-term trends observed within the EU. In contrast, comparisons of EU Member and non-Member States ask whether EU State aid control reduces aid levels. In a comparative study Thomas63 concludes that it does. His study shows how the US spends substantially more than the EU on the promotion of inward investment. Yet, he finds that the impact of the EU regime on the aggregate trend in inward investment across Europe is minimal. This leads him to draw positive conclusions about the effectiveness of EU State aid control.64 In contrast, Blauberger and Krämer65 see the efforts of the Commission to export its state aid regime externally as a way to counter probable disadvantages arising from the EU’s distinctive rules. Wolf66 compares systems of State aid control across different levels, global (World Trade Organization (WTO)), regional (EU), and national (German federalism), and concludes that EU State aid control is by far the most effective system in ensuring compliance.67 Aydin68 analyses State aid expenditure across 16 Organisation for Economic Co-operation and Development (OECD) countries, including EU and European Economic Area (EEA) Member States, candidate countries, Turkey and Japan. Without denying the persisting differences between EU Member States’ industrial policies, she finds strong evi-

57 André Blais, ‘The Political Economy of Public Subsidies’ (1986) 19(2) Comparative Political Studies 201. 58 Zahariadis, ‘Why State subsidies?’ (n 52); Zahariadis, ‘Discretion by the rules’ (n 21); Cao, Prakash and Ward (n 55). 59 Nikolaos Zahariadis, ‘Winners and losers in EU State aid policy’ (2013) 13(1) Journal of Industry, Competition and Trade 143. 60 Damien J Neven and Lars-Hendrik Röller, ‘The political economy of State aid: econometric evidence for the Member States’ in Damien J Neven and Lars-Hendrik Röller (eds), The Political Economy of Industrial Policy in Europe and the Member States (Baden-Baden: edition sigma 2000). 61 Fabio Franchino and Marco Mainenti, ‘Electoral institutions and distributive policies in parliamentary systems: an application to State aid measures in EU countries’ (2013) 36(3) West European Politics 498. 62 See also, Fiona McGillivray, Privileging Industry: The Comparative Politics of Trade and Industrial Policy (Princeton: Princeton University Press 2004). 63 Kenneth P Thomas, ‘EU control of state aid to mobile investment in comparative perspective’ (2012) 34(6) Journal of European Integration 567. 64 ibid 580. 65 Michael Blauberger and Rilke U Krämer, ‘European competition vs. global competitiveness. Transferring EU rules on State aid and public procurement beyond Europe’ (2013) 13(1) Journal of Industry, Competition and Trade 171. 66 Wolf (n 52). 67 ibid 91. 68 Aydin, ‘Promoting industries’ (n 52).

10  Research handbook on European State aid law dence for lower State aid levels due to EU State aid control.69 Blauberger70 compares State aid policies in Central and Eastern European countries before and after EU accession. While candidate countries partly used their ‘last-minute’ chance between the conclusion of accession negotiations and enlargement to grant considerable amounts of State aid, they largely brought their policies in line with EU requirements afterwards.71 This point is reinforced by the work of Hölscher, Nulsch and Stephan72 who show how there are now no markable differences between State aid practice in EU Member States, east and west. Qualitative studies complement these accounts of broader trends by focusing on individual cases of successful or unsuccessful State aid control. Their picture of the domestic impact of European State aid control is more nuanced. For example, a case study on German public banks analyses how European State aid control provided an opportunity structure for private competitors to complain and to build an alliance with the Commission which finally helped to overcome governmental resistance.73 Other studies are more sceptical and point to institutional incompatibilities between the EU and domestic levels which may lead to sub-optimal outcomes for both sides. Despite initial agreement on the direction of restructuring Olympic Airways, the positions of the Greek government and the Commission diverged over time and both parties ended up in a legal conflict before the CJEU.74 The Commission won the case in the CJEU, but taking the long duration of the conflict into account and the legal uncertainty involved, this result was clearly inferior to a cooperative solution. The impact of State aid control on territorial relations within federal member states has been addressed in several studies. Thielemann75 discusses a dispute over State aid to Volkswagen. Three institutional features, the author argues, explain the Commission’s ‘blindness’ to the peculiarities of German federalism causing an evitable conflict:76 centralised decision-making by DG COMP versus traditionally joint decision-making involving federal and regional authorities in Germany, discretionary versus legalistic decision-making, as well as horizontal versus vertical policy co-ordination (that is, the interference of DG COMP in what is considered to be a question of regional policy autonomy in Germany). Other studies on territorial relations address different questions. The more recent case of Madeira in the context of Portugal’s corporate tax rates was discussed above.77 In a similar and quite strident vein, Streb78 argues that the Commission has undermined and disempowered sub-national states in

ibid 122–25. Blauberger, ‘Negative integration’ (n 52). 71 ibid 1037. 72 Jens Hölscher, Nicole Nulsch and Johannes Stephan, ‘State aid in the new Member States’ (2017) 55(4) Journal of Common Market Studies 779. 73 Emiliano Grossman, ‘Europeanization as an interactive pocess: German Public Banks Meet EU State Aid Policy’ (2006) 44(2) Journal of Common Market Studies 325. 74 Kevin Featherstone and Dimitris Papadimitriou, ‘Manipulating rules, contesting solutions: Europeanization and the politics of restructuring Olympic Airways’ (2007) 42(1) Government and Opposition 46. 75 Eiko R Thielemann, ‘Institutional limits of a “Europe with the regions”: EC State-aid control meets German federalism’ (1999) 6(3) Journal of European Public Policy 399. 76 ibid 411f. 77 Wishlade, ‘Policy worlds’ (n 10). 78 Hagen Streb, ‘State aid policy, territoriality and federalism: EU scrutiny and control of regional aid and the supranationalisation of subnational autonomy in federal Member States’ (2013) 13(1) Journal of Industry, Competition and Trade 129. 69 70

State aid control from a political science perspective   11 federal political systems (he considers the German, Austrian and Belgian cases) because it flattens territorial structures, limiting autonomy.79 More recent qualitative studies, such as Botta and Schwellnus,80 have addressed the special circumstances of EU State aid control in Central and Eastern Europe (CEE) and in the Eastern Neighbourhood. In the case of Ukraine, a rather limited convergence with the EU State aid rules is attributed to the role played by veto-players in the form of Ukrainian oligarchs who are able to limit convergence where it impacts their interests.81 Amongst the CEE states, the situation had been rather different. One of the major topics of debate during accession negotiations was regional aid, mainly through tax exemptions in so-called ‘special economic zones’.82 The Commission concluded several transitional agreements on special economic zones with Poland, Hungary and other new Member States. In the case of Hungary, Bohle and Husz83 argue, the concessions made by the Commission were not so much due to insurmountable governmental resistance, as the tax exemptions granted put a serious strain on public budgets, but rather resulted from successful lobbying of multinational companies who are the main beneficiaries of this type of regional aid. In Poland, domestic party politics and unstable governments were the main reasons why the introduction of State aid legislation was repeatedly delayed.84 Given that accession countries had no choice but to comply with EU demands, however, party political factors played a decreasingly important role towards the end of accession negotiations and after accession, so that even the eurosceptic Kaczyński government could not fundamentally oppose EU State aid control anymore.85 In sum, a broad variety of political science research shows that national State aid policies are partly ‘europeanised’, that is, that EU State aid control has an identifiable impact on the overall design of Member States’ policies as well as on individual State aid measures. While aggregate trends tell us little about the instruments and mechanisms of EU influence on the ground, individual case studies sometimes provide very specific explanations that may only be representative for some cases, for example, depending on the applicable rules or the Member States involved. The next section, therefore, discusses recurrent patterns of Member State compliance with EU State aid rules. III.ii

Patterns of Compliance with EU State Aid Rules

There exists an increasingly differentiated political science literature on why States (do not) comply with EU legal obligations and by which instruments the Commission is most success Colomb and Santinha (n 42) 459. Marco Botta and Guido Schwellnus, ‘Enforcing State aid rules in EU candidate countries: a qualitative comparative analysis of the direct and indirect effects of conditionality’ (2015) 22(3) Journal of European Public Policy 335. 81 Antoaneta Dimitrova and Rilka Dragneva, ‘Shaping convergence with the EU in foreign policy and state aid in post-Orange Ukraine: weak external incentives, powerful veto players’ (2013) 65 Europe-Asia Studies 658. 82 Isabela Atanasiu, ‘State Aid in Central and Eastern Europe’ (2001) 24(2) World Competition 257; Dorothee Bohle and Dóra Husz, ‘Whose Europe is it? Interest group action in accession negotiations: the cases of competition policy and labor migration’ (2005) 6 Politique Européenne 85. 83 Bohle and Husz (n 82) 94f. 84 Anna Gwiazda, ‘Europeanization of Polish competition policy’ (2007) 29(1) European Integration 109. 85 ibid 124. 79 80

12  Research handbook on European State aid law ful in ‘guarding the Treaty’, that is, in making Member States comply.86 Compliance with EU State aid rules is a special case in at least two respects. First, before initiating infringement proceedings, the Commission already possesses the specific tool of recovery decisions. Second, in contrast to harmonised EU policies, ‘compliance’ with EU State aid rules is not accomplished once and for all by the domestic transposition and implementation of European secondary law, but continuously and often passively through not granting distortive aid.87 Wolf88 finds hierarchical forms of enforcement, monitoring and sanctioning through the Commission and judicial dispute settlement by the CJEU to be most important for ensuring compliance with EU State aid rules. By contrast, inclusion and participation of the affected parties or discursive processes of mutual learning are found to be less decisive. Undoubtedly, the single most powerful instrument of the Commission is a negative decision (including the order of recovery of unlawful aid) or even the threat thereof. While the relatively low number of negative decisions might be interpreted to indicate weak enforcement by the Commission, it was noted quite early that it should rather be read as a sign of Member States’ anticipatory obedience.89 The Commission’s threat to decide negatively or even the opening of formal investigations immediately imposes costs on potential State aid beneficiaries through creating legal uncertainty, thus reducing the attractiveness of receiving State aid in the first place. EU State aid rules, therefore, serve to ‘channel State aid demand’.90 Compliance with EU State aid rules is largely assured at the early stages of policy formulation, based on the comprehensive regulation of State aid procedures and substance.91 As regards compatible aid, the Commission managed to gradually increase and shift the burden of proof towards Member State governments. While the Commission automatically assumes all State aid to potentially distort competition, Member State governments, in order to pass the balancing test and to make final approval likely, need to design and justify their State aid measures along the lines of the Commission’s Guidelines and Frameworks. Besides, the more detailed the criteria set out by the Commission in guiding its assessment of compatible aid, the more these rules provided an opportunity structure for private parties to either demand forms of compatible aid or to complain about distortive aid.92 Franchino and Mainenti93 are perplexed, however, by the illegal aid that persists in the EU Member States. They point to the importance of electoral institutions in shaping government incentives to comply with international obligations, such as the State aid rules. Where there is a misalignment between the collective objectives of a government party and the individual objectives of members in the legislature, individuals may not mind too much if they are caught 86 Tanja A Börzel, ‘Guarding the Treaty. The compliance strategies of the European Commission’ in Tanja A Börzel and Rachel A Cichowski (eds), The State of the European Union VI: Law, Politics, and Society (Oxford: Oxford University Press 2003); for a broad overview, see Oliver Treib, ‘Implementing and complying with EU governance outputs’ (2008) 3 Living Reviews in European Governance 1, available at accessed 8 May 2020. 87 Blauberger, ‘Negative integration’ (n 52) 1033. 88 Wolf (n 52) 92–113. 89 Smith, ‘Integration’ (n 52) 568. 90 Blauberger, ‘Negative integration’ (n 52) 1041f. 91 Wolf (n 52) 99f. 92 Grossman (n 73). 93 Fabio Franchino and Marco Mainenti, ‘The electoral foundations to noncompliance: addressing the puzzle of unlawful State aid in the European Union’ (2016) 36(3) Journal of Public Policy 407.

State aid control from a political science perspective   13 out by the State aid rules as they can then blame the Commission and still take the credit for proposing the aid. As such, Franchino and Maintenti argue that the EU compliance literature does not help to explain the patterns (and persistence) of (illegal) State aid. Several authors have contributed to assessment of the Commission response to the financial crisis, with the focus mainly on the 2008–09 period. Compliance is a key theme in these accounts. The literature argues that credit should go to the Commission for the way in which it handled State aid during the financial crisis.94 After the collapse of Lehman Brothers in September 2008, Member States allocated billions of Euros to the propping up of their national banking sectors. Overall aid levels rose to 3.5 per cent of GDP in 2009. The Commission faced 325 notified aid schemes which Member States expected them to review over a short period of time, challenging their administrative capacity.95 Indeed, Member States told the Commission they would need to apply the state aid rules speedily and flexibly. The Commission was initially accommodating and was gradually able to reassert itself. It had been aware of the risk involved in dealing with the aid in a heavy-handed, dogmatic manner and decided to respond pragmatically in the first instance, by providing temporary authorisation to all notified aid96 and later by crafting a special crisis regime (based on the soft law ‘crisis communications’).97 If the Commission had not acted in this way it is likely that ‘… member states would have stopped complying with the State aid rules …’.98 The outcome was impressive. Aside from the crisis measures themselves, the Commission maintained total aid to industry at around pre-crisis level (around 0.5 per cent of GDP).99 ‘This supports the contention that state aid generally remained under control despite the economic crisis’.100 In the end, and in the absence of an EU Treasury, ‘… State aid control became the main EU instrument for coordinating the member states’ responses to the destabilisation of banks during the financial crisis’101 and a key component of the EU’s steering of the crisis.

IV. CONCLUSION The main goal of this chapter has been to show what research on EU State aid policy has been undertaken by political scientists; it demonstrates the sorts of issues that arise from a political perspective, which reflect to some degree wider trends in EU political science research, but also developments and interest in the policy itself. In relatively recent times, there has been some interest in the Commission’s approach to State aid in the context of the financial crisis, and ongoing work on the intersection between regional and industrial policy. State aid has provided case study material for other research, including on the relevance of electoral institutions in distributive policy-making. While there was a flurry of activity in 2012 and 2013, there has 94 Doleys, ‘Managing State aid’ (n 26) 551; Bruce Lyons and Minjan Zhu, ‘Compensating competitors or restoring competition? EU regulation of State aid for banks during the financial crisis’ (2013) 13(1) Journal of Industry, Competition and Trade 39. 95 Botta, ‘Competition policy’ (n 25) 268. 96 ibid 268. 97 Doleys, ‘Managing State aid’ (n 26). 98 Botta, ‘Competition policy’ (n 25) 268. 99 Doleys, ‘Managing State aid’ (n 26). 100 Aydin and Thomas (n 11) 541. 101 Botta, ‘Competition policy’ (n 25) 275.

14  Research handbook on European State aid law been a relatively limited output of work on State aid policy since then, covering quite a diffuse range of political and policy questions. One might question whether many of the political questions about State aid have been settled. It is too early to tell. What we might be witnessing is a temporary lull in research activity on this topic or a new normal given the maturity of the State aid regime. As things stand, while the cumulative contribution of political science to the study of State aid has continued to increase, albeit at a less dramatic pace, there still remains plenty of room for further research. There are a number of obvious research gaps that have already been identified in previous parts of this chapter: What determines the Commission’s evolving mix of policy goals incorporated into EU State aid rules? Can we investigate further the tensions between industrial and regional politics and State aid control? What other policy objectives are being met, or might in future be met through a creative use of State aid policy? How far do Member States’ policies converge towards a common European model of modern State aid policy and what accounts for persisting differences between national approaches? What is the role of EU State aid control in an increasingly global economy, for example, will the EU be able to export its State aid rules beyond Europe.102 Finally, what is the impact of the election of populist governments and leaders on State aid compliance? And how might the UK’s departure from the Union affect the EU State aid regime, if at all? These and other such questions continue to make EU State aid control an interesting policy field for political scientists.

102 Umut Aydin, ‘Promoting Competition: European Union and the Global Competition Order’ (Paper presented at the EUSA Eleventh Biennial International Conference, Los Angeles, 23–25 April 2009); Blauberger and Krämer (n 65).

2. The market economy operator principle: an economic role model for assessing economic advantage Nicole Robins and Laura Puglisi

1. INTRODUCTION Economic logic, and legal principles, dictate that State aid—as a ‘transfer of State resources through measures that are imputable to the State and that are selective with the potential to distort competition and trade’1—occurs only when the State confers an economic advantage to a market participant. If a public authority grants funding to a firm on terms that the same firm could have obtained from a private bank, or the capital markets, then there is no ‘advantage’ conferred by the State intervention. Hence, the funding provided by the public authority does not constitute State aid. This is irrespective of whether the firm is government-owned or private. Therefore, a prime question in State aid law is how to assess whether the terms of measures provided by public entities are in line with those acceptable to a private commercial operator. This is known as the market economy operator principle, or MEOP. This chapter focuses on the economic and financial principles behind the MEOP. We start by discussing the relevance of the MEOP in State aid assessments (section 2), before giving a brief overview of existing commentary regarding the applicability of the MEOP (section 3). We then discuss the methods available to establish MEOP compliance (section 4), before providing concluding remarks (section 5).

2.

THE RELEVANCE OF THE MEOP

The MEOP test assesses the criterion of economic advantage, which is one of four cumulative criteria stipulated in Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) that determines the presence of State aid. Any public measure that satisfies the MEOP—i.e. where an economic advantage can be excluded—is not considered State aid. In this case, the other criteria for State aid—selectivity, and (actual or potential) distortion of competition and intra-community trade—no longer need to be assessed. Many State-owned operations undertake both commercial activities (which are, or could be, run for profit) and other social or public policy activities (which are often funded by the government and are not typically based on commercial considerations, such as public safety and security measures). The objective of the MEOP is to assess the presence of aid in transactions where the State acts as the economic operator and pursues purely commercial objectives (for

1

Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).

15

16  Research handbook on European State aid law instance, as the shareholder of a company). The MEOP therefore relates only to the State’s role as an economic operator, not as a public authority.2 This distinction is not always straightforward. A company’s operations may be set up under a complex legal ownership or organisational structure that makes it difficult to identify exactly where the commercial operations end and the public policy aspects start. Yet, from an economics perspective, the commercial aspects of the operations can often be ring-fenced, making them independent of the legal structure (e.g. by setting up separate accounting systems). The concept of the MEOP has been developed and refined over the years due to the increasing complexity of State interventions and market liberalisation. Initially developed as the ‘market economy investor principle’ (MEIP), the concept was mainly applied to public capital contributions.3 The role of the MEIP was also recognised in the 1998 Van der Kooy case, which concerned a gas tariff for greenhouse horticulturalists in the Netherlands. As the tariff was set by the State, it was necessary to assess whether the fixed tariff was commercially justifiable to exclude the existence of an economic advantage. Advocate General Slynn noted: It is of the essence of a State aid that it is non-commercial in the sense that the State steps in where the market would not. The State may have its reasons for doing so but they are not commercial in the ordinary sense of the word. Thus the State may subscribe for shares in a company or lend money, but when it does so to an extent or on terms which would not be acceptable to the commercial investor, it is granting aid which falls within Article [107] if the tests of that provision are satisfied.4

Over time, a more general definition of the principle—the MEOP—has been developed. Despite differences in the terminology used, the guiding principle remains the same: in order to rule out the presence of an economic advantage, it needs to be assessed whether the State is acting in the same way as a private market operator would do in a similar situation. The MEOP has grown into a key instrument for the European Commission to assess a broad spectrum of public measures. In addition to public investments, different types of arrangements involving the State can be subject to the MEOP (or similar assessment principles). Such arrangements include, for example, loans, guarantees, tax rulings or agreements with operators signed by State-owned entities. Therefore, over time, different sub-types of the MEOP have evolved. For example, the ‘private creditor test’ and the ‘private vendor test’ examine whether

2 European Commission, ‘Commission 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] OJ C 262/1, para 77. In the Ryanair Charleroi case, in 2008, the Court of First Instance considered the MEOP to be applicable ‘when the State acts as an undertaking operating as a private investor’, while it is not applicable when ‘the State acts as a public authority’. For further detail, see MA Cyndecka, ‘“Reversed”, “Excessive” or “Misconstrued”? The Controversy about the Burden of Proof in MEOP Cases’ (2019) 18(2) European State Aid Law Quarterly 157. 3 For an overview of the origins of the MEOP, see MA Cyndecka, The Market Economy Investor Test in EU State aid Law (Kluwer Law International BV 2016), chapter 2.3; and MA Cyndecka, ‘The Applicability and Application of the Market Economy Investor Principle: Lessons Learnt from the Financial Crisis’ (2017) 16(4) European State Aid Law Quarterly 512. 4 Joined Cases 67/85, 68/85 and 70/85 Van der Kooy [1988] EU:​C1988:​38, Opinion of AG Sir Gordon Slynn, p 251. Emphasis added.

The market economy operator principle  17 debt renegotiations by public creditors, or sales carried out by a public body, confer an economic advantage.5 A key principle of the MEOP is that the assessment should be undertaken only based on information that could reasonably have been foreseen at the time the State decided to enter into the transaction.6 This was recognised in the 2002 Stardust Marine case, where the European Court of Justice established that: In this case, it is undisputed between the parties that, in order to examine whether or not the State has adopted the conduct of a prudent investor operating in a market economy, it is necessary to place oneself in the context of the period during which the financial support measures were taken in order to assess the economic rationality of the State’s conduct, and thus to refrain from any assessment based on a later situation.7

3.

THE APPLICABILITY OF THE MEOP

The distinction between the State’s commercial activities and its public policy activities is important in order to establish the applicability of the MEOP. As a guiding principle, any costs and benefits that are linked to the State’s role as a public authority must be excluded from the application of the MEOP.8 For example, if a local municipality offers a loan to a branch of a company, any regional or macroeconomic effects that arise from the measure, such as the development of the regional economy, tax revenues or job creation, should be excluded from the MEOP assessment. This is on the basis that a private economic operator would not take these factors into account in its decisions. A landmark judgment from the (then) Court of First Instance (CFI) (now the General Court) in 2008 set an important precedent for the role of the MEOP test and the distinction between economic and non-economic activities. The case concerned a set of agreements that determined the conditions of the operations of the airline, Ryanair, from Brussels South Charleroi Airport (BSCA). See Box 2.1.9

BOX 2.1 THE RYANAIR CHARLEROI CASE In November 2001, Ryanair, BSCA and the Walloon Region (the airport’s owner), signed two agreements setting out the terms and conditions under which Ryanair would base aircraft at BSCA. The arrangements involved discounted airport charges for Ryanair, such as ground-handling charges, in return for long-term commitments by Ryanair to provide a minimum level of service at the airport.1

5 Commission, ‘State aid as referred to in Article 107(1)’ (n 2) para 74. In 1997, the Commission issued a guidance note for the MEOP assessment of sales of publicly owned land and buildings. See European Commission, ‘Commission Communication on State aid elements in sales of land and buildings by public authorities’ [1997] OJ C 209/3. 6 Commission, ‘State aid as referred to in Article 107(1)’ (n 2) para 78. 7 Case C-482/99 France v Commission [2002] EU:​C:​2002:​294. Emphasis added. 8 Commission, ‘State aid as referred to in Article 107(1)’ (n 2) para 77. 9 Case T-196/04 Ryanair v European Commission [2008] EU:​T:​2008:​585. Oxera advised Ryanair on the economic and financial analysis of these proceedings.

18  Research handbook on European State aid law In 2004, the Commission concluded that Ryanair’s agreement with the Walloon Region, and the discount on ground-handling charges stipulated in the agreement with BSCA, constituted unlawful State aid.2 One of the main issues highlighted during the Commission’s investigation was whether the MEOP could be applied to the agreement signed between the Walloon Region and Ryanair. The Commission characterised the fees paid by Ryanair to use the airport as ‘taxes’ (given that they were set by decree of the Walloon Parliament) rather than charges (which could be set by the airport independently of political authorisation).3 As a result, the Commission concluded that the MEOP was not applicable to the relationship between the Walloon Region and Ryanair.4 The Commission also raised concerns about whether the agreement between BSCA and Ryanair was in line with the MEOP. In particular, the Commission identified shortcomings in the business plan prepared by BSCA prior to the signing of the agreement, and revised some of the main input parameters. These changes sharply reduced the expected profitability of the agreement between Ryanair and BSCA, such that the agreement was expected to be loss-making from BSCA’s perspective. Therefore, the Commission concluded that, even if the MEOP had been applicable, the MEOP was not met. Ryanair appealed the Commission’s decision to the CFI on a number of grounds. In particular, Ryanair argued that, for MEOP purposes, the Commission should have treated BSCA and the Walloon Region as a single economic entity, through the Walloon Region’s ownership of BSCA, and the close relationship between the airport and the Region.5 The CFI subsequently endorsed this view.6 The CFI also concluded that the actions of the Walloon Region in determining airport charges should be considered economic activities.7 Following from this, the CFI concluded that the argument that airport charges may not be set by the airport itself was insufficient to exclude the application of the MEOP to the agreement between BSCA and Ryanair. As a consequence of the above findings, the CFI annulled the Commission’s decision.8 Reopening the investigation in 2012, the Commission found that the agreements between BSCA and Ryanair, when BSCA and the Walloon Region were considered as a single economic entity, were in line with the MEOP.9 Sources: 1 European Commission Decision (EU) of 12 February 2004 concerning advantages granted by the Walloon Region and Brussels South Charleroi Airport to the airline Ryanair in connection with its establishment at Charleroi [2004] OJ L 137/1, paras 7–12. 2 Ibid, para 357. 3 Ibid. See, for example, paras 7 and 13. 4 Ibid, paras 161–9. 5 Case T-196/04 Ryanair Ltd v Commission of the European Communities [2008] EU:​T:​2008:​585, para 34. 6 Ibid, paras 53–61. 7 Ibid, paras 81–101. 8 Ibid, paras 102–5. 9 Commission Decision (EU) of 1 October 2014 concerning measures SA.14093 (C76/2002) implemented by Belgium in favour of Brussels South Charleroi Airport and Ryanair [2016] OJ L 325/63. For further detail, see also N Robins and H Geldof, ‘The Ryanair Charleroi Judgment: What Is Its Legacy?’, in C Buts and JLB Sierra (eds), Milestones in State aid Case Law: EStAL’s First 15 Years in Perspective (Lexxion 2017).

Building on the Aéroports de Paris judgment in 2000, the CFI judgment in the Ryanair Charleroi case provided further clarity about what constitutes an economic activity.10 In particular, the judgment led to a greater emphasis on the MEOP in State aid assessments, and an increasing role for economic and financial analysis in MEOP assessments. 10 Case T-128/98 Aéroports de Paris v Commission [2000] EU:​T:​2000:​290, upheld on appeal in Case C-82/01P [2002] EU:​C:​2002:​617.

The market economy operator principle  19 A later landmark case that considered the applicability of the MEOP involved Electricité de France (EDF). While it was commonly understood that the MEOP is generally ruled to be non-applicable in cases where the State exercises its public powers, this view was challenged by the European courts in the EDF case (see Box 2.2).11

BOX 2.2 THE EDF CASE In 1997, EDF was fully owned by the French State and was undergoing a restructuring process. As part of this restructuring, unused provisions for the renewal of the high-voltage transmission network were reallocated to other items on the balance sheet. In particular, some of these provisions were reclassified as capital injections without being subject to corporation tax. In 2003, the Commission concluded that the tax exemption resulting from these accounting provisions constituted illegal State aid and ordered the French State to recover €1.37bn (including interest) from EDF.1 However, the Commission’s decision was subsequently annulled in 2009 by the General Court, on the basis that the Commission had not assessed whether a private investor would have undertaken the measure under similar circumstances.2 In its assessment, the Commission had not applied the MEOP, on the basis that a private operator would never be able to adopt a fiscal measure such as a tax exemption. However, the General Court clarified that the fiscal nature of the measure, which is not available to a private operator, does not per se rule out the applicability of the MEOP.3 In 2012, the European Court of Justice (ECJ) confirmed this effects-based approach to fiscal measures.4 It concluded that the State must be able to show that it behaved as a rational and profit-oriented market operator, and that ‘it may be necessary’ to provide evidence to show that the State’s investment decision was based on an economic assessment similar to those undertaken by private operators.5 In 2013, the Commission reopened the investigation into EDF. In light of the evidence provided by the French authorities during the investigation, the Commission concluded that: (i) the MEOP was not applicable, given that the French authorities did not provide material evidence to demonstrate that the expected profitability of the investment had been examined; and (ii) even if the MEOP were applicable, the measure was not expected to be sufficiently profitable to be in line with the MEOP.6 Thus, the Commission found that the tax exemption was not in line with the MEOP. EDF again appealed the Commission’s decision to the General Court.7 The General Court upheld the Commission’s decision on the basis that the French State had failed to provide sufficient evidence that the tax break was granted on the basis of profitability consider-

11 Commission, ‘Commission Decision of 16 December 2003 on the State aid granted by France to EDF and the electricity and gas industries’ [2005] OJ L 49/9. For further detail, see N Baeten and L Gam, (2017), ‘Tax Measures and the Private Investor Test: The Court of Justice Endorses a Level Playing Field, Annotation on the Judgment of the Court of Justice (Grand Chamber) of 5 June 2012 in Case C-124/10 P – Commission v EDF’ (2013) 12(3) European State Aid Quarterly 546; and B von Wendland and H Standtke, ‘European Commission v Electricité de France – a Distant Mirror’, in C Buts and JLB Sierra (eds), Milestones in State aid Case Law: EStAL’s First 15 Years in Perspective (Lexxion 2017), pp 508–16 and pp 517–30 respectively.

20  Research handbook on European State aid law ations, in line with the manner of a private investor.8 Following an appeal by EDF to the ECJ, the ECJ upheld the Commission’s conclusion that the MEOP test was not applicable and that the Commission had taken into account all the evidence available to it to decide that the measure did not meet the MEOP.9 Sources: 1 Commission, ‘Commission Decision of 16 December 2003 on the State aid granted by France to EDF and the electricity and gas industries’ [2005] OJ L 49/9. 2 Ibid, para 89. 3 Ibid, paras 229–37. Case C-534/07 P William Prym GmbH & Co. KG and Others v Commission [2009] EU:​T:​2009:​505, para 229. 4 Case C-124/10 P Commission v EDF [2012] EU:​C:​2012:​318. 5 MA Cyndecka, ‘“Reversed”, “Excessive” or “Misconstrued”? The Controversy about the Burden of Proof in MEOP Cases’ (2019) 18(2) European State Aid Law Quarterly 157. 6 Commission Decision of 22 July 2015 on State aid SA.13869 (C 68/2002) (ex NN 80/2002)—reclassification as capital of the tax-exempt accounting provisions for the renewal of the high-voltage transmission network (RAG) implemented by France in favour of EDF, paras 126–93. 7 Case T-747/15 EDF v Commission [2018] EU:​T:​2018:​6. 8 Ibid, paras 135–76 and 217–51. 9 Case C‑221/18 EDV v Commission [2018] EU:​C:​2018:​1009, paras 22–9 and 34–8.

The ECJ’s judgment in the EDF case implies that the MEOP is applicable for measures that fall within the exclusive competence of the public authority, such as tax exemptions, provided that the State can demonstrate that it behaved as a rational and profit-oriented market operator.12 The question about the applicability of the MEOP also often arises in cases where a given undertaking received State aid in the past. Although this does not in itself preclude the applicability of the MEOP, it must be carefully decided to what extent economic and financial implications of previous aid measures should be taken into account in the application of the MEOP. In a much-debated judgment from the ECJ in 2018 concerning the Danish bank, FIH Erhvervsbank and its subsidiaries (‘FIH’), legal scholars have commented that the ECJ applied a more formal approach, compared to that applied in the EDF case, and concluded that financial interests arising from previous State aid interventions must be excluded from the application of the MEOP, on the basis that they reflect the State’s actions as a public authority.13

BOX 2.3 THE FIH CASE In 2009, in the context of the financial crisis, the Danish government provided a capital injection to FIH, as well as a State guarantee on new bond issues. The Commission approved these measures as compatible aid.1 In 2012, FIH experienced further liquidity problems. In response, the Danish government implemented additional support measures to address the risk that FIH might default. Although the Commission approved the additional support measures as compatible aid,2 the Danish government challenged the decision in front of the General Court,3 on the basis that the additional support measures from 2012 were free of aid. Denmark applied the private creditor test to the 2012 measures. It assessed the measures with the objective to minimise its expected losses from the funds granted in 2009. The Commission, however, applied the private investor principle in its assessment of the 2012 measures, and concluded that the measures were unlikely to generate a return that would be sufficient for a private investor. According to the Commission, the amount that could be recovered from the 2009 funds should be excluded from the assessment because the funds

Wendland and Standtke, in Buts and Sierra (eds) (n 11), pp 517–30. Case C-579/16 P Commission v FIH Holding and FIH Erhversbank [2018] EU:​C:​2018:​159. See J Bonhage, ‘Previous State aid and Subsequent Financial Assistance, the FIH Judgment and the Future of the MEOP’ (2019) 18(1) European State Aid Law Quarterly 29. 12 13

The market economy operator principle  21 were granted by the State acting in its capacity as a public authority. Although the General Court upheld FIH’s view,3 the ECJ annulled the General Court’s 2018 decision,4 thereby rejecting the relevance of previous State aid when assessing subsequent measures. Sources: 1 European Commission Decision of 29 June 2012, case No SA.34445 (2012/C) (ex 2012/N) – Denmark. The transfer of property-related assets from FIH to the FSC. 2 European Commission Decision of 11 March 2014, case SA.34445 (2012/C) implemented by Denmark for the transfer of property related assets from FIH to the FSC. 3 Case T-386/14 FIH Holding and FIH Erhversbank v Commission [2016] EU:​T:​2016:​474. 4 Case C-579/16 P Commission v FIH Holding and FIH Erhversbank [2018] EU:​C:​2018:​159.

As demonstrated in the FIH case, depending on the scope of the transaction (i.e. whether financial implications from previous State interventions are taken into account), the perspective of the MEOP assessment—and, thus, its results—can change significantly. The applicability of the MEOP is discussed intensively (and controversially) by legal scholars.14 Legal scholars have commented that, whilst the EDF case widens the scope of the applicability of the MEOP, the FIH case restricts its perspective.15 In any case, whether to take into account previous State aid when applying the MEOP requires in-depth legal analysis of the specifics of the case at hand. Once the applicability of the MEOP is established, economic and financial analysis can be undertaken to apply the MEOP to assess whether the measure under assessment is expected to be commercially viable. In the remainder of this chapter, we discuss the methods available for establishing MEOP compliance and the economic principles underlying each method, illustrated with specific cases.

4.

METHODS FOR ESTABLISHING MEOP COMPLIANCE

The Commission has developed four methods for establishing MEOP compliance, which can be broken down into direct and indirect methods. 4.A

Direct Methods

Under the direct methods, MEOP compliance can be demonstrated where the transaction is carried out pari passu by the State and by private operators, or by using tender procedures if it concerns the sale and purchase of assets, goods and services or other comparable transactions involving the State.16 4.A.1 Pari passu transactions In pari passu transactions, the State takes part in the transaction at the same time and under the same terms and conditions (and therefore with the same level of risk and reward) as private 14 For a detailed discussion of the applicability of the MEOP, see, for example, MA Cyndecka, ‘Market Economy Investor Principle’ (n 3); MA Cyndecka, ‘Once an Aid Recipient, Always an Aid Recipient? The Post-Crisis State Interventions in the Banking Sector and Beyond’ (2018) 17(2) European State Aid Law Quarterly 192; and Bonhage, ‘FIH Judgment’ (n 13). 15 Bonhage, ‘FIH Judgment’ (n 13). 16 Commission, ‘State aid as referred to in Article 107(1)’ (n 2) para 84.

22  Research handbook on European State aid law operators, and the State and the private parties involved assume an equal share of the risk (and reward) inherent in the transaction.17 Under these conditions, and if the contribution of the private operator is significant (meaning not merely symbolic), such a transaction can be considered in line with market terms and, thus, be deemed MEOP-compliant. In 2007, in a case concerning the rollout of broadband infrastructure in Amsterdam, the Commission concluded that the investment contribution by the municipality of Amsterdam to the project fulfilled the requirements for a pari passu transaction.18 It was the first broadband measure assessed and approved by the Commission under the MEOP.

BOX 2.4 THE CITYNET AMSTERDAM CASE The Citynet Amsterdam case concerned the construction of a ‘fibre-to-the-home’ broadband access network connecting 37,000 households in Amsterdam. Together with two private investors and three social housing corporations, the municipality of Amsterdam provided funds for the construction of the passive network infrastructure, which included the installation of ducts, fibre and street cabinets. The total equity investment amounted to €18m, of which the municipality and the social housing corporations each provided one-third, while the two remaining private companies each invested one-sixth of the total investment costs.1 Thus, the contribution of the private operators together amounted to one-third of the total equity. Following a complaint from competitors, in 2006 the Commission started a formal investigation to review whether the investment from the municipality of Amsterdam met the MEOP. As the municipality had already undertaken some investments before the start of the project,2 the Commission questioned whether the terms and conditions under which the municipality invested were equal to the terms and conditions of the two private operators. The Commission raised concerns that the investments undertaken by the municipality prior to the start of the project lowered the risks involved in the project for the other shareholders.3 However, based on analysis of the business plan of the owner and manager of the passive infrastructure (whose shareholders were the municipality, the two private investors and the social housing corporations), the Commission revised its view. It concluded that the initial limited work undertaken by the municipality did not affect the risks of the project, and that rather the success of the project depended on how the market might develop.4 Therefore, the Commission concluded that the municipality and the private operators assumed the same level of risk. The Commission assessed the business plan by comparing the level of profitability expected with comparable projects, and by analysing the appropriateness of key assumptions in the plan. The Commission considered the expected internal rate of return (IRR) as the most appropriate parameter to assess the profitability of the project. Despite the novelty of the project rendering a benchmarking analysis difficult, the Commission compared the expected IRR of the project against the weighted average cost of capital (WACC) of comparable companies in the same industry.5 It concluded that the expected return was within a range accept Ibid, para 86. European Commission Decision of 11 December 2007, case C 53/2006 (ex N 262/2005, ex CP 127/2004), Investment by the city of Amsterdam in a fibre-to-the-home (FttH) network. 17 18

The market economy operator principle  23 able for a private investor. The Commission also analysed the key parameters of the business plan, including the penetration rate (i.e. the percentage of customers in the market that the network could reach), the wholesale prices for access to the passive network, and the investment costs. Overall, it concluded that the plan was based on realistic assumptions and in line with the MEOP. The Commission therefore concluded that the municipality invested on terms and conditions equal to those of the two private companies, thereby fulfilling the pari passu requirements.6 Notes/Sources: 1 European Commission Decision of 11 December 2007, case C 53/2006 (ex N 262/2005, ex CP 127/2004), Investment by the city of Amsterdam in a fibre-to-the-home (FttH) network, para 28. 2 The municipality commissioned several studies in 2003 and 2004 to prepare the project, and organised tenders for the construction and the operation of the network. In addition, the city of Amsterdam financed certain construction activities and purchased software for the construction of the network. 3 As the legal status of the social housing corporations under State aid rules was not clarified at the point in time of the Commission’s investigation, their financial contribution was excluded from the MEOP assessment. 4 Commission Decision of 11 December 2007 case C 53/2006 para 113. 5 Ibid, para 129. 6 Ibid, para 176.

This case shows that the conformity of a public investment with market terms has to be demonstrated thoroughly and comprehensively. This must be done by showing not only that the participation of the private investor(s) is substantial, but also, in particular, that a comprehensive business analysis, setting out the expected return from the project, had been undertaken in advance. 4.A.2 Tender procedures If the sale of assets, goods and services is carried out following a competitive tender procedure, this represents an alternative way of demonstrating that the terms and conditions of a transaction from the State are in line with the MEOP. However, for this to be the case, tender procedures must comply with specific criteria. In particular, the tender procedure should be competitive, transparent, non-discriminatory, unconditional and in line with public procurement rules.19 In the Port of Salerno case, the Commission concluded that market prices for the concession fee to be paid by future operators at the port could be established by conducting a public tender procedure (see Box 2.5).20

BOX 2.5 THE PORT OF SALERNO CASE In 2014, the Italian authorities notified investment aid to the Commission to enhance the infrastructure of the Port of Salerno, improving the safety of entry and the manoeuvre of larger ships to the freight terminals.1 The Commission approved the investment aid as compatible aid. The Port of Salerno issued a tender to select the operators that would use the port, in order to ensure that the aid granted to the port authority would not leak to the operators Commission, ‘State aid as referred to in Article 107(1)’ (n 2) para 89. European Commission Decision of 27 March 2014, case SA.38302 (2014/N)––Italy Investment Aid to the Port of Salerno. 19 20

24  Research handbook on European State aid law that use the aided infrastructure to provide services to end-users.2 The Commission also required the Italian authorities to cross‑check the concession fees resulting from the tender with the fees for similar concession contracts at other ports (in Italy and elsewhere), and to check that the port authority’s expected level of profitability from the concession fees would be in line with the level required by a private investor. Sources: 1 European Commission Decision of 27 March 2014, case SA.38302 (2014/N) – Italy Investment Aid to the Port of Salerno, para 11. 2 Commission, ‘Infrastructure analytical grid for port infrastructure’ at https://​ec​ .europa​.eu/​competition/​state​_aid/​modernisation/​grid​_ports​_en​.pdf accessed 26 May 2020, para 18.

In the Port of Salerno case, the Commission required the Italian authorities to conduct a benchmarking analysis and a profitability analysis to cross-check the concession fees resulting from the tender procedure. Benchmarking analysis and profitability analysis are indirect methods to establish MEOP compliance, which are discussed in the next section. 4.B

Indirect Methods

Indirect methods for assessing MEOP compliance include benchmarking and profitability analysis. Both methods examine whether the terms offered to the recipient would be available (and, therefore, acceptable) to a private investor. However, the tests are undertaken from two different perspectives: that of the recipient and that of the investor. Benchmarking is undertaken from the recipient’s perspective. The price as well as other terms of a public measure are compared with similar transactions undertaken by comparable private companies.21 The objective is to establish a range of possible values (e.g. price ranges) by assessing a sufficiently large set of comparable transactions. To be in line with the MEOP, the terms of the public transaction need to fall within the established range. Profitability analysis is undertaken from the investor’s perspective. The expected return to the State entity from the transaction is compared with the level of return that a private investor under similar circumstances would most likely require. The existence of an economic advantage can be excluded if the expected return is higher than, or in line with, the return that a private investor would require from projects involving similar risks. 4.B.1 Benchmarking analysis The MEOP has been applied through benchmarking analysis in different types of transactions, including loan agreements, State guarantees, and agreements signed by State-owned entities with users. As described below, similar principles have been used to determine market-conforming prices of intragroup transactions within multinational companies in State aid investigations of rulings issued by tax authorities. Loan agreements To determine whether a loan provided by a State entity is in line with the MEOP, benchmarking analysis is typically undertaken to assess whether the terms are in line with those that a market economy operator in similar circumstances would provide. These terms relate to the level and timing of interest payments, the loan amount and duration, the level of collateral

Commission, ‘State aid as referred to in Article 107(1)’ (n 2) section 4.2.3.2.

21

The market economy operator principle  25 underpinning the loan, and the terms under which the principal must be repaid. The Munich Airport case illustrates the use of benchmarking analysis to determine whether loans provided by public entities are in line with the MEOP.22

BOX 2.6 THE MUNICH AIRPORT CASE In 2013, the Commission started a formal investigation into loans provided to Munich Airport by public development banks and publicly owned banks in Germany to construct a second terminal at the airport. To assess whether the loans were in line with market terms, the Commission applied the MEOP test using two approaches: • benchmarking the interest rates on the loans offered by the public entities against the rates on comparable loans with a similar credit rating from non-financial private companies. In particular, the benchmarking analysis was based on a sample of credit default swaps (CDS1) from approximately 30 non-financial companies with a similar credit rating and loan to maturity; • cross-checking the interest rates on the loans from public entities against proxy market interest rates set out by the Commission in its reference rate framework.2 This framework includes proxy margins, which vary according to the debtor’s creditworthiness (in terms of its credit rating) and the level of collateral underpinning the loan.3 As the results from both approaches showed that the interest rates on the loans provided by the public entities were higher than the benchmark rates, the Commission concluded that the loans provided by the public entities were in line with the MEOP.4 Notes/Sources: 1 Contracts between two counterparties whereby the buyer pays a premium to the seller for insuring against the risk of default. 2 Commission, ‘Communication from the Commission on the revision of the method for setting the reference and discount rates’ [2008] OJ C 14/6. 3 The proxy margins are added to the base rate to determine the overall interest rate on the loan. 4 European Commission Decision of 29 November 2013, case SA. 23600 – C 38/08 (ex NN 53/07) – Germany: Financing Arrangements for Munich Airport Terminal 2, paras 120–1.

State guarantees The Commission’s Guarantee Notice sets out the specific conditions under which it can be assumed that the State does not confer an economic advantage on the recipient:23 ●● the borrower must not be in financial difficulty;24 ●● the guarantee must be linked to a specific financial transaction, for a fixed maximum amount and limited in time;

22 European Commission Decision of 29 November 2013, case SA. 23600 – C 38/08 (ex NN 53/07) – Germany: Financing Arrangements for Munich Airport Terminal 2. 23 Commission, ‘Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees’ [2008] OJ C155/10, section 3.2. 24 An undertaking is considered to be in difficulty when, without intervention by the State, it would almost certainly go out of business in the short or medium term. The specific criteria for determining whether a company is in financial difficulty are set out in Commission, ‘Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty’ [2014] OJ C 249/1, para 20.

26  Research handbook on European State aid law ●● the guarantee cannot typically cover more than 80% of the outstanding debt or other financial obligation; ●● the beneficiary must pay a market-oriented price. An example of the Commission’s approach to assessing the criteria from the Guarantee Notice, and in particular, how the market-oriented price for the guarantee is determined in practice, is described in Box 2.7 below.

BOX 2.7 STATE GUARANTEE ON LOANS TO SHIPPING COMPANIES IN THE NETHERLANDS The Commission assessed the MEOP compliance of a State guarantee from the Dutch government on senior debt funding for loans to small and medium-sized shipping companies.1 In particular, it examined the approach proposed by the Dutch government to calculate the market-oriented price for the State guarantee. The objective of the State guarantee was to improve access to loan financing for small and medium-sized shipping companies that experience difficulties obtaining funding from the private market. To address this problem, the Dutch NESEC Foundation, a private financial institution for the maritime sector, proposed to set up a debt fund of €250m to channel funds, raised from institutional investors and backed by an 80% State guarantee, to shipping companies.2 The benchmark price of the State guarantee was based on a sample of CDS prices for Dutch listed companies (financial and non-financial) with credit risk similar to that of the debt fund. Since the State guarantee was limited to seven years, the analysis included information on prices for seven-year CDS only. The Commission took positively into account that specific investment criteria were implemented to reduce the State’s risks. For example, it was established that the average loan-to-value (LTV) ratio3 of the fund’s portfolio would not exceed 65%. Overall, the Commission concluded that the pricing approach would ensure a market-conforming remuneration of the guarantee, and that the requirements for establishing MEOP compliance set out in the Guarantee Notice were fulfilled. The Commission also allowed the guarantee to be extended for two years, in case not all loans would have been repaid at the end of the fixed duration of the guarantee, i.e. after seven years. However, this was contingent on a positive outcome from the private creditor test. Thus, at the end of the seventh year, the Dutch authorities would be required to assess whether it would be more profitable to prolong the guarantee and thereby potentially reduce the State’s payment under the guarantee, or to partially invoke the guarantee.4 Notes/Sources: 1 European Commission Decision of 4 August 2017, case SA.46664 (2017/N) – The Netherlands State guarantee on senior debt funding for loans to shipping companies. 2 Ibid para 9. 3 This measures the value of the outstanding loan relative to the value of the collateral (in the case at hand, the resale value of a vessel). Typically, loans with high LTV ratios are riskier than loans with a low LTV ratio. Any LTV ratio below 100% indicates that, if the borrower defaults, the lender is able to recover its exposure. 4 Commission, case SA.46664 (n 1) para 49.

The market economy operator principle  27 Benchmarking of user agreements Benchmarking can also be used to assess the MEOP compliance of agreements signed by State-owned infrastructure with users of the infrastructure. This is particularly relevant in the transport sector, as the infrastructure can often be publicly owned and financed through State aid, but operated by private investors. Benchmarking can ensure that the prices paid by private operators for accessing and using the infrastructure are in line with market terms such that no State aid is (unintentionally) passed on to the users of the infrastructure. In the ports sector, for example, benchmarking is regularly used to establish the appropriate level of concession fees to be paid by users of the State-owned port.25 However, the Commission considered that benchmarking was not an appropriate method to establish the MEOP compliance of prices charged by airports to airlines.26 Even if some airports are privately owned or managed, the Commission assumes that their prices may have been ‘polluted’ by the prices charged by publicly owned airports and/or airports that have received aid.27 In light of the significant increase in the number of privately owned airports since the aviation State aid guidelines were introduced in 2014, it is possible that this position might change going forwards.28 Until then, MEOP compliance for airport–airline agreements can be established only by undertaking a profitability analysis. (See, for instance, the Ryanair Charleroi case discussed in Box 2.1 above.) However, from an economics perspective, it is not clear why the Commission accepts the use of benchmarking analysis in the ports sector, but not the aviation sector. Similar to the aviation sector, the seaports sector comprises a number of state-owned and privately owned ports.29 Benchmarking in the context of tax arrangements More recently, the Commission has also relied on benchmarking analysis to assess whether corporate tax arrangements of multinational companies confer an economic advantage.30 As illustrated through the Starbucks case (see Box 2.8 below), there is a significant role for benchmarking analysis to determine the appropriateness of the calculation of the taxable profit

25 See, for example, the Port of Salerno case and European Commission Decision of 2 July 2013, case SA.35418 (2012/N)—Extension of Piraeus port—Greece, para 36. 26 Commission, ‘Guidelines on State aid to airports and airlines’, Communication from the Commission, [2014] OJ C 99/3, section 3.5.1. 27 Ibid para 58. 28 While publicly owned airports comprised 77% of EU airports in 2010, this proportion fell to 53% in 2016, with the remaining 47% comprising a mix of fully private and mixed public–private ownership. See Airports Council International (2010) and (2016), ‘The ownership of Europe’s airports’ at http://​81​ .47​.175​.201/​sky​-water/​attachments/​article/​92/​2010​_ownership​_report​.pdf (2010) and www​.aeroport​.fr/​ uploads/​documents/​ACI​%20EUROPE​%20Report​_The​%20Ownership​%20of​%20Europes​%20Airports​ %202016​.pdf (2016) accessed 26 May 2020. 29 European Sea Ports Organisation, ‘European Port Governance: Report of an Enquiry into the current governance of European Seaports’ (2010) 55–6. 30 For an overview of state aid tax cases, see N Robins, ‘Tax rulings: an overview of EU state aid cases’ (2019) Foreword to Concurrences e-Competitions Special Issue on tax rulings accessed 1 May 2020.

28  Research handbook on European State aid law specified in the tax ruling. While the Commission dropped its initial references to the use of the MEOP test in this context, the assessment is similar.31 In particular, whether taxable profit is on market terms is assessed using the OECD’s arm’s-length principle, as outlined in the OECD’s Transfer Pricing Guidelines.32 The guidelines are an internationally agreed standard to ensure that the outcome of intra-group transactions between entities of a multinational are in line with those that would be observed between independent entities.33 The Commission also uses the guidelines to assess whether tax arrangements confer an economic advantage. Under one of the OECD’s methods to establish the arm’s-length principle for intra-group transactions—the comparable uncontrolled price method34—if prices for similar transactions between subsidiaries of the same group and independent companies are sufficiently similar, the transaction can be considered to be in line with market terms or the arm’s-length principle.

BOX 2.8 THE STARBUCKS CASE In 2015, the Commission ordered Starbucks to pay €20m–€30m in the Netherlands as the company’s tax arrangements were found to constitute illegal state aid.1 The Commission’s investigation focused on the Advance Pricing Agreement between the Netherlands and Starbucks Manufacturing EMEA BV (SMBV), a subsidiary of the Starbucks Group in the Netherlands that processes green coffee and sells roasted coffee to both Starbucks and independent third parties. In the investigation of Starbucks’ tax arrangements, the Commission concluded that: • the royalty paid by SMBV to Alki, a subsidiary of the Starbucks Group in the UK, for coffee-roasting know-how was significantly higher than royalty fees paid by independent companies to Starbucks for similar licences. Based on agreements between Starbucks and third parties, as well as agreements between Starbucks’ competitors and third-party roasters, the Commission considered that SMBV should not have paid any royalty to Alki;2 • from 2011 onwards, SMBV paid above the market price for green coffee beans, which led to lower taxable profits for SMBV;3 and 31 In the Commission’s decision to open a formal investigation procedure into Starbucks, the Commission noted: ‘When accepting a calculation method of the taxable basis proposed by the taxpayer, the tax authorities should compare that method to the prudent behaviour of a hypothetical market operator, which would require a market conform remuneration of a subsidiary or a branch, which reflects normal conditions of competition.’ See European Commission Decision of 1 June 2014, case SA.38374 (2014/C) (ex 2014/NN) (ex 2014/CP) – Netherlands Alleged aid to Starbucks, para 77. This reference to the MEOP was dropped in the Commission’s final decision. 32 OECD, ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ (OECD Publishing 2010); and OECD, ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017’ (OECD Publishing 2017). 33 Ibid. 34 The other four methods being: the cost plus method; the resale price method; the transactional net margin method; and the transactional profit split method. For further details, see Oxera (2019), ‘State aid spotlight on tax: the General Court’s judgments on Fiat and Starbucks’, Agenda, October, at www​.oxera​ .com/​agenda/​state​-aid​-spotlight​-on​-tax​-the​-general​-courts​-judgments​-on​-fiat​-and​-starbucks/​ accessed 26 May 2020.

The market economy operator principle  29 • there were a number of errors in the way in which the OECD’s arm’s-length pricing methodology had been applied. In particular, the Commission concluded that the comparators used to estimate the profit-level indicator were not appropriate.4 For the above reasons, the Commission concluded that SMBV’s taxable profit was underestimated, and thus that the tax ruling conferred an advantage to SMBV. However, the General Court annulled the Commission’s decision in September 2019.5 According to the General Court: • the Commission had not shown that the royalty payments made by SMBV were overestimated. According to the General Court, the Commission had incorrectly compared SMBV’s activities with those of companies that were not sufficiently similar.6 The Commission had also incorrectly used information on contracts concluded after the tax ruling, which contradicts the principle that only information available prior to the State’s intervention (i.e. the tax ruling) should be included in assessing whether a measure confers an economic advantage;7 • the Commission had not compared the price paid by SMBV for the coffee beans with the price paid by a stand-alone roaster in a comparable situation, and had therefore not demonstrated that the price of green coffee beans exceeded the market level;8 • the Commission incorrectly argued that the comparators used to estimate the profit-level indicator were not appropriate, given that the comparator companies selected by the Commission were sufficiently different from the Commission’s own description of SMBV’s main functions.9 Sources: 1 European Commission Decision of 21 October 2015, case SA. 38374 (2014/C ex 2014/NN) implemented by the Netherlands to Starbucks. 2 Ibid paras 291–309. 3 Ibid paras 348–57. 4 Ibid paras 387–91. 5 Joined Cases T-760/15 and T-636/16 Netherlands v Commission and Starbucks and Starbucks Manufacturing Emea v Commission [2019] EU:​T:​2019:​669. 6 Ibid para 307. 7 Commission, ‘Commission 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] OJ C 262/1, para 78. 8 Ibid, paras 398 and 401. 9 Joined Cases T-760/15 and T-636/16 (n 5) paras 478 and 492.

The Starbucks case demonstrates the need for careful selection of comparators. Without this, the benchmarking analysis (to assess whether the calculation of taxable profit stipulated in the tax ruling confers an economic advantage) might not be valid. 4.B.2 Profitability analysis Profitability analysis represents an alternative way to apply the MEOP test, and involves comparing the expected return from a public measure from the State’s perspective against the return required by a private investor. If the level of return expected by the State from the measure is expected to be sufficiently high such that a private investor would have been likely to enter into a similar transaction, this indicates that the MEOP test is met.

30  Research handbook on European State aid law Establishing MEOP compliance using profitability analysis requires that particular attention be paid to the following principles, as established through the Commission’s case practice.35 ●● Define the scope of the transaction. As discussed in section 3 of this chapter, this requires a detailed (legal) analysis of the extent to which past State intervention can be taken into account or has to be excluded, in addition to whether several consecutive interventions by the State could be considered to be a single measure. ●● Ring-fence the commercial activities from the functions that would be performed by the State in its role as public authority, as only those benefits and obligations linked to the State’s role as an economic operator can be taken into account in the profitability analysis (as discussed in section 2). ●● Analyse the expected profitability of the transaction based on a generally accepted assessment methodology. The MEOP assessment should take into account only information that could reasonably have been foreseen at the time the State decided to enter into the transaction.36 Actual (i.e. ex post) outcomes are largely irrelevant and should not be used directly for the analysis. In relation to the scope of the transaction, an important consideration is whether several consecutive interventions by the State can be thought of as a single measure. In general, if the State’s interventions are closely linked to each other—in particular, with regard to their timing and economic objective—the measure might be considered a single measure.37 This question often arises in investigations of whether agreements signed by State-owned airports with airlines are in line with the MEOP. In such cases the Commission requires the MEOP analysis to be limited to the duration of the contract under assessment.38 For example, even if an airport has concluded several agreements with an individual airline over a relatively short period of time, under the Commission’s current approach, MEOP compliance should be demonstrated for each contract separately.39 After defining the scope of the transaction, the focus moves to the assessment of the expected profitability of the State’s action. In essence, this involves measuring the expected rate of return from the State’s transaction, using standard investment appraisal techniques. The conceptually correct basis for assessing profitability is an estimate of the IRR or net present value (NPV). If the NPV is greater than zero, by definition the expected return exceeds the estimate of investors’ required rate of return. This implies that the arrangements are sufficiently profitable that similar arrangements are likely to have been entered into by an MEOP investor.40 This analysis therefore requires both the expected profitability to be estimated as well as the appropriate benchmark, as illustrated in Figure 2.1. Commission, ‘State aid as referred to in Article 107(1)’ (n 2) paras 76–82 and 101–5. Case C-482/99 France v Commission (n 7). 37 Commission, ‘State aid as referred to in Article 107(1)’ (n 2) para 81. 38 Commission, ‘Communication from the Commission – Guidelines on State aid to airports and airlines’ [2014] OJ C 99/3, para 63. 39 See, for example, European Commission Decision of 22 February 2018, case SA.31149 (2012/ C)—Germany Alleged State aid to Ryanair. 40 The NPV is zero only if the IRR is equal to investors’ required rate of return or the benchmark return. The IRR is defined as the discount rate for which the NPV of a stream of cash flows equals zero. The investment decision can also be examined in terms of its NPV, which in general produces the same results as the IRR analysis. 35 36

The market economy operator principle  31

Source: Oxera.

Figure 2.1

Overview of profitability analysis

The MEOP should be applied by comparing the expected profitability of the project in question against the expected profitability of a hypothetical counterfactual scenario, based on business plans prepared prior to the transaction going ahead.41 The counterfactual scenario should be chosen for the case in question, using evidence about the most feasible, and likely, situation that would occur without the State’s intervention. An important factor in assessing the profitability of a government investment is the estimate of the benchmark return.42 As the MEOP involves an assessment of whether a private operator would have undertaken the State’s transaction, the benchmark return should reflect the rate of return required by a private operator in similar circumstances. A rational private investor will invest only if it expects to earn at least the opportunity cost of capital—that is, the return that the investor would expect to obtain in the capital markets from other investments with similar risk profiles. The standard benchmark is the WACC, which can be derived from well-established financial methods, such as the Capital Asset Pricing Method (CAPM). This represents the average of the expected rates of return to debt and equity, weighted by the relative proportions of debt and equity in a firm’s capital structure. However, if the State is an equity investor, the appropriate required rate of return is the cost of equity, rather than the WACC. Conversely, if the State provides debt financing, the appropriate rate of return is the cost of debt. This should be equivalent to the true market cost of debt, excluding any effect of a State guarantee (which would artificially lower the cost of debt). It is important that the profitability analysis is underpinned by plausible and verifiable assumptions. All the evidence should be well-documented; otherwise, the Commission might consider this as an indication that the transaction had not been carried out in line with the MEOP.43 In general, the Commission requires a number of sensitivity checks to be undertaken on the main input parameters underlying the business plan, including a higher cost of capital, for example, to assess whether the results of the MEOP test are sufficiently robust.44

See Commission, ‘State aid as referred to in Article 107(1)’ (n 2) para 102. For a detailed discussion of these techniques and how they are used in a competition law context, see Oxera, ‘Assessing Profitability in Competition Policy Analysis’ (2003) OFT Economic Discussion Paper 6. 41 European Commission, ‘Guide to Cost-Benefit Analysis of Investment Projects’ (2014), p 26. 42 The benchmark return may also be referred to as the discount rate. 43 European Commission Decision of 26 October 2018, case SA.43260 (2015/FC) – Germany – Alleged aid to Frankfurt Hahn Airport and Ryanair, para 287. 44 See, for example, European Commission Decision of 1 October 2014, case SA.21121 (C29/2008) (ex NN 54/2007) implemented by Germany concerning the financing of Frankfurt Hahn airport and the

32  Research handbook on European State aid law The following cases demonstrate how the economic principles of the MEOP assessment have been applied in practice. In particular, the Ciudad de la Luz case illustrates how the benchmark return can be established (see Box 2.9).

BOX 2.9 THE CIUDAD DE LA LUZ CASE Between 2000 and 2010, the Valencia Regional Government provided funding to develop a large film studio complex in Valencia.1 The funding came in the form of capital contributions, subordinated loans and the provision of publicly owned land. The region’s decision to carry out the project was based on analysis of a business plan. The plan showed that the project would be expected to generate cash flows immediately after its construction in 2002.2 Following delays to the construction and a significant increase in the required investment costs, in 2004 the region commissioned a new study to reassess the project’s profitability prospects. This new study showed that the project was still expected to be profitable, and the region provided further funding.3 Although a private investor contributed €600,000 to the initial share capital of the company responsible for managing the project, Ciudad de la Luz SA, the region provided a capital increase of €9m in 2001 and acquired the shares of the private investor shortly afterwards, such that by 2004 the region had become the sole owner.4 The Spanish authorities did not notify the funding to the Commission, on the basis that the MEOP was satisfied. However, following two complaints, the Commission started a State aid investigation in 2007.5 It concluded that the financing of the project was not in line with the MEOP and ordered the Spanish authorities to recover €265m of illegal aid.6 The authorities appealed the Commission’s decision to the General Court, but the General Court confirmed the Commission’s decision.7 In particular, the Commission had doubts about the appropriateness of the benchmark required rate of return assumed by the Spanish authorities,8 and therefore undertook its own economic assessment to determine the benchmark return for the project.9 As the project was fully financed by equity,10 the cost of equity represented the appropriate benchmark return. To calculate the required cost of equity, the Commission applied the CAPM, using the formula: Cost of equity = Rf + β ERP where Rf is the risk-free rate, ERP is the equity risk premium and β is the equity ‘beta’, a measure of systematic (i.e. non-diversifiable) risk associated with equity investments in projects with business and financial risks similar to those of the Ciudad de la Luz project. While the estimated IRR of the project was 5.74%, based on the expected cash flows presented in the business plan, the Commission found that the appropriate benchmark cost of equity amounted to approximately 14.9% (on a post-tax basis) at the time of the investment.11 In particular, the Commission concluded that substantially higher estimates should financial relations between the airport and Ryanair, para 474; and European Commission Decision of 8 May 2012, case SA.22668 (C 8/2008 (ex NN4/2008)) implemented by Spain for Ciudad de la Luz SA, para 81.

The market economy operator principle  33 be adopted for both the ERP and the beta. While the Commission estimated the ERP to be 6.8–9.3% (depending on the method of calculation), the Spanish authorities argued that the ERP should be 3.75%.12 The Commission’s estimate was based on the historical ERP over government bonds in Spain in 1991–2003. In contrast, the estimate proposed by the Spanish authorities took into account evidence from European and US equity markets, and therefore the estimate was not specific to Spain.13 In relation to the equity beta, the Commission used data from two competitors in the sector (Carrere Group and Babelsberg) and estimated the beta to be around 1.5.14 It also noted that this beta estimate might be conservative since investment in the Ciudad de la Luz project was likely to involve greater risks than investing in the other two well-established studios. The Spanish authorities submitted a significantly lower beta estimate of around 0.4, implying that the investment was significantly less risky than the overall market.15 According to the Commission, the Spanish authorities did not provide any reliable evidence to support their beta analysis, and, in particular, to show why, given the greenfield nature of the project, an assumption for the beta significantly below the average for the market would be appropriate. Finally, the Commission conducted a sensitivity analysis to assess the robustness of its results. It found that the expected NPV of the project turned negative if the benchmark (post-tax) cost of equity was at least 5–6%.16 Therefore, as the Spanish authorities based their investment decision on an expected equity IRR of slightly above 5%, the profitability of the investment hinged on a small margin of error. According to the Commission, even if the Spanish authorities had been correct in assuming a benchmark cost of equity of around 5%, the results would not have been robust to any sensitivity analysis. This is because a slightly higher required return on equity would have resulted in a negative NPV, implying that the results were not sufficiently robust and therefore most likely not in line with the MEOP. Based on the benchmark cost of equity estimated by the Commission, using the business plan submitted by the Spanish authorities, the expected NPV of the investment was –€130m.17 Therefore, the Commission concluded that no private investor would have invested in the project, and that the financing provided by the region constituted aid.18 Ciudad de la Luz SA and the Spanish authorities appealed the Commission’s decision. The General Court examined in detail the economic and financial evidence brought forward during the procedure and the Commission’s approach to calculate the benchmark cost of equity. While the level of the risk-free rate was not disputed, the Court reviewed in particular the evidence in relation to the ERP and the beta. On the ERP, the Court supported the Commission’s approach to use figures for Spain alone.19 The General Court also agreed with the Commission’s assessment of the equity beta. The Court stressed, in particular, that a beta below 1, as proposed by the applicants, seemed unrealistic because it would indicate a much lower risk than the average for all companies in the market.20 Overall, the General Court rejected the applicant’s argument that the Commission committed manifest errors of assessment concerning the parameters used in the CAPM to estimate the benchmark cost of equity.21

34  Research handbook on European State aid law Notes/Sources: 1 European Commission Decision of 8 May 2012, case SA.22668 (C 8/2008 (ex NN4/2008)) implemented by Spain for Ciudad de la Luz SA, paras 14–19 and 53. 2 Ibid para 24. 3 Ibid para 27. 4 Ibid paras 16–17. 5 Ibid paras 35–8. 6 Ibid paras 114–17. 7 Joined Cases T-319/12 and T-321/12 Spain v Commission [2014] EU:​T:​2014:​604. 8 Commission Decision, case SA.22668 (n 1) para 65. 8 European Commission Decision 12 February 2008, case C8/08 – Spain Ciudad de la Luz film studios, paras 75–80. 9 Commission, case SA.22668 (n 1) paras 71–83. 10 The subordinated loans were considered as equity. See Commission, case SA.22668 (n 1) para 88. 11 Ibid paras 74 and 78. 12 Ibid paras 72 and 75. 13 Ultimately, the Commission adopted a conservative approach in estimating the equity risk premium and considered only the lower bound of this interval (6.8%). 14 Commission, case SA.22668 (n 1) para 73. 15 Ibid para 75. 16 Ibid para 81. 17 Ibid para 80. 18 The application of a pari passu transaction, given the involvement of a private investor at the start of the project, was ruled out by the Commission. It did so mainly on the grounds that the private investor had committed only a marginal amount, and had withdrawn its funding when the majority of the investment had to be committed. See Commission Decision, case SA.22668 (n 1) para 64. 19 Joined Cases T-319/12 and T-321/12 Spain v Commission (n 7) para 93. 20 Ibid para 113. 21 Ibid paras 95 and 119.

Although the methodologies and financial tools used in the Ciudad de la Luz case to assess MEOP compliance are not new, the Commission’s assessment provides helpful technical guidance for practitioners and public authorities. Furthermore, the fact that the General Court reviewed the technical issues of the case in detail underlines the importance of quantitative financial analysis in MEOP assessments. As highlighted in the FIH case, an important factor to consider before undertaking a profitability analysis is whether the State is an investor or a creditor to the company. While the Ciudad de la Luz case focuses on the private investor test, the Frucona Košice case sheds some light on the private creditor test (see Box 2.10). While a private investor is driven by future profitability considerations of the investment, a private creditor has already entered into a commercial relationship with the company—for example, by having provided a loan or capital to the company. Therefore, any future decisions will take into account the funding already invested in that company. The private creditor test is usually applied when the company faces financial difficulties. In such situations, it might be reasonable for a private creditor to write off parts of the outstanding debt, as long as the amount that can be recovered exceeds the amount that could be recovered if the company were forced into bankruptcy. Estimating the counterfactual scenario in the private creditor test might be more complex than in a MEOP assessment, and can involve detailed analysis of the national insolvency law and appropriate assumptions for the collateral and the market value of the assets to be sold. To establish MEOP compliance, all the relevant information that affects the recoverable amount must be taken into account, as well as the time and effort needed to recover it. The Frucona Košice case demonstrates that, in some instances, the EU courts can set a high bar for the burden of proof on the Commission to demonstrate the validity of the private creditor test. As set out in Box 2.10, the courts required the Commission to reconstruct the behaviour of the ideal, rational and fully informed hypothetical private creditor, by seeking any ‘imaginable’ information and evidence.45

45 MA Cyndecka, ‘“Reversed”, “Excessive” or “Misconstrued”’ (n 2). For further discussion on the burden of proof, see A Bengt Jespersen, ‘The Development of the Burden of Proof in MEOP Cases’ (2019) 18(4) European State Aid Law Quarterly 458; and L Hancher, ‘The Role of Presumptions and the Burden of Proof in Recent State aid Cases – Some Reflections’ (2019) 18(4) European State Aid Law Quarterly 470.

The market economy operator principle  35

BOX 2.10 THE FRUCONA KOŠICE CASE Between 2002 and 2003, the Košice tax office offered Frucona Košice, a company active in the beverage industry in Slovakia, to defer tax payments of around €12.6m.1 Before agreeing to the deferral, the tax office secured its claims against the company’s assets. Due to legislative changes that limited the possibility for companies in Slovakia to defer tax payments against collateral to only once a year, Frucona Košice was no longer able to defer or pay its taxes and was forced to start insolvency proceedings. However, the company subsequently came to an agreement with its creditors, including the local tax office, to write off 65% of the outstanding debt and to repay the remaining 35%.2 Under the agreement, the tax office was required to write off tax claims of €11m.3 In contrast to Frucona Košice’s other creditors, the tax office’s claims were secured against collateral. As such, the tax office was considered a ‘separate creditor’ and had a right to veto the proposal. However, the tax office did not make use of this option. In contrast to the private creditors, the tax office was entitled to start, on its own initiative, the sale of real estate, machinery or the firm as a whole to collect outstanding tax claims (the ‘tax execution procedure’). In its decision to launch a formal investigation, the Commission raised doubts that the disputed debt write-off was free of State aid.4 In particular, the Commission considered that the tax office, as a private creditor, would have been better off selling the firm’s assets. To assess the private creditor test, the Commission compared the expected recoverable amount from the sale of the beneficiary’s assets in a bankruptcy and tax execution procedure to the expected return from the debt write-off. The Commission concluded that the bankruptcy, as well as the tax execution procedure, would have been expected to lead to a higher return.5 Thus, the private creditor test was not passed. In 2006, the Commission ordered the Slovak authorities to recover incompatible aid from Frucona Košice of €11m.6 In 2007, Frucona Košice appealed the decision before the General Court.7 Following the Court’s dismissal of the action as unfounded, Frucona Košice then appealed to the ECJ.8 In 2013, the ECJ held that by failing to take into account the duration of the bankruptcy procedure in its assessment of the private creditor test, the Commission had committed a manifest error of assessment.9 The ECJ considered the duration of the bankruptcy could have affected the value of the assets to be sold and, thus, would normally have significant influence on the decision-making process of a prudent and diligent private creditor.10 In a new decision in 2013, the Commission again found that the bankruptcy procedure was a more advantageous alternative for the tax office than the debt write-off, and concluded that the private creditor test was not met.11 Frucona Košice appealed again to the General Court, which annulled the Commission’s decision in 2016.12 In 2017, the Commission appealed to the ECJ, which confirmed the General Court’s view that the Commission had failed to take into consideration all the relevant information.13 In particular, the ECJ noted that the Commission failed to obtain the relevant information in relation to the expected time and costs involved in selling the firm’s assets.14 As a result, the ECJ dismissed the Commission’s appeal.15

36  Research handbook on European State aid law Sources: 1 European Commission Decision of 7 June 2006, case No C 25/2005 (ex NN 21/2005) implemented by the Slovak Republic for Frucona Košice, a.s., para 17. 2 Ibid para 21. 3 Ibid para 22. 4 Commission, State aid — Slovakia State aid No C 25/2005 (ex NN 21/2005) — Measure in favour of Frucona Košice Invitation to submit comments pursuant to Article 88(2) of the EC Treaty (2005/C 233/11) [2005] OJ C 233/47; and Case C‑300/16 P Commission v Frucona Košice [2017] EU:​C:​2017:​706, para 12. 5 Ibid paras 92 and 99. 6 Ibid Article 1 and 2. 7 Case T-11/07 Frucona Košice v Commission [2010] EU:​T:​2010:​498. 8 Case C‑73/11 P Frucona Košice v Commission [2013] EU:​C:​2013:​32, para 103. 9 Ibid para 103. 10 Ibid paras 78–81. 11 European Commission (2016), ‘Commission Decision of 16 October 2013, case SA.18211 (C 25/2005) (ex NN 21/2005) granted by the Slovak Republic for Frucona Košice a.s., paras 119, 124, 127 and 139. 12 Case T‑11/07 RENV Frucona Košice v Commission [2014] EU:​T:​2014:​173. 13 Case C‑300/16 P Commission v Frucona Košice [2017] EU:​C:​2017:​706, para 81. 14 Ibid para 80. 15 Ibid para 84.

The Commission’s case practice in the field of State aid in the financial services sector during the global financial crisis that started in 2007–8 offers some interesting and complex cases to analyse. During a relatively short period of time (2008–12), the Commission adopted more than 300 decisions, involving around €5,300bn of approved aid—an unprecedented amount.46 While most of these measures were granted as compatible aid, in one case concerning the Dutch bank, ING Grope NV, the Commission did not apply the MEOP, even though, according to the EU Courts, it would have been applicable (see Box 2.11).

BOX 2.11 THE ING CASE In the course of the financial crisis, the Netherlands adopted a package of support measures for the ING bank, including a capital injection of €10bn. In 2008, the Commission approved these measures as compatible aid.1 In 2009, the Netherlands submitted a restructuring plan for ING to the Commission, which included an amendment to the repayment terms of the capital injection previously granted to ING. The Commission considered that the revised repayment terms amounted to additional aid of approximately €2bn.2 The Netherlands appealed the Commission’s decision to the General Court, on the basis that the Commission should have applied the MEOP to the amendment of the repayment terms.3 As the General Court agreed with the Netherlands, the Commission contested the General Court’s ruling in front of the ECJ. In 2014, the ECJ supported the General Court’s assessment and annulled the Commission’s decision.4 Similar to the EDF case, the Court found that the Commission could not rule out the applicability of the MEOP simply on the grounds that the previous measures were granted as State aid.5 Instead, the Commission had to take into account the role of the State as shareholder of the company and assess the effects of the measure—i.e. whether it actually conferred an advantage on ING. During the procedures before the ECJ, the Commission adopted a new decision, assessing the amendment to the repayment terms of the capital injection in light of the MEOP. However, it reached the same conclusion; namely, that a market economy investor would not have agreed to those new terms.6 Although both the Netherlands and ING brought actions against that new decision, the parties ultimately withdrew their actions, such that the new Commission’s decision became final.7

46 J Rivas, ‘Testing the Soundness of the Commission’s Practice on State aid to the Financial Sector’ (2014) 13(4) European State Aid Law Quarterly 716.

The market economy operator principle  37 Sources: 1 European Commission Decision of 31 March 2009, case C 10/2009 (ex N 138/2009) – illiquid assets back-up facility for ING, The Netherlands. 2 European Commission Decision of 18 November 2009, case No C 10/2009 (ex N 138/2009) implemented by the Netherlands for ING’s Illiquid Assets Back-Up Facility and Restructuring Plan. 3 Joined Cases T‑29/10 and T‑33/10 Netherlands and ING Groep v Commission [2012] EU:​ T:​2012:​98. For further detail, see Oxera ‘Passing judgment on crisis state aid control: the ING MEIP case’ (2012) Agenda, March, at https://​www​.oxera​.com/​agenda/​passing​-judgment​-on​-crisis​-state​-aid​-control​-the​-ing​-meip​-case/​ accessed 26 May 2020. 4 Case C‑224/12 P Commission v Netherlands and ING Groep [2014] EU:​C:​2014:​213. 5 Ibid para 31. 6 European Commission Decision of 11 May 2012, case SA.28855 (N 373/2009) (ex C 10/2009 and ex N528/2008) – The Netherlands ING – restructuring aid. 7 Case C‑224/12 P Commission v Netherlands and ING Groep (n 4) paras 20–1.

Another interesting case in the financial services sector concerns the German public bank, Norddeutsche Landesbank – Girozentrale (NordLB) (see Box 2.12).

BOX 2.12 THE NORDLB CASE In 2011–12, NordLB received a capital injection of around €600m from its public shareholders. It also benefitted from other capital measures totalling around €1.1bn, of which the largest part involved the conversion of hybrid capital into equity in response to new capital requirements set by the European Banking Authority (EBA).1 Despite these measures, NordLB was not able to recover its financial strength. As the bank suffered from losses in its shipping finance division, its core capital fell under the required regulatory threshold.2 In 2019, the German authorities therefore notified a recapitalisation plan for NordLB to the Commission that (in contrast to the previous measures) demonstrated that the support granted by Germany was in line with the MEOP.3 The measure mainly concerned a capital injection for NordLB of €2.8bn from its public owners, of which €1.5bn was provided by the Land of Lower Saxony, and around €0.8bn by the German Savings Banks Association (Deutscher Sparkassen- und Giroverband).3 This was conditional on a substantial restructuring of NordLB’s business model; namely, a resized bank with a lower risk profile and a stronger regional focus. To assess whether the proposed capital injection was in line with the MEOP, the Commission first examined the assumptions underlying the bank’s business plan for the period 2018–19, and the targets set out in the plan.4 The Commission took positively into account that the bank committed to exit the shipping financing industry, which had caused the financial distress. The Commission did not consider the expected growth rates set out in the business plan to be overly aggressive, given the bank’s new strategy to focus on more profitable clients. In this regard, the bank presented a detailed analysis of all client relationships in the corporate and retail segment based on a scoring model that took into account financial and risk data. Lastly, the Commission assessed the bank’s planned cost reductions, which included a significant reduction in full-time employees of around 2,800 and a substantial streamlining of IT systems. Overall, the Commission found that the structural measures in the business plan addressed the weakness of the bank at that time, and were based on realistic assumptions. Thus, the Commission concluded that the business plan appeared to be in line with what would be expected by a private investor.5 Having analysed the credibility of the business plan, the Commission examined the State’s expected return on the investment.6 To assess the market conformity of the capital

38  Research handbook on European State aid law injection, the Commission compared the expected IRR of the investment to the relevant benchmark: the cost of equity. Germany’s estimate of the benchmark cost of equity was 8–10%, which the Commission found to be reasonable.7 The Commission noted that the risk-free rate and country risk premium for Germany were around 0% at the time, implying the appropriateness of a low benchmark return. It also took into account positively that Germany’s estimate of the benchmark cost of equity was supported by analysis from the European Banking Authority, which estimated that the cost of equity of European banks was 8–10%. Given that the expected IRR (after tax) amounted to 7%, the Commission noted that the expected return on equity would be slightly below the benchmark cost of equity.8 However, it also noted that the difference is minimal and the business plan was conservative, to some extent, especially in relation to the assumed level of regulatory capital. Assuming a lower, but still adequate, capital requirement, the Commission found that the expected return on equity would increase to 8.56% and thus exceed the benchmark cost of equity.9 Furthermore, the Commission also took into account the overall profitability of European banks, as measured by their return on equity in the second quarter of 2019, which was 6.3%.10 The Commission also undertook its own calculations and estimated the expected IRR to be 8.9%, which was in line with the estimate of the benchmark cost of equity of 8–10% submitted by the German authorities.11 The Commission noted that its estimates of the expected IRR were based on a conservative dividend policy. If the dividend policy had been assumed to be less conservative, the estimated IRR would have been higher.12 Overall, the Commission concluded that the capital injection was in line with the MEOP.13 Sources: 1 European Commission Decision of 22 December 2011, case SA.33571 (2011/N) – Rescue aid to NORD/LB – Germany; and European Commission Decision of 25 July 2012, case SA.34381 (2012/N) – Germany Restructuring aid to Norddeutsche Landesbank AöR. 2 European Commission Decision of 5 December 2019, case SA.49094 (2019/N) – Germany Market-conform measures for strengthening capital and restructuring of Norddeutsche Landesbank, para 13. 3 Ibid para 39. 4 Ibid paras 145–66. 5 Ibid para 167. 6 Ibid paras 170–92. 7 Ibid para. 173. The Commission’s decision does not specify if the estimate of the cost of equity is reported on a pre-tax or post-tax basis. 8 Commission, SA.49094 (n 2) para 176. 9 Ibid para 176. 10 Ibid para 180. 11 Ibid paras 187–9 and para 86. 12 Ibid para 190. 13 Ibid paras 207–11.

5. CONCLUSIONS The last decade has seen a significant shift in EU State aid policy towards more sophisticated economic and financial analysis. While such analysis has always underpinned State aid assessments, its role was more formally introduced through the changes made by the Commission in the EU State aid Modernisation initiative launched in 2012.47 Given the increasing complexity of State interventions, the Commission and the European courts have been putting much more importance on financial and economic analysis in determining whether measures from public entities constitute State aid. The MEOP is central to determining whether a measure confers an economic advantage on the recipient. The cases

47 Oxera, ‘A brave new world? Implications of state aid modernisation’ (2013) Agenda, March at www​.oxera​.com/​agenda/​a​-brave​-new​-world​-implications​-of​-state​-aid​-modernisation/​ accessed 26 May 2020.

The market economy operator principle  39 discussed in this chapter illustrate some of the range of circumstances in which the MEOP can be used. In the Ciudad de la Luz case, the Commission provides technical guidance on the application of financial tools to determine adequate benchmark returns. The Ryanair case demonstrates that the General Court is endorsing the use of the MEOP for commercial activities carried out by the State—in this case, airport services to airlines—despite the Commission’s initial reluctance. Finally, the NordLB case shows that the MEOP can also be used to evaluate more complex financial transactions where the state is involved; it cannot be taken for granted that such transactions always constitute State aid. All these cases demonstrate the evolution of the MEOP as an important economic tool in State aid analysis.

3. Taxation and State aid Julia Rapp1

1. INTRODUCTION The primary purpose of taxation is to raise revenue to finance public expenditure. Most governmental activities must be financed by taxation. But it is not the only goal. Taxation policy can also have some non-revenue objectives or pursue certain policy objectives such as environmental protection. Member States are free to decide on the economic policy which they consider most appropriate – and on the means as to how to pursue that economic policy.2 However, Member States must exercise this competence in accordance with Union law, including State aid rules. And this is where taxation and State aid meet – Member States may pursue any policy objectives with the means they see fit provided this does not selectively favour certain undertakings or the production of certain goods. The notion of selectivity thus has a large impact on the design and the application of tax rules because tax measures which apply to all undertakings are general and therefore not selective. Tax measures which apply only to certain undertakings or certain production may be selective and therefore, in principle, prohibited under the State aid rules of the Treaty. The line between selective and non-selective tax measures is, however, difficult to draw since every tax measure is different, pursuing different objectives. This has led to Commission decisions and Court judgments which sometime seem difficult to reconcile or which are simply contradictory. Nevertheless, the interplay of taxation and State aid is a topical one, as fiscal measures are often used by Member States, not only to influence a certain behaviour or pursue a policy objective, but also to support, openly or less openly, a certain industry or (group of) undertaking(s). This is confirmed by data from the Commission’s yearly scoreboard, where in 2018, State aid granted in the form of tax advantages represented the second most popular aid instrument with 32% of total State aid expenditure.3 When looking at the interplay of tax measures and State aid rules, the type of tax measure plays a crucial role for the assessment. In this chapter, the following tax measures are discussed in more detail: tax rulings, anti-abuse measures, special purpose levies and turnover taxes. The choice of those tax measures for a more in-depth discussion in this chapter was guided most importantly by the fact that the recent years have seen an important number of Commission decisions and Court judgments that merit further analysis. While the focus in this chapter will

1 All views expressed in this chapter are purely personal and cannot be considered an official position of the European Commission. 2 Commission Notice of 19 June 2016 on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union [2016] OJ C 262/1, para 156. 3 See European Commission State Aid Scoreboard 2018, available at: accessed 2 October 2020.

40

Taxation and State aid  41 be on Court judgments (both of the General Court and the Court of Justice), mention will also be made of Commission decisions, in particular where Court judgments are not (yet) available. However, before entering into the intricacies of applying State aid rules to fiscal aid measures, it is useful to recall the basic principles of those rules with a particular focus on the selectivity condition.

2.

THE BASICS OF STATE AID AND FISCAL MEASURES

Article 107(1) TFEU stipulates that [s]ave as otherwise provided in the Treaties, 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.

As regards the application of this provision to fiscal measures, the most relevant condition pursuant to Article 107(1) TFEU is the selectivity criterion, i.e. to fall within the scope of Article 107(1) TFEU, a State measure must “favour certain undertakings or the production of certain goods.” Thus, measures of general application do not fall within the scope of Article 107(1) TFEU.4 On the other hand, a measure is not necessarily general because it benefits a large number of undertakings or because it concerns many and diverse sectors, if not all undertakings or economic sectors can benefit from it.5 The defining criterion to ascertain whether a measure is general or, on the contrary, “favours certain undertakings or the production of certain goods” is therefore whether, under the objective of a defined reference system, the measure treats legally and factually comparable undertakings differently. As will be shown in this chapter, the definition of the reference system is of particular importance in the context of fiscal measures. But it is by no means easy as the comparison between companies that are legally and factually in the same situation should be made “in the light of the objective attributed to the tax system of the Member State concerned” and not in light of the objective of the tax measure under scrutiny.6 In addition, the General Court, various Advocate Generals and the Court of Justice often differ in their views of what is the “correct” reference system. Not only are there various methods of analysis to defining the reference framework and conducting a selectivity analysis (such as the “General Availability Test”, the “three-step test” or the “two-step test”) but also does the definition of the reference system change with respect to the State measure at issue.7 Commission Notice State aid (n 2), para 118. Case C-143/99 Adria-Wien Pipeline GmbH and Wietersdorfer & Peggauer Zementwerke GmbH v Finanzlandesdirektion für Kärnten [2001] EU:​C:​2001:​598, para 48, Joined Cases C-20/15 P and C-21/15 P Commission v World Duty Free Group SA and Others [2016] EU:​C:​2016:​981, para 80. 6 Case C-522/13 Ministerio de Defensa and Navantia SA v Concello de Ferrol [2014] EU:​C:​2014:​ 2262, para 49. 7 In the Commission Notice State aid (n 2), the Commission describes in paragraphs 133 and 134 the reference system as “a consistent set of rules that generally apply – on the basis of objective criteria – to all undertakings falling within its scope as defined by its objective. Typically, those rules define not only the scope of the system, but also the conditions under which the system applies, the rights and obligations of undertakings subject to it and the technicalities of the functioning of the system. In the case of taxes, 4 5

42  Research handbook on European State aid law Furthermore, State aid can be granted to one company only (and constitute an individual aid measure) or to a group of undertakings (and constitute a scheme). In the former case, where State aid is granted through an individual aid measure, the selectivity test is slightly different than in the presence of a scheme. Thus, for individual aid, the Court stated in MOL: “the selectivity requirement differs depending on whether the measure in question is envisaged as a general scheme of aid or as individual aid. In the latter case, the identification of the economic advantage is, in principle, sufficient to support the presumption that it is selective.”8 In the context of a scheme, i.e. where the aid is granted to a (potentially large) group of undertakings, the selectivity assessment is more complicated, precisely because the distinction between a general measure, which does not constitute State aid, and a State aid scheme is less straightforward.9 The selectivity assessment for a scheme therefore follows a three-step analysis, which entails the following steps: in order to classify a domestic tax measure as “selective”, it is necessary to begin by identifying and examining the common or “normal” regime applicable in the Member State concerned. It is in relation to this common or “normal” tax regime that it is necessary, secondly, to assess and determine whether any advantage granted by the tax measure at issue may be selective by demonstrating that the measure derogates from that common regime inasmuch as it differentiates between economic operators who, in light of the objective assigned to the tax system of the Member State concerned, are in a comparable factual and legal situation.

Finally, in accordance with the Court’s case-law, a measure which, although conferring an advantage on its recipient, is justified by the nature or general scheme of the system of which it is part is not considered to be selective and thus falls outside the scope of Article 107(1) TFEU.10 This three-step test is the basis for any selectivity assessment, not necessarily only in fiscal aid cases11 but created and predominantly applied to deal with tax measures, which

the reference system is based on such elements as the tax base, the taxable persons, the taxable event and the tax rates.” 8 Case C-15/14 P Commission v MOL Magyar Olaj- és Gázipari Nyrt [2015] EU:​C:​2015:​362, para 60. See also Case T-314/15 Hellenic Republic v Commission [2017] EU:​T:​2017:​903, para 79. See also Joined Cases T-755/15 and T-759/15 Grand Duchy of Luxembourg and Fiat Chrysler Finance Europe v Commission [2019] EU:​T:​2019:​670, para 333. 9 A scheme is defined in Article 1(d) of the State aid Procedural Regulation 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” (Council Regulation (EU) No 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union [2015] OJ L 248/9). 10 Joined Cases C-78/08 to C-80/08 Paint Graphos and others [2011] EU:​C:​2011:​550, para 49. 11 See Case C-524/14 P European Commission v Hansestadt Lübeck [2016] EU:​C:​2016:​971, Opinion of AG Wahl, paras 87 to 89: “The Court’s case-law confirms that the comparative exercise prescribed in the case of tax regimes is equally valid in the case of other measures. It should be noted that the Court has, moreover, conducted that comparative exercise in the case of measures relating to the payment of costs and to the use of infrastructure. Indeed, in the Judgment of 14 January 2015, Eventech (C‑518/13, EU:​C:​2015:​9), the Court took care to consider, in relation to the authorisation given to London taxis to drive in bus lanes, whether London taxis and minicabs were in a comparable factual and legal situation.” See also Case C-70/16 P Comunidad Autónoma de Galicia and Redes de Telecomunicación Galegas Retegal, SA (Retegal) v Commission [2017] EU:​C:​2017:​1002.

Taxation and State aid  43 seem to be of general application but may nevertheless be selective because they are designed to favour certain undertakings or the production of certain goods.12 In the following, the author will apply the three steps of the test to the different fiscal aid measures identified before (tax rulings, (exceptions to) anti-abuse rules, special purpose levies, turnover taxes) and try to find a common thread which could guide the selectivity assessment beyond the cases discussed here. While the three steps of the selectivity analysis seem clear, at least in theory, a lot depends on the interpretation of those three steps by the respective Courts. While, the acceptance of a broad reference system under the first step of the three-step test as encompassing for instance the general corporate taxation system, enlarges the scope of the selectivity test, thereby making exceptions to the system more likely to constitute illegal State aid, a narrower reference system allows Member States to distinguish between taxpayers on the basis that they are not considered comparable, thereby reducing the scope of the selectivity test and the application of State aid rules. As the following discussion will show, this seems to be an important consideration in the European Courts’ jurisprudence on fiscal aid measures.

3.

TAX RULINGS AND STATE AID

The topic of tax rulings and their interaction with State aid rules can be found in Chapter 16. However, a discussion on the topic of taxation and State aid, as this chapter aims to do, would not be complete without some words on the selectivity assessment in the tax ruling cases. Tax rulings are in principle individual aid measures, i.e. a tax ruling is given upon the request of a company to its tax authority, asking for the tax consequences of a certain tax structure or the interpretation of a tax provision. As explained before, individual aid measures usually do not have to be assessed according to the three-step test but a presumption of selectivity applies if an advantage exists. However, the Commission in its decisions on tax rulings13 has not solely relied on the presumption of selectivity but equally assessed all measures in accordance with the three-step test. In doing so, it has taken the following approach: In all its decisions, the Commission determined the existence of a selective advantage by comparing the tax treatment of the beneficiary of the ruling with the tax treatment of other corporate taxpayers under the ordinary corporate income tax system of the Member State concerned. It thus chose a wide reference system based on the corporate income tax rules (and thereby clearly rejected a benchmark whereby group companies are only compared to other group companies transacting within their group).

12 While this chapter will focus on the selectivity condition of Article 107(1) TFEU, the reader’s attention is also drawn to the fact that in the so-called Spanish football cases, the General Court, annulling the Commission decision, made clear that also the finding of advantage in the case of a reduced tax rate is not always straightforward. (See Case T-865/16 Fútbal Club Barcelona v Commission [2019] ECLI:​EU:​T:​2019:​113.) 13 Commission Decision (EU) 2016/2326 of 22 December 2016 on State aid which Luxembourg granted to Fiat [2016] OJ L 351/1 (Fiat decision); Commission Decision (EU) 2017/502 of 29 March 2017 on State aid implemented by the Netherlands to Starbucks [2017] OJ L 83/38 (Starbucks decision); Commission Decision (EU) 2017/1283 of 19 July 2017 on State aid implemented by Ireland to Apple [2017] OJ L 187/1; and Commission Decision (EU) 2017/6740 of 15 June 2018 on State aid implemented by Luxembourg to Amazon [2018] OJ L 153/1.

44  Research handbook on European State aid law In so doing, it based itself on the judgment of the Court of Justice in Forum 187 according to which: [i]n order to decide whether a method of assessment of taxable income … confers an advantage on [its beneficiary], it is necessary … to compare that [method] with the ordinary tax system, based on the difference between profits and outgoings of an undertaking carrying on its activities in conditions of free competition.14

The choice of a wide reference framework as encompassing the entire corporate income tax code, although heavily contested by the parties to the proceedings, follows a consistent line of case law in the area of corporate income taxation. As such, also in World Duty Free, a case concerning a Spanish rule, which allowed companies acquiring shares in foreign companies a more favourable tax treatment than companies acquiring shares in a Spanish company, the Court of Justice considered the reference system to constitute the “ordinary tax system”, i.e. the general Spanish corporate income tax system.15 Similarly, in Paint Graphos, the Court held that the reference system should be defined in light of its purpose and where the main purpose of a tax system is revenue generation, the reference system would usually be the corporate income tax system.16 In line with Forum 187, the Commission argued in the tax ruling decisions that any corporate tax system is based on the principle that tax should be paid on the difference between income and outgoings of an undertaking carrying on its activities in conditions of free competition. In the same vein, the Commission argued, that in any corporate income tax system based on the separate entity approach, companies are taxed on a level of profits that reflects a market-based outcome. Standalone companies always pay market prices. Group companies have to determine their prices by reference to the arm’s length principle (i.e. also equivalent to a market-based outcome). The arm’s length principle is the only means to ensure that group companies are taxed as separate entities, just as standalone companies are, and are thus not selectively favoured over standalone companies. The Court recently had the occasion to pronounce itself on the validity of this reasoning. In Cases T-755/15 and T-759/15 Luxembourg and Fiat Chrysler Finance Europe v Commission17 and T-760/15 and T-636/16 Netherlands and Starbucks v Commission,18 the Court was asked to decide, inter alia, on the question whether the Commission correctly determined the existence of a selective advantage pursuant to Article 107(1) TFEU by using the arm’s length principle as a tool to ensure that group companies and standalone companies are treated equally. It thus had to decide whether the Commission correctly included the arm’s length principle in the definition of the reference system of the Member States concerned, and this not because the 14 Joined Cases C-182/03 and C-217/03 Belgium and Forum 187 v Commission [2006] EU:​C:​2006:​ 416, para 95 (emphasis added). 15 Joined Cases C-20/15 P and C-21/15 P Commission v World Duty Free Group SA and Others [2016] EU:​C:​2016:​981, para 67. 16 See Joined Cases C-78/08 to C-80/08 Paint Graphos and others (n 10) para 50. See also C-128/16 European Commission v Kingdom of Spain and Others [2018] EU:​C:​2018:​591. 17 Cases T-755/15 and T-759/15 Grand Duchy of Luxembourg and Fiat Chrysler Finance Europe v Commission [2019] EU:​T:​2019:​670 (Fiat judgment). The judgment has been appealed by Fiat and Ireland (as intervening party). 18 Cases T-760/15 and T-636/16 Kingdom of the Netherlands and Others v European Commission [2019] EU:​T:​2019:​669 (Starbucks judgment). The judgment has not been appealed.

Taxation and State aid  45 principle is laid down in the national law but because it is a way to ensure non-discriminatory treatment between group and standalone companies. In Fiat, the General Court upheld the Commission decision; in Starbucks, it annulled the decision. However, irrespective of the latter, the Court clearly endorsed in both judgments that the arm’s length principle can be used as a tool to determine the existence of advantage. In other words, where national tax law does not make a distinction between integrated undertakings and standalone undertakings for the purpose of their liability to corporate income tax [which, according to the Court, was not the case neither for Luxembourg nor the Netherlands19], that law is intended to tax the profit arising from the economic activity of such an integrated undertaking as though it had arisen from transactions carried out at market prices. … Article 107(1) TFEU allows the Commission to check whether that pricing corresponds to pricing under market conditions … The arm’s length principle … is thus a tool for making that determination in the exercise of the Commission’s powers under Article 107(1) TFEU.20

In addition, although the General Court at a later point in the Fiat judgment does not seem to take any position as to the correct reference system – the national corporate income tax system or the rule in Luxembourg law21 laying down the arm’s length principle – as selectivity exists under both reference systems, the statements in relation to the arm’s length principle and its purpose to allow equal treatment between integrated and standalone companies under the national tax system confirm the Commission’s choice of the national corporate income tax system as the reference system. Put differently, if the correct reference system according to the General Court had been the national rule laying down the arm’s length principle, the undertakings whose legal and factual situation should be compared would comprise only integrated companies. Standalone companies do not need to apply the arm’s length principle in order to charge market prices. There would therefore be no need to apply the arm’s length principle in order to treat integrated and standalone companies equally. Once the reference system is defined, the question whether the tax ruling at issue constitutes a derogation from the reference system coincides with the identification of the advantage granted to the beneficiary of the measure.22 And also the existence of a justification in Fiat is dismissed by the General Court. In the first instance, the General Court observes that neither Luxembourg nor Fiat had advanced any possible grounds of justification during the administrative procedure. As regards grounds put forward later by Fiat that the tax ruling is justified because it complies with the arm’s length principle and is meant to avoid double taxation, the Court dismisses those arguments by considering that the former is based on a false premise and the latter unsubstantiated as Fiat has “not maintained nor established that it could avoid double taxation only if the tax ruling at issue was adopted.”23 The latter seems to imply some

Starbucks judgment (n 13) para 149; Fiat judgment (n 13) para 141. Fiat judgment (n 13) paras 141, 143. 21 Reference is made only to the Fiat judgment as the Starbucks judgment does not go beyond the assessment of advantage, the reason for annulment of the Commission decision. 22 Fiat judgment (n 13) para 361. 23 ibid para 365 (emphasis added). 19 20

46  Research handbook on European State aid law sort of proportionality reasoning, i.e. the tax ruling was neither necessary nor appropriate in order to avoid double taxation.24 The issue of justification as the third step of the selectivity analysis is usually not discussed at great length in the Commission’s tax ruling decisions, since few Member States have claimed a valid justification in the Commission proceedings. Notable exceptions are Belgium in the excess profit regime and the UK in the CFC regime. While the UK CFC case will be discussed in more detail below, some words on Belgium’s argument to justify the existence of the excess profit regime and the (albeit short) assessment thereof by the General Court in its judgment of 14 February 2019 in Cases T-131/16 and T-263/16 Belgium and Magnetrol v Commission.25 To recall, the Commission had concluded in its decision of 11 January 2016 that the Belgian excess profit scheme, which allowed Belgian entities that are part of a multinational group to deduct so-called “excess profits” from their tax base constituted incompatible State aid. These profits had been classified as “excess” by the Belgian authorities based on a premise that they resulted from being part of a multinational group, e.g. due to synergies, economies of scale or other group related factors. The Commission disagreed with this argument, considering that this premise did not comply with the arm’s length principle. Belgium and some 32 beneficiaries appealed the decision before the General Court which annulled the decision on 14 February 2019. While the General Court confirmed that the Commission was in general competent to review such tax practices under EU State aid rules, it did not agree with the conclusion that the Belgian excess ruling practice constituted an aid scheme. Belgium had justified the non-taxation of the excess profit in order to prevent potential double taxation. The argument was that the excess profit remained untaxed in Belgium because it might be taxed in another tax jurisdiction. However, according to the Commission, the scheme at issue did not pursue the objective of avoiding double taxation, since it was not necessary, in order to benefit from the excess profit exemption, to demonstrate that that profit was included in the tax base of another company.26 The General Court agreed with the assessment of the Commission in this respect, stating that “it does not appear that the non-taxation of excess profit, as applied by the Belgian tax authorities, pursued the objective of avoiding double taxation. The application of the measures at issue was not subject to the condition that it be demonstrated that the excess profit in ques24 See Paint Graphos where the Court also applies a proportionality reasoning in the justification analysis: “In any event, in order for tax exemptions such as those at issue in the main proceedings to be justified by the nature or general scheme of the tax system of the Member State concerned, it is also necessary to ensure that those exemptions are consistent with the principle of proportionality and do not go beyond what is necessary, in that the legitimate objective being pursued could not be attained by less far-reaching measures” (Joined Cases C-78/08 to C-80/08 Paint Graphos (n 10) para 75). See also the Commission Decision of 7 March 2019, case SA.50400 (2019/NN-2) – Luxembourg – Possible State aid in favour of Huhtamäki, where the Commission applies a proportionality reasoning to the tax treatment afforded by the Luxembourg tax authorities to the company Huhtamäki and provisionally concludes that the tax treatment was neither adequate nor necessary in order to avoid double taxation and achieve equal treatment between group and standalone companies (para 96 et seq.). 25 Cases T-131/16 and T-263/16 Kingdom of Belgium and Magnetrol International v European Commission [2019] EU:​T:​2019:​91. 26 Commission Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium [2016] OJ L 206.61, paras 172, 173.

Taxation and State aid  47 tion had been included in the profit of another company. Nor was it necessary to demonstrate that that excess profit had actually been taxed in another country.”27 In other words, justifying an aid measure for reasons of avoiding potential double taxation is not sufficient, only the need to avoid actual double taxation may justify a prima facie selective tax measure.

4.

(EXCEPTIONS TO) ANTI-ABUSE MEASURES AND STATE AID

The definition of the reference system has also been a contested issue in the case of anti-abuse measures applied by Member States in order to counter tax avoidance as well as in the cases of exceptions to anti-abuse measures and whether those exceptions constitute State aid. The question that arose in those cases was whether the reference system consists of the anti-abuse measure only or the national corporate income tax system of which the anti-abuse measure is a part. Where the reference system is wider than just the anti-abuse measure, the issue then arises whether the anti-abuse measure constitutes a (justified) derogation. In P Oy, the Court seems to have taken the approach that the anti-abuse measure itself constituted the reference system. P Oy is a case on Finnish legislation which in principle prohibits the deduction of losses in the event of ownership changes but includes an escape clause allowing tax authorities to authorise the loss offset even in the case of ownership change provided “special considerations” apply. An administrative guidance letter then listed those special reasons, including, inter alia, “particular impact on employment.” In this preliminary ruling case, the Court does not directly answer the question of the referring court on the correct definition of the reference system but concludes that “if it were to be established that the reference system, namely the ‘normal system’ consists in a prohibition on the deduction of losses in the case of a change of ownership …, the authorisation procedure [by the Tax Directorate of Finland which enables losses to be carried forward provided ‘special reasons’ are met] would constitute an exception”.28 The correct definition of the reference system – whether it is the general rule or the anti-abuse measure, which prohibits the use of the general rule in order to prohibit an abusive behaviour – was also at issue in a German case on the possibility under German law to carry forward losses for companies in difficulties (so-called “Sanierungsklausel”).29 Under the German legal system, the carry-forward of tax losses in case of restructuring of companies in difficulty allows companies that are illiquid or over-indebted to offset losses in a given year against taxes in profits in future years despite changes in the company’s shareholding structure. The clause departs from the general principle in the German corporate tax law that prevents the carry-forward of losses for fiscal purposes when there has been a change in the shareholding structure in order to prevent companies to avoid taxes by taking over failed companies for the purpose of using their fiscal carry-forward value. While the General Court, following the Commission decision, considered the (anti-abuse) rule governing the forfeiture of losses as the reference framework within the meaning of

Cases T-131/16 and T-263/16 Kingdom of Belgium (n 25) para 72. Case C-6/12 P P Oy [2013] EU:​C:​2013:​525, para 32. 29 Case T-287/11 Heitkamp BauHolding GmbH v Commission [2016] EU:​T:​2016:​60. 27 28

48  Research handbook on European State aid law Article 107(1) TFEU,30 the Court of Justice thought differently. The Court of Justice annulled the General Court’s judgment and the Commission decision considering that the Commission had failed to appropriately determine the system of reference against which selectivity had to be assessed. It starts by explaining that while the determination of the reference framework within which the analysed measure falls, is of particular importance in case of tax measures, since the very existence of an advantage may be established only when compared with the “normal taxation”,31 the regulatory technique cannot be decisive for the purposes of defining the reference system.32 In other words, the Court emphasises that the qualification of a tax measure as selective does not depend on its design as a derogation or exception from the generally applicable rules, which is in line with the settled case-law that Article 107(1) TFEU does not distinguish between measures of State intervention by reference to their causes or their aims but defines them in relation to their effects, and thus independently of the techniques used.33 In relation to the German rule, the Court of Justice finds that by excluding from the relevant reference framework the general rule of loss carry-forward, the General Court and the Commission defined the reference framework too narrowly.34 Thus, while the Court does not go as far as suggesting which rule would be the correct reference framework the wording suggests that the right reference framework would be the loss carry-forward rule and that the provision concerning companies in difficulty was not selective because it reflected the general rule, i.e. the possibility to carry forward losses.35 Therefore, a possible reading of the judgment could be that the German rule allowing carry-forward of tax losses in case of restructuring of companies in difficulty was not selective because it translated the general rule and was not an exception to it. The fact that companies in difficulty, which had changed ownership, were considered as part of the general rule was justified by the objective of the anti-abuse measure because there was no risk of abuse due to the requirement under the law for companies benefiting from the loss carry-forward to maintain economic activities. For this reason, companies in difficulties were entitled to the benefit of the loss carry-forward to the same extent as all other companies. The judgment stresses the importance of the appropriate identification of the reference system and the need to always assess measures based on their effects and not according to the legislative technique. As mentioned before, the Court in P Oy does not expressly answer the question of the correct definition of the reference system but proceeds in its selectivity assessment on the assumption that it is the rule on the prohibition to deduct losses. If that is ibid paras 106, 107. Case C-203/16 P Dirk Andres v European Commission [2018] EU:​C:​2018:​505, paragraph 88. 32 ibid paras 90–2. 33 Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] EU:​C:​2011:​732, paragraphs 91–3. 34 Dirk Andres (n 31) para 103: “… the selectivity of a tax measure cannot be precisely assessed on the basis of a reference framework consisting of some provisions that have been artificially taken from a broader legislative framework. Therefore, by thus excluding from the relevant reference framework in the present case the general rule of loss carry-forward, manifestly the General Court defined it too narrowly.” 35 So unlike the Advocate General, the Court of Justice did not define the correct reference framework and also did not express itself on the issue as to whether under the correctly defined reference framework, the measure would still result in a different treatment between companies which are in a comparable situation. 30 31

Taxation and State aid  49 the case, there would be an inconsistency between P Oy and the German restructuring clause. Indeed, it is not immediately obvious why in P Oy, the Court would consider the anti-abuse measure, i.e. the prohibition to deduct losses in the case of ownership changes as the reference system (and not the general rule that allows deduction of losses) while in the German case on the restructuring clause, it considers the general rule of the possibility to carry forward losses as the reference framework. Unfortunately, in the German case the Court of Justice does not go as far as to examine if under the corrected reference system, there was an unjustified differentiated treatment amounting to a selective advantage for the companies involved. Indeed, the benefit of the loss carry forward was denied without valid justification to healthy companies continuing their activities. Those companies were therefore at a “disadvantage” with respect to ailing companies continuing their activities. Therefore, a possible reading of this judgment could be that the Court does not consider all inconsistencies in the tax treatment of companies to necessarily amount to an advantage but only those inconsistencies that lead to an unjustified advantage for those companies falling under the tax measure. In other words, a beneficial treatment for some companies does not become an advantage under State aid rules because other companies are disadvantaged as a consequence of the tax measure. In another German case A-Brauerei concerning the tax exemption for certain intra-group transformation procedures, the Court of Justice was again called in the context of a preliminary ruling procedure to examine the selectivity of an exception to an anti-abuse measure, but chose also in this case a wide reference system. The German transfer tax law stipulates that a tax has to be paid when the owner of a German property changes. In 2009, an exemption from the property transfer tax was introduced for transfer of properties made through transformations within groups of companies. For the exemption to apply, the parent company must have strong control over the subsidiary concerned (at least 95% for five years prior and after the transformation). The objective of the exemption was to facilitate the restructuring of undertakings.36 The implicit logic was to tax only genuine transfers of real estate property. Advocate General Saugmandsgaard Øe in his opinion considers the exemption from the property transfer tax in the context of group transformations not to lead to a selective advantage, based on what he calls a “general availability test.” He views the three-step test as the root of several problems.37 He considers the test to be intrusive with the sovereignty of Member States in tax matters and creating legal uncertainty, as the test is too complex and its outcome uncertain. He believes that fiscal State aid should be focused on measures, which are the most damaging to competition in the internal market, namely individual aid and sectoral aid, as well as measures based on activity, legal form, size, seat and nationality. Therefore, he proposes to the Court of Justice to use instead of the three-step test an alternative test, the “general availability test,” according to which measures that are generally and ex ante availa-

36 See explanatory memorandum accessed 15 April 2020. 37 Case C‑374/17 Finanzamt B v A-Brauerei [2018] EU:​C:​2018:​741, Opinion of AG Saugmandsgaard Øe. See also Advocate General Kokott in her opinion on the Hungarian crisis tax (Case C‑75/18 Vodafone Magyarország Mobil Távközlési Zrt. v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága [2019] EU:​C:​2019:​492, Opinion of AG Kokott, para 151) “sharing the concerns of Advocate General Saugmandsgaard Øe.”

50  Research handbook on European State aid law ble to any undertaking would not be selective, even if not every undertaking would effectively benefit from them.38 The Court of Justice, however, rejects the “general availability test” and refers to the principles set out in World Duty Free, confirming that the selectivity of a fiscal measure is assessed pursuant to the classic three-step test.39 When applying this test to the German tax exemption, it finds the measure prima facie selective as it differentiates between companies which are in the same situation, in the light of the objective of the system, which is the taxation of any change in ownership of real estate property. Whereas companies carrying out those restructuring procedures without being linked by a shareholding as specified in the law are excluded from that exemption, companies carrying out the same procedures in the context of a group restructuring benefit from the exemption.40 However, the Court finds the differentiated treatment justified by the guiding principle of the tax system, which is to avoid double taxation.41 According to the Court, the three-step test therefore remains the correct approach to assess the selectivity of fiscal measures. The correct definition of the reference system, i.e. whether it is the general rule of which the anti-abuse measure constitutes the derogation or whether the reference system is the anti-abuse measure itself will also be a contentious point in the pending appeal procedures of the Commission decision on the UK rules on controlled foreign companies (CFC). In the decision of 2 April 2019, the Commission held that the UK rules partly constitute State aid insofar as they unduly exempt certain multinational groups from the UK CFC rules. The UK corporate tax system is largely territorial, i.e. profits which are recorded outside the UK are generally not subject to UK tax, even if they are generated in the UK. In order to tackle tax avoidance by setting up a subsidiary (a CFC) in a low-tax jurisdiction and to artificially divert profits from the UK to the CFC, the CFC rules aim to protect the UK tax base through the imposition of a CFC charge on the UK resident company controlling the CFC.42 In the decision, the Commission considered the reference system to be the UK CFC rules, contrary to the UK authorities, which argued that the reference system consists of the general ibid para. 5. Case C-374/17 Finanzamt B v A-Brauerei [2018] EU:​C:​2018:​1024, para 27. 40 ibid para 38. See also paragraph 42 of the same judgment: “It is apparent that Paragraph 6a of the GrEStG differentiates between, on the one hand, companies carrying out a restructuring procedure within a group such as that referred to in that provision and which are capable of benefiting from the tax exemption at issue in the main proceedings and, on the other, companies carrying out that same procedure without belonging to such a group, which are however excluded from that exemption, whereas both are in comparable factual and legal situations in the light of the objective pursued by the tax in question, which is to tax the change in proprietor of the ownership rights from the point of view of civil law, implying the transfer of those rights from one natural or legal person to another natural or legal person.” 41 According to the Court of Justice, pursuant to the law, “the transfer of the property concerned is, as a rule, already taxed ‘at entry’, that is to say at the time when the company owning that property is integrated into such a group of companies. If, subsequently, the transfer of that property were again taxed because of a restructuring procedure carried out within that group, … this would result in the same transaction transferring the property concerned being taxed twice: on the first occasion at the time of the transfer of ownership deemed to correspond to the controlling company’s acquisition of at least 95% of the capital or business assets of the dependent company and, on the second occasion, at the time of the restructuring procedure consisting, in the present case, in the merger by absorption of the dependent company by the controlling company.” (para 46). 42 Commission Decision (EU) 2019/1352 of 2 April 2019 on the State aid SA.44896 implemented by the United Kingdom concerning CFC Group Financing Exemption [2019] OJ L 216/1, para 9. 38 39

Taxation and State aid  51 UK corporate tax regime of which the CFC rules are an important corollary. The Commission justified the narrower definition of the reference system by reference to the different objectives of the UK corporate tax system and the UK CFC rules. It argued that the latter rules were specifically designed to protect the UK tax base by bringing into charge profits which are considered to have been “artificially diverted.”43 The Court procedure will show which reference system should ultimately be retained as the correct one. It is difficult to find precise guidance from the Court cases, partly due to what seem to be contradictory selectivity analyses, partly because the Court of Justice does not always expressly define the reference system. A decisive element in the UK CFC case will be whether the General Court (and most probably, subsequently the Court of Justice) endorses the Commission argument that the CFC rules follow a different objective than the UK corporate tax rules or, conversely, whether it considers, in line with the UK authorities, that the CFC rules and the UK corporate tax rules follow the same objective.

5.

SPECIAL PURPOSE LEVIES AND STATE AID

As explained in the introduction, the function of taxation is not always only revenue generation. Taxation can also be used as an instrument to correct market failures or change the behaviour of companies. In these cases, the tax usually has a narrower scope and is directed at a specific economic activity or specific economic operators. The State aid issue in these cases is not so much that an exemption or reduction of a tax for one or a specific group of undertakings leads to unequal treatment in relation to the other companies that have to pay the tax but, conversely, that one group of undertakings, i.e. those that have to pay the special tax, are “disadvantaged” in relation to the broad category of all other undertakings that do not have to pay the tax and could therefore be considered as aid beneficiaries. It may be questioned whether the State aid rules should apply in conditions where it is not the advantage that is selective but the disadvantage44 and where the Commission or the Court assesses the selective advantage for a group of beneficiaries that are formally outside the scope of the tax. On the other hand, only the effect of the measure on the undertaking is relevant, and not the cause or the objective of the State intervention.45 A special levy for certain undertakings clearly has an advantageous effect for those that do not have to pay the levy and the distortion of competition is the same, irrespective of the regulatory technique used and how and on whom a tax is levied.46 Advocate General Kokott in her opinions on the Hungarian crisis tax,47 a progressive turnover tax which will be discussed more in detail below, as well as in her opinions in the ANGED Commission Decision (EU) 2019/1352 (n 42) para 105. See Joined Cases C-105/18 to C-113/18 Asociación Española de la Industria Eléctrica (UNESA) and Others v Administración General del Estado [2019] EU:​C:​2019:​395, Opinion of AG Hogan, para 92. 45 Case C-173/73 Italy v Commission [1974] EU:​C:​1974:​71, para 13. 46 See Case C-487/06 British Aggregates Association v Commission of the European Communities and United Kingdom [2008] EU:​C:​2008:​757, where it is held at paragraph 85 that “State aid does not distinguish between measures of State intervention by reference to their causes or their aims but defines them in relation to their effects, and thus independently of the techniques used.” 47 Opinion of AG Kokott in Case C‑75/18 (n 37). 43 44

52  Research handbook on European State aid law cases48 raises the issue that proceedings brought by a disadvantaged competitor should not be held admissible, as it is settled case law that undertakings which are required to pay a tax cannot rely before the national courts on the unlawfulness of the exemption for the others in order to avoid payment of the tax or to obtain a refund.49 However, in ANGED, the Court did not consider the questions referred by the national court as inadmissible on this basis, even if the applicants in the main proceedings could not avoid the payment of the taxes if the non-payment of the tax by the other companies was declared illegal.50 The only outcome of this would be that all companies have to pay the tax. Turning from questions of admissibility to the substantive assessment of special purpose levies under State aid rules, two – if not opposing but partly overlapping – considerations apply. On the one hand, it is settled case law that “neither the fiscal nature nor the economic or social aim of the State measure at issue, nor the environmental protection objectives which it pursues are sufficient to exclude it from [Article 107 TFEU].”51 Article 107 TFEU does not make a distinction between State measures according to their aim or the reasons for their introduction, but defines them only in terms of their effects.52 On the other hand, it also emerges from the case law that objectives extrinsic to fiscal policy objectives and the purpose to raise revenue for the State budget could play a role in the determination of the reference framework. This is usually the case for self-standing levies or special taxes, which do not form part of a wider taxation system but form a reference system in themselves. In the recent Polish progressive turnover tax case, for instance, the General Court held that “the measure described by the Commission as State aid is part of the framework of a specific sectoral tax concerning the retail sale of goods to individuals. The ‘normal’ tax system cannot, therefore, in any event, exceed that sector.”53 And also the Irish air travel tax case is an example of a case where the measure itself constitutes the reference system.54 Thus, while the case law has made clear that special purpose levies are assessed according to their effect and that the special aim they pursue cannot “save” them from being assessed under State aid rules, the fact that special purpose levies often form their own reference system modifies the selectivity test from the classic three-step test into a “consistency check” with the result that they are often not considered to constitute State aid.

Opinions of Advocate General Kokott in Cases C-233 to 237/16 ANGED, ECLI:​EU:​C:​2017:​853. Case C-233/16 Asociación Nacional de Grandes Empresas de Distribución (ANGED) v Generalitat de Catalunya [2017] EU:​C:​2017:​852, Opinion of AG Kokott, paras 62 to 65; Opinion of AG Kokott in Case C‑75/18 (n 37) para 139. This would only be different, i.e. an action would be admissible, if the proceedings before the national court concerned a review of the legislation itself (with erga omnes effect) and not a review of an individual tax notice (AG Kokott in Case C‑75/18 (n 37) para 144). 50 This is in contradiction with previous case law, pursuant to which the Court would not give a ruling if the answer to the question on the State aid character of a tax had not been necessary for the referring court to resolve the dispute before it, as was the case, for instance, in a judgment of 26 July 2017, Superfoz., C-519/16, that concerned the interpretation of a very similar levy in Portugal. 51 See among others Case C-409/00 Spain v Commission [2003] EU:​C:​2003:​92. 52 Italy v Commission (n 45); Case C-56/93 Belgium v Commission [1996] EU:​C:​1996:​64; Case C-241/94 France v Commission [1996] EU:​C:​1996:​353. 53 Joined Cases T-836/16 and T-624/17 Poland v Commission [2019] EU:​T:​2019:​338, para 64. 54 Joined Cases C-164/15 P and C-165/15 P Commission v Aer Lingus Ltd and Ryanair [2016] EU:​ C:​2016:​990. Jérôme Monsenego, Selectivity in State Aid Law and the Methods for the Allocation of the Corporate Tax Base (EUCOTAX Series on European Taxation Vol 60, Wolters Kluwer 2019) 76. 48 49

Taxation and State aid  53 Thus, in the case of special levies, it has been clarified by the Court in a series of judgments that Member States are free to decide the externalities they want to tackle provided the scope of the tax and its features are consistent with its objectives. The core of the review concerned the consistency in the design of the taxes and the question whether the boundaries of the levy have been designed in an arbitrary or biased way, so as to favour certain products or activities which are in a comparable situation with regard to the underlying logic of the levies in question. A clear example of this approach can be found in the judgment of the Court of Justice on Kernkraftwerke Lippe-Ems,55 a preliminary ruling case raising, inter alia, the issue whether a German law which taxes the use of nuclear fuel for the production of electricity might be benefiting other producers of electricity as they are not impacted by the nuclear fuel duty. Here, the Court considered that the underlying logic of the tax at stake was its environmental purpose, as the tax revenues were to be used with the aim of rehabilitating the mining site where radioactive waste from the use of nuclear fuel was stored.56 In view of this objective, it stated that even though other methods of producing electricity than those based on nuclear fuel are not affected by the rules imposing taxes on the use of nuclear fuel, “they are not, in the light of the objective pursued by those rules, in a factual and legal situation that is comparable to that of the production method based on nuclear fuel ….”57 Thus, the environmental purpose of the tax, drawn from the link between its structure and the use of the tax revenues, leading to the non-comparability of the various producers of electricity was the reason why the levy was qualified as a specific tax and thus not part of a wider reference system. In the recent preliminary ruling on the lawfulness of a Spanish tax on the use of inland waters for the production of electricity, UNESA, the Court of Justice had to decide on a very similar question than in Kernkraftwerke Lippe-Ems, namely whether a special levy imposed on producers of hydroelectricity in inter-communities river basins58 amounted to State aid to electricity producers that (i) do not extend beyond a single community; (ii) that generate electricity from other sources of energy; and (iii) electricity producers that use water for purposes other than the generation of electricity. In this context, it is interesting to note that the referring court pointed out that while the purported objective as indicated in the preamble of the law seems to be the protection and improvement of public water resources, the essential characteristics and the very structure of the tax indicate that it actually pursues a purely economic objective in that “it seeks to obtain revenue for the State in order to cover the tariff deficit of the electricity system ….”59 The Court, in its selectivity analysis, concludes, similar to Kernkraftwerke Lippe-Ems, that producers of hydroelectricity are not in a legally and factually comparable situation with

55 Case C-5/14 Kernkraftwerke Lippe-Ems GmbH v Hauptzollamt Osnabrück [2015] EU:​C:​2015:​ 354. 56 R Garcia and E Ferreiro Serret, ‘Hardening the preliminary reference procedure in a Union in crisis: Kernkraftwerke Lippe-Ems’ (2016) 53(3) CML Rev, 837. 57 Case C-5/14 Kernkraftwerke Lippe-Ems GmbH (n 55) para 79. Or, as Advocate General Szpunar pointed out: given that it is impossible to create a system of advance taxation which would take account of all production processes equally, the producers of electricity are not in the same factual situation (even though they may be in competition with each other). (Case C-5/14 Kernkraftwerke Lippe-Ems GmbH v Hauptzollamt Osnabrück [2015] EU:​C:​2015:​35479, Opinion of AG Szpunar, paras 71 to 75.) 58 River basins located in more than one Comunidad autónoma (autonomous community) of Spain. 59 Joined Cases C-105/18 to C-113/18 UNESA and Others (n 44) para 20.

54  Research handbook on European State aid law respect to producers of electricity from other sources in light of the environmental objective of the tax. A discrimination between those groups of producers can therefore be excluded.60 Interestingly, it dismisses the argument of the referring court (and of Advocate General Hogan in this case) that the objective of the tax is not environmental but rather budgetary (i.e. to cover the tariff deficit of the Spanish electricity system), by referring to the tax competence of the Member States and their freedom to spread the tax burden across various factors of production and economic sectors.61 Indeed, the non-comparability and therefore non-discrimination between hydroelectricity producers and other producers of electricity only seems defendable taking into account the purported environmental objective to protect and improve public water resources.62 If the real objective, as indicates the referring court, is to cover the tariff deficit of the Spanish electricity system, all producers of electricity should be considered to be in a comparable situation and the special tax therefore selective.63 Also, in three preliminary rulings on a tax on large retail operators introduced by six Spanish regions64 (the so-called ANGED cases) did the Court focus its analysis on the comparability and consistent application of the tax, in light of the objective it pursues. The tax had been imposed by the regions with the objective to address adverse effects of large retail outlets on the environment as well as on town and country planning, stemming from the use of private cars by the customers.65 It was calculated on the basis of the surface of the retail establishment, as a proxy for the adverse effects. This meant that individual retail outlets below a certain surface threshold were exempted from the tax; certain specialised retail outlets were exempted from the tax irrespective of their surface; and large collective establishments (e.g. shopping malls) were de facto exempted from the tax as the individual shops of the mall were below the threshold. In the three judgments, the Court of Justice considered66 that the tax at stake was not selective, but for the exemption of large collective outlets (shopping malls).67 It held that retail 60 As regards the second selectivity assessment between producers of hydroelectricity using inter-community basins and those that use river basins within one community, the Court considers the reference system restricted in accordance with the competence of the public authority. In other words, the central government did not have jurisdiction to tax hydroelectric producers operating within a single community, which were taxed by the autonomous communities. (See opinion of Advocate General Hogan who reaches the opposite conclusion and who considers the division of competences only as an element for justifying the limited territorial scope of the measure but not as an element for defining the territorial delimitation of the reference framework.) 61 UNESA and Others (n 44) para 68. See also paragraph 50 of Advocate General Hogan’s opinion. 62 ibid para 66. 63 Opinion of AG Hogan UNESA and Others (n 44) para 60. 64 Catalonia, Asturias, Aragon, Navarra, Canarias, La Rioja. The taxes were only enforced and collected by the regional authorities in Catalonia, Asturias and Aragon. 65 Case C-233/16 Asociación Nacional de Grandes Empresas de Distribución (ANGED) v Generalitat de Catalunya [2017] EU:​C:​2017:​852; Joined Cases C-234/16 and C-235/16 Asociación Nacional de Grandes Empresas de Distribución (ANGED) v Consejería de Economía y Hacienda del Principado de Asturias and Consejo de Gobierno del Principado de Asturias [2018] EU:​C:​2018:​281; Joined Cases C-236/16 and C-237/16 Asociación Nacional de Grandes Empresas de Distribución (ANGED) v Diputación General de Aragón [2018] EU:​C:​2018:​291. 66 The Court also had to rule on whether the tax was contrary to the freedom of establishment, which it denied. It did not find the existence of any direct or covert discrimination. 67 According to the Court, large collective establishments are in a similar situation to large individual establishments in the light of the environment objective of the tax. The difference in treatment therefore amounts to State aid.

Taxation and State aid  55 establishments excluded from the scope of the tax were not comparable to establishments that came within the scope, in light of the objective of the tax. In this case, the purpose of the tax was to contribute towards environmental protection and town and country planning. Therefore, “a condition relating to sales area thresholds, such as that adopted by the national legislation at issue in the main proceedings, in order to distinguish between undertakings with a greater or lesser environmental impact, is consistent with the objectives pursued.”68 Moreover, the discretion of Member States is very wide and the Court has only limited powers to review the determination of the threshold, which is “based on technical, complex assessments.” Therefore, “the thresholds should not be regarded as manifestly inappropriate for the purposes of the objectives pursued.”69, 70 This wording is remarkable and illustrates the high burden of proof of the Commission to review special purpose levies as to their compliance with State aid rules. Indeed, the Court in one of the three Spanish cases uses the “manifest inappropriate test” to test the compliance of the tax under State aid rules. Also Advocate General Kokott proposes the use of a “manifest inconsistency” test “where inconsistency ultimately indicates abuse” as the benchmark to assess the proportionality of the tax in the context of the fundamental freedoms and under State aid rules.71 As noted before, the Court seems to have taken the approach in the context of special purpose levies, that given the Member States’ discretion in this field, selectivity only arises if the levy is inconsistent with the objective of the system and thereby leads to discrimination. The classic three-step test and the definition of the reference system play a subordinate role in this assessment, which requires from the Commission to prove a manifestly inconsistent tax in order to show selectivity. Last but not least, before moving on to the next section on turnover taxes, which share very similar features to special purpose levies, it is worth mentioning two no-aid Commission decisions that have not been appealed and therefore will not come under Court scrutiny.72 The Commission decision of 24 April 2018 on an Irish tax on Sugar Sweetened Drinks, which Ireland notified to the Commission is illustrative of the Commission’s line of reasoning followed in these cases but also raises questions in terms of approach, i.e. when to accept the objective of a tax system put forward by the Member State and when not to accept it. Indeed, the question may be asked why in the Irish case, the Commission accepts the objective of the special purpose levy put forward by the Member State but finds enough reason to question the objective in the turnover tax cases. It may be true, as the Commission asserted in the turnover tax cases that the tax was designed in a manner to have a disproportionate effect on

68 Case C-233/16 ANGED (n 65) para 53. Moreover, as Advocate General Kokott argues in her opinion, the use of thresholds contributes to administrative simplification and is therefore not objectionable (Opinion of Kokott in Case C-233/16 ANGED (n 65) para 105). 69 Joined Cases C-234/16 and C-235/16 ANGED (n 65) para 48. 70 As regards the specialised stores exceptions, the Court considers that such large sales areas may not be intended to attract a large number of consumers or increase private traffic flows, which is a factor that may justify the distinctive tax treatment of specialised stores. Here, the Court appears to admit that such exceptions are prima facie selective but can be justified within the logic of the system. 71 Opinion of AG Kokott in Case C-233/16 ANGED (n 49) paras 48 and 106. 72 Commission Decision (EU) 2019/1732 of 6 June 2019 on SA.33159 (2015/C) – Taxation of saturated fat in certain food products sold in Denmark [2019] OJ L 264/5; Commission Decision of 24 April 2018, case SA.45862 (2018/N) – Ireland Irish tax on Sugar Sweetened Drinks.

56  Research handbook on European State aid law foreign-owned undertakings that were taxed at a higher average rate.73 However, in view of the strong emphasis of the Court on Member States’ discretion when designing special taxes, the only way to question an objective put forward by a Member State seems to be – in view of the jurisprudence – to consider it inconsistent/manifestly inappropriate/arbitrary and biased. This constitutes a high burden of proof for the Commission, which the General Court in the turnover tax cases did not see fulfilled. But coming back to the Irish sugar tax case, the tax was part of an overarching policy to tackle obesity in adults and children and would apply with two rates depending on the sugar content, i.e. a lower rate would apply for a sugar content between five and eight grams and a higher tax rate for drinks whose sugar content exceeded eight grams. Certain drinks (e.g. entailing dairy, soja, etc. if they contain a certain minimum amount of calcium) were excluded as well as food supplements. The tax charge was payable by the suppliers of these products. The Commission considered that the measure conferred an advantage on the suppliers of those products that were not subject to the sugar tax (e.g. beverages with no added sugar, dairy-based drinks, etc.).74 In terms of selectivity, the Commission considered the reference system to be the levy itself which was part of the overarching policy framework to “foster the reformulation and disincentivise the consumption (by raising sale prices) of products which are specifically harmful and dangerous for health because of their high added-sugar content and which, at the same time, lack satiating effect.”75 However, as certain products that also contain (added) sugar were not taxed, the Commission considered that while some of those products were not comparable (e.g. products with naturally occurring sugar or artificial sweeteners), others (food products, products containing added sugar below the threshold, dairy-based drinks, etc) were comparable and their non-taxation therefore prima facie selective. In the third step of the selectivity analysis, the Commission then assessed the justification and concluded that in light of the health objective of the tax, the non-taxation of those products with added sugar was justified, in light of the “reformulation” objective of the tax, i.e. to incentivise sugar producers to use less sugar. In addition, the progressive rate structure for products containing more than five grams and the existence of two different rates depending on the sugar content was justified in the light of the health objective of the tax.76 In this case, the Commission therefore accepted the progressive rate structure as it was in line with the objective of the tax. In the turnover tax cases discussed next, the progressive rate structure was not accepted by the Commission. Based on the context and design of the tax, the Commission considered the objective to be a different one than the one put forward by the Member State, which may have been the reason why the General Court annulled the decisions and decided in favour of the Member States in question.

6.

TURNOVER TAXES AND STATE AID

In the years 2016 and 2017, the Commission adopted four negative decisions against progressive turnover taxes: Commission decisions of 4 July 2016 on the Hungarian food chain inspec 75 76 73 74

Poland v Commission (n 53) para 47. Commission Decision, case SA.45862 (2018/N) (n 72) para 18. ibid para 39. Commission Decision, case SA.45862 (2018/N) (n 72) paras 64 and 93.

Taxation and State aid  57 tion fee77 and the Hungarian health contribution of tobacco industry businesses,78 Commission decision of 4 November 2016 on the Hungarian advertisement tax79 and Commission decision of 30 June 2017 on the Polish retail tax.80 The Commission decisions on the Hungarian advertisement tax and the Polish retail tax were challenged by Hungary and Poland before the General Court81 which has rendered its judgments in case T-20/17 Hungary v Commission on 27 June 201982 and in Joined Cases T-836/16 and T-624/17 Poland v Commission on 16 May 201983 respectively. In addition, the Court of Justice is currently assessing two preliminary ruling requests concerning the Hungarian crisis taxes that applied between 2010 and 2012 in the telecom and retail sectors.84 All cases share certain similarities – most importantly they all concern progressive turnover taxes and the Commission in its four final decisions considered the turnover taxes to constitute incompatible State aid. In order to explain the Commission and the General Court’s assessments, it is proposed to explain in detail the Polish retail tax case, one of the two cases that were brought to the General Court.85 On 6 July 2016, the Polish Parliament adopted an Act on retail sales tax, pursuant to which all companies operating in the retail sector were subject to a monthly tax based on their turnover from retail sales. The tax featured a progressive rate structure with three different brackets and rates: the part of the turnover below the threshold of PLN 17 million (approx. EUR 4 million) was not subject to the tax; a tax rate of 0.8% applied on the part of the company’s turnover between PLN 17 million and 170 million (approx. EUR 40 million);86 and a tax rate of 1.4% applied on the turnover in excess of PLN 170 million.

77 Commission Decision (EU) 2016/1848 of 4 July 2016 on the measure SA.40018 (2015/C) (ex 2015/NN) implemented by Hungary on the 2014 Amendment to the Hungarian food chain inspection fee [2016] OJ L 282/63. 78 Commission Decision (EU) 2016/1846 of 4 July 2016 on the measure SA.41187 (2015/C) (ex 2015/NN) implemented by Hungary on the health contribution of tobacco industry businesses [2016] OJ L 282/43. 79 Commission Decision (EU) 2017/329 of 4 November 2016 on the measure SA.39235 (2015/C) (ex 2015/NN) implemented by Hungary on the taxation of advertisement turnover [2017] OJ L 49/36. 80 Commission Decision (EU) 2018/160 of 30 June 2017 on the State aid SA.44351 (2016/C) (ex 2016/NN) implemented by Poland for the tax on the retail sector [2018] OJ L 29/38. 81 Hungary did not challenge the Commission’s final decisions concerning the Hungarian food chain inspection fee and the Hungarian health contribution for tobacco industry businesses but challenged the adoption of the suspension injunctions in those cases. The challenge was dismissed by the General Court in Cases T-554/15 and T-555/15, an appeal is pending. 82 Case T-20/17 Hungary v European Commission [2019] EU:​T:​2019:​448. 83 Poland v Commission (n 53). 84 Case C‑75/18 Vodafone Magyarország Mobil Távközlési Zrt. v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága (pending); Case C‑323/18 Tesco-Global Áruházak Zrt. v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága (pending). 85 In addition to the progressive turnover tax (with a steeper pattern of progressivity than in the Polish case), the Hungarian advertisement tax case included the possibility for taxable persons whose pre-tax profits for the year preceding the introduction of the new tax were zero or negative to deduct from the taxable amount of the following year 50% of the losses carried forward from the earlier financial years. Subsequent to the Commission’s opening decision of 12 March 2015, Hungary amended the advertisement tax replacing the previous scale of six progressive rates from 0–50% with a scale of two rates of taxation from 0 to 5.3%. 86 No tax applied to the part of the turnover below the threshold.

58  Research handbook on European State aid law In its final decision, the Commission considered the advantage to consist of the fact that retailers with low turnover, i.e. below the threshold of PLN 17 million are either not subject to the retail tax or subject to the tax at substantially lower average effective rates than retailers with high turnover, thereby reducing the charges that undertakings with low turnover have to bear as compared to undertakings with high turnover.87 In order to argue the existence of advantage on this basis, it is necessary to consider that the “normal” charges that undertakings active in the retail sector have to bear are higher and indeed, this is what the Commission did when identifying the reference system in its selectivity analysis. Based on the Gibraltar case law,88 the Commission then considered that the progressive rate structure was discriminatory and specifically designed to favour smaller retailers (including those operating under a franchise model) over larger ones. Therefore, it excluded the progressive rate structure from the reference system and considered the appropriate reference system to be the imposition of a single (flat) rate tax89 on the monthly turnover generated from retail sales.90 In the second step of the selectivity analysis, the Commission considered that the progressive rate structure derogated from the reference system in favour of retailers with lower turnover and in the third step, the Commission questioned the existence of a justification based on the logic of the tax system. Poland had argued that the progressive tax structure was justified by its redistributive objective, as is the case for profit-based taxes. Poland further claimed that undertakings with high levels of turnover have a greater ability to pay, that such undertakings enjoy economies of scale and have the ability to exert pressure on producers and suppliers’ margins to their own benefit. Finally, Poland argued that undertakings with high levels of turnover often use tax optimisation strategies.91 The Commission did not accept any of these justification grounds.92 According to the Commission, Poland had not provided any evidence that the design of the tax – based on turno-

Poland v Commission (n 53) para 39. Joined Cases C-106/09 P and C-107/09 P (n 33). 89 While the Commission in the final decision did not determine the level of the flat rate tax, it considered in the opening decision for the purposes of calculating the recovery amount that “[i]n the absence of any better reference, the single rate to be used as reference could be the highest marginal rate (1.4%) of the highest average rate observed amongst operators subject to the tax.” (State aid SA.44351 (2016/C) (ex 2016/NN) – Polish tax on the retail sector – Invitation to submit comments pursuant to Article 108(2) of the Treaty on the Functioning of the European Union [2016] OJ C 406/76, para 51). Similarly, in the final decision on the Hungarian advertisement tax, the Commission considered that for the purposes of calculating the recovery amount, it should be the amount of tax that undertakings should have paid under the application of a reference system in line with State aid rules with a single tax rate of 5.3% (unless another value was chosen by the Hungarian authorities, without the loss carry forward deduction and the amount of tax actually paid). (Commission Decision (EU) 2017/329 (n 79) para 91.) 90 The Commission argued, based on Gibraltar, that the progressive tax rate structure was specifically designed to favour smaller retailers over larger ones, although both types of undertakings were engaged in the same activity (Commission Decision (EU) 2018/160 (n 80) para 47). Therefore, it concluded that the reference system was selective by design in a way which was not justified in light of the objective of the tax, which was to tax the turnover of all retail operators active in Poland. 91 Poland v Commission (n 53) para 57. 92 But seemed to consider that progressive turnover taxes could be justified to, e.g. address certain negative externalities if it was shown that the externalities created by the activities subject to the tax also increase progressively when the turnover (or size) of the taxpayer increases. However, no such justification had been brought forward by Poland (Commission Decision (EU) 2018/160 (n 80) para 59). The Commission also did not accept the Polish argument that a tax on turnover could have a deterrent effect 87 88

Taxation and State aid  59 ver – ensured the redistribution of profit. As opposed to taxes based on profit, a turnover-based tax does not take into account the costs incurred in the generation of sales so that turnover – contrary to profit – is not a natural proxy for the ability to pay. Thus, Poland did not show according to the Commission that operators in the Polish retail sector with a higher turnover had a higher ability to pay and that the progressive tax rate structure as such as well as the proportionality of the progressivity of the tax was justified by the redistributive purpose of the system. Poland challenged the opening and the final decision before the General Court that concurred with Poland and annulled both decisions. As regards the first step of the selectivity analysis, the Court accepts Poland’s argument that the tax rates cannot be excluded from the definition of the reference system as they “[form] part of the fundamental characteristics of a tax levy’s legal regime, just as the basis of assessment, the taxable event and the group of taxable persons do.”93 Therefore, in the view of the Court, the single-rate reference system is hypothetical or incomplete and the Commission cannot rely on it. In terms of derogation, the General Court ruled that the objective of the system as defined by the Commission, namely taxing the turnover of all the undertakings in the retail sector, was erroneous as the Commission failed to take into account that the sectoral tax had been introduced with a principle of tax redistribution and ability to pay.94 Thus, according to the General Court, the progressive structure of the tax was consistent with that objective and therefore did not constitute a derogation,95 thereby moving the burden of proof from the Member State back to the Commission. Moreover, taxes, which lead to “variations” in terms of different levels of taxation, including exemptions, do not necessarily lead to selective advantages, if those “variations” are not arbitrary, applied in a non-discriminatory manner and consistent with the objective of the tax concerned.96 As a consequence, according to the General Court, the

on tax optimisation strategies, which are usually applied by larger undertakings. An argument could be made that the risk of tax base reduction through tax optimisation arises only for profit taxes. While it is certainly the case that tax optimisation can take place through profit shifting, some multinationals with very high turnovers choose to remain loss-making by financing aggressive expansion strategies or undercutting rival’s prices. A profit-based tax would not tackle this type of aggressive behaviour. 93 Poland v Commission (n 53) para 65. 94 As regards the objective of progressive turnover taxation according to the ability to pay, the General Court considered that it “may reasonably be presumed that an undertaking which achieves a high turnover may, because of various economies of scale, have proportionately lower costs than an undertaking with a smaller turnover – because fixed unit costs (buildings, property taxes, plant, staff costs for example) and variable unit costs (raw material supplies for example) decrease with the levels of activity – and that it may, therefore, have proportionately greater disposable revenue which makes it capable of paying proportionately more in terms of turnover tax” (Poland v Commission (n 53) para 75). 95 In three alternative lines of reasoning, the General Court also dismissed the Commission’s arguments that, first, the tax on the retail sector would only lead to 109 out of 200,000 undertakings operating in the retail sector being taxed and that therefore the retail tax was incompatible with its objective (judgment, recitals 94 to 99); second, that, de facto, the tax would place a greater burden on foreign-owned than Polish-owned undertakings; and third, that the retail tax would place a greater burden on retail networks organised according to an integrated model as opposed to a retail network organised with franchisees (judgment, recitals 100 to 103). It dismissed those arguments on the ground that it was either insufficiently reasoned, that the different treatment of foreign taxpayers was the result of a normal application of the tax system and that undertakings are free to choose how they are organised. 96 Poland v Commission (n 53) paras 80 to 93 with reference to other case law. Similarly, the General Court reasons in the Hungarian advertisement tax case that with respect to the possibility to carry

60  Research handbook on European State aid law Commission did not establish that the measure introduced a difference of treatment between operators in a comparable factual and legal situation with regard to the objective assigned to the retail tax. Or, in the Court’s words, “when a tax’s progressive taxation structure reflects the objective pursued by that tax, it cannot be considered that two undertakings with a different taxable amount are in a comparable factual situation in the light of that objective.”97 Readers will note that these statements fall squarely within the reasoning employed by the Court of Justice in ANGED where it reverted to a “consistency and non-discrimination” test. It will therefore be interesting to see what the outcome will be of the appeals brought against the General Court’s judgments. However, before the Court of Justice will decide on the Polish retail tax case and the Hungarian advertisement tax case, it will most probably decide on two preliminary ruling cases concerning the Hungarian crisis tax, which deal with very similar issues. Between 2010 and 2012, Hungary applied a temporary (crisis) tax based on the turnover of retail and telecom companies with progressive rates. The measure was challenged before the Hungarian courts, which submitted two references for preliminary ruling to the Court of Justice: Case C-75/18 by Vodafone98 concerning the telecommunications sector; Case C-323/18 by Tesco concerning the retail sector.99 Advocate General Kokott in her opinions considers the progressive taxes to infringe neither the free movement provisions nor the rules on State aid. In respect of the latter, Advocate General Kokott considers for the purposes of determining the reference framework that a distinction must be drawn between general corporate income tax regimes where the classic three-step test applies (like in the case of World Duty Free) and tax regimes which “create the reference framework for the first time” (i.e. the case at issue but also ANGED) and where the regime itself is the reference framework.100 In those cases, the selectivity test amounts to a “softer” consistency check. General differentiations, which, in principle, do not constitute selective measures, only become selective where those differentiations have no “rational basis in the light of the objective of the legislation.”101 On the other hand, differentiations, which are inconsistent in the light of the objective of the legislation amount to an abusive use of tax law by the Member State in order to grant subsidies to individual undertakings in circumvention of the rules on State aid.102 Consequently, the difference in treatment between economic operators that are, in the light of the objective attributed to the tax system, factually and legally comparable needs to be “manifest.” Second, that difference in treatment can be justified by basic or guiding principles of the national tax system, which have to be “plausible,” including

forward losses, this leads to a difference in treatment between undertakings not in a similar situation: the profit-making undertakings in 2013 and undertakings not having made profits that year. According to the Court, the existence of “threshold” effects is inherent in numerous variation mechanisms and cannot, based on that fact alone, lead to the existence of a selective advantage (Hungary v European Commission (n 82) para 122). 97 Poland v Commission (n 53) para 99. 98 Case C‑75/18 Vodafone (n 84). 99 Case C‑323/18 Tesco-Global (n 84). 100 Opinion of AG in Case C‑75/18 (n 37) para 163. 101 ibid para 170. Case C‑323/18 Tesco-Global Áruházak Zrt. v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága [2019] EU:​C:​2019:​492, Opinion of AG Kokott, para 151. 102 Opinion of AG Kokott in Case C‑75/18 (n 37) para 168.

Taxation and State aid  61 plausible non-fiscal reasons.103 As such, a difference in financial capacity can justify a difference in treatment for tax purposes,104 as well as the prevention of abuse in tax law.105

7. CONCLUSION In the introduction, the author expressed the ambition to find a red line in the jurisprudence of the Court as regards the fiscal measures discussed in this chapter. Far from pretending to have found this red line, the following is an attempt to summarise and link issues: 1. The General Court in the tax ruling judgments (Fiat, Starbucks) as well as the Court of Justice in the judgments on the application of anti-abuse provisions (P Oy, A-Brauerei, German restructuring clause) seem to have endorsed the approach to define the reference systems widely, either encompassing the entire corporate income tax systems or, in the case of anti-abuse rules, consisting in the most general rule. By doing so, the Court, in the tax ruling cases but also in other cases where the reference system is the corporate tax system of a Member State, could be said to shift the burden of proving that a certain tax measure does not constitute State aid on the Member States, thereby restricting Member States’ discretion in tax matters. Quite the opposite seems true in the field of special purpose levies and turnover taxes (pending the final judgments of the Court of Justice). Indeed, as regards those tax measures “where the reference framework is created for the first time,” the Court seems to reduce the power of review of the Court and the Commission to a “consistency check” and leave the discretion to the Member States to freely design tax measures in order to pursue certain policy objectives. 2. Accordingly, in the cases on special purpose levies, the Court’s assessment has moved from a classic selectivity test to a non-discrimination test with a certain alignment in the reasoning between the free movement and State aid rules. This is most obvious in the opinions of Advocate General Kokott in the Hungarian crisis tax and in the ANGED cases where she calls for the assessment of those tax measures under a consistency check and where only “manifestly inconsistent” tax measures constitute selective tax measures. Similar wording can be found in the Court of Justice’s judgment in ANGED, not in the justification of the measure but when analysing whether those companies that have to pay the special levy are comparable to those that do not have to pay it.106 Allowing Member States to justify a prima facie selective tax measure by arguing that the tax measure is proportionate to the objective pursued could enlarge the possibility for Member States to argue non-selectivity, beyond the grounds so far accepted by the Commission and the Courts in State aid cases.107

103 Opinion of AG Kokott in Case C‑75/18 (n 37) paras 171 and 172; Opinion of AG Kokott in Case C‑323/18 (n 101) para 153 with reference to ANGED where environment and town and country planning reasons were considered justification grounds. 104 Opinion of AG Kokott in Case C-233/16 ANGED (n 49) para 44. 105 Opinion of AG in Case C‑75/18 (n 37) para 186, with reference to A-Brauerei (Case C-374/17 B v A-Brauerei [2018] ECLI:​EU:​C:​2018:​1024) and GIL insurance (Case C-308/01 GIL Insurance Ltd and Others v Commissioners of Customs & Excise [2004] EU:​C:​2004:​252). 106 Joined Cases C-236/16 and C-237/16 ANGED (n 65) para 48. 107 Such as the need to fight fraud or tax evasion, the need to take into account specific accounting requirements, administrative manageability, the principle of tax neutrality, the progressive nature of

62  Research handbook on European State aid law So far, a proportionality assessment in the context of the third step of the selectivity analysis only exists in very few State aid judgments, most notably in the Paint Graphos case108 and, to a certain extent, in the General Court judgment of the German restructuring clause, with reference again to Paint Graphos.109 However, as explained before, the General Court judgment was annulled on the basis of an erroneous definition of the reference framework. The Court of Justice therefore did not have to decide on whether it is appropriate to apply a proportionality test in the justification of a selective aid measure. 3. On the other hand, while the above seems to point to a restrictive application of State aid rules, at least as regards special purpose levies, there is a tendency in the cases brought before the Court to argue the existence of a selective advantage because of an “unequal burden” between companies. In other words, while State aid rules should normally apply in a situation where a group of companies that falls within the scope of the tax measure receives a favourable treatment, the situation in the case of special purpose levies is rather that the favourable treatment is “granted” to those companies that do not fall within the scope of the measure. This seems in line with established case law according to which only the effect of the measure is relevant, and not the cause or the objective of the State intervention. On the other hand, if the unequal burden seems relevant in the assessment, why did the Court of Justice not consider relevant the unequal burden in the German restructuring clause case? To recall, due to the application of the German restructuring clause, healthy companies that changed ownership (and continued their activity) did not benefit from the possibility to carry forward losses while companies in difficulty that changed ownership and continued their activity did benefit from the restructuring clause. In the judgment, the Court of Justice did not consider that the companies in difficulty received a favourable treatment although the healthy companies that were arguably in a comparable situation in the light of the objective of the anti-abuse rule, were at a disadvantage. 4. Last but not least, with the General Court judgments in Fiat and Starbucks, it seems accepted (unless the Court of Justice in the appeal procedure of the Fiat case rules otherwise) that the arm’s length principle can be used as a tool to achieve equal treatment

income tax and its redistributive purpose, the need to avoid double taxation, or the objective of optimising the recovery of fiscal debts (Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union, OJ C 262/1, para 139). 108 Joined Cases C-78/08 to C-80/08 Paint Graphos and others (n 10) para 75. In that judgment, the Court emphasises the need to ensure that tax benefits are applied in a proportionate way, which means that they should not go beyond what is necessary, “in that the legitimate objective being pursued could not be attained by less far‑reaching measures.” This proportionality test is the same applied by the Court to assess possible justifications for the restrictions of the fundamental freedoms. Restrictions on the freedom of establishment are permissible if they pursue a legitimate objective and are justified by overriding reasons in the public interest. Their application must however be appropriate to attain the objective and not go beyond what is necessary to achieve the objective. See, inter alia, Case C‑311/08 Société de Gestion Industrielle (SGI) v Belgian State [2010] EU:​C:​2010:​26, para 56. 109 Case T-620/11 GFKL Financial Services AG v European Commission [2016] EU:​T:​2016:​59, paras 154, 160. Also in Heitkamp BauHolding GmbH (n 29), the applicant argued that “[t]he restructuring clause is … proportionate to the objective pursued, regard being had to the fact that, on the one hand, the previous system, based on the decree on restructuring, has proved to be inadequate in the light of the global financial crisis and, on the other, that the new system does not confer any discretion on the tax authorities with respect to the application of the restructuring clause.” The General Court did not consider it necessary to decide on that point.

Taxation and State aid  63 between group and standalone companies, insofar as the national law does not draw a distinction between these two types of companies. The State aid tax ruling cases require that the arm’s length principle is applied correctly as otherwise, this may amount to State aid. On the other hand of the spectrum, the Court of Justice ruled that when a transfer pricing rule is applied to cross-border situations only, it may constitute a restriction of the fundamental freedoms110 and Member States should also consider possible economic justifications before applying the arm’s length principle. They need to apply the arm’s length principle in the right circumstances.111 In addition, the application of the arm’s length principle itself is not always straightforward, first because it heavily relies on approximations and, second, because of its reliance on the notion of comparability, while at the same time it might be difficult to find transactions that are fully comparable to those being tested under the arm’s length principle. In the context of digital taxation, efforts at international level (OECD) move towards a simplified application of the arm’s length principle with fixed margins. However, the more simplified the application of the arm’s length principle will be, the less it may ensure equal treatment between group and standalone companies.

110 Case C-324/00 Lankhorst-Hohorst GmbH v Finanzamt Steinfurt [2002] EU:​C:​2002:​749; Case C-524/04 Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue [2007] EU:​C:​2007:​161; Case C‑311/08 Société de Gestion Industrielle (SGI) v Belgian State [2010] EU:​C:​2010:​ 26; Case C-382/16 Hornbach-Baumarkt AG v Finanzamt Lindau [2018] EU:​C:​2018:​366. 111 For example, in cases of tax avoidance, cf. Hornbach-Baumarkt AG v Finanzamt Lindau (n 110) para 55. Similar Svitlana Buriak and Ivan Lazarov, ‘Between State aid and the Fundamental Freedoms: The Arm’s Length Principle and EU Law’ (2019) 56(4) CMLRev 905.

4. State aid in the energy sector Leigh Hancher and Francesco Maria Salerno

1. INTRODUCTION The ink had scarcely dried on the Clean Energy Package1 – a comprehensive EU legislative framework for the energy sector – that in March 2020, the European Commission unveiled its proposal for a Regulation “establishing the framework for achieving climate neutrality”, the so-called European Climate Law.2 The proposed Regulation takes its cue from the 2019 European Green Deal Communication, outlining a strategy for “a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use”.3 These ambitious initiatives are sure to impact the production and supply of all forms of energy, from the phasing out of fossil fuels and their replacement with renewable energy in electricity production, heating and cooling and of course transportation. In this context, State aid may come to play an even more prominent role. In fact, already the 2018 State aid Scoreboard indicated that,4 between 2009 and 2017, State aid expenditures in connection with environmental protection including energy saving grew from approx. EUR 14 billion (approx. 20% of total State aid excluding railways) to approx. EUR 61 billion (approx. 53% of total State aid excluding railways); moreover a large share of the 2017 expenditures in this area was due to the approval under EU State aid rules of renewable energy initiatives. In the Communication on “Sustainable Europe Investment Plan – European Green Deal Investment Plan”,5 the Commission made clear that the role of the State in financing the Green Deal is set to grow. Accordingly, the same Communication announced 1 The Clean Energy Package includes several pieces of legislation, see “Clean Energy for all Europeans Package: Documents” at accessed 25 March 2020. 2 Commission, “Proposal for a Regulation of the European Parliament and of the Council, establishing the framework for achieving climate neutrality and amending Regulation (EU) 2018/1999 (European Climate Law)” COM(2020) 80 final, see accessed 25 March 2020. 3 See Commission, “Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee of the Regions, The European Green Deal” COM(2019) 640 final. 4 See “State Aid Scoreboard 2018” accessed 25 March 2020 at . 5 See Commission, “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions” COM(2020) 21 final, point 4.3 (“State aid rules will be revised to provide a clear, fully updated and fit-for-purpose enabling framework for public authorities to reach these objectives, while making the most efficient use of limited public funds. State aid rules will support the transition by fostering the right types of investment and aid amounts. They will encourage innovation and the deployment of new, climate-friendly technology at market scale. As part of this, the Commission will also consider further procedural facilitation to approve State aid for just transition regions. They will also facilitate the phasing out of fossil fuels, in particular those that are most polluting, thus ensuring a level-playing field in the internal market”).

64

State aid in the energy sector  65 that “the relevant State aid rules will be revised by 2021 in light of the policy objectives of the European Green Deal and support a cost-effective and socially-inclusive transition to climate neutrality by 2050”. This chapter aims to provide an overview of the interplay between the EU State aid rules and energy policy. In particular, the chapter focuses on the application of key concepts of State aid law to the energy sector. The first part will look at the concept of aid and how it plays out in the context of energy-related measures. The second part of the chapter will go on to examine the concept of compatible aid and its application in the energy field, focusing on the Environmental and Energy State aid guidelines (“Guidelines”),6 which provide essential guidance on the Commission’s use of its powers to authorise aid in the energy sector.

2.

THE CONCEPT OF AID

Introduction In principle, in order for a measure to fall within the scope of Article 107(1) Treaty on the Functioning of the European Union (TFEU), the measure in question must confer a benefit or advantage and all of the following conditions must be met: ●● the aid has been granted or imposed by a public authority; ●● the measure results in a transfer of resources from the State or the State receiving less resources; ●● the aid distorts competition by favouring certain undertakings or the production of certain goods; and ●● the products or services in question are traded within the EU. Before turning to the various aspects of the definition, some preliminary clarification is in order. First, as regards the concept of “beneficiary”, that is, the recipient of aid, it is well settled in the case-law that recipients of aid are those who actually benefit from it.7 The Commission has a wide discretion in determining whether companies forming part of a group must be regarded as an economic unit or as legally and financially independent for the purposes of applying the State aid rules.8 Second, it is equally well settled that Article 107 TFEU prohibits aid granted by a State or through State resources in any form whatsoever, without drawing a distinction as to whether the aid-related advantages are granted directly or indirectly.9 The only proviso is that there must be a causal link between the aid granted through State resources

6 See Guidelines on State aid for environmental protection and energy 2014–2020 [2014] OJ C 200/1. 7 See, for example, Case C-303/88 Italy v Commission [1993] EU:​C:​1991:​136, para 57. 8 See Case T-394/94 British Airways v Commission [1998] EU:​ T:​ 1998:​ 140, para 314. Case T-234/95 DSG v Commission [2000] EU:​T:​2000:​174, para 124; and Case T-303/05 AceaElectrabel v Commission [2009] EU:​T:​2009:​312 [confirmed on appeal: Case C-480/09P, Judgment of 16 December 2010]. 9 See recently Case T-445/05 Associazione italiana del risparmio gestito and Fineco Asset Management v Commission [2009] EU:​T:​2009:​50, para 127.

66  Research handbook on European State aid law and the benefit.10 Finally, in order to be caught by the application of the State aid rules, a beneficiary must be an “undertaking”. This term is usually defined broadly, covering any entity engaged in an economic activity.11 The Concept of Advantage The core of the concept of State aid is that it confers an economic advantage on the (potential) recipient, that is, an advantage that the recipient would not enjoy under normal market conditions. In its judgment in case C-438/16 P – Commission v France and IFP,12 the Court of Justice clarified the scope of presumptions in relation to the existence of an advantage, in connection with the transformation of the Institut Français du Pétrole (“IFP”) (a French public body that carries out research and development in the fields of oil and gas prospecting and refining and petrochemicals technologies) into a legal entity governed by public law – a publicly owned industrial and commercial establishment (or EPIC). The Commission issued a Decision in 2011 that turning the IFP into an EPIC had given the IFP an unlimited public guarantee for its entire activity base – meaning that it could not ever be at risk of going insolvent, and thus was not operating under traditional market conditions, unlike its competitors. The guarantee was, in large part, deemed to be State aid. However, the Commission also found that with some changes, the guarantee could be considered a form of State aid compatible with the internal market. More importantly, the Commission’s finding on the existence of such an advantage rested on a presumption. France and the IFP contested the Commission Decision before the General Court, which annulled the Commission Decision in 2016 because it considered that the Commission’s conclusion, according to which that guarantee had created a real economic advantage in favour of IFP, was based on purely hypothetical reasoning. The Commission appealed the General Court’s findings before the Court of Justice of the European Union (CJEU), which set aside the General Court’s judgment and referred the case back to the General Court for reconsideration. The Court of Justice at paragraph 116 upheld the Commission decision because it held that the existence of the guarantee for IFP was such as to enable the Commission to rely on the presumption of an advantage, as developed by the Court in the judgment of 3 April 2014, France v Commission (C-559/12 P, EU:​C:​2014:​217), since that presumption is based on the idea that, thanks to the guarantee associated with its status, an EPIC benefits or could benefit from better financial terms than those normally available on the financial markets. In order to rely on that presumption, the Commission was therefore not required to show the actual effects produced by the guarantee at issue (see, to that effect, judgment of 3 April 2014, France v Commission, C-559/12 P, EU:​C:​2014:​217, paragraph 99).

10 See Case C-382/99 Netherlands v Commission [2002] ECR I-5163 and Opinion of AG Lègerof 14 March 2002 in the same case, especially para. 130. See also Case C-156/98 Germany v Commission [2000] EU:​C:​2000:​467. 11 See, for example, Case C-41/90 Höfner and Elser v Macrotron GmbH [1991] EU:​C:​1991:​161, para 21. 12 Case C-438/16 P Commission v France and IFP [2018] EU:​C:​2018:​737.

State aid in the energy sector  67 The Market Economy Operator Test and the EDF Ruling As is discussed in more detail in Chapter 2, public bodies (including public undertakings) carrying out transactions, do not confer an advantage, and therefore do not grant aid, if they operate in line with normal market conditions. To apply the “normal market conditions” test or “Market Economy Operator” –“MEO” principle, the Courts draw a distinction between State participation through acts of public prerogative and intervention through other means in their national economy. If a State intervenes as a market investor, then this will not confer an advantage on the target company.13 In EDF v. Commission the Courts were requested to examine the legality of a Commission Decision condemning various fiscal measures adopted in the context of the restructuring of EDF in order to prepare unbundling of the transmission network and to remedy the company’s under-capitalisation.14 The French government had, inter alia, waived payment of certain taxes due by EDF in preparation for the liberalisation of the electricity market as required by EC Directive 96/92.15 The Commission adopted a final Decision in which it held that the non-payment of company tax by EDF amounted to aid and directed the French State to recover some 14 billion FFr from EDF. The French authorities had claimed that these various measures should have been seen as a normal investment. The Commission was of the view that the MEO principle did not apply in the context of the operation of the exercise of State prerogative powers, including fiscal powers. EDF successfully appealed this Decision to the General Court. That Court upheld EDF’s plea in this respect. It recognised that the established jurisprudence drew a distinction between the State’s obligations as owner and its obligations in regard to the exercise of its public powers. It was however necessary to look not only at the form of the measure in question, but also its effect. In this case, the French State was the sole shareholder and was entitled as such to select the most effective means to restructure EDF’s financing, including measures relating to the exercise of its fiscal powers. The General Court’s ruling was upheld by the Court of Justice. The CJEU recalled that the applicability of the private investor test ultimately depends on the Member State concerned having conferred, in its capacity as shareholder and not in its capacity as public authority, an economic advantage on an undertaking belonging to it. The Commission adopted a second decision in 2015 in which it rejected France’s claim that it had acted as a MEO would have done at the time of the transaction.16 The Commission concluded that France had not presented it with sufficiently unequivocal evidence to establish that it had acted as a MEO. 13 See also Commission 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] OJ C 262/1. 14 Case T-156/04 Electricité de France (EDF) v European Commission [2009] ECR II-4503 (on appeal C-124/10 P Commission v EDF EU:​C:​2012:​318). See E Szyszczak, ‘The survival of the market economic investor principle in liberalised markets’ (2011) 10(1) European State Aid Law Quarterly 35. 15 European Parliament and Council Directive 96/92/EC of 19 December 1996 concerning common rules for the internal market in electricity [1997] OJ L 27/20. 16 Commission Decision of 22 July 2015, case SA.13869 (C 68/2002) (ex NN 80/2002) – Reclassification as capital of the tax-exempt accounting provisions for the renewal of the high-voltage transmission network (RAG) implemented by France in favour of EDF.

68  Research handbook on European State aid law EDF and France subsequently appealed the 2015 decision, claiming inter alia, that the Commission had again failed to recognise the applicability of the MEO. The General Court in a lengthy judgment,17 as again confirmed by the CJEU on appeal,18 held that the Commission had properly applied the requisite tests, and that France had failed to provide convincing evidence that the fiscal measures in question were adopted in its capacity as shareholder. This approach also suggests that the evidentiary standard is high – that evidence must be unequivocal. The EDF case law underlines the importance of keeping two possibly distinct tests in mind: the applicability of the MEO to the measure at issue, and its actual application to the assessment of the case at hand.19 The former test only requires a global assessment, or to borrow the term used in competition law, a “quick look” by the Commission, whereas the second test must be discharged by the party claiming to rely upon it. The MEO and “Aid” through Public Undertakings The MEO also applies to investments made by public undertakings in so far as the resources in question of these entities can be deemed to be State resources and the measure can be attributed to the State, as discussed above. The following Dutch case from 2019 is illustrative of this approach. N.V. Nederlandse Gasunie (“Gasunie”) and TenneT are companies managing, respectively, the gas and electricity grids. Gasunie and TenneT’s shares are fully held by the State. In these circumstances, a complainant submitted that payments made by Gasunie and TenneT to compensate land owners whose property was occupied by network elements, amounted to State aid.20 The Commission dismissed the complaint because it found that Gasunie and TenneT acted in line with the MEO principle. In particular, the Commission found at paragraph 78 that Network companies construct and maintain large infrastructure works of general interest. The large-scale investments have a long lifetime and a long payback period. Payments of cooperation indemnities are part of the regular operations and cost structure, and made from the financial resources of these companies, in order to allow for the investments on the basis of economic principles …. Even if these transactions cannot easily be compared with similar ones made by other undertakings on a market, as they are specific to the network companies and to the tasks they perform, the Commission is of the opinion that they are made on the basis of economic principles and that they are considered to constitute transactions in line with normal market conditions who is guided by prospects of profitability in the long-term.

Case T-747/15 EDF v Commission [2018] EU:​T:​2018:​6 upheld on appeal. Case C-221/18 P EDF v Commission [2018] EU:​C:​2018:​1009. 19 See Joined Cases T‑319/12 and T‑321 Spain and City of Luz v Commission [2014] ECLI:​EU:​T:​ 2014:​604, para 133, and Case C-224/12 P Commission v Kingdom of Netherlands and ING Group [2014] EU:​C:​2014:​213, para 37. See also Opinion of AG Sharpston of 19 December 2013 in Case C-224/12 P Commission v Kingdom of Netherlands and ING Group [2014] EU:​C:​2014:​213, para 35. 20 See Commission Decision of 17 December 2013, case SA.37964 (2013/FC) – Alleged State aid through compensation for the use of land for gas pipe lines, power lines and other lines by network companies. 17 18

State aid in the energy sector  69 State Resources If the measure in question constitutes an economic or financial advantage for the recipient, it must then be ascertained whether or not that benefit is financed by or through State resources. Given that national authorities frequently impose special levies or include “para-fiscal charges” in energy tariffs or impose quotas on the amount of renewable energy that suppliers must purchase, and final consumers effectively pay these charges, are these forms of support for energy from renewable energy sources (“RES”) then not financed by State resources and can escape Commission scrutiny? Indeed, the case law is not always straightforward and two main lines of case-law have evolved. The first line of case-law, in which the involvement of State resources was denied, is represented, in particular, by PreussenElektra (2001) and, more recently, ENEA (2017); the second line of case-law, in which the involvement of State resources was confirmed, is represented by the rulings in Essent (2006) and Vent de Colere (2016). In the PreussenElektra case,21 the Court held that compensation provided to a regional supply undertaking participating in a so-called feed-in scheme did not involve any direct or indirect transfer of State resources to undertakings and therefore did not constitute State aid. The measures in question concerned a State-imposed minimum price which consumers had to bear and a quota system, which impacted on all electricity distribution companies. No transfer of State resources as such was involved. The Court did not take up the Commission’s suggestion that a concept of a “measure having equivalent effect” to a State aid measure should be embraced so as to prevent Member States from adopting minimum price regulations and quotas which essentially have the same protective effect as a State aid. Nevertheless, the scope for Member States to avoid the reach of State aid control is relatively restricted. As subsequent case law has confirmed, Preussen Elektra can only be applied in cases where there is no intermediary fund or organisation under the control of the state. If the State intervenes in collecting and distributing additional charges levied on consumers with a view to promoting renewable energy, diversifying energy sources or for compensating past “stranded investments”, then irrespective of whether they originate from energy consumers, these funds are usually considered to be under the control of the State and therefore State aid. This was confirmed by the Courts in the subsequent Essent and Iride and Vent de Colere cases.22 In Achema issued only shortly after the judgment in EEG 2012, the Court 23 applied the Vent de Colere! test to establish public control of the resources at issue. If there is no intervention by the State, however, and the resources mobilised to purchase minimum quantities of renewable energy are both private and public, then there probably is no aid involved. In ENEA,24 referring to Essent and Vent de Colère, the Court attached importance to the question whether extra costs arising from a purchase obligation can be passed on entirely to end-users, or whether they are financed by a compulsory contribution imposed by the State or by a full offset mechanism.

Case C-379/98 PreussenElektra AG v Schleswag AG [2001] EU:​C:​2001:​160. Case C-206/06 Essent Netwerk Noord BV and others [2008] ECLI:​EU:​C:​2008:​413 and Case T-25/07 Iride SpA and Iride Energia SpA v Commission [2009] EU:​T:​2009:​33. 23 Case C-706/17 Achema et al v VKEKK [2019] EU:​C:​2019:​407, paras 45–7. 24 Case C-329/15 ENEA SA v Prezes Urzędu Regulacji Energetyki [2017] EU:​C:​2017:​671. 21 22

70  Research handbook on European State aid law In the recent ruling in Case C-405/16 P, Germany v Commission (EEG 2012) the Court set aside the judgment of the General Court on the basis that it had erroneously concluded that the measure involved State resources and thus constituted State aid, and annulled the decision of the Commission. The ruling contributes to clarifying the concept of State resources, but raises new issues on the framework to be relied upon to determine when funds remain constantly under public control. The General Court had taken the view that, in light of its effects, the EEG surcharge constituted a levy; in practice, electricity suppliers passed the financial burden resulting from the EEG surcharge on to final consumers. Accordingly, final consumers were de facto required to pay the surcharge. But the European Court of Justice (ECJ) held that the General Court wrongly interpreted its earlier Association Vent De Colère case, as the compensation amounts in the EEG case had not been transferred to an independent administrative authority. In Association Vent De Colère, these amounts always remained under State control (paragraph 84 et seq. of the judgment). Although the German State controlled the implementation of the EEG surcharge, it did not have to cover “in full the additional costs imposed on undertakings should the sum of the charges collected from final consumers of electricity be insufficient to cover those additional costs” (paragraph 84) nor was there an entrustment to a body similar to the Caisse des dépôts (paragraph 85): a public law entity appointed by the French State to provide administrative, financial and accounting management services for the Commission de régulation de l’énergie (French energy regulation authority), the independent administrative authority responsible for ensuring the proper functioning of the market for electricity and gas in France, with the result that those sums must be regarded as remaining under public control.

Imputability to the State In France v Commission (Stardust Marine) the Court provided a further clarification on the interpretation of Article 107 TFEU concerning the involvement of State resources as a constituent element of an aid measure. It held that even though resources which may eventually be at the disposal of the State may be deemed to be “State resources”, it is also necessary to show that the actual deployment of those resources for the benefit of a particular undertaking can be attributed to some form of government decision. Merely “organic” forms of public control over such resources are not in themselves sufficient.25 In the Olympic Airways case the Court made clear in its ruling on non-payment by Olympic of airport charges to Athens Airport, which operated as a private undertaking, that the Commission must state clear reasons as to why it considers a measure to be imputable to the State.26 The implications for the energy sector of the Stardust ruling are nonetheless of some importance given that several Member States still own or control parts of their countries’ energy enterprises.27 Should a government (whether national or local) seek to exert control or influ Case C-482/99 French Republic v Commission [2002] EU:​C:​2002:​294, para 52. Case T-68/03 Olympiaki Aeroporia v Commission [2007] EU:​T:​2007:​253. 27 Where special derogations or exemptions arise from EU measures, for example, taxation measures, then the exemption is not attributable to a Member State, but to the Union institution and Article 25 26

State aid in the energy sector  71 ence over, for example, the tariffs charged to certain groups of users or to ensure that capacity in pipelines, electricity networks, storage facilities or inter-connectors is reserved to particular undertakings, or for the dispatch of renewable forms of energy, State aid issues may well arise. The case of the Dutch compensatory payments, mentioned above, provides a good illustration, as the Commission, following the Stardust Marine jurisprudence, could not exclude imputability to the State of the payments made by the network operators. Similarly, in Case C-329/15 ENEA, the Court discussed imputability and State resources conflating somewhat the two issues under a single test, i.e. whether a Member State “exercises a dominant influence over an undertaking in which it is the majority shareholder, within the meaning of the judgment of 16 May 2002, France v Commission” (point 35). Ultimately, the Court held that the decisive element was that “the purchase obligation applied equally to all electricity suppliers, regardless of whether their capital was predominantly held by the State or by private operators” (paragraph 33). Selectivity Only measures which favour the production of certain goods (or services) or certain undertakings can fall within the scope of Article 107(1) TFEU. It has to be determined whether “certain undertakings or the production of certain goods” is favoured over other firms or sectors which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation.28 This is a complex test to apply, especially in the field of energy taxation. Ad hoc measures such as tax holidays, in favour of individual undertakings are usually presumed to be selective. Schemes which are prima facie general in their application may result in either regional or material selectivity. The aims or objectives of the measures are irrelevant – environmental or energy policy aims cannot be relied upon to claim that a derogation in a tax scheme is not selective. As discussed in more detail in Chapters 3 and 8, general measures which can benefit the entire economy, such as a lowering of tax rates or interest rates do not create a selective benefit. The Courts have generally found the “selectivity criteria” to be easily met in cases involving energy levies. In Adria-Wien Pipeline,29 the Court held that an Austrian tax measure awarding a rebate on energy taxes charged on supply of natural gas and electricity to undertakings active (i) in the manufacture of goods (ii) in so far as energy taxes exceeded 0.35% of the production value was in fact a selective measure as it did not apply to the service sector. Similar considerations on the need to distinguish between the object of the measure (relevant for the compatibility assessment) and its effects (relevant for the qualification of the measure as aid) underpinned the decision by the Court to set aside a judgment by the General Court in British Aggregates. The General Court had accepted that the Commission was right in holding that the pursuance of environmental protection rendered a dedicated levy non-selective. The

107(1) TFEU does not apply. See Case T-351/02 Deutsche Bahn AG v Commission [2006] EU:​T:​2006:​ 104. 28 Case C-524/14 Commission v Hansestadt Lübeck [2016] EU:​C:​2016:​971, para 41. 29 Case C-143/99 Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke v Finanzlandesdirektion für Kärnten [2001] EU:​C:​2001:​598.

72  Research handbook on European State aid law Commission adopted a second, elaborate decision but this too resulted in a challenge before the GC and subsequently a further round of appeals to the Court.30 However, objective differentiation between energy companies that are not in a comparable factual and legal situation cannot result in selectivity.31 Differential treatment for nuclear electricity as opposed to fossil fuel has been justified in this respect in Case C-5/14.32 In AEM SpA,33 an increase in taxation for certain types of electricity was deemed to constitute aid for all other energy producers. The Court considered the aid measure justified by advantages arising from the liberalisation of the energy market. However, as the recent joined cases C-105/18 to C-113/18 Asociación Española de la Industria Eléctrica (UNESA)34 confirm, it is usually difficult for taxed entities to claim that non-taxed entities enjoy a selective advantage – as the outcome of this logic would be that all entities would be exempt from the tax in question. In UNESA a dispute had arisen between several electricity and hydroelectricity producers and the Spanish government concerning a tax on the use of inland waters for the production of electricity. Spain levied four different taxes to internalise the environmental costs resulting from the use of inland waters for the production of electricity. The applicants had initiated legal action seeking annulment of a tax on the use of inland waters for the production of electricity in inter-community river basins. These are river basins which extend over the territory of more than one autonomous community. In other words, the tax was levied only on those hydroelectric producers that operated in more than one community. The ECJ considered first that the tax criterion, relating to the source of production of the electricity, did not derogate formally from a given legal reference framework, even if it excluded such electricity producers from the scope of that tax. Were the hydroelectricity producers subject to the tax at issue and electricity producers whose source of electricity production is other than water in a comparable situation in the light of the objective pursued by the tax at issue? The ECJ did not consider that this was the case (at 66–7). Further, if a tax was levied at different levels of government, in order to determine whether it was selective, the ECJ recalled its ruling in Commission v Hansestadt Lübeck,35 to hold that the relevant reference framework may be restricted to the legal regime adopted by an entity within the limits of its own powers. The selective nature of a measure cannot be examined without taking account of the legal limits on the powers of the public authority which adopted the measure in question.

30 C Ziegler, ‘The British Aggregates Saga – Looking Back at an Earlier Stage of the Selectivity Discussion’ in Caroline Buts and José Luis Buendía Sierra (eds), Milestones in State Aid Case Law. EStAL’s First 15 Years in Perspective (Lexxion 2017). 31 See the ruling in Case C-70/16 Comunidad Autónoma de Galicia and Retegal v Commission [2017] EU:​C:​2017:​100. See also Case C‑524/14 P (n 28) – differential tariffs may not be selective. 32 Case C-5/14 Kernkraftwerke Lippe-Ems [2015] EU:​C:​2015:​354. For a further discussion see L Hancher and M Klasse, ‘Aid to Nuclear and Coal’ in L Hancher et al (eds), State Aid and the Energy Sector (Hart 2018). 33 Joined cases C-128/03 and 129/03 AEM v Autorità per l'energia elettrica e per il gas and Others [2005] EU:​C:​2005:​224. 34 Joined Cases C-80/18 to 83/18 UNESA and others v Administración General del Estado and Others [2019] EU:​C:​2019:​934. 35 Hansestadt Lübeck (n 28).

State aid in the energy sector  73 Finally, it should be noted that given that courts are considered to be part of the institutional apparatus of the state – court rulings can also be considered to be selective measures. In the long running case concerning Greek electricity tariffs, the ECJ held in Case C‑332/18 P, Mytilinaios Anonymos Etairia – Omilos Epicheiriseon v European Commission that under certain circumstances, the award of an interim injunction could amount to a selective advantage. The identification of an economic advantage is therefore sufficient to establish selectivity.36 Mytilinaios is the successor of Alouminion, an aluminium producer which in 1960 entered into a very long contract with the incumbent electricity producer of Greece – DEI – to buy electricity at reduced or preferential tariffs. The contract was to be terminated on 31 March 2006. In February 2004, DEI informed Alouminion that it intended to end the contract. Alouminion challenged that decision of DEI before a local court. The local court granted interim measures with which it ordered suspension of the termination of the contract until the dispute between DEI and Alouminion could be resolved. In the meantime, the Commission had concluded that the preferential tariff constituted incompatible State aid. Alouminion then successfully challenged that decision in Case T-542/11.37 The General Court took the view that the aid was existing, that the ruling of the national court extended only temporarily an existing aid measure through interim measures, but in Case C‑590/14 P, DEI and European Commission v Alouminion, the ECJ set aside that judgment. It declared that State aid could also be granted by a decision of a national court. The interim measures which extended the 1960 agreement, constituted State aid that had not been notified to the European Commission for prior authorisation. Therefore, this was automatically illegal.38 Tradable Certificates and Permits Already prior to the issuance of the Guidelines on State aid for environmental protection in 2008,39 the Commission considered tradable permits in the energy sector (notably emission permits) as falling under the State aid rules.40 In the Dutch tradable Nox credits scheme, the Commission similarly held that credits corresponded to the absolute emission standard imposed by the State but were provided free of charge, so State revenues were foregone. The Commission considered the scheme was selective as it benefited a selected group of large industrial undertakings. On appeal, however, the General Court quashed the Commission Decision because of the measure’s lack of selectivity.41 In particular, the Court found that 36 Case C-15/14 P European Commission v MOL Magyar Olaj- és Gázipari Nyrt [2015] EU:​C:​2015:​ 362. 37 Case T-542/11 Alouminion tis Ellados VEAE v European Commission [2014] EU:​T:​2014:​859. 38 M Kekelekis, ‘DEI v European Commission C-590/14P – Annotation by Mihalis Kekelekis’ (2017) 16(2) European State Aid Law Quarterly 291. In a subsequent ruling the General Court examined the various pleas in law raised by the appellant in its application, which it had not ruled on in its judgment of 8 October 2014, Alouminion v Commission (n 37); DEI subsequently lodged an unsuccessful appeal against that judgment – Case C-332/18 P Mytilinaios Anonymos Etairia v Commission [2019] EU:​C:​ 2019:​1065. 39 Community Guidelines on State aid for environmental protection [2008] OJ C 82/1. 40 Commission Decision (EC) 2002/259/EC of 28 November 2001 which Germany implemented in favour of the steel company for Georgsmarienhütte Holding GmbH [2002] OJ L 91/24, see also Commission decisions N 653/99 – Denmark CO2 quotas and N 123/2000, UK Climate Change Levy. 41 Case T-233/04 Netherlands v Commission [2008] EU:​T:​2008:​102.

74  Research handbook on European State aid law the criterion for application of the measure in question was an objective one, without any geographic or sectoral connotation. Moreover, since the measure in question was aimed at the undertakings which are the biggest polluters, that objective criterion was furthermore in conformity with the goal of the measure, that is the protection of the environment, and with the internal logic of the system. The CJEU did not follow the General Court.42 The CJEU also confirmed that the granting for free of the tradable permits at issue in the Dutch Nox credits scheme entailed an advantage financed through State resources. The Commission has subsequently followed this position in cases concerning “green certificates” (i.e. incentives for the production of electricity from renewable energy sources). In particular, in the (second) decision on Green Certificates in Romania,43 the Commission recalled the CJEU’s ruling in the Dutch Nox case, finding that the Commission considers that the same reasoning can be applied to the Romanian green certificates system. The State has created tradable assets in form of green certificates and made them available to producers of electricity from renewable energy sources. Further the State has conferred an economic value on them by creating a genuine market of green certificates with a demand stemming from the quota imposed on electricity suppliers. Instead of selling the green certificates or putting them up for auction, the State allocates the green certificates for free and thus it forgoes public resources.44

On this basis the Commission concluded that the Romanian green certificates system involved State aid. Effect on Trade It is not incumbent on the Commission to establish that the measure in question can appreciably affect competition or inter-State trade. It is sufficient that it can establish a link between the measure in question and the likely or potential effect on competition and trade. However, as a general rule, the Commission must at least provide reasons as to why it assumes there is a foreseeable prospect for the measure to affect trade.45 Given that the energy sector has been liberalised following the adoption of four separate packages of legislation, national energy sectors are now fully open to competition. The general presumption is that any support to an undertaking can strengthen its position in inter-state trade and so this condition is very easily met46 – even if the goods/services in question are not exported. Similarly, a measure is deemed to distort competition when it improves the Ibid paras 84–100. Commission Decision of 4 May 2015, case SA. 37177 (2015/NN) – Romania Amendments to the green certificates support system for promoting electricity from renewable source, available at https://​ec​ .europa​.eu/​competition/​state​_aid/​cases/​257518/​257518​_1688819​_123​_2​.pdf accessed 26 May 2020. 44 Ibid p 52. 45 See Electricité de France (EDF) (n 14). See also ACEAElectrabel v Commission (n 8), where the Court held that an aid measure to support the construction of a district heating network in the Rome area can affect trade given that aid to the recipient will strengthen its position vis-à-vis other energy suppliers. 46 As the ECJ recalled in Case C-332/18P MOL (n 36) “Where aid strengthens the position of an undertaking compared with other undertakings competing in the Union’s internal trade, the latter must be regarded as being affected by that aid (judgments of 17 September 1980, Philip Morris Holland v Commission, 730/79, EU:​C:​1980:​209, paragraph 11, and of 20 November 2003, GEMO, C 126/01, EU:​ C:​2003:​622, paragraph 41)”. The appellant’s plea to the effect that the disputed preferential tariff could not have that effect, since treated aluminium is a uniform product, the price of which is determined, in 42 43

State aid in the energy sector  75 competitive position of the alleged beneficiary compared with its competitors. If however the service in question is a legal monopoly (in compliance with EU law) there is no competition – either on the market or for the market.47 A TSO may be in this position so that State support to a TSO might not lead to distortion of competition (as long as there is no possibility for cross-subsidisation into a related market that is open to competition).

3. COMPATIBILITY Although an aid measure may be characterised as State aid within the meaning of Article 107(1) TFEU, this does not mean that it is prohibited: Article 107(1) TFEU is a conditional prohibition in the sense that a State aid measure may nevertheless be deemed to be compatible with Article 107(2) or 107(3) TFEU.48 This next section will examine the application of these exemptions to the energy sector. It will also include a short discussion on the application of Article 106(2) TFEU to financial support measures for services of general economic interest in the energy sector as well as outlining the application of State aid rules to important projects of common European interest (“IPCEI”). The Automatic Exceptions: Article 107(2) TFEU With regard to the exceptions listed in Article 107(2) TFEU, it is well established that the Commission has no discretion in their application. Its primary task is to ensure that the conditions for exemption are met. Article 107(2)(a) TFEU provides that aid having a social character and granted to individual consumers is compatible with the common market, provided that the aid in question is granted without discrimination with regard to the origin of the products or service concerned. It must be ascertained whether consumers benefit from the aid in question irrespective of the economic operator supplying the product or service capable of fulfilling the social objective relied on by the Member State concerned. If, for example, a social form of aid was provided to consumers to install smart meters in their homes allowing them to switch easily between energy suppliers but the aid in question would only be disbursed if the consumers either purchased meters from locally based companies or had such meters installed by a local company, then Article 107(2)(a) TFEU could not apply.49

essence, by international markets, so that any cost reduction resulting from the preferential tariff applied to it could not be reflected in the selling price of its goods, was rejected. 47 See Commission, “Notice on Infrastructure Analytical Grid For Energy Infrastructure” a guidance document published by DG COMP (available at accessed 25 March 2020). 48 For completeness, Article 107(3)(e) TFEU provides for such categories of aid as may be specified by Decision of the Council acting by a qualified majority on a proposal from the Commission. Council Regulation 1407/2002 on State aid to the coal industry after expiry of the ECSC Treaty is based on this provision, in OJ 2002 L 205/1. 49 See, for example, Joined Cases T-116/01 and T-118/01 P&O Ferries (Vizcaya) v Commission [2003] EU:​T:​2003:​217, para 63 (the appeal was dismissed by Joined Cases C-442/03 P and 471/03 P P&O European Ferries (Vizcaya) v Commission [2006] EU:​C:​2006:​356).

76  Research handbook on European State aid law State Aid in the Energy Sector and Compensation for Public Service Obligations – Article 106(2) TFEU Article 106(2) TFEU may be relevant in examining whether a particular measure of financial support in the energy sector confers an advantage and thus a state aid within the meaning of Article 107(1) TFEU. By way of background, based on the judgment Altmark from July 2003,50 if the four cumulative criteria set out in that judgment are met, the measure is not aid, and need not therefore be notified. By contrast, if any one of the Altmark criteria is not met, the measure will be deemed to be a State aid measure and must be notified to the Commission. The ECJ judgment in Achema illustrates well the application of these principles in the energy sector. Lithuanian legislation defined public interest services (“PIS”) to include (i) the generation of electricity through renewable energy sources and its balancing; (ii) the generation of electricity by cogeneration at combined heat and power plants when such plants supply heat to district heating systems and the savings of primary energy are such that combined heat and power production can be considered efficient; (iii) the construction of specific electric power plants in order to safeguard the security of electricity supply; (iv) the maintenance of the reserve capacity of specific electric power plants the operation of which is necessary in order to safeguard national energy security; (v) the development of energy generation capacity which is of strategic importance in order to safeguard the security and reliability of the State’s energy system or the independence thereof; and (vi) the implementation of strategic projects in the electricity sector relating to improving energy security by installing interconnectors with electricity systems of other States and/or by connecting the Lithuanian electricity system with those of other Member States. Lithuanian legislation also set up a mechanism to defray PIS providers from the costs connected with discharging the PIS. In particular, PIS monies were collected from end consumers of electricity by the distribution and transport system operators, which transferred them to the administrator of PIS monies, which in turn distributed them to PIS providers after deducting a sum to cover its administrative costs. The referring court asked whether the PIS monies are a compensation for services provided by the recipient undertakings in order to discharge public service obligations, within the meaning of the Altmark judgment. In reply, the Court recalled that the first Altmark condition presupposes that the recipient undertaking is “under a genuine obligation to provide the service in question under given conditions, and that it is not merely authorised to provide such a service”. The Court held at paragraph 109 that the production of electricity from renewable energy sources did not meet this condition because the producers have no obligation whatsoever under national legislation to provide the electricity that they produce under specific conditions relating, inter alia, to the universal nature or duration of the services to be provided. On the contrary, pursuant to Article 20 of the Law on renewable energy sources, producers of that type of electricity merely agree to sell the electricity generated and the administrators of distribution and transport systems merely agree to buy it, with those transactions taking the form of contracts entered into on a voluntary basis.

50 Case C-280/00 Altmark Trans GmbH and Regierungspräsidium Nahverkehrsgesellschaft Altmark GmbH [2003] EU:​C:​2003:​415.

Magdeburg

v

State aid in the energy sector  77 A similar reasoning obtained for the production of electricity in combined heat and power plants. The Court also raised doubts on the fulfillment of the second and third Altmark conditions, which, together, ensure that no undertaking responsible for discharging public service obligations is overcompensated. As the AG noted, the case shows the extent to which EU law is shaping the notion of SGEI, which, although remaining a prerogative of Member States, is more and more becoming “Europeanised” through the case law of the Court. In particular, the judgment in Achema underscores that the mere fact that an activity is expressly and lawfully designated as “service of general economic interest” does not suffice for the purposes of the Altmark case-law. There must also be a public act that entrusts one or more specific undertakings with the task of supplying, with some degree of universality and compulsion, the services in question.51

The Application of State Aid Rules to IPCEI On 20 June 2014, the Commission published a broad communication setting out the criteria to analyse the compatibility of State aid to promote the execution of IPCEI, updating and replacing the previously applicable rules within the R&D and Innovation Framework and the Environmental Guidelines (the “IPCEI Communication”).52 The IPCEI Communication now applies to potential IPCEIs in all sectors of economic activity, making it easier to support projects with a clear European dimension that would normally have to be assessed under several different sets of State aid rules. The eligibility criteria hinge on three main pillars: (i) the project needs to be well defined, (ii) it must fulfil strict cumulative criteria to determine its qualification under “common European interest”, and (iii) the project must be of qualitative and/or quantitative importance. Granted aid, as always, should be necessary and proportional.53 Of particular relevance to the energy sector, the second criterion mentioned above is more easily assumed if the project falls within the scope of the Energy Strategy for Europe,54 the 2030 framework for climate and energy policies,55 the European Energy Security Strategy,56 or the Trans-European Transport and Energy networks (as discussed above).57 51 Case C-706/17 Achema et al v VKEKK [2019] EU:​C:​2019:​407, Opinion of AG Wahl, point 84. Emphasis added. 52 Commission, ‘Communication on Criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest’ [2014] OJ C 188/4. 53 See further Case T-68/15 HH Ferries I/S, formerly Scandlines Øresund I/S and Others v Commission [2018] EU:​T:​2018:​563, para 196. 54 Commission, “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Energy 2020 – A strategy for competitive, sustainable and secure energy” COM(2010) 639 final. 55 Commission, “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A policy framework for climate and energy in the period from 2020 to 2030” COM(2014) 15 final. 56 Commission, “Communication from the Commission to the European Parliament and the Council, European Energy Security Strategy” COM(2014) 330 final. 57 Supra, OJ [2013] L 115/39. European Parliament and Council Regulation (EU) 247/2013 of 17 April 2013 on guidelines for trans-European energy infrastructure and repealing Decision 1365/2006/EC and amending Regulations (EC) 713/2009, (EC) 714/2009 and (EC) 715/2009 (1) [2013] OJ L115/39.

78  Research handbook on European State aid law According to the Commission, “[t]he deployment of IPCEIs often requires a significant participation from public authorities since the market would not otherwise finance such projects”.58 As such, if an IPCEI falls under the definition of State aid, it should nevertheless be declared compatible if it adheres to the conditions set out in the Communication. After the IPCEI on Microelectronics was approved in December 2018, most recently the Commission has found that the proposed IPCEI on batteries fulfils all the required conditions set out in its Communication.59 The project will involve 17 direct participants from the seven Member States, some of which will have activities in more than one Member State. The overall project should be completed by 2031 (with differing timelines for each sub-project). The direct participants could receive up to approximately EUR 3.2 billion in funding. More specifically, the Commission found that the project involved compatible aid because (i) (ii)

(iii)

(iv)

(v)

The battery value chain is a strategic value chain for the future of Europe in particular with respect to clean and low emission mobility. The project has a wide scope, covering the full battery value chain. It is highly ambitious and innovative, as it aims at developing technologies and processes that are not currently available and will allow major improvements in performance and reduction of environmental impact. The project also involves significant technological and financial risks that could lead to failures or significant delays. Public support is therefore necessary to provide incentives to companies to carry out the investments. The results of the project will be widely shared by participating companies benefitting from the public support with the European scientific community and industry beyond the participating companies. As a result, positive spillover effects will be generated throughout Europe. Ultimately, all these activities will contribute to the development of an ecosystem in the battery sector at EU level. The implementation of the project will be monitored via a dedicated governance structure composed by representatives of public authorities from the seven participating Member States and of the direct participants. The Commission will also attend the governance meetings. Finally, the Commission also found that the aid to individual companies is necessary, proportionate and does not unduly distort competition.

The Discretionary Exceptions: Article 107(3)(c) TFEU On the basis of Article 107(3)(c) TFEU, the Commission may consider compatible with the internal market State aid to facilitate the development of certain economic activities within the European Union, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. In order to assist Member States and potential aid recipients, the Commission has published numerous Guidelines and Notices on the conditions under which certain types of aid may be considered compatible under Article 107(3)(c) of the Treaty. These OJ [2014] C 188/4 (n 52), para 5. Commission Decision of 18 December 2018, cases SA.46705 (France), SA.46578 (Germany), SA.46595 (Italy) and SA.46590 (United Kingdom) (2018/N) – Important Project of Common European Interest (IPCEI) Microelectronics. For batteries – SA.54793 (Belgium), SA.54801 (Germany), SA.54794 (France), SA.54806 (Italy), SA.54808 (Poland), SA.54796 (Sweden) and SA.54809 (Finland). 58 59

State aid in the energy sector  79 various Guidelines and Notices are considered to be binding on the Commission and on the Member States if the latter have agreed to their contents. On 8 May 2012, the Commission adopted the State aid modernisation program or SAM60 (i) to foster growth in a strengthened, dynamic, and competitive internal market, (ii) to focus enforcement on cases with the biggest impact on the internal market, and (iii) to streamline rules and faster decisions (see Chapter 1). Within this context, earlier sets of guidelines were updated, leading – on 28 June 2014 – to the adoption of the current Guidelines for aid in the energy sector. It should be stressed that aid falling within the scope of a particular set of guidelines must still be notified for eventual clearance, albeit that if the notified measure or scheme fulfils the criteria set out in the guidelines, this should allow the Commission to reach a positive Decision on the notified measure or scheme at the end of its preliminary investigation. The absence of a relevant set of guidelines does not of course mean that the aid in question is likely to be declared compatible. If no guidelines are applicable, the Commission must deal with the State measure on a case-by-case basis. Similarly, if a case cannot be disposed of under the relevant guidelines, the Commission is still bound to examine the possible application of Article 107(3)(c) TFEU. In particular, although the Euratom Treaty does not contain state aid rules for the nuclear sector, the Commission assesses nuclear state aid within the meaning of Art 107(1) TFEU under Art 107(3)C). On this basis, in 2014 the Commission approved aid that the UK was planning to grant to Hinckley Point C’s future operator. It found that the aid was compatible with the internal market, and as necessary to attain “in good time” new nuclear energy capacity in the UK, and it did so at minimal risk to competition, with positive effects of the aid off-setting any negative effects. In Case T-356/15 – Austria v Commission, the General Court dismissed Austria’s action to annul the decision. The Commission, in the General Court’s view, correctly viewed the UK’s decision to develop nuclear energy capacity as a public interest-related objective, even if not all Member States pursue nuclear energy. The aid in question was also deemed proportionate, and Austria failed to demonstrate that the negative effects of the aid outweighed the positive effects. The Court confirmed that while the EU State aid rules are applicable to nuclear energy provision in principle, their application needs to take the provisions and objectives of the Euratom Treaty into account.61 The 2014 Guidelines During the period 2014–20, the Guidelines on State aid for environmental protection and energy (“Guidelines”) have been the key State aid instrument for assessing compatibility of aid in the energy sector.

60 Commission, “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, EU State Aid Modernisation (SAM)” COM(2012) 209 final. European Parliament Resolution 2012/2920(RSP)/EU of 17 January 2013 on state aid modernization [2015] OJ C 440/14. 61 The GC also held that the aid offered to Hinckley Point C could not have been put out to tender under the EU’s procurement rules, as it is merely subsidising the operation of the facility once it is established but not constructing it. See also Chapter 17.

80  Research handbook on European State aid law In particular, the Guidelines cover aid for the following type of measures: (a) aid for going beyond Union standards or increasing the level of environmental protection in the absence of Union standards (including aid for the acquisition of new transport vehicles); (b) aid for early adaptation to future Union standards; (c) aid for environmental studies; (d) aid for the remediation of contaminated sites; (e) aid for energy from renewable sources; (f) aid for energy efficiency measures, including cogeneration and district heating and district cooling; (g) aid for resource efficiency and, in particular, for waste management; (h) aid for CO2 capture, transport and storage including individual elements of the Carbon Capture Storage chain; (i) aid in the form of reductions in or exemptions from environmental taxes; (j) aid in the form of reductions in funding support for electricity from renewable sources; (k) aid for energy infrastructure; (l) aid for generation adequacy measures; (m) aid in the form of tradable permits; (n) aid for the relocation of undertakings. For each of these measures, the Guidelines set out a number of requirements to determine their compatibility under Article 107(3)(c). In line with the principles of the SAM Communication, the general compatibility requirements are the following: (i) contribution to a well-defined objective of common interest (e.g. promotion of RES as well as aims of the Union policy pursuant to Article 194 TFEU) (Section 3.2.1); (ii) need for State intervention – i.e. where there is residual market failure (Section 3.2.2); (iii) appropriateness of the aid measure (Section 3.2.3); (iv) incentive effect (Section 3.2.4); (v) proportionality of the aid (aid kept to the minimum) (Section 3.2.5); (vi) avoidance of undue negative effects on competition and trade between Member States (Section 3.2.6); and (vii) transparency of aid (Section 3.2.7). For certain measures, only the general compatibility conditions apply, whereas there are more stringent rules for other measures which are identified by reference to aid amount, absence of a competitive bidding process or type of aid (investment aid versus operating aid). More specifically: ●● For investment aid, the threshold is EUR 15 million for one undertaking. ●● Based on the type of measure, the thresholds are as follows: ●● For operating aid for the production of renewable electricity and/or combined production of renewable heat: where the aid is granted to renewable electricity installations at sites where the resulting renewable electricity generation capacity per site exceeds 250 megawatts (“MW”); ●● For operating aid for the production of biofuel:62 where the aid is granted to a biofuel production installation at sites where the resulting production exceeds 150 000 tonnes (“t”) per year; ●● For operating aid for cogeneration: where aid is granted to cogeneration installations with the resulting cogeneration electricity capacity exceeding 300 MW; ●● For aid for energy infrastructure: where the aid amount exceeds EUR 50 million for one undertaking, per investment project; ●● For aid for Carbon Capture and Storage: where the aid amount exceeds EUR 50 million per investment project; ●● For aid in the form of a generation adequacy measure: where the aid amount ex-

62 See the decisions on Danish biomass and biogas, Commission Decision of 14 November 2013, case SA.35485 (2012/N) – Denmark Aid for all forms of biogas use – A and Commission Decision of 16 December 2015, case SA.36659 (2013/N) – Denmark Aid for all forms of biogas use – B.

State aid in the energy sector  81 ceeds EUR 15 million per project per undertaking. The sections below illustrate the application of the Guidelines to aid for generation from RES and to capacity remuneration mechanisms (“CRM”). Aid for Generation from RES Increasing the production of electricity from RES to reach the targets set in the RES Directive – or even exceeding them – has automatically become an objective of common interest. RES support measures normally enjoy a benign State aid scrutiny. For instance, paragraph 115 of the Guidelines grants a positive presumption as regards the existence of a market failure justifying the need for State intervention in the production of RES. Nonetheless, on appropriateness, incentive effect, proportionality, and effect on competition, the Guidelines introduce significant changes to existing – more permissive – rules, in particular through the progressive introduction of a bidding process for the selection of beneficiaries.63 In particular, the Guidelines have introduced the following cumulative requirements (as from 1 January 2016): (i) the aid must be granted as a premium in addition to the market price; (ii) the beneficiaries must be subject to standard balancing responsibilities (unless no liquid intraday balancing markets exist); and (iii) measures are put in place to ensure that generators have no incentive to generate electricity under negative prices.64 In addition, as of 1 January 2017, aid must be granted following an auction or competitive bidding process, save in the following cases: first, when Member States can demonstrate that the bidding process is not suitable for a number of reasons set out in the Guidelines. Second, the requirement to conduct a competitive bidding process is not mandatory for installations with less than 1 MW of capacity (all technologies except wind energy) of not more than 6 MW of generation units for wind energy, or demonstration projects.65 The use of auctions has an impact on the proportionality assessment. In case of auctions, the Commission will presume that the aid is proportional. Otherwise, the aid per unit of energy must not exceed the difference between the total levelised costs of producing energy (LCOE) from the particular technology in question and the market price of the form of energy con-

63 For guidance see the recent decision on Danish Wind Turbines – involving multi-technology auctions as well as targeted auctions and aid schemes for demonstration projects, see Commission Decision of 17 August 2018, SA. 49918 (2018/N) / 57015 (2018/N) / 50727 (2018/N), paras 75 et seq. See also Commission Decision of 11 July 2017, case SA.44076 Hungary, Aid for electricity production from renewable energy sources (METÁR) – repowered installations and new installations can compete on an equal footing in an auction. 64 These conditions do not apply in case of aid granted to installations with an installed electricity capacity of less than 500 kW (for all technologies except wind), of not more than 3 MW or 3 generation units (for wind energy) and demonstration projects. 65 See Commission decision in case SA.50717 – Denmark – Aid scheme for onshore wind for test and demonstration projects outside the two national test centres for large wind turbine, especially paras 88 et seq.

82  Research handbook on European State aid law cerned. The LCOE may include a normal return on capital. Investment aid is deducted from the total investment amount in calculating the LCOE.66 There are fewer rules on investment aid for RES generation: Annex I sets out aid intensities (which can reach up to 100% in case of auctions) and Annex II sets out the counterfactual (which is the construction of a conventional power plant with the same capacity). The 2017 decision on the Spanish rules for aid to RES generation, dated 10 November 2017, is illustrative of the Commission’s approach.67 ●● The scheme had been implemented prior to Commission authorisation since 2014. The Commission therefore classified the measure as unlawful aid. Nevertheless, the aid was cleared in full, benefitting around 40,000 beneficiaries, with annual payments under amounting to EUR 6.4 billion. ●● The scheme has been authorised until 2024 (i.e. ten years since the new legislation from 2014). The main features of the scheme that earned a compatibility assessment were as follows: ●● First, beneficiaries receive support through a premium on top of the market price of electricity, so that they have to respond to market signals. This premium is meant to help these facilities compensate for costs that cannot be recovered from selling electricity in the market, and obtain a reasonable return on investment. ●● Second, since 2016, support to new facilities was granted through competitive auctions with different technologies competing (essentially wind and solar). Thus, beneficiaries will receive compensation only if, in the coming years, the market price drops to a level significantly below the reference prices. Aid for Capacity Remuneration Mechanisms Section 3.9 of the Guidelines outlines the main requirements to approve a capacity remuneration mechanism (“CRM”) as compatible state aid. The Commission has subsequently reviewed and eventually cleared numerous national CRMs. In particular, in February 2018, CRMs in Belgium, France, Germany, Greece, Italy and Poland received EU State aid approval.68 The Commission found that these measures contribute towards ensuring security of supply while preserving competition in the single market. The approved mechanisms are the following: strategic reserves, in Belgium and Germany, two market-wide capacity mechanisms in Italy and Poland, as well as a demand response (“DR”)69 tender in France and an interruptibility scheme in Greece.70 The Commission's approval was expressly stated 66 The Commission refers inter alia to IRENA, an OECD study to calculate the returns on capital in its LCOE calculations. 67 Commission Decision 10 November 2017, case SA.40348 (2015/NN) – Spain – Support for electricity generation from renewable energy sources, cogeneration and waste. 68 European Commission, ‘State aid: Commission approves six electricity capacity mechanism to ensure security of supply in Belgium, France, Germany, Greece, Italy and Poland’ (European Commission Press Corner, 7 February 2018) accessed 25 March 2020. 69 DR operators can choose either between a certification of DR as capacity or a reduction of consumption as supplier obligation. 70 “Interruptibility schemes” are mechanisms “in which industrial customers are asked by the network operator to reduce their demand in scarcity situations, are also considered a form of ‘reserve’,

State aid in the energy sector  83 to be without prejudice to the need for these measures to comply with the future sectoral EU legislation when it becomes applicable.71 This proviso is important, given the then upcoming changes in legislation, described below. The General Block Exemption Regulation The Guidelines must be read together with the revised General Block Exemption Regulation (“GBER”),72 covering measures that, being below certain minimum thresholds,73 do not require notification, thereby reducing the administrative burden, and allowing the Commission to carry out a detailed examination of large amounts of State aid, which have a greater impact on the internal energy market to focus.74 According to the latest State aid scoreboard – some 95% of aid directed to the energy and environmental objectives falls under the scope of the GBER. Compared to the Guidelines, for aid that falls under the GBER, the incentive effect of the aid is presumed. Further, the assessment of eligible costs under the GBER is less detailed than the assessment under the Guidelines, and the aid intensities envisaged by the GBER are less than those provided for in the Guidelines. However, a number of other strict procedural obligations apply, including a transparency obligation. Member states must publish in a dedicated website the measures enacted under the GBER, and the failure to do so results in the illegality of the aid measure or scheme. Also, the GBER scope is more limited as it concerns primarily investment aid and fiscal exemptions/reductions, albeit with some provisions allowing the grant of operating aid. Moreover, aid arising out of tradeable permit schemes, and support for carbon capture and storage, relocation of undertakings, or the reduction in funding support for electricity from as they provide capacity that is only activated when a supply shortfall occurs”, European Commission, “Final Report State Aid to secure electricity supplies – Sector inquiry” (European Commission Energy and Environment, 2016), available at accessed 26 March 2020. 71 See, for instance, Commission decision in case SA.42011 – Italy – Italian Capacity Mechanism, fn. 50. 72 Commission Regulation (EU) 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty [2014] OJ L 187/1. In 2017, this act was amended by Commission Regulation (EU) 2017/1084 of 14 June 2017 amending Regulation (EU) 651/2014 as regards aid for port and airport infrastructure, notification thresholds for aid for culture and heritage conservation and for aid for sport and multifunctional recreational infrastructures, and regional operating aid schemes for outermost regions and amending Regulation (EU) 702/2014 as regards the calculation of eligible costs [2017] OJ L 156/1. 73 The relevant thresholds under the GBER are as follows: (i) for investment aid for energy efficiency projects: EUR 10 million; (ii) for investment aid for remediation of contaminated sites: EUR 20 million per undertaking per investment project; (iii) for operating aid for the production of electricity from renewable sources and operating aid for the promotion of energy from renewable sources in small scale installations: EUR 15 million per undertaking per project. When the aid is granted on the basis of a competitive bidding process under Article 42: EUR 150 million per year taking into account the combined budget of all schemes falling under Article 42; (iv) for investment aid for the district heating or cooling distribution network: EUR 20 million per undertaking per investment project; (v) for investment aid for energy infrastructure: EUR 50 million per undertaking, per investment project. 74 For national examples, see also K Strandoo (Energy Saving Trust, UK) and M Jamiolkowski (National Fund for Environmental Protection and Water Management, Poland), “Financing energy efficiency: dealing with State Aid rules” (Funds and Financing for Energy Efficiency, Executive Summary 4.7, April 2016).

84  Research handbook on European State aid law RES for large users and support for CRM is only dealt with under the 2014 Guidelines. Accordingly, aid measures and schemes to pursue these objectives must be notified. Upcoming Developments The goals of the Green Deal are bound to influence the application of State aid in the energy sector in a number of ways. First of all, in 2019 the Commission launched a “fitness check” in relation to the GBER and the Guidelines (among other instruments). To provide predictability and legal certainty, whilst preparing for a possible future update of these measures, the Commission prolonged their validity beyond 2020. As regards the update of the Guidelines, in the 2020 Communication on the European Green Deal Investment Plan, the Commission announced more favourable rules to invest in the energy efficiency of buildings (see point 4.3.2 – “Member States will be given more flexibility to support financing arrangements that are advantageous to consumers of electricity, such as Energy Performance Contracts …”). Similarly, the Commission took the position that support for district heating distribution networks could fall outside of State aid control when district heating networks are run in the same way as other energy infrastructure through separation from the heating generation, third-party access and regulated tariffs. By contrast, there will be more stringent rules on measures to compensate operators of coal-fired plants for foregone profits in case of closure. In these cases, the Commission promised to assess “State aid involved in such projects directly under the Treaty”. Moreover, the Commission, at point 4.3.4, will in particular examine the proportionality of such support in order to avoid overcompensation. This means that Member States need to demonstrate that the compensation does not go beyond the loss of profit faced by the installation due to its anticipated closure. It is also important to ensure that the measure is structured in a way that limits to the minimum any distortion of competition in the market.

CRMs are another measure under the Guidelines that will likely be impacted by legislative developments to pursue the Commission’s Green Deal agenda. In particular, to limit the impact of CRMs on climate goals, the recast of the Electricity Regulation provides emission limits to be imposed on the subsidisation of polluting generation facilities.75 In particular, Article 22(4) introduces an Emission Performance Standard (EPS) with different time horizons, for new and existing plants. More specifically, ●● Generation capacity that started commercial production on or after 4 July 2019 and that emits more than 550 g of CO2 of fossil fuel origin per kWh of electricity, “shall not be committed or to receive payments or commitments for future payments under a capacity mechanism”; ●● According to Article 22(4)(b), “from 1 July 2025 at the latest, generation capacity that started commercial production before 4 July 2019 and that emits more than 550 g of CO2 of fossil fuel origin per kWh of electricity and more than 350 kg CO2 of fossil fuel origin

75 European Parliament and Council Regulation (EU) 2019/943 of 5 June 2019 on the internal market for electricity [2019] OJ L 158/54.

State aid in the energy sector  85 on average per year per installed kWe shall not be committed or receive payments or commitments for future payments under a capacity mechanism” (emphasis supplied). However, there is also a grandfathering clause, whereby “Member States that apply capacity mechanisms on 4 July 2019 shall adapt their mechanisms to comply with Chapter 4 without prejudice to commitments or contracts concluded by 31 December 2019” (Article 22(5)). Finally, the Recast Renewable Energy Directive incorporated the principles of the Guidelines by providing that support for RES should be granted pursuant to tendering procedures and “in the form of a market premium, which could be, inter alia, sliding or fixed” (Article 4).76

4. CONCLUSION The EU’s commitment to a “carbon-free” economy will require an even higher effort from the Commission to clarify the application of the State aid rules to the energy sector, given that the latter will be one of the main protagonists in the efforts needed to achieve the EU’s ambitious environmental targets. Thus, further updates will be needed to clarify the State aid aspect inherent in dealing with the heightened challenges of maintaining competitiveness and respecting the environment. More specifically, based on the overview provided in this chapter, potential areas for further research include a new relationship between soft law/guidelines and legislation, as the provisions in the Guidelines have to a certain extent shaped the provisions in the recast Energy Regulation (especially on CRM) as well as in the new RES Directive (e.g., as regards the use of tenders to assign support). This is a new turn in the relationships between soft law/Guidelines and legislation because so far, the former had acted as “gap filler” relative to issues left open in the latter. As a consequence, it may deserve further study whether this turn is due to a shift in the center of gravity of policy in the sector: from liberalisation to climate. Another area for potential further research is the notion of State resources and the related – albeit distinct – notion of imputability. In a strange re-run of history, after PreussenElektra, another case on RES support in Germany – Germany v Commission – has shaped the interpretation of this notion, distinguishing from another energy case – Vent de Colere. Similarly, the Court’s reasoning in ENEA on state resources and imputability is potentially applicable to other sectors and circumstances. It remains to be seen if and how the legacy of these cases plays out in other sectors. Finally, although still very recent and partly ongoing, the corona virus crisis will have lasting consequences on the application of State aid rules. For the energy sector, the Commission’s recent Temporary Framework stated that, in case of recapitalisation measures, the Commission will assess the degree to which national support measures are tied to achieving “the EU’s policy objectives related to green and digital transformation”.77 This provision indicates that another area for further research lies in mapping the interactions between the

76 European Parliament and Council Directive (EU) 2018/2001 of 11 December 2018 on the promotion of the use of energy from renewable sources [2018] OJ L 328/82. 77 Commission, “Amendment to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak” (Communication) [2020] OJ C 164/3, p 9.

86  Research handbook on European State aid law Temporary Framework and the energy sector as the Commission starts to assess such recapitalisation measures and their link with the climate objectives.

5. State aid and free movement Andrea Biondi

1. INTRODUCTION Every EU state aid adeptus is probably able to recite by heart the following passage of the Spaak Report: ‘La règle générale est que sont incompatibles avec le marche commune les aides, sous quelque forme qu’elles soient accordées, qui faussent la concurrence et la repartition des activités en favorisant certaines entreprises au certaines productions’.1 State aid control was then to be forever associated with two of the driving forces of the whole process of European integration: the achievement of an internal market and the preservation of fair competition. A debate has raged on for years on the question of whether the DNA of state aid is to be found in the rules of the single market or in those aimed at avoiding distortions of competition.2 However, as any parent may testify, this is a futile exercise. Not only do the progenies have a fully independent and autonomous character, but also if resemblances can be spotted, they are often impossible to attribute or to quantify in favour of one or the other ancestors. This contribution will thus not rehash the same old discussion but simply accepts that state aid control bears resemblances and shares traits with both free movement and competition. It will instead attempt to delineate the precise contours of the interactions between the rules of both free movement and state aid, interactions that are perhaps becoming unforeseeably more complex and sophisticated, in parallel with the complexity and sophistication of the contemporary European Market. It will briefly reconstruct the state of play and outline the main analogies and differences between free movement and state aid and discuss some specific issues arising from the application (or non-application) of these supranational sets of rules.

2.

STATE AID AND FREE MOVEMENT: GENERAL PRINCIPLES

Since the adoption of the Treaty of Rome in 1957, the creation of the European single market has been fundamental to the European integration process. One of the principal methods by which the rules of the single market have sought to achieve European-wide integration has been through the imposition of limits on national economic policies as to ensure the free flow

1 High Authority ECSC, ‘The Brussels Report on The General Common Market’ (Spaak Report) (1956), 53, available at accessed 10 June 2020. 2 See for instance L Buendía Sierra and B Smulders, ‘The Limited Role of the “Refined Economic Approach”’ in V Di Bucci, JL Buendi Sierra, B Smulders et al (eds), Achieving the Objectives of State Aid Control: Time for Some Realism in EC State Aid Law: Liber Amicorum Francisco Santaolalla (Kluwer 2008) 18; J Luis Da Cruz Vilaca, ‘Material and Geographic Selectivity in State aid’ (2009) 8(4) EstaL 443; and A Biondi, ‘The rationale of State aid control: a return to orthodoxy’ (2011) 12 Cambridge Yearbook of EU Law 35.

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88  Research handbook on European State aid law of trade. Central to this aim is the prohibition of Member States from seeking to influence or affect inter-State trade. This prohibition is embodied within the free movement provisions, which outlaw regulatory measures that create an obstacle to the free movement of goods, capital, workers, or services. In addition to the protection of these ‘four freedoms’, the Treaty of Rome, and now the Treaty on the Functioning of the European Union (the TFEU or the Treaty), also include provisions that prohibit the introduction of discriminatory tax measures by Member States that could have an effect on inter-State trade, as well as rules governing the creation of State monopolies. Each set of these provisions, however, is a specific embodiment of a more fundamental, underlying principle: Member States must not favour certain (usually national) undertakings to the disadvantage of undertakings from other Member States. Member States therefore have a positive obligation to take into account in the formulation of their economic policies the out of state impact of these policies as to avoid falling foul of the EU obligations. It is this basic premise that forms the basis on which the realisation of the single market is built, and is a principle that is expressly embodied in Articles 107 and 108 TFEU, which require Member states to stop or abstain from putting in place aid measures which can have the effect of creating an obstacle to free movement and distorting competition. As emphatically affirmed by the European Court of Justice Grand Chamber in Commission v Spain, State aid control rules are the expression of one of the essential tasks with which the European Union is entrusted under Article 2 EC (now Article 3 TFEU), namely the establishment of a common market, which provides that the activities of the Community are to include a system ensuring that competition in the internal market is not distorted.3

2.1

Similar but Separate: Iannelli v Meroni Revisited

If the matrix of free movement and state aid rules can be easily identified, one should then wonder what the differences between the two are. On the surface the terminology is very different; whilst free movement speaks of ‘obstacles’, ‘market access’, ‘discrimination’, ‘hindrance to trade’, state aid is concerned with ‘state resources’ ‘the state as a regulator versus the state as a market operator’ or ‘selectivity’. The European Court of Justice, as ever worried to rely on the proper legal base and not to mix up different Treaty articles, has actually repeatedly reaffirmed a formal distinction based on the mutually exclusive application of either free movement or state aid provisions. The leading authority in this area continues to be the Iannelli v Meroni judgment, which has been good law since it was handed down in 1977.4 The case addressed the question of whether a national court could, when asked to rule on a question of State aid, take into account a possible violation of the free movement of goods (Article 34 TFEU) as well as a violation of Article 107 TFEU. In its ruling, the Court of Justice of the European Union (CJEU) first dealt with the question of whether a measure that allowed domestic publishers to obtain newsprint produced by national paper-mills at reduced prices – a crystal clear aid –- constituted a measure with an effect equivalent to that of a quantitative restriction on imports, as prohibited by the free movement provisions. The Court began its reasoning by acknowledging that a State aid regime is likely to have at least an indirect effect



3 4

Case C-184/11 Commission v Spain [2014] EU:​C:​2014:​316, para 70. Case C-74/76 Iannelli & Volpi v Meroni [1977] EU:​C:​1977:​51.

State aid and free movement  89 on trade. It went on to consider, however, that as a general principle it was not possible to test it as a measure equivalent to a quantitative restriction (MEQR) as this would have amounted to apply one section of the Treaty to a different section. Instead, the particular ‘purpose of the Treaty provision in question needed to be taken into account, as did the provision's position in the general context of the aims of the Treaty and the scope of its application’.5 In seeking to analyse the purpose and context of the State aid regime in Iannelli v Meroni, the CJEU focused on the fact that Article 107 TFEU is not mandatory in nature. In doing so, the Court highlighted the fact that although Article 107(1) TFEU lays down a general prohibition on the granting of State aid, Articles 107(2) and (3) TFEU set out a series of exceptions to the general prohibition and confer to the Commission a wide discretion to accept that a State aid system merits derogation from the general prohibition. In addition, the Commission enjoys full responsibility for analysing whether a national measure is contrary to the single market. By comparison, the CJEU considered that the purpose and context of the free movement provisions were mandatory, explicit and unconditional in nature and could be invoked directly before national courts. The CJEU concluded, therefore, that: the effect of an interpretation of Article 30 of the Treaty [now Article 34 TFEU] which is so wide as to treat an aid as such within the meaning of Article 92 of the Treaty [now Article 107 TFEU] as being similar to a quantitative restriction referred to in Article 30 would be to alter the scope of Articles 92 and 93 of the Treaty [now Articles 107 and 108 TFEU] and to interfere with the system adopted in the Treaty for the division of powers by means of the procedure for keeping aids under constant review as described in Article 93 [now Article 108].6

To reference myself, the Court distinction between State aid and free movement provisions was found in a ‘constitutional’ rather than functional dimension, and was based on the allocation of competence as set out in the Treaty7 and on the limited direct applicability of state aid provisions;8 the Commission has sole discretion to evaluate the compatibility of a State aid measure with the single market, whereas individuals may challenge national measures perceived as being contrary to the free movement provisions directly before national courts. There is, however, more. By the time Iannelli v Meroni arrived in Luxembourg, the Dassonville formula9 was already a big hit amongst traders, companies, and national courts. Hence the reluctance of the Court to transplant such an all-encompassing test beyond free movement provisions. In Iannelli, the Court clearly indicated that the effect of an interpretation so wide as to treat any aid as being akin to a quantitative restriction, would simply bring down any state measure of economic policy. It was thus not such a great idea to use the State aid measures and free movement interchangeably. So far so good, but the Court felt compelled to add: Those aspects of aid which contravene specific provisions of the Treaty other than Articles 92 [now Article 107 TFEU] and 93 [now Article 108 TFEU] may be so indissolubly linked to the object of the aid that it is impossible to evaluate them separately so that their effect on the compatibility or incompatibility of the aid viewed as a whole must therefore of necessity be determined in the light

ibid para 9. Iannelli & Volpi v Meroni (n 4) para 12. 7 A Biondi and P Eeckhout, ‘State aids and barriers to trade’ in A Biondi, P Eeckhout and J Flynn (eds), The Law of EC State Aids (Oxford University Press 2003) 103. 8 See, inter alia, Case C-368/04 Transalpine Ölleitung in Österreich [2006] EU:​C:​2006:​644. 9 Case C-8-74 Dassonville v Procureur du Roi [1974] EU:​C:​1974:​82. 5 6

90  Research handbook on European State aid law of the procedure prescribed in Article 93. Nevertheless the position is different if it is possible when a system of aid is being analysed to separate those conditions or factors which, even though they form part of this system, may be regarded as not being necessary for the attainment of its object or for its proper functioning.10

The CJEU concluded, therefore, that where it was possible to separate out the conditions that are not necessary for the attainment of the objects of the aid measure, the national court should be allowed to determine whether these separate factors constituted possible violations of the free movement provisions. There was no further explanation. This so-called ‘severability’ test has been severely and rightly criticised for lacking clarity and for its difficult application.11 What became clear in the ensuing application of Iannelli was that while the Court maintained the ‘separateness’ of the two sets of provisions, it also reaffirmed time after time that ‘the provisions relating to the free movement of goods, the repeal of discriminatory tax provisions and aid have a common objective, namely to ensure the free movement of goods under normal conditions of competition’.12 The prohibition contained in the free movement provisions against any possible obstacle to the free flow of goods and the prohibition contained in Article 107(1) TFEU on aid that affects trade, therefore, have the same legal consequence, namely that the national measure in question is incompatible with European law.13 In the vast majority of judgments the CJEU eventually ended up applying the free movement provisions, bona pace Iannelli v Meroni. Let us take the Buy Irish judgment.14 This celebrated case concerned an advertising campaign financed by the Government that aimed to promote the sales of Irish products. The Commission brought the case before the Court as a free movement of goods violation. In a formidable Opinion, AG Capotorti discussed at length the possible application of either free movement or state aid provisions. He argued that such a campaign should not have been considered as a measure that had an effect equivalent to quantitative restrictions, falling within the Dassonville formula. He opined that by having separated the rules on the free movement of goods from the rules on competition, the general scheme of the Treaty has placed on two different levels barriers or obstacles to intra-Community trade, which are introduced through measures adopted by the public authorities, and activities by which competition is restricted or distorted, which may be pursued not only by undertakings but also by States, in the form of aid.

Thus the contested measures were ‘in the nature not of barriers or obstacles to trade established by the public authorities but rather of public aid whereby it sought to give domestic producers a competitive advantage over foreign producers’.15 The learned Advocate General took this opportunity to sketch a state aid manifesto of sorts, arguing for the elaboration of a wide concept, a manifesto which proved to eventually be very influential in the years to come. The Court, instead, only discussed the fact that the campaign itself was only indirectly financed by Iannelli & Volpi v Meroni (n 4) para 14. A Dashwood, ‘Preliminary Rulings on the EEC State Aid Provisions’ [1977] ELR 367. 12 Case 18/84 Commission v France [1985] EU:​C:​1985:​175. See also Cases C-78/90 to C-83/90 Compagnie Commerciale de l’Ouest [1992] EU:​C:​1992:​118 and Case C-17/91 Lornoy [1992] EU:​C:​ 1992:​514. 13 Case C-21/88 Du Pont de Nemours Italiana [1990] EU:​C:​1990:​121. 14 Case 249/81 Commission v Ireland [1982] EU:​C:​1982:​402. 15 ibid p 4031. 10 11

State aid and free movement  91 State resources, which did not mean that it could escape the prohibitions laid down in Article 34 TFEU. The Court identified the substitution of domestic products for imported products in the Irish market as the true Government intention – an intention which was liable for hindering trade. Of course, for those who tend to read footnotes it will be apparent that we are dealing with extremely dated case law that is reflective of a very specific stage of European legal integration, particularly regarding state aid control. As has been observed, the Court was prompt in reacting to the ‘unattractive nature’16 of the mutual exclusivity argument. In Buy Irish – as in many other free movement versus state aid cases – the Member States had never notified the Commission of the measures at stake – a common practice in those days. Accepting that Article 34 TFEU was not applicable would have left the breach of EU law unsanctioned. The attraction of applying the principles of free movement has proved, despite the good intentions of Iannelli v Meroni, too difficult to resist – not only for the CJEU, but also for the Commission. One such example involved an order by the Commission addressed to the German Government requiring it to repeal a memorandum obliging certain civil servants to fly exclusively with Lufthansa or, failing that, with foreign companies that were associated with the German national airline.17 While the Commission acknowledged that the memorandum in question constituted a State measure in favour of a public undertaking, and was clearly in breach of Article 107(1) TFEU, following the CJEU’s preference, when faced with a choice to rely on free market provisions or State aid provisions, it opted for the former. The Commission based its decision on Article 56 TFEU on the freedom to provide services rather than on the State aid rules. Obviously with the steady and continuous expansion of state aid control and the adoption of more robust sanctions against Member states flouting the rules 18 the big umbrella of free movement provisions was needed less. A svelte search on the Curia website shows how Iannelli practically became redundant, except for a single case decided at the end of 2019. On this there will be more later, as to keep a bit of suspense alive. 2.2

Similar and Together: Consequences and Possible Implications

The hibernation of the ‘severability’ test does not mean of course that the Court did not have the chance to examine the interaction between state aid and free movement. On the contrary, some of the most significant rulings of the Court in the last ten years have touched upon this issue. Suffice to mention examples such as Preussen Elektra, UTECA or the Luxury Tax case. These well-known judgments are all preliminary reference procedures whereby national courts expressly required of the Court an interpretation of both state aid and free movement provisions. In the PreussenElektra judgment19 the question was whether German law which imposed an obligation on electricity distributors to purchase electricity produced from renewable energy suppliers within their area at fixed minimum prices and required upstream suppliers to compensate them could be considered to be a State aid, given that the purchase obligation 16 P Oliver, ‘A Review of the Case Law of the Court of Justice on Articles 30 to 36 EEC’ (1985) 22 CML Rev 108. 17 European Commission, ‘Twentieth Report on Competition Policy’ (1990), para 357. 18 See M Merola, ‘The Forces Shaping State Aid Control in the EU’ in L Rubini and J Hawkins (eds) What Shapes the Law? Reflections on the History, Law, Politics and Economics of International and European Subsidy Disciplines (e-book, EUI, University of Birmingham 2016); and JJ Piernas Lopez, The Concept of State Aid under EU Law (Oxford University Press 2015) ch 9. 19 Case C-379/98 Preussen Elektra [2001] EU:​C:​2001:​160.

92  Research handbook on European State aid law amounted to an aid even if this obligation did not involve a transfer of state resources. The second question was whether it could be considered as a measure having equivalent effect to quantitative restrictions as it clearly discriminated in favour of German products. The Court ruled against both possible violations. In the UTECA case,20 the CJEU was asked to rule on a Spanish law that required television operators to earmark 5% of their operating revenue for the funding of European cinematographic films and films made for television, and to spend 60% of that funding on the production of films in which the original language was one of the official languages of Spain (not only Spanish, but also ‘catalán, gallego, euskera’). The Court found that the legislation in question did breach the free movement principles, but was justified by the cultural aim of promoting Spanish multilingualism. The CJEU also ruled that the measure did not constitute an advantage granted either directly or indirectly by the State or through State resources, as the burden was not shouldered by the state but by television operators. As such, the measure did not fall foul of State aid rules. In the Presidenza del Consiglio dei Ministri v Regione Sardegna, the CJEU was asked to rule on a regional tax that was imposed on stopover flights. The tax only applied, however, to undertakings that had their tax domicile outside of that region.21 The Court this time considered the measure to be both a violation of the free movement of services and an aid, and focused its reasoning on the differential treatment between flights operated by persons having their tax domicile within the region and those with tax domiciles established in other Member States. Such differential treatment created an advantage that could be classified both as an obstacle to free movement and as a State aid. In these three cases, the Court simply replied to the national court’s questions in turn without any further elaboration on the possible severability of the national measure. Not only was there no discussion on this issue, but also the outcome of the Court’s analysis was identical in either excluding the application of both sets of provisions (Preussen Elektra and UTECA) or in applying them (Luxury Tax). The wording was also nearly identical. For instance, in the Luxury Tax case, the Court held that granting tax benefits only to residents of a Member State or taxing non-residents at a higher rate of tax constituted indirect discrimination by reason of nationality. Likewise, the Court used verbatim the same argument when concluding that the measures should have been considered to be selective. Another macro example of the possible convergence between free movement and state aid lies within the area of direct taxation measures.22 In this area questions of competence are very prominent, because the regulation of national tax regimes falls within the competence of Member States and not the European Union. It is therefore up to Member States, not the Commission, to devise a system of taxation best suited to the national economy. Member States’ competence to devise and regulate their own internal tax regimes is limited, however, to the extent that such regimes must not conflict with the provisions of the Treaty. For example, while a national tax regime can confer an advantage to certain undertakings over others provided that such differentiations are non-discriminatory and justified by the nature

Case C-222/07 UTECA [2009] EU:​C:​2009:​124. Case C‑169/08 Presidenza del Consiglio v Regione Sardegna [2009] EU:​C:​2009:​709. 22 See further in this volume Julia Rapp, ‘Taxation and State Aid’ (Chapter 3). See further R Szudockzy, ‘Convergence of Analysis of National Tax measures under EU state aid and the fundamental freedoms’ (2016) 15(3) EStaL 357; and K Lenaerts, ‘State Aid and Direct Taxation’ in H Kanninen et al (eds), EU Competition Law in Context – Essays in Honour of Virpi Tiili (Hart Publishing 2009), 291. 20 21

State aid and free movement  93 of the tax system, the regime will be contrary to the Treaty where such differences are based on the grounds of nationality or residency. The CJEU has thus repeatedly held that granting tax benefits only to residents of a Member State or taxing non-residents at a higher rate of tax constitute indirect discrimination by reason of nationality.23 As such, the Commission will not approve aid that is granted through tax exemptions if the benefit of these taxes is restricted on the grounds of nationality.24 In judgments such as Marks & Spencer25 and Cadbury Schweppes,26 the Court even went as far as considering measures that permitted the transfer of losses from a subsidiary to its parent company, on the condition that the former was either resident in the UK or economically active there, as a violation of freedom of establishment rules. The primary effect of this case law is of course to remove the possible discriminatory effects of different taxation levels between Member States. It nonetheless – albeit indirectly – restricts a Member State's choice when developing an internal selective tax regime, as the European Courts will always assess whether such a measure constitutes an obstacle to trade. Such an effect is clear, for instance, in the Italian banking foundation judgment, which dealt with a tax reduction for banking foundations in Italy. In this case, the CJEU had no hesitation in holding that such a measure constituted State aid and further specified that the advantage, in terms of competitiveness, that was created by the tax reduction for operators established in Italy made it even more difficult for operators in other Member States to penetrate the Italian market. Despite the Member States’ wider powers in tax matters, therefore, they must still ‘endeavour to ensure that the choices made in tax matters take due account of the consequences which may flow therefore for the proper functioning of the internal market’.27 2.2.1 Can concepts developed in one context be helpful in the other? A wish list The gradual convergence of the two sets of rules begs the question of whether the supposed exclusivity of the two sets of rules should either be considered overruled or applicable in very limited circumstances. The fact remains that the recent case law clearly tends to apply the relevant Treaty provision one after the other. If this is true, it could be interesting to speculate about what the possible implications of a de facto overruling of Iannelli v Meroni could be and the likely consequences of a cross fertilization between the two sets of rules. Arguably some of the concepts developed in one of the areas could be usefully transplanted into another. Just for some academic fun, let’s make a list:28 for instance, it is rather clear that the Court has found it slightly arduous to conceptualise the question of what degree of influence exerted by a Member State over a company should constitute a restriction of the free movement of capital. 23 Case C-175/88 Biehl v Administration des contributions du Grand-duché de Luxembourg [1990] EU:​C:​1990:​186. 24 For example, see Case C-156/98 Germany v Commission [2000] EU:​C:​2000:​467, para 85, where the CJEU approved the Commission’s refusal to authorise a scheme of aid whereby tax relief was granted for the reinvestment of profits in companies established in West Berlin or the former East Germany. 25 Case C-446/03 Marks & Spencer plc v David Halsey [2005] EU:​C:​2005:​763. 26 Case C-196/04 Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue [2006] EU:​C:​2006:​544. See also Case C-362/12 Test Claimants in the Franked Investment Income Group Litigation v Commissioners of Inland Revenue and Commissioners for Her Majesty’s Revenue and Customs [2013] EU:​C:​2013:​834. 27 Case C-222/04 Cassa di Risparmio di Firenze [2006] EU:​C:​2006:​8, para 90. 28 Some of these ideas are sketched in A Biondi, ‘Every family is the same, every family is different: state aid and free movement’ in J Buendia Sierra and C Buts (eds), Milestones in State aid law (Lexxion 2017), 34.

94  Research handbook on European State aid law Generally the Court tends to conclude that there is a restriction of free movement of capital if the state is participating in a certain company by holding special shares in capital as this is likely ‘to deter investors from other Member states’, or if holding those special shares confers to the state ‘a decisive influence’, and finally, if there is a risk that a state might exercise its special rights in order to pursue ‘interests which do not coincide with the economic interests of the company concerned’.29 The exact meaning of these expressions has proven to be elusive, but arguably it implies that free movement will be impeded by measures that hinder access to the national market for investors that are not established in the Member State in question, not only because of extra costs or other barriers, but because investors in other Member States would never be sure that the company law rules adopted by a Member state would respect the normal rules of the operation of the market.30 It is easy to see how the fast developing content of the Market Operator Principle could provide a useful checklist in deciding whether a state is actually operating as regulator or as a market actor.31 In these resurgent Covid-19 protectionist times it would be a rather useful ‘transplant’. To continue the list of possible ‘transplants’, the Court now seems rather content to deploy the supreme principle to distinguish between what is lawful and unlawful under free movement and proportionality as well as to interpret the notion of aid. In Paint Graphos, the CJEU in discussing the third prong of selectivity – justification by the logic of the system – held that it was necessary to ensure that possible derogations from the general system ‘are consistent with the principle of proportionality and do not go beyond what is necessary, in that the legitimate objective being pursued could not be attained by less far reaching measures’.32 It went on to specify that the Member State concerned must behave ‘consistently’ in relation to the public aim it is claiming to pursue.33 Intriguingly, the Commission itself in its Notice on the Notion of Aid has confirmed that a reduced taxation for cooperatives must be proportionate and not go beyond what is necessary.34 The deployment of a proportionality assessment is nothing new in state aid law but it usually takes place at the derogations stage under paragraphs (2) and (3) of Article 107 TFEU. The Court in Paint Graphos seems to suggest that this can also happen under the state aid definition from paragraph (1). Predictably, especially in light of the robust approach taken by the CJEU on selectivity, at least on the other two other prongs of the test (identification of the general benchmark and derogation),35 the ‘justified by the logic

29 Joined Cases C‑282/04 and C‑283/04 Commission v Netherlands [2006] EU:​C:​2006:​608, para 30; and Case C-563/17 Associação Peço a Palavra and Others [2019] EU:​C:​2019:​144. 30 See along these lines Joined Cases C‑463/04 and C‑464/04 Federconsumatori and Others [2007] EU:​C:​2007:​752, Opinion of AG Maduro. 31 See further in this volume Nicole Robins and Laura Puglisi, ‘The Market Economy Operator Principle’ (Chapter 2). 32 Joined Cases C-78/08 to C-80/08 Paint Graphos and others [2011] EU:​C:​2011:​550, para 74. 33 ibid para 75. 34 Commission 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] OJ C 262/1, para 160. 35 Joined Cases C‑20/15 P and C‑21/15 P Commission v World Duty Free Group and Others [2016] EU:​C:​2016:​981. It is of course also clear that the Court shows some extra flexibility on the application of the second prong of the test of selectivity especially in cases of ad hoc taxes, Likewise in ANGED, another example of the contemporaneous application of state aid and free movement provisions, the Court was asked whether a Spanish regional tax calculated on the surface occupied by sales area could have been considered either a state aid as it conferred an advantage to small undertakings or as an obstacle to the freedom of establishment for large companies. The Court generously accepted to look into the

State aid and free movement  95 of the system’ part of the test, if casted in the proportionality test could be a fertile ground in future litigation. As it seems to be a somewhat arduous hurdle to overcome to prove during a Commission investigation that a selective measure is actually justified, proportionality in its familiar procedural definition – i.e. necessity, less restrictive alternative restrictions – could become an important judicial safeguard in litigation before national and EU courts. This is not to advocate for an extra way out of sorts for Member States or for the beneficiaries of aid, but to simply make the third prong of the selectivity test not redundant or impossible to apply. It would still be for the Court to scrutinise the grounds invoked, even applying a very high burden of proof on Member states. Interestingly, the Italian court that referred the question in Paint Graphos, in the ensuing procedure, closely followed the CJEU judgment and quashed the lower court decision as it failed to carry out any verification as to whether the undertaking in question was truly pursuing a social and mutual aim and thus entitled to the tax reduction.36 Making proportionality more explicit under the third ground of selectivity may at least be clearer than subsuming external grounds within the other state aid criteria, for instance by relying on national regulatory techniques to decide whether a measure is granted through state resources à la Preussen Elektra. As for a fitting conclusion to our wish list, there has always been one important concept where both the wording and interpretation of the two sets of provisions are identical: ‘effect on trade’ under the four freedoms and under state aid ex Article 107(1). Thus, a national measure will always be considered an obstacle to trade regardless of whether the measure in question applies to only part of the national territory37 or whether its ‘effects’ are marginal on trade flows in intra-EU trade.38 Likewise, the question of whether a measure is classified as affecting trade, for the purposes of Article 107(1) TFEU, does not depend on the local or regional character of the services supplied or on the scale of the field of activity concerned. As often repeated by the CJEU, there is also no threshold or percentage below which it may be considered that trade between Member States is not affected.39 This rigid stance has always been routinely criticised as a sign of excessive and pedantic application of state aid rules. In reality, the Court case law makes sense as it simply highlights the fact that an obstacle to trade within a single market does not cease to be an obstacle because of the scale of its effects or by the fact that the measure in question applies only to part of the national territory.40 Further, both the Commission and the Court are in reality applying a slightly more nuanced approach. For instance, under free movement law, especially in direct actions, the Court is gradually imposing on the Commission specific reasons that according to the Spanish government justified the introduction of ad hoc tax: that is to say the territorial and environmental impact that a concentration of large establishment can cause and the need to modernize retail infrastructure and the urban space. The Court concluded that there was no selectivity as small and large undertakings were not in a comparable situation in the light of those objectives. Case C‑233/16 ANGED [2018] EU:​C:​2018:​280. 36 Corte di Cassazione, Sentenza 24 febbraio 2015, n 3653. 37 Joined Cases C-1/90 and C-176/90 Aragonesa de Publicidad and Publivía v Departamento de Sanidad [1991] EU:​C:​1991:​327. 38 ‘The articles of the Treaty relating to the free movement of goods, persons, services and capital are fundamental Community provisions and any restriction, even minor, of that freedom is prohibited’ Case C-212/06 Government of the French Community and Walloon Government v Flemish Government [2008] EU:​C:​2008:​178. See also Case C-112/00 Schmidberger v Austria [2003] EU:​C:​2003:​333. 39 Case C-280/00 Altmark Trans [2003] EU:​C:​2003:​415, para 79. Case C-518/13 Eventech v The Parking Adjudicator [2015] EU:​C:​2015:​9, para 65. 40 Case C-67/97 Ditlev Bluhme [1998] EU:​C:​1998:​584, para 20.

96  Research handbook on European State aid law a higher and more intensive burden of proof to show the link between a national measure and a possible violation of free movement. The Commission, particularly in free movement cases, should discharge its duty by providing ‘conclusive evidence’41 which could include reliable estimates, figures, and even patterns of trade.42 Likewise in state aid law, the Court requires the Commission to provide reasons as to why the effects on intra-Community trade can in certain cases be ‘less immediate and even less discernible’.43 The Commission itself – perhaps controversially – signalled clearly in the Notice on the Notion of aid that, as far as the effect on trade is concerned, Article 107(1) would not be triggered when the measure has a purely local impact. In these cases, the Commission needs to ascertain that the beneficiary supplied goods or services to a limited area within a Member State and was unlikely to attract customers from other Member States, and that it could not be foreseen that the measure would have more than a marginal effect on the conditions of cross-border investments or establishment.44 Despite a formal rigidity, the Court case law is also not so monolithic. For instance in the Eventech case,45 dealing with the question of whether reserving the use of bus lanes for black cabs only (other than buses, of course) could have an effect on trade and often cited as an example of the exorbitant application of state aid rules, the Court held that it was conceivable that the practice of permitting Black Cabs to use bus lanes on public roads during the hours when the traffic restrictions relating to those lanes are operational, while prohibiting minicabs from using those lanes, except in order to pick up or set down passengers who have pre-booked such vehicles, may be such as to affect trade between Member States within the meaning of Article 107(1) TFEU.46

A contrario – echoing the opinion of AG Wahl where such an effect is not even conceivable, Article 107(1) should not be applied.47 Likewise in Congregación de Escuelas Pías Provincia Betania v Ayuntamiento de Getafe on the question of whether a tax exemption granted to the Catholic Church had an effect on intra-EU trade, the Advocate General observed in her Opinion, that the fact that the Catholic Church possessed ‘numerous properties’, which all were capable of enjoying the tax exemption would seem to satisfy the effect on trade requirement. 48 The Court, instead, called the national court to verify a possible application of the De Minimis Regulation No 1998/2006 in the case at stake, and to seek the assistance of the European Commission if necessary. In other words, it seems reasonable for the Court to start responding by developing presumptions, in the light of its experience and of its knowledge of market behaviour, regarding the likely effects of different types of national measures on intra EU trade. These presumptions can of course be rebutted if it is clear that they do not have actual effects on market actors akin to exclusion from the market. To paraphrase a ‘classic’ 41 Case C-400/08 Commission v Spain [2011] EU:​ C:​ 2011:​ 172, para 62; and Case C-209/18 Commission v Austria [2019] EU:​C:​2019:​632. 42 Case C-147/03 Commission v Austria [2005] EU:​C:​2005:​427, paras 64–6. 43 Case C-494/06 Commission v Italy and Wam [2009] EU:​C:​2009:​272, para 62. 44 Commission Notice on the Notion of Aid (n 34) para 196. 45 Eventech v The Parking Adjudicator (n 39) para 66. 46 ibid para 71. 47 AG Wahl speaks of a ‘rebuttable presumption on effect of trade’. Eventech v The Parking Adjudicator (n 39), Opinion of AG Wahl, para 85. 48 Case C-74/16 Congregación de Escuelas Pías Provincia Betania v Ayuntamiento de Getafe [2017] EU:​C:​2017:​496, Opinion of AG Kokott, para 85.

State aid and free movement  97 from free movement law – AG Jacobs in Leclerc-Siplec – all undertakings which engage in a legitimate economic activity in a Member State should have unfettered access to the whole of the EU market – unless there is a valid reason to the contrary.49

3.

STATE AID AND FREE MOVEMENT: TO HYPOTHECATE OR NOT TO HYPOTHECATE THAT IS THE QUESTION

It is important to remember that the rules that govern the single market extend beyond the four freedoms and have an equally important role to play. One such area, especially regarding its relationship with the State aid rules, is the rules concerning indirect taxation. Article 110 TFEU sets out specific provisions in respect of internal taxation, which prohibit Member States from imposing internal taxation of a discriminatory nature. The aim of such a provision – as the Court has repeatedly held – is that of ensuring the free movement of goods between the Member States under normal conditions of competition through the elimination of all forms of protection that are a result of the application of internal taxation that discriminates against products from other Member States, and the complete neutrality of internal taxation as regards competition between domestic products and imported products.50 As such, if a tax measure involves discriminatory taxation, Article 110 TFEU will prohibit it even though the taxation in question may form part of an aid within the meaning of Article 107 TFEU. Conversely, however, the mere fact that the financing of an aid scheme does not infringe Article 110 TFEU does not necessarily mean that the scheme will be compatible with the requirements set out in Articles 107 and 108 TFEU. In order for a tax measure that constitutes aid to be valid, the Commission must, therefore, be satisfied that the measure in question, firstly, does not infringe Article 110 TFEU, and secondly, satisfies all of the relevant conditions set out in Articles 107 and 108 TFEU. The same obligations also apply to national courts. For example, the Nygård judgment51 concerned a levy imposed by Denmark on the production of live pigs for export. The national court had no doubts about such a measure’s compatibility with the free movement of goods. It was unsure, however, whether the authorisation granted by the Commission under Article 107(3) TFEU to the Danish scheme of production levies could preclude it from setting aside a levy used to finance the authorised aid. Through the preliminary reference mechanism, the CJEU held that although only the Commission is competent to decide whether an aid scheme is compatible with the internal market, national courts also have a responsibility to check whether any other directly effective provisions might have been violated, especially ‘with a view to remedying, if necessary, infringements of Community law which have not been confirmed in the procedure provided for under Article 88 (now Article 108) of the Treaty’.52 Perhaps one of the most challenging forms of aid related tax measures that the Commission and the European Courts have had to face, however, concerns parafiscal charges. Parafiscal

49 Case C-412/93 Société d’Importation Edouard Leclerc-Siplec v TF1 Publicité SA and M6 Publicité SA [1994] EU:​C:​1994:​393, para 42. 50 See inter alia Case C-213/96 Outokumpu Oy [1998] EU:​C:​1998:​155 and Case C-383/01 De Danske Bilimportører [2003] EU:​C:​2003:​352. 51 Case C-234/99 Niels Nygård v Svineafgiftsfonden [2002] EU:​C:​2002:​244. 52 ibid para 60.

98  Research handbook on European State aid law charges are charges dedicated to funding a particular purpose,53 and are often levied on a particular area of the industrial sector as to finance activities benefiting the sector as a whole. The funds generated by parafiscal charges are often used to finance promotional and marketing activities54 or collective research.55 In many cases the beneficiaries of parafiscal charges are institutions that do not carry out economic activities, and which do not, therefore, constitute undertakings for the purposes of the Treaty provisions. In such cases, Article 107 TFEU does not apply and questions of State aid do not arise.56 Where the beneficiaries of funds levied by parafiscal charges are undertakings, however, two issues can arise in the context of State aid rules: first, whether the funds constitute aid; and second, if the funds do constitute aid, can the charges be challenged under Articles 107 and 108 TFEU. In respect of the first question, the Court held in Compagnie Commerciale de l’Ouest that the application of funds financed by parafiscal charges constitutes State aid for the purposes of Article 107 TFEU where the effect of the allocation of such funds is to favour certain undertakings over others, and that such aid measures had to be considered pursuant to the procedure laid down in Article 108(2) TFEU, subject to the jurisdiction of the national court where there is a breach of Article 108(3) TFEU.57 The second question, however – whether parafiscal charges could be challenged under Articles 107 or 108 TFEU – is more difficult to answer. Article 107 TFEU does not, on the face of it, prohibit the imposition of a tax or charge, even where the funds of such a charge are used to finance State aid. In its ruling in France v Commission,58 the CJEU acknowledged that a close relationship exists between an aid and a charge that finances it. The Court emphasised that in order to apply Article 107(1) TFEU, it is necessary to consider all of the legal and factual circumstances surrounding the aid, including whether there is an imbalance between the charges imposed and the benefits derived from the aid. As such, the aid cannot be considered separately from the way in which it is financed. Finding a connection between the aid measure and the method of its financing still stops considerably short, however, of allowing applicants to challenge parafiscal charges that fall within the ambit of a Member State’s internal tax regime. The CJEU sought to clarify the position of parafiscal charges in its rulings in the Van Calster59 and Streekgewest60 cases. The Van Calster case concerned a reference for a preliminary ruling in proceedings brought by Mr Van Calster and Mr Cleeren for the reimbursement of a parafiscal charge that had been levied by the public authorities on trade in cattle. The funds levied from the charges were used to fund measures to combat animal disease and improve animal health and hygiene. Neither party disputed the fact that the use of the funds constituted State aid. Such aid had, indeed, been approved by the Commission. The question was whether the retroactive imposition of parafiscal charges under the scheme was prohibited under Articles 107 and 108 TFEU. The CJEU began its ruling by reiterating

53 See Joined Cases C-34 to 38/01 Enirisorse v Ministero delle Finanze [2003] EU:​C:​2003:​640, Opinion of AG Stix-Hackl, para 167. 54 Case 78/76 Steinike und Weinlig v Germany [1997] EU:​C:​1977:​52. 55 Case 47/69 France v Commission [1970] EU:​C:​1970:​60. 56 Joined Cases C‑266/04 to C‑270/04, C‑276/04 and C‑321/04 to C‑325/04 Distribution Casino France and Others [2005] EU:​C:​2005:​657. 57 Compagnie Commerciale de l’Ouest and Others (n 12). See also Case C-206/06 Essent Netwerk Noord and Others [2008] EU:​C:​2008:​413. 58 France v Commission (n 55) paras 7–8. 59 Joined Cases C-261 and 262/01 Belgium v Van Calster and Cleeren [2003] EU:​C:​2003:​571. 60 Case C-174/02 Streekgewest [2005] EU:​C:​2005:​10.

State aid and free movement  99 its position in France v Commission, and concluded that the State aid rules do not cover the method of financing an aid where that method ‘forms an integral part of the measure’, in the sense that the charges are designed ‘specifically and exclusively’ to finance the aid.61 Where the aid measure and the method of financing are so closely linked, the notification of the aid under Article 108(3) TFEU must also cover the method of financing, so that the Commission may consider the measure on the basis of all available facts.62 The CJEU went on to conclude that if a charge which is integral to an aid measure is implemented in breach of the obligation to notify, then the national courts must order reimbursement.63 Therefore, parafiscal charges only fall within the scope of the State aid rules where such charges are ‘integral’ to the aid in question. In such a case, the Member State must notify the Commission of both the aid and the charge for its approval. Failure to notify the Commission of the charges will entitle applicants who have paid the charge to seek reimbursement before their national courts. The Court subsequently had the opportunity to develop the concept of a charge being ‘integral’ to an aid measure in its ruling in the Streekgewest case. As was the case in Van Calster, the applicant sought the reimbursement of a charge – this time in relation to a Dutch waste levy. In its ruling, the CJEU considered that: Taxes do not fall within the scope of the provisions of the Treaty concerning State aid unless they constitute the method of financing an aid measure, so that they form an integral part of that measure. For a tax, or part of a tax, to be regarded as forming an integral part of an aid measure, it must be hypothecated to the aid measure under the relevant national rules, in the sense that the revenue from the tax is necessarily allocated for the financing of the aid. In the event of such hypothecation, the revenue from the tax has a direct impact on the amount of the aid and, consequently, on the assessment of the compatibility of the aid with the common market ... The Court thus held that, where there is such a link between the aid measure and its financing, the notification of the aid provided for in Article 93(3) of the Treaty [now Article 108(3) TFEU] must also cover the method of financing, so that the Commission may consider it on the basis of all the facts. If this requirement is not satisfied, it is possible that the Commission may declare that an aid measure is compatible when, if the Commission had been aware of its method of financing, it could not have been so declared.64

The test for determining whether a parafiscal charge can be challenged under the State aid rules, therefore, in the first instance, is whether the charge forms an integral part of the aid to the extent that the proceeds of the charge are specifically allocated for the purposes of financing the aid. The lack of such hypothecation means that undertakings will not be able to challenge the parafiscal charges based on Articles 107 and 108 TFEU.65 Following the Court’s ruling in Van Calster, however, even where the charge is integral to the aid measure, an applicant may only seek reimbursement of the charge where the charge was not included in the Member State’s notification to the Commission prior to implementing the aid measure.

Van Calster (n 59) paras 44–9. ibid paras 50–1. 63 ibid paras 52–4. 64 Streekgewest (n 60) paras 24–6. 65 Joined Cases C‑393/04 and C‑41/05 Air Liquide Industries Belgium [2006] EU:​C:​2006:​403, para 43 et seq. 61 62

100  Research handbook on European State aid law 3.1

Reasons to Stay Apart

Why such a long detour on a rather vintage area of EU law? The perfect harmony sketched so far is a bit too perfect, as there are still substantial reasons why free movement and state aid should be kept ‘apart’. Apart from the constitutional dichotomy – Commission versus national courts as highlighted above – there is still a considerably substantial difference between the two sets of rules: while state aid tends to the equalization of norms operating within the same state and between operators active within the same state, free movement concerns interstate distinctions between economic operators (e.g. distinctions between residents and non-residents or between cross-border income and domestic income). Thus, the legal consequences of applying one or the other rules can differ considerably. On one side – in cases of unlawful aid related to domestic transactions – the remedy would be the recovery from the beneficiary and a repayment for the domestic transactions only. In cases of a violation of free movement on the other side, the conflicting national law needs to be set aside and in practice this consequence would have to be extended to all cross-border transactions. Mixing the two provisions may thus have the effect of making the criteria for applying either state aid or free movement too broad. The Court is extremely alert to this problem. Let’s take two specific scenarios with reference to taxation. As for the first scenario, the Court over the years has gradually and steadily expanded its ‘tax hypothecation’ case law to scenarios that are not directly related to indirect taxes on goods, but rather to any other fiscal measure of an indirect nature66 such as (and most notably) turnover taxes. In Vodafone Magyarország,67 for instance, the question concerned the compatibility with EU law of two Hungarian tax laws regarding the turnover of companies operating in the telecommunication and store retail sectors, and a special levy on providers of advertising services. Vodafone argued that both state aid and the freedom of establishment had been violated. AG Kokott in her Opinion found that the measure did not constitute aid as it could not have been considered to be selective, as well as concluding that no violation of free movement could be established. The Court in its judgment did not follow its AG on state aid but simply found the question inadmissible. Relying on the hypothecation test developed in its case law on parafiscal charges, the Court held that taxes do not fall within the scope of the provisions of the Treaty concerning State aid, unless they constitute the means of financing an aid measure and thus form an integral part of that measure. As the tax was not hypothecated to an aid measure, the possible unlawfulness of the aid measure contested under EU law was not capable of affecting the lawfulness of the tax itself. Consequently the undertakings who are liable to pay that tax cannot rely on the argument that the tax measure for which other persons qualify constitutes State aid in order to avoid payment of that tax or to obtain a repayment of tax paid. The tax burden borne by Vodafone is the result of a general tax the revenue from which is transferred to the State budget, that tax not being specifically allocated to the funding of a tax advantage for which a particular category of taxable persons qualify.68

66 Distribution Casino France and Others (n 56); Case C‑510/16 Carrefour Hypermarchés and Others [2018] EU:​C:​2018:​751; and Case C‑449/14 P DTS Distribuidora de Televisión Digital v Commission [2016] EU:​C:​2016:​848. 67 Case C-75/18 Vodafone Magyarország [2020] EU:​C:​2020:​139. 68 Vodafone Magyarország (n 67) paras 28–9.

State aid and free movement  101 The Court further held that Hungarian law did not violate the freedom of establishment as the special taxes at issue made no distinction according to where companies have their registered office. The second scenario is best exemplified by looking at the A-Fonds judgment,69 where finally Iannelli v Meroni resurfaces after so many years. The case concerned a Dutch law that exempted public entities from corporate income tax, as well as benefitting them with a refund possibility for Dutch dividend tax. A Fonds, a German collective fund, asked several times for a refund of taxes paid, a request declined by Dutch tax authorities. In the ensuing proceedings, A-Fonds argued that Dutch tax law should be considered as a violation of the free movement of capital provisions. The national court, however, had doubts over the classification of the measure and considered that the measure should have been instead classified as aid. The Court agreed and found that EU law thus precluded the national court from assessing the ‘residence condition’ against the free movement of capital where the scheme for refund of dividends constituted an aid scheme.70 According to the Court, the refund condition was indissolubly linked to the very object of the exemption measures at issue, which was only to the advantage of national undertakings. Thus, it would have to be assessed by the European Commission only. Although the judgment is cast within the traditional constitutional-competence dichotomy between national courts and the Commission, it is clear that had the Court held that a violation of free movement was to be found, this would have implied an automatic extension to the exemptions of the dividend taxes for any EU companies, thus altering decisively the cohesion of the tax system. The Vodafone and A-Fonds scenarios despite being very different and possibly problematic in many respects as in both the Court seems to have exercised a considerable self-restraint, have something in common: namely, the attempt to use EU law as seems fit for the exclusive interest of the undertaking involved – in other words, as a way to bend EU provisions to strengthen their commercial freedom. As there is an increasing tendency for companies to rely on state aid (or conversely free movement provisions) as a way of invoking the extension of certain benefits and curiously, of national authorities to deny the granting of a tax advantage on the basis that it amounts to an aid, the Court seems perhaps even too willing to prevent a slightly abusive use of EU law. This is an issue perfectly identified by AG Kokott. In the Austrian Financial Goodwill case, the Court held that the Austrian tax legislation that granted goodwill amortization on the acquisition of domestic participations by operating group members infringed the freedom of establishment as protected in Article 49 TFEU, but it did not engage in a state aid analysis.71 The AG, however, makes an interesting point: according to the AG there is a general obligation for national courts to comprehensively give effect to the prohibition on putting into effect proposed State aid and, in doing so, they must also take full account of the interests of the European Union. The solution when a case raises questions on both free movement and state aid is to apply both sets of provisions but with one exception: where a relief denied to a comparable cross-border transaction in breach of a fundamental Treaty freedom could also comprise unlawful state aid, the national courts should not extend it to the cross-border transaction, ‘in order to avoid extending the circle of beneficiaries of an unlawful aid’.72 Whilst the concern of not allowing a too extensive application of EU norms is Case C-598/17 A-Fonds v Inspecteur van de Belastingdienst [2019] EU:​C:​2019:​352. ibid paras 47–54. 71 Case 66/14 Finanzamt Linz v Bundesfinanzgericht, Außenstelle Linz [2015] EU:​C:​2015:​661. 72 ibid, Opinion of AG Kokott, paras 29 and 30. 69 70

102  Research handbook on European State aid law a legitimate one, a too formalistic approach may actually leave, in certain cases, a substantive violation of EU law unsanctioned.

4.

THE END

The above discussion illustrates that, despite the best efforts of the European Court of Justice to clarify the situation, the exact contours of the relationship between the State aid rules and the Treaty provisions governing the single market remain elusive. The development of tests such as severability and references to the constitutional hierarchy of norms within the Treaty go some way towards explaining the interplay between the two sets of rules, but, in reality, the fact that the provisions inherently serve the same purpose – the furtherance of the internal market – means that it is almost impossible to delineate their application completely. The guiding principle, therefore, as always in respect of European law, is that the Treaty principles should be interpreted and applied in a way that gives effect to their aims. The evolution of the European Internal Market as a cohesive set of rules and principles facilitates the smooth operation of the two sets of provisions, with growth, however, complexity is also unavoidable.

6. State aid and international trade law Luca Rubini

1. INTRODUCTION This chapter provides a critical overview of the rules on subsidies included in the World Trade Organization (WTO) and in Preferential Trade Agreements (PTAs). In the light of its inclusion in a handbook on the regulation of EU State aid law, the chapter aims at providing an account useful to the EU lawyer, practitioner or simply observer. There are various theoretical and practical reasons that make international trade subsidy laws of interest to EU insiders. Whether you call them subsidies or State aid, public measures of support raise the same issues in any legal system that attempts to regulate them. The analysis of what policies have come to the scrutiny of another system and how that system has regulated them is always of great significance for the attentive reader that looks for solutions. Similarities and differences are always revealing. In the end, it would be naïve to think that the regulation of public subsidies is limited to EU law or that EU law is necessarily the best regulation (or, indeed, that EU law prevails over any other international law commitment). For this reason, when appropriate, I will carry out comparisons between trade and EU law. The roadmap of the chapter is the following. It will begin by outlining the economics underlying the trade regulation of subsidies, which is essential to understand the law. Afterwards, it will analyse the regulation of subsidies in the GATT and in the WTO to then move to a quick overview of subsidy rules in PTAs, with a special focus on those signed by the EU. A few broad conclusions will follow.

2.

THE ECONOMICS

Before moving to the analysis of the international trade regulation of subsidies, it is important to sketch the underlying economic principles.1 Subsidy rules are based on a trade perspective. Subsidies are a concern inasmuch as they may constitute obstacles to imports or if they boost exports. They are a trade problem if they negatively affect the market access of competitors in the subsidising country or third markets, or if they boost imports in the complaining country’s market. One government can protect its domestic industry in various ways. It can impose a tariff on imports or it can grant a domestic subsidy. Since these policies can be equivalent in their protective effect,2 trade agreements need to regulate subsidies in addition to border measures like tariffs or quotas. Similarly, trade agreements often regulate export subsidies for their trade impact. 1 An excellent analysis is Alan O Sykes, ‘The Questionable Case for Subsidy Regulation: A Comparative Perspective’ (2010) 2(2) Journal of Legal Analysis 473. 2 If the domestic subsidy is combined with a tax on consumers, the measure is equivalent to a tariff in all respects.

103

104  Research handbook on European State aid law As a consequence of this focus on trade, subsidy laws focus on producers’ interests.3 They don’t delve into a comprehensive competition analysis of all the negative and positive effects of subsidies and, if appropriate, their balancing.4 The most important corollary is that trade laws are only intended to capture the negative impact on trade of subsidies and do not normally regulate any legitimate public policy objective, and positive welfare effect, those measures may pursue. Going back to the example above, it is clear that in many cases domestic subsidies are adopted to pursue public policy goals (other than protection). The fact is, however, that subsidy disciplines in international trade law are very often silent on these objectives and do not provide any express normative recognition which, in some cases, could lead to counter-balance the negative distortions on trade. A quick comparison with EU State aid control shows that international trade rules are less ambitious. They only purport to capture and regulate certain negative effects rather than providing a complex system of common governance of public expenditure.

3.

THE INTERNATIONAL REGULATION OF SUBSIDIES

In international trade law, subsidies are usually regulated at two different levels: the multilateral (i.e. the WTO) and the regional/bilateral (i.e. the PTAs).5 The multilateral regulation of subsidies is universal inasmuch as it is open to all countries, and, at the time of writing, it indeed applies to 164 nations. The multilateral level is constituted of a basic normative framework which represents the ‘zeroth’ level of regulation. Countries, aiming for deeper integration between themselves, can enter into PTAs (for example, the treaties establishing the EU) which, depending on the number of participants and their geography, can be defined as bilateral or regional (and even mega-regional).6 As noted, through these agreements countries usually intend to enter into deeper commitments and integrate their economies deeper than what WTO law requires. This liberalization of trade, which according to GATT Article XIV and GATS Article V should apply to ‘substantially all trade’ (for trade in goods) and have ‘substantial sector coverage’ (for trade in services), can also include specific subsidy commitments, going beyond the WTO regulation. The following sections will first outline the normative and institutional features of the regulation of subsidies in the GATT/WTO and then in PTAs.

3 Petros C Mavroidis, ‘Come Together? Producer Welfare, Consumer Welfare and WTO Rules’ in Ernst-Ullrich Petersmann and James Harrison (eds), Reforming the World Trading System: Legitimacy, Efficiency and Democratic Governance (Oxford University Press 2005). 4 For an analysis of a trade vis-à-vis competition perspective to subsidies see Luca Rubini, The Definition of Subsidy and State Aid: WTO Law and EC Law in Comparative Perspective (Oxford University Press 2009) 37–67. 5 The grant of subsidies could also breach investment laws, though very often subsidies are excluded from the scope of the relevant provisions. 6 PTAs are defined as preferential because they enable their parties to derogate from the basic Most-Favoured-Nation (MFN) principle and apply a preferential treatment only to the participants.

State aid and international trade law  105

4.

THE MULTILATERAL TRADE REGULATION OF SUBSIDIES: FROM THE GATT TO THE WTO, AND BEYOND7

4.1

The GATT (1948–94)

The first attempts to regulate the negative impact on trade of subsidies date back to the second half of the nineteenth century.8 The very first tool for controlling subsidies can, however, be found in those domestic laws that permitted the imposition of countervailing duties on subsidised imports.9 The first modern international regulation of subsidies is the General Agreement on Tariffs and Trade (GATT).10 The GATT entered into force on 1 January 1948 and gradually evolved into an international organization without legal personality, serving as the focal point for eight rounds of multilateral trade negotiations with the purpose of reducing tariffs and other barriers to international trade.11 If the removal of trade barriers, especially tariffs, was a key focus at the beginning and for many years (it was these trade barriers that in the 1930s had led to protectionism and eventually to World War II), in the 1970s the focus shifted to beyond-the-border barriers, including subsidies. 4.1.1 Rules applicable to subsidies The original GATT 1947 contained few provisions on subsidies and countervailing measures within Articles XVI, VI, XXIII, and III. It is important to note that these provisions were only applicable to trade in goods and not trade in services. Article XVI contained a single reporting requirement in respect of subsidies reducing imports or increasing exports and, should the subsidy cause or threaten to cause serious prejudice, the possibility of discussion between the relevant countries. Article VI set out the requirements for the use of countervailing duties, noting in particular that the duty could not exceed the amount of the subsidy and that it should

7 This section partly draws on Luca Rubini, ‘WTO Subsidy Laws: The International Regulation of State aid’ in Herwig CH Hofmann and Claire Micheau (eds), State Aid Law of the European Union (Oxford University Press 2016). 8 Anthony Howe, ‘Subsidies, Bounties, and Free Trade: Issues and Perspectives, 1880–1940’ in Luca Rubini and Jennifer Hawkins (eds), What shapes the law? Reflections on the History, Law, Politics and Economics of International and European Subsidy Disciplines (Florence, Global Governance Programme, European University Institute, 2016) 5–10. 9 Douglas A Irwin, ‘Historical Notes on Subsidies and the Trading System’ in Luca Rubini and Jennifer Hawkins (eds), What shapes the law? Reflections on the History, Law, Politics and Economics of International and European Subsidy Disciplines (Florence, Global Governance Programme, European University Institute, 2016) 11–12. 10 On the origins of the GATT see Douglas A Irwin, Petros C Mavroidis and Alan O Sykes, The Genesis of the GATT (Cambridge University Press 2008). Generally, on the GATT and its laws and policies, see the seminal works of John H Jackson or Robert E Hudec. 11 These rounds of negotiations are: Geneva 1947, Annecy 1949, Torquay 1950, Geneva 1956, Dillon 1960–1, Kennedy 1962–7, Tokyo 1973–9, and Uruguay 1986–94. The GATT was intended to be part of a broader legal system regulated by the Havana Charter and centred on the creation of an International Trade Organization (ITO) that would have included rules on a variety of subjects from competition to investment and labour and would have had a distinct institutional structure and dispute settlement. The ITO never came into being because the US Congress refused ratification.

106  Research handbook on European State aid law not be imposed unless the effect of subsidization was such as to cause or threaten to cause material injury to a domestic industry or to retard materially the establishment of a domestic industry. Subsidies may be considered as discrimination inasmuch as support only goes to domestic and not to foreign products. Thus, they may, in principle, be subject to Article III which prohibits, with respect to internal tax and regulation, to afford protection to domestic producers by discriminating imports. The prohibition of discrimination does, however, not apply to the ‘payment of subsidies exclusively to domestic producers’ (paragraph 8(b) of Article III).12 The overview of the GATT disciplines of subsidies would not be complete if we did not mention Article XXIII and the remedy for non-violation complaints. According to this provision, and in particular letter (b), any contracting party could complain of any measure, ‘whether or not it conflicts’ with the GATT, if the application of the measure ‘nullifies or impairs’ any benefit deriving directly or indirectly from the GATT or impedes the attainment of any of its objectives. This refers to the scenario hinted at in section 2 above, where the grant of a domestic subsidy counters and defeats the value of a tariff concession and thus frustrates a legitimate expectation of market access. It should be remembered that the first focus of the GATT was exactly the negotiated reduction of tariff levels. On the basis of the equivalence between the effects of tariffs and domestic subsidies, this scenario seeks to avoid situations where one government gives with one hand (tariff concession) and takes away with the other (grant of subsidy). It is called a ‘non-violation’ scenario because, strictly speaking, granting domestic subsidies is permitted. Apart from the introduction of specific prohibitions for certain export subsidies on primary and industrial products in the first years of the GATT,13 there were no significant developments till the Tokyo Round of negotiations, which took place between 1973 and 1979 and which specifically focused on beyond-the-border measures. An agreement known as the Subsidy Code was negotiated, which included significant substantive and procedural provisions (more stringent restrictions on export subsidies and procedures for trade remedy investigations).14 4.1.2 Institutional framework As noted, the GATT did not include any provision on the institutional structure. A common adage says it was a ‘treaty without an organization’. An organization, with an increasingly developed dispute settlement, was nonetheless pragmatically developed by the various generations of diplomats and officials involved in the administration of the GATT. Various committees were created to administer the various areas of trade, including subsidies, as well as a secretariat to assist the contracting parties in the implementation of the agreement. Incidentally, it is important to note that, for many decades, the secretariat was almost exclusively staffed with officials with a diplomatic or economic background. It is only in the 1970s that the first lawyers entered the premises of the Centre William Rappard in Geneva.

12 A similar exclusion from Article III applies to government procurement, indicating that the founding fathers considered these two policy areas particularly sensitive. 13 See the amendment of Article XVI during the 1954–5 Review Session and the introduction of an illustrative list of export subsidies in 1960. 14 For an excellent analysis of the GATT regulation of subsidies in the pre-WTO era see Gary C Hufbauer and Joanna Shelton-Erb, Subsidies in International Trade (MIT Press 1984).

State aid and international trade law  107 This is an important circumstance to understand the development of the GATT as a political and legal system, and is also relevant when analysing its dispute settlement. The story of the GATT dispute settlement is one of a diplomatic system slowly giving way to a more judicialized and legalized approach.15 The GATT lacked an ordinary legislative function. Rules were changed in law-making moments (rounds of negotiations) which took place regularly. Till the 1970s these rounds were almost exclusively focused on tariff reductions and did not touch subsidies. 4.1.3 Conclusion In recognition of the public policy objectives of state intervention, the GATT has a benign attitude towards domestic subsidies. The regulation is limited. As a general principle, subsidies are permitted. They may be acted against only if they cause material injury to the competing domestic industry or if they frustrate the legitimate expectations of market access deriving from tariff reduction promises. By contrast, virtually since the beginning, export subsidies have been increasingly subject to harsher treatment. The justification for this stricter status depends on the fact that export subsidies are likely to reduce global welfare,16 to generate emulation, and to cause political and diplomatic frictions.17 Although the Tokyo Round Subsidy Code of 1979 added further corpus to the subsidies disciplines, the essential balance of the original GATT framework was maintained. With the exception of export subsidies, the default rule is one of permission. 4.2

The WTO (1995 to Date)

By the early 1980s it was clear that the GATT had exploited all its potential and that an overall significant reform should have taken place. The Final Act of the Uruguay Round transformed the GATT into a new international organization with legal personality: the WTO. This came into being on 1 January 1995 on the basis of the package of agreements annexed to a single document, the Marrakesh Agreement Establishing the WTO. 4.2.1 Rules applicable to subsidies Subsidies are one of the main subjects of the new WTO disciplines which include two treaties, in jargon ‘covered agreements’, specifically devoted to subsidies. The Agreement on Subsidies and Countervailing Measures (ASCM) is the general framework applicable to subsidies. The Agreement on Agriculture (AA) includes specific (but, importantly, not exclusive) disciplines on subsidies in the agricultural sector.18 Subsidies in the services sector were tackled to a limited extent in the General Agreement on Trade in Services (GATS). The formalisation of the administrative function and the strengthening of the dispute settlement system created the 15 The dispute settlement in the GATT and then the WTO is the subject of a huge strand of literature. See, e.g., Robert E Hudec, Enforcing International Trade Law – The Evolution of the Modern GATT Legal System (Butterworth Legal Publishers 1991); Joseph H Weiler, ‘The Rule of Lawyers and the Ethos of Diplomats: Reflections on the Internal and External Legitimacy of WTO Dispute Settlement’ (Jean Monnet for International and Regional Economic Law and Justice Working Paper 9/00, 2000) available at accessed 7 June 2020. 16 See Sykes (n 1) p 518, who notes that this conclusion is ‘plausible’. 17 See Hufbauer and Shelton-Erb (n 14) Chapter 1. 18 More specifically, the AA covers aid to the agricultural products explicitly included in Annex 1.

108  Research handbook on European State aid law possibility of peer-review and monitoring of subsidies as well as the opportunity for the newly created Appellate Body to clarify the many uncertainties of the law.19 The ASCM represents a significant development of the disciplines included in the GATT and in the Tokyo Subsidy Code. In particular, one can notice a general strengthening of the disciplines and more legal precision in defining subsidies and their effects as well as the obligations pertaining them. I can now go through these normative innovations in more detail. Definition of subsidy One of the most important novelties of the ASCM is its inclusion, for the first time, of a legal definition of subsidy. The difficulty of defining subsidies was known since the beginning of the GATT (and even before) but, due to its controversial nature, it was never settled.20 The definition of subsidy in the WTO—like the definition of State aid in the EU—plays a crucial role in subsidy laws and practice. It is the gateway to the disciplines, its obligations, sanctions, and remedies. Only if you have a subsidy are you subject to subsidy rules. Otherwise, other rules—if applicable—will show their teeth. But different rules may have different requirements, producing different constraints and reflecting different balances. Consequently, the definition of subsidy becomes a fiercely contested battlefield. Public policy considerations, which often support the adoption of the measure, sneak in, and the risk of confusing the justification of a subsidy with its very existence becomes one of the most likely occurrences.21 This scenario is common in both the WTO and the EU contexts. The confusion and conflation of scope and justification is the theme that puts together many landmark cases in both legal systems. It also constitutes the key of interpretation of many of the seemingly only technical issues arising in subsidy laws and policy. Each legal system reacts in a different way to this powerful force of fusion—which is, however, always present. Due to its relevance, and amount of jurisprudence generated, I will spend some time on the various definitional elements. Article 1 ASCM reads as follows: 1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if: (a)(1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as ‘government’), i.e. where: (i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);

19 Claus-Dieter Ehlermann’s account of his years at the WTO Appellate Body is still a must read to understand the ethos and practice of the first years of WTO dispute settlement. See Claus-Dieter Ehlermann, ‘Six Years on the Bench of the “World Trade Court” – Some Personal Experiences as Member of the Appellate Body of the World Trade Organization’ (2002) 36(4) Journal of World Trade 605. 20 One early GATT Panel report noted that to come to a precise definition was not considered as ‘necessary [or] feasible’ and that it ‘would probably be impossible to arrive at a definition that would at the same time include all measures that fall within the intended meaning of the term in Article XVI without including others not so intended’. Report on ‘Operation of the Provisions of Article XVI’ adopted on 21 November 1961 (1962) BISD 10S/201, para 23. 21 This is one of the main themes of Rubini (n 4).

State aid and international trade law  109 (ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); (iii) a government provides goods or services other than general infrastructure, or purchases goods; (iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; or (a)(2) there is any form of income or price support in the sense of Article XVI of GATT 1994; and (b) a benefit is thereby conferred. 1.2 A subsidy as defined in paragraph 1 shall be subject to the provisions of Part II [prohibited subsidies] or shall be subject to the provisions of Part III [actionable subsidies] or V [countervailing duties] only if such a subsidy is specific in accordance with the provisions of Article 2.

The definition of subsidy entails a ‘financial contribution’ by a government, or ‘any form of income or price support’. This measure may be classified as a subsidy only if it confers a ‘benefit’. The Appellate Body has consistently held that the requirements of the ‘financial contribution’ and the ‘benefit’, ‘together determine whether a subsidy exists’.22 This means that ‘a financial contribution [or a form of income or price support] that does not confer a benefit is not a subsidy and neither is there a subsidy in the case where the government provides a benefit without making a financial contribution [or a form of income or price support]’.23 Equally, the condition of a ‘benefit’ indicates that not all government schemes, programmes, and projects that constitute a financial contribution or a form of income or price support are, for this reason only, subsidies. If, for example, a government grants a loan at market conditions, no benefit arises and hence there is no subsidy. The definition of subsidy is different from that of EU State aid in various respects. First, the notion of subsidy is more detailed, especially with respect to the description of the conduct of the government. Second, this definition does not include any reference to the specificity of the measure or to its effects. Both are dealt with under separate provisions.24 In the WTO, one should simply prove the existence of a financial contribution and its benefit in order to have a subsidy. This may already have practical consequences. For instance, the fact itself of being defined as a subsidy may subject the measure to an obligation of notification. In this respect, at least on paper, many more measures are potentially subject to transparency in the WTO than in the EU. Financial contribution and income or price support Article 1.1(a)(1) ASCM develops what constitutes a ‘financial contribution’ in three sub-paragraphs: (i) direct transfers of funds (e.g. grants, loans and equity infusions) and potential direct transfers of funds or liabilities (e.g. loan guarantees), (ii) fiscal incentives (e.g. tax 22 Appellate Body Report, Brazil—Export Financing Programme for Aircraft (20 August 1999) WT/ DS46/AB/R, para 157. 23 Petros C Mavrodis, Patrick A Messerlin and Jasper M Wauters, The Law and Economics of Contingent Protection in the WTO (Edward Elgar Publishing 2008), 301. 24 Respectively, Article 2 and Articles, 3, 5 and 6 ASCM.

110  Research handbook on European State aid law credits), and (iii) provision of goods or services and purchases of goods. As the WTO Panel in the landmark US – Export Restraints case explicitly confirmed, these forms of action are exhaustive.25 This means that only the types of conduct expressly mentioned can amount to a financial contribution. Article 1.1(a)(2) broadens the definition of subsidy further by covering ‘any form of income or price support’. Though this provision has been unexplored,26 it is clear that it covers measures different from those considered as financial contribution.27 While the concepts of ‘income’ and ‘price support’ do not feature the specific qualifying language of the forms of financial contribution under Article 1.1(a)(1) of the SCM Agreement, they have been interpreted as being informed by the same spirit, with the result that the focus is more on the nature of the action of the government, rather than its effects. The China—GOES Panel Report thus noted that, while the concept of ‘price support’ would involve the direct ‘setting and maintaining’ of price, it would not cover a random change in price, which is merely a ‘side-effect’ of a government measure.28 This means that, despite its potentially broad scope, Article 1.1(a)(2) merely covers those types of governmental conduct that raise ‘price’ or ‘income’ in a direct and immediate way. While sub-paragraphs (i), (ii) and (iii) refer to those cases where the government operates directly, the final sub-paragraph (iv) regulates those cases where the government acts indirectly – through a funding mechanism, or by entrusting or directing a private party to carry out one of the courses of action under sub-paragraphs (i), (ii) or (iii). Whereas the initial interpretation of ‘entrustment’ and ‘direction’ was requiring an ‘affirmative and explicit action of delegation or command’, the case-law has increasingly relaxed these two concepts, considering that governments may use means subtler than a delegation or command to exercise their influence on private bodies.29 Finally, subparagraph (iv) also includes two final provisos that essentially require that the transaction at issue is ‘normal governmental conduct’ (it is in particular necessary to show that the function of, say, transferring funds or purchasing goods is one ‘which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments’). The lack of clarity of this language adds to the lack of clarity of the legal standards to prove ‘entrustment’ or ‘direction’. Only action by ‘governments’ may constitute a subsidy under Article 1 ASCM. The concept of ‘government’ is broad, encompassing not only governmental authorities at any level, but also public bodies. The interpretation of ‘public body’ has increasingly become important when assessing the policies of countries with a still-dominant public presence in the economy and in particular China. What are the criteria to define a public body? Does the notion include State-Owned Enterprises (SOEs)? Early case-law held that ‘control’ is key.

25 Panel Report, United States—Measures Treating Export Restraints as Subsidies (‘US – Export Restraints’) (23 August 2001) WT/DS194/R. 26 See Rubini (n 4) 123–5. 27 Appellate Body Report, United States—Final Countervailing Duty Determination with respect to Certain Softwood Lumber from Canada (‘US - Softwood Lumber IV’) (17 February 2004) WT/DS257/ AB/R, para 52. 28 Panel Report, China—Countervailing and Anti-Dumping Duties on Grain Oriented Flat-Rolled Electrical Steel from the United States (‘China – GOES’) (16 November 2012) WT/DS414/R, para 7.86. 29 Appellate Body Report, United States—Countervailing Duty Investigation on Dynamic Random Access Memory Semiconductors (DRAMS) from Korea (‘US – DRAMS’) (20 July 2005) WT/DS296/ AB/R, paras 110–11.

State aid and international trade law  111 Public bodies are those entities controlled by the government, and, in this respect, although not necessarily dispositive, public ownership may be an important factor to consider. Eventually, the Appellate Body hardened its interpretation of control by concluding that public bodies are only those entities that perform governmental functions, or are vested with and exercise the authority to perform such functions.30 In essence, ‘governmental authority’ replaced ‘control’ as key criterion. This interpretation has been strongly criticised because it would make it more difficult to cover the conduct of SOEs and it would thus render subsidy rules less effective. The argument is that, if SOEs cannot be considered as public bodies, they would necessarily qualify as ‘private bodies’ but, as seen above, letter (iv) of Article 1.1(a)(1) is still fraught with many ambiguities. I will now briefly analyse three types of measures: tax incentives, clean energy support and infrastructure provision. i) Tax incentives The test for determining whether a tax measure constitutes a financial contribution is whether revenue—which is ‘otherwise due’—has been ‘forgone or not collected’ (letter (ii) of Article 1.1(a)(1) ASCM). As the US—FSC litigation31 shows, this determination is inherently unstable, inasmuch as the ‘otherwise due’ requirement is difficult to establish.32 The determination of what is ‘otherwise due’ requires a complex counterfactual analysis, which ultimately rests on whether the measure under examination constitutes a derogation from the otherwise applicable benchmark norm.33 But how can one identify the relevant norm in the field? How can one determine what is general and what is an exception? Taxation is notorious for targeted interventions and a fast-changing pace, with the result that tax laws carefully drafted around general principles or norms are rare. Complexity is pervasive and coherency rarely reached. The applicable general tax rule is therefore often difficult to establish. Unlike in EU State aid law (with the only notable exception being the Gibraltar ruling),34 the WTO jurisprudence holds that the ‘otherwise due’ language does not always require the identification of the general rule of taxation.35 To be sure, if the general rule of taxation applied by the Member in question can be identified, the test of whether the measure is an exception to the general rule can be applied.36 By contrast, in those situations where a general rule cannot be identified, the challenged taxation measure should be compared to the treatment applied to

30 See Appellate Body Report, United States—Definitive Anti-Dumping and Countervailing Duties on Certain Products from China (‘US – AD/CVD’) (25 March 2011) WT/DS379/AB/R, para 290. 31 See United States—Tax Treatment for ‘Foreign Sales Corporations’ (‘US – FSC’), WT/DS108. 32 The Panels and the Appellate Body used no less than four different tests to approach this language. See Rubini (n 4) 263–74. 33 For an analysis of the derogation test, see Rubini (n 4) Chapter 9. 34 See Joined Cases C-106/09P and C-107/09P Government of Gibraltar v Commission [2011] EU:​ C:​2011:​732. 35 See Appellate Body Report, US–FSC—Recourse to Article 21.5 of the DSU by the European Communities (20 March 2000) WT/DS108/AB/RW, para 91. 36 Panel Report, US – Measures Affecting Trade in Large Civil Aircraft (Second Complaint) (‘US – Large Civil Aircraft’) (23 March 2012) WT/DS353/R, para 7.120.

112  Research handbook on European State aid law comparable income for taxpayers, in comparable circumstances, in the jurisdiction in issue.37 This language bears great resemblance to that used by the Court of Justice of the European Union (CJEU) in the AdriaWien case (where the CJEU noted that to conclude that we have a State aid, we have to establish whether a State measure favours certain undertakings ‘in comparison with other undertakings which are in a legal and factual situation that is comparable in the light of the objective pursued by the measure in question’).38 The legal tests are arguably very similar.39 If one really cares about the substance of things (is this a subsidy or not?), mechanical approaches and formalistic tests are to be avoided. Only a substantive analysis is likely to show whether the tax incentive under examination is in line with the relevant general tax norm, or whether it constitutes a deviation from it. The crucial point is to look at the substance of tax rules. This leads one to consider their objectives and evaluate how they actually relate to the tax measure at issue and to the tax system in general. If a tax incentive is designed and applied in a way that is fully in line with (and proportionate to) the objectives of the relevant general tax norm that it implements, then there is no financial contribution. One cannot find ‘otherwise’ applicable alternative scenarios that have been deviated from. This is the kind of analysis that the WTO Appellate Body carried out in the Report in US—Large Civil Aircraft: to require a Panel to examine ‘the structure of the domestic tax regime and its organizing principles’ is nothing but asking it to entertain with the objectives informing the tax system and consequently the tax measure at issue.40 These considerations bear obvious similarities with the approach taken by the EU Courts as regards the interpretation of Article 107(1) TFEU and more particularly with respect to the ‘derogation test’ and the ‘logic of the tax system’. In the context of a rather limited case law on tax incentives in the WTO, there are legitimate reasons to presume that an approach similar to the one taken by the EU Courts will also be followed in the WTO. The ‘derogation test’ is not system-specific, but reflects a logical process capable of establishing the existence of an advantage that is universal. At the end of the day, ‘[i]n all cases the meaning ultimately conveyed is the same, being whether this apparent anomaly [i.e. the detected differential treatment of the measure at issue] is in fact an anomaly and an undue advantage conferred. Whatever language is used, the underlying process is the same and requires a complex analysis which focuses on similarities and differences between various situations, objectives and justifications, and eventually on the delicate interplay of rules and exceptions’.41 ii) Clean energy support The increasingly common and innovative forms of public support in the green energy sector raise important questions of interpretation in subsidy laws. The main difficulty is that many Appellate Body Report, United States—FSC—Recourse to Article 21.5 of the DSU (n 35) para 91. C-143/99 Adria-Wien Pipeline GmbH and Wietersdorfer & Peggauer Zementwerke GmbH v Finanzlandesdirektion für Kärnten [2001] EU:​C:​2001:​598, para 41. 39 See Rubini (n 4) 271–2. 40 See Appellate Body Report, US –Large Civil Aircraft (23 March 2012) WT/DS353/AB/R, para 815: ‘while there may be circumstances in which scrutiny of a tax regime indicates the presence of a general rule and an exception, we would expect that such an indication will not ordinarily end the analysis. Rather, we would expect a panel to further examine the structure of the domestic tax regime and its organizing principles.’ 41 Rubini (n 4) 207–8. 37 38

State aid and international trade law  113 of these policies are complex regulatory schemes involving various actors, going beyond the simplicity of direct financial transfers. Indeed, as it happens for EU State aid law, the treatment of ‘regulation’ under subsidy laws is the true ‘elusive frontier’ of subsidy laws.42 So far, however, the issue has remained only academic in the WTO. For example, in the Canada—Renewable Energy/FIT disputes, the Appellate Body concluded that the Ontario feed-in tariff programme, which operated through complex purchasing agreements, amounted to a ‘purchase of goods’. Though all parties agreed that the measure was covered by the definition, they disagreed on its specific classification—i.e. financial contribution in the form of transfer of funds or purchase of goods, or indeed income or price support. Neither the Panel nor the Appellate Body addressed the significant claim whether the Canadian Feed-In Tariff (FIT) could have represented a form of price support. This term, which, as noted, is formulated in an open-ended way, may represent a catch-up provision for many instances of regulatory action. It is now interesting to compare the way in which regulation is—or could be—addressed in WTO subsidy laws and EU State aid laws. The legal frameworks are different. WTO law employs very specific language as regards the forms of governmental action covered by the definition. EU law is more laconic—with the very broad language of Article 107(1) TFEU, which targets ‘any aid … in any form whatsoever’. WTO lawyers are thus required to work more closely on the text and draw from it the precise boundaries of what action of the government is covered and what is not. As noted, this is what the China—GOES Panel did, providing a useful precedent for the future. As we are about to see, however, the main tool of selection of regulatory measures used by the Appellate Body in its recent jurisprudence was the ‘benefit’ requirement. This approach may have important ramifications in the future. By contrast, the EU Courts seem to employ a different interpretative device, by relying on the use of State resources (and on the ‘logic of the system’ in tax cases). An interesting intellectual exercise is to put some measures, which have been subject to litigation in the EU, to the test of WTO subsidy laws. In other words, what would happen if these measures were complained about in Geneva or subject to a trade remedy investigation in one of the WTO Members? The German FIT—which was famously scrutinized and justified in the benchmark PreussenElektra case—is the most relevant example in this respect and is still the best testing ground to start with. This exercise can then be usefully extended to other forms of FIT that came before the EU Courts or the EU Commission. In the case of action via an intermediary, i.e. when governments mandate private actors to purchase green electricity,43 the action could be scrutinized as a form of ‘financial contribution’ or a form of ‘price support’.44 The latter avenue is certainly easier to follow and, 42 See Luca Rubini, ‘The Elusive Frontier: Regulation under State Aid Rules’ (2009) 8(3) European State Aid Law Quarterly 277. 43 It should be highlighted that, under the prevailing case law in the WTO, examined in Section 3.4, the notion of ‘private body’ would also include those bodies that are controlled by the government but that do not exercise governmental authority. It is only the latter that makes a ‘public body’ under the subsidy definition of Article 1 ASCM. There is therefore no identity between the notions of public body in WTO and EU law (at least with respect to subsidy disciplines). Thus, many electricity distributors or operators that would be considered public bodies in EU State aid law would be tagged private bodies under WTO subsidy law. 44 We assume that, following the US – AD/CVD ruling (n 30), it is more difficult to prove in the WTO that a certain actor is a public body. This makes it necessary to follow the alternative scenario of ‘action via a private body’.

114  Research handbook on European State aid law according to the China—GOES jurisprudence analysed previously, the German FIT would, for example, be easily caught since the German measure directly fixed the price of green energy. The same conclusion is applicable to many, if not all, the other measures of support of renewable energy analysed by the EU Commission or the EU Courts. The key element to qualify as a form of ‘price support’ is the fixing of a price or tariff by the government, which seems to be common in many EU measures. By contrast, the funding mechanism of this tariff, which is so central in the EU analysis, is, under WTO law, irrelevant. EU law always strives to determine the public nature of the resources used to subsidize, concentrating in particular on discerning the degree of control of the State over these resources. But, the elusiveness of this concept of control has become increasingly evident, with the result that the CJEU, not willing to expressly change its PreussenElektra jurisprudence, is forced to rely on Byzantine distinctions that, case after case, increase the uncertainty.45 By contrast, WTO law frames the analysis in a neater way, focusing on whether the relevant price effect is an immediate result of the action of the government. From this perspective, based on the degree of immediacy (or imputability) of the public action, there is no need to embark on difficult distinctions regarding the nature of the resources involved. If, albeit relatively unexplored in the case law, the ‘price support’ route seems very promising, the ‘financial contribution’ route is more difficult to follow. This is all the more so as the two final provisos of item (iv) of Article 1.1(a)(1) SCM Agreement46 are still unclear.47 By contrast, FIT measures where governments—or public bodies, in the WTO sense, that is, entities with delegated public authority and powers—are acting directly by purchasing electricity would most probably be interpreted as providing a ‘financial contribution’ or a ‘price support’. Once again, no special difficulties would be encountered in scrutinizing under this lens many schemes controlled in the EU where the government seems to be acting in a direct way. That being said, it is the ‘benefit’ analysis, such as it was reinterpreted by the Appellate Body in the Canada—Renewable energy/FIT case,48 which could make measures of support of clean energy, such as the FIT in PreussenElektra, WTO-safe. iii) Infrastructure Like in the EU the question concerning the conditions that have to be fulfilled in order for the provision of an infrastructure to amount to a subsidy has also arisen at the WTO level. According to the wording of sub-paragraph (iii) of Article 1.1(a)(1) SCM Agreement, only infrastructures that are ‘other than general’ are covered by the definition of ‘financial contribution’. What is in issue is not the ‘creation’, but the ‘provision’ of the infrastructure.49 In order

45 See Rubini (n 42). See also Phedon Nicolaides, ‘The legal differences and economic similarities of the various methods of supporting green electricity under state aid rules’ (2014) 36(5) European Competition Law Review 1. 46 The delegated ‘functions’ must ‘normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments’. 47 See, e.g., Luca Rubini, ‘“Ain’t Wastin’ Time no More”: Subsidies for Renewable Energy, SCM Agreement, Policy Space, Law Reform’ (2012) 15(2) Journal of International Economic Law 525, 543. 48 Appellate Body Report, Canada – Certain Measures Affecting the Renewable Energy Generation Sector (24 May 2013) WT/DS412/AB/R; Canada – Measures Relating to the Feed-In Tariff Program (24 May 2013) WT/DS426/AB/R (‘Canada – Renewable Energy/FIT’). 49 Appellate Body Report, European Communities and Certain Member States—Measures Affecting Trade in Large Civil Aircraft (‘EC – Large Civil Aircraft’) (1 June 2011) WT/DS316/AB/R, para 964.

State aid and international trade law  115 to define whether this access is not general, which is a case-by-case analysis, several factors should be taken into account, in particular: [they] may relate to the circumstances surrounding the creation of the infrastructure in question, consideration of the type of infrastructure, the conditions and circumstances of the provision of the infrastructure, the recipients or beneficiaries of the infrastructure, and the legal regime applicable to such infrastructure, including the terms and conditions of access to and/or limitations on use of the infrastructure.50

In US—Large Civil Aircraft, the Panel excluded that the expansion to road infrastructure projects were specifically designed for Boeing and concluded they could not amount to general infrastructure because there was ample evidence that the projects were conceived as part of a general transportation policy. The projects in issue were undertaken to address a range of economic, safety, and environmental concerns. Moreover, the relevant funding for the projects was appropriated before the measure at issue and preparations for the work on the projects had also started prior to the latter.51 Benefit In order to qualify as a subsidy under the ASCM, a financial contribution or a measure of income support has to confer a benefit. This requires establishing that the recipient is ‘better off’ than it would have been in the absence of the alleged subsidy. If the conduct were determined to entail ‘government revenue that has been forgone’,52 there is almost inevitably a benefit, since the recipient has spent less than under normal circumstances. By contrast, if the conduct at issue involves a transfer of funds or the provision of goods or services, or the purchase of goods, the question is whether the recipient has received a governmental contribution on terms more favourable than those available to the recipient in the market. Market-related benchmarks are also used when it comes to calculating the benefit of governmental action in the market in the context of countervailing duty investigations.53 This distinction between ‘economic’ and ‘non-economic’ conduct of governments is firmly established in WTO subsidy laws, and can be contrasted to the controversial ruling of the CJEU in the EDF case, where the Court agreed with the application of the ‘market economy investor test’ to the fiscal behaviour of the French government.54 Identifying the appropriate market benchmark is not always easy. If market forces are distorted as a consequence of governmental presence in the market, in-country prices may be rejected as unreliable, and proxies

Panel Report, EC - Large Civil Aircraft, para 7.1039. See also Rubini (n 4) 243–5. Panel Report, US - Large Civil Aircraft, para 7.429 et seq. 52 See Article 1.1(a)(1)(ii) ASCM. 53 See Article 14 ASCM. 54 Case C-124/10P European Commission v Électricité de France (EDF) and Others [2012] EU:​C:​ 2012:​318. 50 51

116  Research handbook on European State aid law like third-country prices or costs may be used as benchmarks.55 This method is also applied in EU State aid law. The best example in this regard is the Chronopost case.56 The meaning of each element of the definition of ‘subsidy’, including the benefit, contributes to determining its scope. In this respect, adjudicators at times make use of the advantage/ benefit analysis in order to redefine the contours of the notion of State aid and subsidy. Reference has been made already to the EU EDF decision57 and its interpretation of the concept of advantage. In this case, the CJEU extended the application of the market economy investor test to a tax measure and managed in this way to conclude that the conduct at issue was not a State aid. The same result was recently reached in the WTO (i.e. a no-subsidy determination) but, intriguingly, this result was achieved through an exactly opposite argument, by reducing the scope of application of market benchmarking. In other words, in one case we witness a further (but incorrect) example of extension of the market logic, in the other an (incorrect) reduction of it.58 I will now devote some time to the important Canada—Renewable Energy/FIT dispute which raises several important questions and prompts various intriguing parallels with EU State aid law. Both the Panel and the Appellate Body carried out an innovative construction of the notion of ‘benefit’. They essentially put into question the established ‘market-orientation’ of the benefit test and, at the same time, inserted the consideration of public policy objectives in the analysis of the benefit.59 The majority of the Panel controversially found that the various benchmarks put forward by the complainants could not be accepted. This decision was justified by the fact that competitive wholesale electricity markets, although a theoretical possibility, will only rarely operate in a way that remunerates the mix of generators needed to secure a reliable electricity system with enough revenue to cover their all-in costs, let alone a system that pursues human health and environmental objectives through the inclusion of facilities using solar PV and wind technologies into the supply-mix.60

55 Appellate Body Report, US—Softwood Lumber IV (n 27) para 106. Cf also Appellate Body Report, US – AD/CVD (n 30) paras 435–47. More recently, the Appellate Body has demanded caution in reaching the conclusion that governmental intervention discards in-country prices. See Appellate Body, United States—Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India (‘US – Countervailing Measures’) (19 December 2014) WT/DS436/AB/R paras 4.147–4.177. See also Appellate Body, United States—Countervailing Duty Measures on Certain Products from China (‘US – Countervaling Duties’) (16 January 2015) WT/DS437/AB/R, para 4.85. 56 Joined Cases C-83/01P, C-93/01P, and C-94/01P Chronopost (‘Chronopost I’) [2003] EU:​C:​2003:​ 388. 57 See Case C-124/10P (n 54). 58 See Steve Charnovitz and Carolyn Fischer, ‘Canada—Certain Measures Affecting the Renewable Energy Generation Sector/Canada—Measures Relating to the Feed-In Tariff Program’ (2014) 48(5) World Trade Review 177. 59 For a commentary on this momentous litigation see Aaron Cosbey and Petros C Mavroidis, ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy: the Case for Redrafting the Subsidies Agreement of the WTO’ (2014) 17(1) Journal of International Economic Law 1; Charnovitz and Fischer (n 58); Luca Rubini, ‘The Good, the Bad, and the Ugly. Lessons on Methodology in Legal Analysis from the Recent WTO Litigation on Renewable Energy Subsidies’ (2014) 48(5) Journal of World Trade 895; Luca Rubini, ‘The Wide and the Narrow Gate. Benchmarking in the SCM Agreement after the Canada – Renewable Energy/FIT ruling’ (2015) 15(2) World Trade Review 211. 60 Panel Report, Canada – Renewable Energy/FIT, para 7.309. One member of the Panel dissented and opined that an appropriate benchmark could be found, even in a hypothetical competitive market, in

State aid and international trade law  117 After defining the relevant product market as including renewable (i.e. wind and solar) energy only,61 the Appellate Body introduced a distinction between government interventions that ‘create’ markets that would not otherwise exist—crucially, this is not subject to subsidy law scrutiny if certain conditions of proportionality are satisfied—and government interventions in support of certain players in markets that already exist—which would, by contrast, be fully subject to subsidy laws and market benchmarking.62 The Appellate Body further indicated that the creation scenario included the choice of the energy supply-mix by using FITs.63 In particular, it seemed to include many instances of public action in this ‘safe haven’ space. The definition of the supply-mix would thus cover the regulation of the quantity and type of electricity supplied through the network and the timing of supply, in order to ensure constant and reliable supply,64 or more generally the parameters of the system.65 It may also include price-setting, such as FITs—whose remuneration encompasses cost recovery and a reasonable margin—and quantity mandates.66 Once the market has been created, benefit benchmarks are likely to be found in the resulting ‘competitive’ markets.67 In this respect, the attribution of more than adequate remuneration would appear to go beyond the ‘market creation’ scenario and constitute an intervention in an already existing competitive market.68 The Appellate Body suggested a sequence of benchmarks and arguably seemed to indicate a preference for ‘price-discovery mechanisms’: ‘[a]lternatively, such benchmark may also be found in price-discovery mechanisms such as competitive bidding or negotiated prices, which ensure that the price paid by the government is the lowest possible price offered by a willing supply contractor’.69 Although the implications of these potentially far-reaching findings are not yet clear, there is a wide agreement that they may offer a carve-out for many policies in support of renewable energy and even beyond this sector. The eventual outcome is that—like in the EU—certain FITs are not covered by the ‘subsidy’ definition.70 Both WTO and EU Courts have been intentionally generous towards governments attempting to facilitate the dissemination of renewable energy. Nevertheless, the legal approach that has been adopted in the two legal systems is different. Whereas the WTO seems to say: ‘if you keep your action within a measure of proportion you are fine’, the EU favours the idea that ‘what matters is that you do not use public money’. If this reading is correct, the WTO

the wholesale market that ‘could’ exist in Ontario. He was also quite adamant that public policy objectives should not interfere with the market analysis of the benefit test. 61 This conclusion was based on a wrong application of market definition analysis, unwarrantedly borrowed from the antitrust toolbox. 62 Appellate Body Report, Canada – Renewable Energy/FIT (n 48) paras 5.188–9. The Appellate Body’s ruling is an attempt to distance itself from the controversial findings of the majority of the Panel that seemed to put into question the use of market benchmarks and at the same time to insert the consideration of public policy objectives in the analysis of the benefit. 63 Appellate Body Report, Canada – Renewable Energy/FIT (n 48) para 5.175. 64 ibid para 5.185. 65 ibid para 5.189. 66 ibid para 5.175. 67 ibid paras 5.190 and 5.219. 68 ibid para 5.228. 69 ibid para 5.228. 70 It is clear that the impact of this finding is not limited to FITs, but also may well apply to other similar policy instruments that share its regulatory nature.

118  Research handbook on European State aid law conclusion may be as controversial as the EU one, but is more logical because it addresses the ‘regulatory question’ (should these regulatory measures be considered as subsidies or not?) head-on. By contrast, the EU approach is more surreptitious and less understandable in reaching its goal of protection. The CJEU is not asking the right questions by focusing obsessively on whether the scheme at issue involves the use of State resources.71 Ultimately, the author takes the view that both Courts make the same error from the perspective of the methodology used to reach their policy outcome. Just like the Canada—Renewable Energy/FIT ruling is wrong because it misconstrues the notion of benefit, and via this the legal concept of subsidy itself, the PreussenElektra case (and its confusing progeny) is wrong because it incorrectly introduces in the definition of State aid a requirement (need for ‘State resources’) and uses it as a technical fudge to implement a policy decision of exclusion of State aid control.72 If one sought to address the specific question of whether a measure like the PreussenElektra FIT would pass the benefit test of the Appellate Body, she or he would have some hesitation. The fact that the German FIT did confer an economic advantage, representing a remuneration going beyond what the market would offer, was not an issue in the EU case. It was clear for the CJEU that the Stromeinpeisungsgesetz did satisfy this requirement.73 One can only wonder, however, whether the findings of the Appellate Body’s reasoning would change the simplicity of this (intuitive) assessment.74 Would the fact of considering renewable energy as an independent market make a difference? How heavy is the regulation and intervention of the government in the green energy sector? How difficult is it, in these circumstances, to identify a free-of-the-government market behaviour? As one final gloss, one should point out that the Appellate Body’s reference to ‘price-discovery mechanisms’ and its possible preference for them is highly relevant for the EU that extended the Altmark jurisprudence75 from the assessment of the notion to aid to the evaluation of compatible aid.76 One may notice an interesting convergence between WTO law and EU law in this respect, which is not a coincidence, but rather the result of the canny lawyering of EU litigators that put forward before the Appellate Body arguments based on the famous Altmark conditions.77 The consequence is the possibility that support to clean energy that is EU law compliant being nonetheless WTO illegal is certainly less likely now.

71 This misdirection is clear if one reads Case C-237/04 Enirisorse SpA v Sotacarbo SpA [2006] C:2006:21, Opinion of AG Maduro, para 50. To be sure, some of the early decisions of the CJEU on the issue did seem to attempt to frame the question in the right terms (should regulatory subsidies be caught or not?), but this narrative was soon corrupted by the reference to the ‘State resources’ requirement. For an analysis of this case law and this issue, see Rubini (n 42). 72 For further analysis of this jurisprudence, and more parallels between WTO and EU law, see Rubini, ‘The Good, the Bad, and the Ugly’ (n 59). 73 ‘There is no dispute that an obligation to purchase electricity produced from renewable energy sources at minimum prices … confers a certain economic advantage on producers of that type of electricity, since it guarantees them, with no risk, higher profits that they would make in its absence’. See Case C-379/98 PreussenElektra [2001] EU:​C:​2001:​160, para 54. 74 The rationale for FITs is exactly to introduce beyond-the-market incentives. 75 C-280/00 Altmark Trans GmbH and Regierungspräsidium Magdeburg v Nahverkehrsgesellschaft Altmark GmbH, and Oberbundesanwalt beim Bundesverwaltungsgericht [2003] EU:​C:​2003:​415. 76 See the new European Commission, Energy and Environmental Aid Guidelines MEMO (Brussels, 9 April 2014) which provided for the progressive replacement of feed-in tariffs with competitive bidding processes by 2017. 77 See Rubini, ‘The Wide and the Narrow Gate’ (n 59).

State aid and international trade law  119 Specificity of the subsidy According to Article 2 ASCM, a subsidy is subject to WTO scrutiny only if it is specific ‘to an enterprise or industry or group of enterprises or industries’. The concept of ‘specificity’ is analogous to the ‘selectivity’ requirement provided for in Article 107(1) TFEU.78 This long provision requires that three different principles be followed in order to establish specificity. First, specificity is present if the measure explicitly limits access to the subsidy to certain enterprises (de jure specificity; sub-paragraph (a) of the provision). Second, if the eligibility to the subsidy is governed by ‘objective criteria or conditions’, then there is no specificity (sub-paragraph (b)). The expression ‘objective criteria or conditions’ refers to ‘criteria or conditions which are neutral’, i.e. that do not favour certain enterprises over others, and that are economic in nature and horizontal in application, such as e.g. the number of employees or size of enterprises. This implies that measures that are ‘selective’ under EU State aid law—such as support to SMEs—would not be ‘specific’ in the WTO system.79 Third, even if a subsidy is designed in an apparently non-specific form, it may still be specific if it is de facto applied to certain undertakings and not to others (Article 2, sub-paragraph (c) of the ASCM). De facto specificity may be established on the basis of the factors stemming from sub-paragraph (c) of the provision, which indicate a targeted or differential impact of the measure. In this respect, the Panel in US—Cotton noted that specificity is a ‘general concept, and the breadth or narrowness of specificity is not susceptible to rigid quantitative definition’, but should rather ‘only be assessed on a case-by-case basis’.80 Furthermore, it seems that the number of economy sectors that benefit from the measure at issue is not really important if the subsidy is not ‘sufficiently broadly available throughout the economy’.81 There are three important remarks to make. First, the specificity requirement shares the same breadth and expansiveness of the ‘selectivity’ test in EU State aid law. One example is relevant in this respect. The ASCM does not define ‘industry’. In the US—Softwood Lumber IV dispute Canada argued that a subsidy available to companies in 23 industries producing 200 separate products could not be specific. The Panel rejected the argument and held that measure was correctly found to be specific. Second, what is the precise relationship between the three principles in the sub-paragraphs of Article 2.1 ASCM? Does de facto specificity always prevail in the end? Is it possible to have a scenario where, although the impact of the subsidy seems to predominantly affect certain enterprises, specificity is excluded as a consequence of the fact that it is the inherent impact of the adherence to objective criteria and conditions, based on neutrality, economic rationality, and horizontal nature, under subparagraph (ii) of Article 2 ASCM? The Appellate Body has noted that the use of the term ‘principles’ rather than ‘rules’ suggests that the three sub-paragraphs (a) through (c) are to be considered within an analytical framework that accords appropriate weight to each principle, without examining the issue of specificity—or

See Rubini (n 4) Chapter 13. Ibid. 80 Panel Report, United States—Subsidies on Upland Cotton (21 March 2005) WT/DS267/R, para 7.1142. 81 Ibid. 78 79

120  Research handbook on European State aid law even reaching a positive determination—on the basis of one of the sub-paragraphs only.82 This hardly settles the issue. Importantly, the ‘specificity’ test, as it is laid down in the ASCM and interpreted in the case law, does not seem to consider the intent (of targeting or otherwise) of the government relevant at all (the case is obviously different for de jure specificity, where the statute is expected to ‘expressly limit’ the access to the subsidy). This may be problematic inasmuch as the scrutiny and consideration of the governmental goals, as they objectively come out from the measure and its context, may be a significant factor in drawing the line.83 Finally, regional schemes that are limited to one or more specific geographical region(s) within a State or within the jurisdiction of an administering authority are specific, unless they amount to the setting of generally applicable tax rates in specific regions by regional authorities competent to do so. This approach bears some resemblance to the approach to regional taxation under EU State aid law which is, however, stricter demanding a three-fold test of autonomy. Prohibited subsidies A major innovation of the ASCM was the classification of subsidies into three categories, often referred to as ‘red light’, ‘yellow light’, and ‘green light’. ‘Red light’ subsidies are prohibited per se, with no need to prove their specificity (which is presumed) or any adverse effect. They comprise two categories of subsidies: first, export subsidies that include, but are not limited to, all subsidies that are enumerated in the illustrative list in Annex I to the SCM Agreement; and second, subsidies that are contingent on the use of domestic over imported goods (so-called ‘local-content’ or ‘import substitution’ subsidies). Prohibited subsidies must not be granted; if they have already been granted, they must be withdrawn without delay. Contingency is the key legal standard of this prohibition. Export contingency may be de jure, when it is the letter of the legislation that imposes exportation as a condition to receive support, or de facto. A subsidy is de facto contingent on export performance when the facts demonstrate that the granting of a subsidy, without it having been made legally contingent or conditional upon export performance, is nonetheless, in fact, tied to actual or anticipated exportation or export earnings. Crucially, the mere fact that a subsidy is granted to enterprises that export does not per se render it an export subsidy. This is just a factual circumstance that, on its own, does not signify any contingency. In particular, case-law had the opportunity to clarify that de facto export contingency is present when a given measure generates the incentive to export in a way that deviates from the normal supply and demand process.84 This test is particularly stringent. It is not fully clear yet whether it also applies to the de facto contingency test for local-content subsidies. The analysis of the most recent case-law seems to indicate an even more exacting standard.85 82 See Appellate Body Report, United States—Countervailing Duties (22 July 2014) WT/DS/449/ AB/R, paras 366 and 371. Taking this finding even further, see Appellate Body Report, United States— Countervailing Measures (n 55) (at para 4.122) that the application of sub-paragraph (c) does not presuppose a formal finding or determination under sub-paragraphs (a) or (b). 83 See Petros C Mavroidis, Trade in Goods (Oxford University Press 2013) 552. Mavroidis sees something similar to an intent test in EU State aid law. 84 Appellate Body Report, EC— Large Civil Aircraft (n 49) paras 1036 et seq. 85 See Pramila Crivelli and Luca Rubini, ‘Flying High in a Plane. Appellate Body Report, European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft (WT/ DS316/AB/RW)’ (2000) 19(2) World Trade Review 316–40.

State aid and international trade law  121 The WTO law on prohibited subsidies can now be usefully compared to the standards that prevail in EU State aid law. EU State aid law requires the measure of support to be liable to distort competition and affect trade within the EU. Stricter conditions apply when the beneficiary is active in cross-border intra-EU trade. A State aid granted for exports to another EU country undoubtedly and automatically constitutes incompatible State aid.86 But, even lacking a clear export-orientation, it is relatively easy to satisfy the ‘impact standards’ of EU State aid law. Good examples are those cases where the CJEU considered the ‘reasonable foreseeability’87 or even ‘non-inconceivability’88 of effects in the EU market as sufficient to prove an effect on intra-EU trade. This difference very well highlights the stark contrast in the operation of the ‘impact standards’ in the WTO and in the EU. If it is safe to say that the distortive effects on competition and trade are basically presumed in the EU,89 there is no doubt that WTO law requires more exact standards and evidence in this regard, and that in particular, a prohibition can be imposed only when a strict export conditionality can be established. As we are about to see, more exact standards are also required when it comes to establish that a subsidy, albeit not prohibited, is still actionable. Actionable subsidies Specific subsidies may be actionable only if they cause ‘adverse effects’. Hence, the ‘yellow light’ or ‘actionable subsidies’ are generally permitted, unless they produce ‘adverse effects’. Such effects may be held to arise when they: (1) cause an injury to a domestic industry of another Member; (2) cause an impairment of the benefits of a tariff concession; or (3) represent a serious prejudice to the interest of another Member (Article 5 ASCM). These three notions derive from the GATT where a material injury was necessary in order to impose unilaterally countervailing duties on subsidized imports (Article VI GATT), new subsidies were recognized as having the potential to impair the benefits of tariff concession (Article XXIII GATT), and, following the determination of serious prejudice to its interests, any contracting party could have sought consultations with the subsidizing government with a view to limiting the subsidization (Article XVI). The Tokyo Code developed these concepts and especially the notion of serious prejudice. What the WTO did to innovate was to further develop the serious prejudice test and to strengthen the remedies. Article 6.3 ASCM defines serious prejudice in various forms: (a) displacement or impediment of imports of a like product of another Member into the subsidizing Member’s market; (b) displacement or impediment of exports of a like product of another Member from a third-country market; (c) significant price undercutting of the subsidized product as compared with the price of a like product of another Member, or significant price suppression, depression, or lost sales in the same market; and (d) increase in the world market share of the subsidizing Member in a particular subsidized primary product.

The prohibition of export-related aid is ubiquitous in EU State aid law. Case C-142/87 Belgium v Commission (‘Tubemeuse’) [1990] EU:​C:​1990:​125, paras 35–40. 88 Case C-172/03 Wolfgang Heiser v Finanzampt Innsbruck [2005] EU:​C:​2005:​130. 89 This automatism has been criticized. See, e.g., Claus-Dieter Ehlermann and Anne Vallery, ‘Giving meaning to the condition of effect on trade: The Court’s judgment in Xunta de Galicia, a missed opportunity?’ (2005) 4(4) European State Aid Law Quarterly 709. 86 87

122  Research handbook on European State aid law The burden of proof in demonstrating that there is a serious prejudice rests with the complaining Member.90 In assessing the existence of serious prejudice, the Appellate Body has requested the performance of a market assessment.91 Though this type of analysis heavily relies on complex factual and economic evidence,92 important questions, for example on what methodologies should be used to determine causality, remain open. This assessment, just like the ‘injury’ analysis, may be usefully contrasted with the ‘distortion of competition’ and ‘effect on trade’ requirements, characteristic of the EU notion of State aid, which, as we have seen, are usually presumed to exist when the other requirements of the notion are satisfied. Non-actionable subsidies The final element of the ASCM light system is the ‘green light’ subsidy category. As with the provision on subsidies deemed to cause serious prejudice (Article 6.1 ASCM), this was introduced for a five-year period only. In the absence of agreement to maintain it, even in amended form, this category lapsed at the end of 1999. Under the ‘green light’ category, certain selected types of subsidies were non-actionable even if they were specific and caused one of the harms listed in Articles 5 and 6. The three categories of subsidies protected from challenges concerned certain research and development subsidies and some regional and environmental subsidies (Article 8.2 ASCM). Members complying with the conditions within each category were allowed to grant subsidies that were shielded from challenges and countervailing measures. This WTO system was analogous to the block exemptions that have been introduced in EU State aid law in recent years. A stark difference between the two systems is the fairly limited scope of the WTO exceptions, when compared to the current broad array of EU justifications. In order to benefit from non-actionability, it was necessary that the subsidy be duly notified by the Member State concerned to the WTO. In the absence of notification, the subsidy was actionable. Further, even if it satisfied the conditions of Article 8 ASCM, a non-actionable subsidy could still be subject to further scrutiny and possible amendments—following consultations with the affected Members—if it was causing serious adverse effects (Article 9 ASCM). In essence, the functioning of this system was similar to the one available in the EU—where State aid may be subject to individual scrutiny by the Commission and where changes may be requested in order to render the measure or scheme ‘compatible with the internal market’. For the sake of the comparison, it is even more interesting to note that this happens also for State aid that would otherwise be normally block exempted, but that, by failing to satisfy one or more of the conditions of the relevant regulation, it raises concerns justifying a case-by-case analysis. With the expiry of the ‘green light’ category and in the absence of specific exceptions, it is not clear whether the general exceptions provided by Article XX GATT may apply to subsi-

90 Under Article 6.1 ASCM, for a five-year period expiring in 1999, certain subsidies were deemed to result in serious prejudice. This provision has now lapsed and has not been revived. 91 See e.g. Appellate Body Report, EC—Large Civil Aircraft (n 49) paras 1105 et seq.; and Appellate Body Report, US—Large Civil Aircraft (n 40) paras 890 et seq. 92 Annex V ASCM provides a special procedure to facilitate the information-gathering process.

State aid and international trade law  123 dies, and especially those with environmental objectives. Since the case law on the matter is rather unclear,93 various voices support law reform.94 The regulation of agricultural subsidies The AA regulates subsidies to agricultural products.95 The classification of a good as ‘agricultural’ or ‘industrial’ may have significant legal consequences. While subsidies to industrial goods are governed only by the ASCM, subsidies to agricultural goods can, in principle, be regulated by both the AA and by the ASCM. The long-term objective of the agreement is to establish a fair and market-oriented trading system. This is mainly done through progressive negotiated reductions in agricultural support. The key distinction of the discipline is between domestic support and export subsidies. In both cases, the discipline is not general, but can only be defined in relation to the commitments Members have entered into their schedules. With respect to export subsidies, for those that are listed among the six categories of Article 9.1 AA, Members were initially allowed to provide them, provided that they were granted (a) only to the agricultural products specified in the schedule, and they were (b) not in excess of the budgetary outlay and quantity commitment levels specified therein (Article 3). The discipline was completed by the prohibition to apply export subsidies not listed in Article 9.1 in a manner that resulted in, or which threatened to lead to the circumvention of, export subsidy commitments (Article 10). This scenario changed in 2015 when Members agreed that developed countries could not grant export subsidies to agricultural products anymore. Therefore, the more permissive discipline analysed above now only applies to developing countries. Domestic support, i.e. domestic subsidization, is mainly expressed with the single figure of the Aggregate Measurement of Support (AMS), which refers to the annual aggregate level of support in monetary terms that is subject to reduction commitments (the so-called ‘amber box’) (Article 6 and Annex 3). Members can thus provide support in favour of domestic producers, but not in excess of the AMS level. It is important to note that not all domestic support is subject to reduction commitments. In particular, apart from a more lenient discipline for subsidies in developing countries (Articles 6.2 and 15) and de minimis subsidies (Article 6.4), the AA exempts certain direct payments under production-limiting programmes (so-called ‘blue-box’ subsidies, Article 6.5) and various types of subsidies with no or minimal trade-distorting effects or effects on production (so-called ‘green box’ subsidies, Article 7 and Annex 2). One of the most important questions relates to the legal relationship between the AA and the ASCM. In particular, Article 13 AA, dubbed ‘peace clause’, more specifically defined the relationship with the ASCM during the implementation period, which expired at the end of 2003. It established that subsidies conforming to the agriculture discipline were either exempt from action under the ASCM or subject to ‘due restraint’ under the latter. With the expiry See further Rubini (n 47) 564–6. Calls for reform of subsidy rules have been numerous in recent years. See the seminal piece of Robert H Howse, ‘Do the World Trade Organization Disciplines on Domestic Subsidies Make Sense? The Case for Legalizing Some Subsidies’ in Kyle W Bagwell, George A Bermann, and Petros C Mavroidis (eds), The Law and Economics of Contingent Protection in International Trade (Cambridge University Press 2010) 85. 95 These products are listed in Annex 1. In particular, only the products classified under Chapters 1–24 of the Harmonized System of Tariff Classification of the World Customs Organization are regulated. 93 94

124  Research handbook on European State aid law of the implementation period, the shelter provided by the ‘peace clause’ lapsed. There is currently no legal obstacle precluding a subsidy in line with the requirements of the AA from being nonetheless challenged under the ASCM. Everything turns on whether the measure is trade-distortive according to the legal standards of the ASCM. The regulation of service subsidies The GATS96 does not include any specific discipline on subsidies. Article XV GATS simply provides for negotiations on multilateral rules on subsidies and for consultations between a Member aggrieved by a subsidy and the relevant subsidizing Member. These negotiations have not gone very far, being faced with divergences even with respect to the basic issue of the definition of subsidy in the specific services context. However, the lack of specific subsidy disciplines does not mean that the GATS cannot regulate the power to subsidize. Subsidies may be governed by the obligation of national treatment under Article XVII GATS, in so far as the Member has accepted commitments in this respect in the Schedule annexed to the GATS. Where applicable, this requires the Member concerned to treat the supply of services of any other Member no less favourably than it treats its own services and service providers. The special treatment of service subsidies is a significant example of the difference between the WTO and the EU legal orders. EU State aid law does not distinguish support to services from support to goods. We notice here a possibly significant ‘gap’ in WTO laws that could provide significant policy space to various countries, including the EU. 4.2.2 Institutional framework: transparency and law-making The institutional structure of the WTO builds on what the GATT developed pragmatically. The main body is the Committee on Subsidies and Countervailing Measures, initially introduced by the Tokyo Subsidy Code. This is the place where Members can make and answer questions on subsidies, their motives and effects, and generally discuss subsidy issues. In this context, transparency essentially serves peer-review. Only effective notifications can enable the proper functioning of the Committee. Unfortunately, as it is widely agreed, the notification track-record is not satisfactory. There is no real sanction for the lack of notification. It is for peers to complain and put pressure on defaulting Members to notify. To be sure, Members may counter-notify other Members’ subsidies, but this has been a rare occurrence.97 The end result is that the Committee is not used as it could be. The ASCM also provides for a Permanent Group of Experts that may be requested to assist adjudicating panels and may also be consulted by the Committee on Subsidies and Countervailing Measures for an advisory opinion ‘on the existence and nature of any subsidy’ (Article 24.3 ASCM). The Group of Experts may also be consulted by any Member and may give confidential and without prejudice advisory opinions on the nature of any subsidy proposed to be introduced or currently maintained by that Member (Article 24.4 ASCM). Nevertheless, to date, this Group of Experts has never been used. Moreover, the Committee

96 Uruguay Round of Multilateral Trade Negotiations (1986–94), Annex 1, Annex 1B—General Agreement on Trade in Services [1994] OJ L336/191. 97 Article 25.10 ASCM. This powerful prerogative has been used only twice, when in October 2011 the United States notified 200 and 50 measures granted by China and India, respectively, that were alleged to constitute subsidies.

State aid and international trade law  125 may also set up subsidiary bodies as appropriate (Article 24.2 ASCM). This power has never been exercised either. Finally, both the Committee and the subsidiary bodies may consult with and seek information from any source they deem appropriate (Article 24.5 ASCM). In the end, the only ways to ensure WTO subsidy laws are complied with is WTO dispute settlement or trade remedies. If the administrative function is particularly weak, the same holds true for law-making. I have noted that Articles 6.1 and 8 expired without any meaningful discussion that might have led to a change in the law. The only meaningful change to subsidies law concerns the prohibition of agricultural export subsidies mentioned above.98 From these few notes, it is clear that the institutional and political framework is very different from the EU and this represents essential context to understand how the laws are interpreted and applied. The approach to the definition of subsidy and State aid and to the various impact standards may differ, since the institutional and procedural context in which the substantive rules operate is different. For example, EU State aid control is particularly strict with requirements according to which State aid must distort competition and affect trade within the EU. These elements are essentially presumed to exist once the other requirements of the definition of State aid have been satisfied. This approach finds its justification in the intention of the ‘principals’ (i.e. the Member States) to give more power to the ‘agent’ (i.e. the EU Commission),99 and in the fact that a wide array of exceptions is available, which may lead to the result that State aid may be considered ‘compatible with the internal market’. As seen, the institutional, procedural, and substantive context is different in the WTO. First, there are virtually no exceptions for legitimate, albeit trade distorting subsidies. Second, there is no regulator that has the power to scrutinize and approve ‘good subsidies’. These differences lead to by far more generous rules on the impact of subsidies with more onerous legal requirements to satisfy. With the exception of export or local-content subsidies, which are simply prohibited, subsidies are permitted unless it is proved that they cause adverse effects. Such proof is not easy to discharge, with its detailed legal standards and evidential burden. Despite these differences, there is an increasing awareness among the WTO Membership that the governance system provided by the ASCM is not effective. Much may be done to enhance transparency and governance, either by using what already exists – we have seen how many institutional devices have been underused – or by introducing changes – for example, by introducing presumptions of illegality for un-notified subsidies, by giving more power to the Secretariat to collect, disseminate and assess information,100 by allowing notifications (subject to verification) coming from NGOs, the private sector, and private citizens.101 In the end, transparency is not only the ‘right to know’. It is also instrumental to make information

98 Another important change was agreed at the 2013 Bali Ministerial conference when Members agreed to extend the protection for subsidies for food stockpiling purposes. 99 See Bill Bishop, ‘From Trade to Tutelage: State Aid and Public Choice in the European Union’ (Presentation to Conference to ACE, Copenhagen, 2 December 2005). 100 Which already happens in the context of the Trade Policy Review Mechanism. 101 For an interesting proposal in this direction, see Liesbeth Casier, Robin Fraser, Mark Halle, and Robert Wolfe, ‘Shining a light on fossil fuel subsidies at the WTO: How NGOs can contribute to WTO notification and surveillance’ (2014) 13(4) World Trade Review 603.

126  Research handbook on European State aid law on subsidies, their rationales, and impact available, and, through this, create opportunities for assessment.102 Equally, there are increasing calls that the disciplines, as they are or as they have been interpreted, are not effective. On the one hand, they may be under-inclusive, by not prohibiting subsidies that are particularly objectionable. On the other hand, they do not offer a clear shelter for certain legitimate subsidies. In the end, it is the law-making function itself, still anchored to the principle of consensus and to the mechanics of ‘Rounds of negotiations’, that does not ensure the necessary, regular updating of the rules. 4.2.3 Institutional framework: adjudication and remedies A WTO Member may respond to subsidization by another Member by either multilateral or unilateral action. Multilateral action consists of adjudication by an ad hoc Panel established by the Dispute Settlement Body (DSB, which includes representatives of all WTO Members), and, in case of appeals on points of law, by the Appellate Body. The WTO dispute settlement system has been consistently hailed as the ‘jewel in the crown’ of the WTO legal system. Almost 600 disputes have been filed in 25 years of practice and the body of law that has emerged is fairly sophisticated. The ASCM is the third most litigated agreement. The Panels and Appellate Body have had the opportunity to clarify many of the ambiguities of subsidy laws. If much of their analysis has generated appreciation,103 inevitably also criticism has been raised towards certain interpretations (for example, the interpretation of ‘public body’ discussed above).104 As an alternative to the multilateral procedure, a WTO Member may act unilaterally by imposing countervailing duties on subsidised imports causing injury to their domestic industry. The ASCM extensively regulate the substantive and procedural requirements guiding trade remedy investigations. It is important to highlight that this type of unilateral remedy is available only in one factual scenario, that is, when one country is receiving subsidized imports. We have seen that prohibited and actionable subsidies are subject to different disciplines. The remedies are also different. While prohibited subsidies should be withdrawn without delay (Article 4.7), Members that have granted an actionable subsidy should ‘take appropriate steps to remove the adverse effects or [should] withdraw the subsidy’ (Article 7.8). The first important issue concerns the interpretation of the term ‘withdrawal’ and, in particular, whether this should apply retrospectively. This is what the implementation Panel in the

102 Terry Collins-Williams and Robert Wolfe, ‘Transparency as a trade policy tool: The WTO’s cloudy windows’ (2010) 9(4) World Trade Review 551. 103 Robert H Howse, ‘The World Trade Organization 20 Years On: Global Governance by Judiciary’ (2016) 27(1) European Journal of International Law 9. 104 Michael Cartland, Gerard Depayre and Jan Woznozski, ‘Is Something Going Wrong in the WTO Dispute Settlement?’ (2012) 46(5) Journal of World Trade 979; Luca Rubini, ‘The Age of Innocence. The evolution of the case-law of the WTO dispute settlement. Subsidies as case-study’ in Joe Francois, Manfred Elsig, Bernard Hoekman, and Joost Pauwelyn (eds), The World Trade Organization. Past Performance and Ongoing Challenges. The World Trade Forum 2015 (Cambridge University Press 2017); Petros C Mavroidis, ‘The Gang That Couldn’t Shoot Straight: The Not So Magnificent Seven of the WTO Appellate Body’ (2016) 27(4) European Journal of International Law 1107.

State aid and international trade law  127 Australia—Leather case concluded.105 At least with respect to non-recurring subsidies already paid, if repayment is excluded, there is no available remedy, which would mean denying justice. This ruling was, however, so controversial that it almost came close to non-adoption, which means that almost all Members objected to it.106 It does not come as a surprise, therefore, that the subsequent case law ignored this ruling, reinstating the mantra that WTO remedies are only for the future.107 This discussion is certainly interesting for the EU State aid lawyer that has always been used to the idea that illegal aid should be repaid in full. Be it as it may, the remedy for prohibited subsidies is certainly more intrusive from a temporal perspective, since the measure should in any event be withdrawn ‘without delay’. This does not happen for actionable subsidies, where the Member granting them has an alternative to the withdrawal of the subsidy, which is the removal of its adverse effects only, and may even negotiate a reasonable period of time to implement the negative ruling. In the absence of withdrawal of a prohibited subsidy, the DSB may authorise the winning party to take ‘appropriate’ countermeasures. In the case of an actionable subsidy causing adverse effects, the offending Member that has not removed the effects of the scheme nor withdrawn the subsidy in question, might be subject to countermeasures ‘commensurate with’ the degree and the effects of the subsidy. 4.3

Conclusions and Law Reform

The overview of WTO subsidy laws has shown that the disciplines are largely ineffective.108 The definition of subsidy and the specificity test are still plagued with ambiguities. The legal standards for both prohibited and actionable subsidies are very demanding. Remedies, especially in so far as they reflect the ‘no-retroactivity’ mantra, are weak. Few momentous and controversial decisions of the Appellate Body have arguably narrowed the scope or the possibility of applying subsidy rules: these range from the interpretation of ‘public body’ (US – AD/CVD) to the benefit analysis (Canada – Renewable Energy/FIT), from the de facto contingency test (US – Tax Incentives) to the interpretation of the remedies (Australia – Leather 21.5 and EC – Large Civil Aircraft 21.5). At the same time, specific presumptions of serious prejudice (Article 6.1 ASCM) and exceptions for legitimate subsidies (Articles 8 and 9 ASCM) that contributed to the balance, efficacy and legal certainty of the rules have gone. From the institutional perspective, transparency and governance are equally ineffective. In the end, trade remedies are still the only real but partial remedy to foreign subsidization. The broader WTO picture is not favourable to a change. Law-making is very difficult. The rules are increasingly detached from today’s challenges: they are not up to the job in regulating the bad (e.g. protectionist industrial policy or subsidised foreign investment) and the good (e.g. action against climate change or exceptional occurrences) in government practices. There have 105 Panel, Australia—Subsidies Provided to Producers and Exporters of Automotive Leather (Article 21.5 DSU) (‘Australia – Leather’) (16 June 1999) WT/DS 126. 106 Panel and Appellate Body reports must be adopted by the DSB with ‘negative’ consensus. 107 In fact, ex tunc remedies were granted by some GATT panels in the fields of anti-dumping and countervailing duties. See Petros C Mavroidis, ‘Remedies in the WTO Legal System: Between a Rock and a Hard Place (2000) 11(4) European Journal of International Law 763. 108 Crivelli and Rubini (n 85) 316; Luca Rubini, ‘The Never-Ending Story: the Puzzle of Subsidies’ in Meredith A Crowley (ed), Trade War: The Clash of Economic Systems Threatening Global Prosperity (CEPR 2019).

128  Research handbook on European State aid law been few areas of discussion, but success has been very limited. To be sure, the AA has been amended to prohibit export subsidies of developed countries. More substantial disciplines on fisheries subsidies have been subject to negotiations but, after many years, they are still failing to garner consensus. The dispute settlement system, once the ‘jewel in the crown’, has been severely impacted by the virtual suspension of activities of the Appellate Body caused by the continuous veto of the US to the appointment of new members. To be sure, at the time of writing, 23 countries have agreed a plurilateral arbitration system which should operate ad interim among the signatories as an appeal process but only time will say whether this can be an appropriate substitute for the Appellate Body. Eventually, law reform talk, once coming out only from policy and academic circles,109 is now taking place at the official level. Various countries are tabling proposals to amend subsidy rules but, for now, significantly, only outside the WTO. One of the most significant initiatives is the so-called ‘Trilateral’ which involves the EU, the US, and Japan and started operations in late 2017. The stated goal of this initiative is to tackle the non-market oriented policies of third countries (read: China), by inter alia strengthening the disciplines on industrial subsidies. The parties came out with a draft text of rules in January 2020.110 The document includes an initial expanded list of prohibited subsidies, reinstates a presumption of harmful effects for certain subsidies, suggests the insertion of an additional type of serious prejudice specifically linked to distortion of capacity to Article 6.3 ASCM, and also of a presumption of illegality for non-notified subsidies. It also calls for further discussions on various issues, including the identification of appropriate market benchmarks in presence of distorted markets and the definition of ‘public body’. We have to wait and see whether this talk generates action. As representatives of the Trilateral have repeatedly noted, this initiative is intended to act as catalyser for change, and various venues such as the G7, G20 or the OECD will be used in this respect. It is, however, critical that other major players (read, once again: China) are taken on board. We live in a time of multiple, mutually reinforcing, crises. What is needed is leadership and, to appease the discontents in various quarters, more ‘voice’.111 There is also need for more effective international cooperation. In many areas, including subsidies, many of our challenges are common challenges.

109 See, e.g., the E-15 Initiative and specifically to its groups on subsidies at accessed 8 June 2020; see also Bernard Hoekman and Douglas Nelson, ‘Rethinking International Subsidy Rules’ (2020) EUI RSCAS Working Paper 2020/20, Global Governance Programme-387; Chad Bown and Jennifer Hillmann, ‘WTO’ing a Resolution to the China Subsidy Problem’ (2020) 22(4) Journal of International Economic Law 557. 110 Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States and the European Union, Washington DC, 14 January 2020. 111 See Debra Steger, ‘Strengthening the WTO Rule-Making Function’ (Centre for International Governance Innovation, 14 May 2020) available at accessed 8 June 2020; see also Joost Pauwelyn, ‘The Transformation of World Trade’ (2005) 104(1) Mich L Rev 1.

State aid and international trade law  129

5.

PREFERENTIAL TRADE AGREEMENTS (1956–TO DATE)

5.1

Broad Picture

Recent World Bank research has mapped more than 280 PTAs, signed between 1956 and early 2016, to enquire how deep the integration they pursue is.112 Figure 6.1 shows the evolution of the number of PTAs with subsidy provisions in the period. What comes out is a steady increase in the number of PTAs signed from the early 1990s onwards. With more specific regard to subsidy rules, 95% of the agreements examined include subsidy commitments. This applies also to the PTAs signed since 2016, which are not covered by this mapping exercise. Subsidies are therefore a central chapter in the very large majority of PTAs in force.

Source: Author’s calculations.

Figure 6.1

Evolution of the number of PTAs with subsidy provisions

What type of provisions do these PTAs include? Apart from general provisions setting up committees, transparency mechanisms and dispute settlement, the most common provisions applicable to subsidies are those on CVDs and export subsidies (accounting for, respectively, 78% and 55% of the PTAs including subsidy rules). The broad picture coming out from this research is that the large majority of PTAs simply replicate GATT/WTO provisions. If there are additional commitments, these are largely of an ancillary or procedural—not substantive—nature. Interestingly, the most developed subsidy disciplines can be found in the PTAs signed by the EU or by those countries/blocs that, for various reasons, are close to the EU. These chapters are very often modelled (explicitly or implicitly) on EU state aid rules. More specifically, it is possible to identify three broad models in the PTAs signed by the EU. First, those that are exclusively based on WTO subsidy disciplines (the CETA or EU – Mercosur are good examples in point). Secondly, we have PTAs that, though referring to WTO rules, for example

112 Luca Rubini, ‘Subsidies’, in Aaditya Mattoo, Nadia Rocha and Michele Ruta (eds), World Bank Handbook of Deep Integration Trade Agreements (Washington DC 2020).

130  Research handbook on European State aid law for the definition of subsidy, significantly elaborate on this, and include interesting inputs from EU State aid law, for example by regulating both goods and services and by introducing various types of exceptions, in some cases reproducing almost verbatim EU law. This model seems to be particularly prevalent in PTAs recently negotiated by the EU (EU – Singapore, EU – Viet Nam, EU – Japan, EU – Mexico). The same model is pursued in the current negotiations with Australia and New Zealand. The increasing convergence between the PTAs within this group and the main elements of EU State aid disciplines seems almost to indicate a trend – almost towards the creation of a ‘common law’ of State aid. Thirdly, there is the model for association and stabilization agreements that mutatis mutandis copy the EU State aid model. Finally, the situation of the UK is unique and its negotiations for a future trade relationship with the EU are likely to include a mix of elements from the second and third categories. 5.2

Significant Examples of EU PTAs

It may be useful to briefly go through the most significant provisions of some of the PTAs of the second category. The EU – Viet Nam PTA is one of the most comprehensive and represents a good example of the new generation EU PTAs. Article 10.4 includes the ‘Principles’ applicable to subsidies. It reads: 1. The Parties agree that a Party may grant subsidies when they are necessary to achieve a public policy objective. The Parties acknowledge that certain subsidies have the potential to distort the proper functioning of markets and undermine the benefits of trade liberalisation. In principle, a Party should not grant subsidies to enterprises providing goods or services if they negatively affect, or are likely to affect, competition and trade. 2. An illustrative list of public policy objectives for which a Party may grant subsidies, subject to the conditions set out in this Section, includes the following: (a) making good the damage caused by natural disasters or exceptional occurrences; (b) promoting the economic development of areas where the standard of living is abnormally low or where there is serious underemployment; (c) remedying a serious disturbance in the economy of one of the Parties; (d) facilitating the development of certain economic activities or of certain economic areas, including but not limited to, subsidies for clearly defined research, development and innovation purposes, subsidies for training or for the creation of employment, subsidies for environmental purposes, subsidies in favour of small and medium-sized enterprises as defined in the Parties' respective legislations; and (e) promoting culture and heritage conservation. 3. Each Party shall ensure that enterprises use the specific subsidies provided by a Party only for the policy objective for which the specific subsidies have been granted. Paragraph 1 is interesting for its explicit reference to ‘public policy objectives’, which cannot be found in the current version of WTO disciplines, and for highlighting that subsidies are a problem when they affect ‘competition and trade’. Equally interesting is the elaboration of the public policy objectives that can be pursued through subsidies, with the use of an illustra-

State aid and international trade law  131 tive list which is directly modelled on Articles 107(2) and 107(3) TFEU.113 Paragraph 3 hints at the necessity and proportionality of the subsidy vis-à-vis the public objective which it pursues. Article 10.5.1, titled ‘Definition and Scope’, incorporates the definition of subsidy of Article 1.1 ASCM ‘irrespective of whether it is granted to an enterprise manufacturing goods or supplying services’. This extension, which can be found in almost all of the new generation of EU PTAs, is a significant upgrade of WTO subsidy disciplines.114 The following paragraphs of Article 10.5 include various provisions: they refer to the specificity test of Article 2 ASCM (paragraph 2), they clarify that the rules equally apply to ‘public and private enterprises’ (paragraph 3) and do not apply to non-economic activities (paragraph 5). The provision is closed by a de minimis carve-out. The influence of EU law on these provisions is clear. A very clear reference to Article 106(2) TFEU (and perhaps the Altmark jurisprudence) can be found in paragraph 4, reading: The application of this Section shall not obstruct the performance, in law or in fact, of the particular tasks of public interest, including public service obligations, assigned to the enterprises concerned. Exemptions should be limited to tasks of public interest, proportionate to the public policy objectives assigned to those enterprises, and transparent.

Article 10.9 regulates ‘Specific Subsidies Subject to Conditions’. This provision sets limits to State guarantees (vaguely requiring that they are ‘limited’ to the amount of debts/liabilities and the duration of the responsibility and without referring to any market benchmark) or restructuring aid. The responding Party is always entitled to prove that the measure does ‘neither affect nor is likely to affect trade or investment of the other Party’ or that the subsidy is granted ‘to remedy a serious disturbance in the economy’. The regulation includes other limitations, exclusions or grandfathering of measures and standard provisions on transparency and consultations, and, quite importantly, an exclusion of the consultation procedure from dispute settlement (Article 10.13). This seems to create an ambiguous scenario where, though still subject to the obligations of preferential subsidy rules, the Parties are, however, sheltered from litigation. The other recent EU PTAs share the basic structure of the EU – Viet Nam agreement, with other innovations. For example, the EU – Japan agreement includes a specific reference to the applicability (mutatis mutandis) of the ‘General exceptions’ of Article XX GATT and Article XIV GATS, whose applicability to subsidies has been a very controversial topic in WTO circles. The EU drafting texts for the negotiations with Australia and New Zealand include other interesting additions, for example the possibility to include a legal clarification of the notion of ‘public body’, clear prohibitions for unlimited guarantees and aid to insolvent or ailing enterprises and exclusions for subsidies ‘to ensure the orderly market exit of a company’. The current post-Brexit negotiations with the UK are, by contrast, defined by a very specific and pretty unusual scenario. Normally, countries enter into PTAs to further integrate their trade and economic relations. Following the departure of the UK from the very integrated EU internal market, the scenario will inevitably mean less integration (though we don’t know how 113 Annex 11-A of the EU – Singapore PTA includes an even closer repetition of the list of exceptions of Articles 107(2) and 107(3) TFEU. 114 More generally, Article 10.6 confirms that the rules of the PTA apply ‘without prejudice to the rights and obligations of each Party’ under Article VI GATT, the ASCM and the AA.

132  Research handbook on European State aid law much less). The future relationship has thus to strike the right balance between (quite probably) a still high market access and the necessary ‘level playing field’ safeguards, in particular with respect to subsidies. TTIP Negotiations and TPP

5.3

To conclude our overview of subsidy disciplines in PTAs, it is useful to briefly analyse the, currently suspended, Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations between the EU and the US, and the Trans-Pacific Partnership (TPP). From available leaked documents,115 which refer to the state of play in March 2016, it is clear that the EU and the US still disagreed on the general approach. The US wanted subsidy negotiations to be limited to federal subsidies and, most importantly, to subsidies to SOEs only. The EU was more interested in defining a common ground covering provisions on subsidies applicable to all companies, at any level and with specific regard to transparency and consultations. The EU textual proposal generally follows the model of the PTAs in the second category above (with fewer exceptions). More details can, however, be found in the ‘Consolidated Proposed SOE Text’ which includes a document with possible provisions on SOEs, each individually attributed to either the EU or the US. Following the US’ position, we find subsidy rules applicable only to financial support to SOEs. The relevant definition of subsidy is ‘non-commercial assistance’ (Article 1, US) and the negative effects of subsidies are regulated under ‘Adverse Effects’ (Article 6, US) and ‘Injury’ (Article 7, US). There are also limited exceptions, mostly ‘to respond temporarily to a national or global economic emergency’ (Article 10) and transparency and corporate governance provisions (Articles 7, EU; and 8, US). Quite interestingly, similar provisions can be found in Chapter 17 on ‘State-Owned Enterprises and Designated Monopolies’ of the TPP (see Articles 17.1, 17.6, 17.7, 17.13) which was largely spear-headed by the US (Obama administration).

6. CONCLUSIONS The regulation of subsidies in international trade law has gone through different periods. Focusing on the most recent past, the 1980s and 1990s were a period of optimism and innovation for trade law, characterised by the strong emergence of the market paradigm which shaped disciplines and case-law. In the new millennium, various events have been affecting the debate on subsidies and their laws: from developing countries’ mounting disillusion towards the Uruguay Round ‘bargain’ (which in late 2001 led to the launch of the Doha Round negotiations) to the shock of the great financial and economic crisis of 2007–13, from the difficulty in dealing with the costs of globalization to the challenges posed by the fight of climate change and the need for a more innovative and sustainable society, up to the rise in industrial policy, mounting protectionism and the difficulty in interfacing the Chinese economic system into the world trading system. Added to this, at the time of writing, we have to factor in the crisis faced by the WTO, which involves its leadership, vision and its ‘jewel-in-the-crown’ dispute settle-

Obtained by Greenpeace.

115

State aid and international trade law  133 ment, as well as the massive public intervention that will be needed to tackle the consequences of the COVID-19 pandemic. The brief review of this chapter has shown that, in terms of subsidy debate and regulation, much has been happening outside the EU. Although viewed as significant progress when they were introduced in the early 1990s, the WTO disciplines on subsidies have increasingly shown signs of fatigue and gaps. This is partly due to the age (many occurrences could simply not be expected), partly because of how they have been interpreted. Whatever it may be, the system seems to be ineffective in regulating subsidies. Many of the challenges described above should act as stimuli for change. Law reform talk—we have seen—is gathering momentum. In this respect, it is interesting to contemplate the EU as a truly unique political and legal system which has managed to introduce an equally unique system of State aid control.116 It is not for this chapter to assess it. This is surely done by other contributors. What immediately stands out, from a macro-comparison between the trade regulation of subsidies and EU law, is that, while the former is exclusively focused on tackling trade distortions, the latter increasingly resembles a fully-fledged governance mechanism which is increasingly orienting and harmonizing Members’ industrial policy. As Piernas-Lopez recently noted, EU State aid law has moved from the internal market to competition, and beyond117—to ensure fiscal discipline and manage tax avoidance. No surprise about this: the objectives of the average PTA and of the EU treaties are very different, the depth of integration pursued significantly different. What is interesting to a trade lawyer or observer looking at the EU system is its ability to regulate both the negative distortions on trade and competition and the public policy objectives underlying subsidization. As said, the EU model is truly unique and cannot probably be replicated outside a closely-knit community like the EU. Still, its efforts to govern state subsidies continuously raise a lot of interest. That said, what is particularly interesting to see is how, via the conclusion of PTAs, and perhaps through high-profile law reform initiatives, the EU is, to a large or lesser extent, exporting its model or parts of it, such as the recognition of the importance of public policy objectives and public services. If the EU lawyer may take pride at this reflection, a good degree of humility is needed. The important influence exercised by the EU model should not foster ‘Euro-centrism’ or ‘Euro-exceptionalism’. If the objectives of the various trade agreements are different, it is a fact that many issues and questions are common. A lot can be learned from, for example, the very sophisticated case-law of the WTO Panels and Appellate Body, from the practice of other countries, and from the ingenuity of some of the most recent PTAs. More generally, one should be aware that there is a world elsewhere. EU law is not the final word. The EU is not an island.

116 See the still true and penetrating comments of Claus-Dieter Ehlermann, ‘State Aid Control in the European Union: Success or Failure? (1994) 18 Fordham Int’l LJ 1212. 117 Juan Jorge Piernas Lopez, The Concept of State Aid under EU Law – From Internal Market to Competition and Beyond (Oxford University Press 2015).

7. State aid and the financial sector: the crisis and beyond Małgorzata Agnieszka Cyndecka

1. INTRODUCTION In 2020, it will be 13 years since the financial crisis started to undermine trust between banks. The major reasons why the crisis broke out were macroeconomic imbalances, risk management and corporate governance failures, regulatory and supervisory flaws, accounting deficiencies, problems related to credit rating agencies and global institutional weaknesses.1 An aggressive lending policy became a problem when the borrowers started to default on their loans. This triggered the US subprime crisis. Unsurprisingly, the very first victims of the crisis in Europe were the banks that aggressively invested in the US subprime securities: SachsenLB,2 WestLB,3 IKB4 and Northern Rock.5 In the EU, the beginning of the financial crisis is associated with the collapse of Lehman Brothers on 15 September 2008.6 The panic created by the largest bankruptcy filing in US history led the Member States to quickly design emergency aid packages. This raised serious concerns. Measures taken by one Member State could easily trigger a deposit run in neighbouring countries as was the case with the Irish blanket guarantee.7 The transmission of financial distress to the real economy evolved at record speed and the size and extent of the financial crisis that hit the European and global economy was without precedent in post-war economic history.8 Unlike the Great Depression, however, competition 1 See High-Level Group on Financial Supervision in the EU, chaired by Jacques de Larosière, Brussels, 25 February 2009 ˂https://​ec​.europa​.eu/​economy​_finance/​publications/​pages/​publication14527​ _en​.pdf˃ accessed on 28 February 2020. 2 Commission Decision of 4 June 2008 on State aid implemented by Germany for SachsenLB, (C 9/2008) (ex NN 8/2008). 3 Commission Decision of 30 April 2008 on WestLB risk shield, Germany, (C 15/2008) (ex NN 25/2008). 4 Commission Decision of 11 March 2008 on IKB, Germany, (C 10/2008) (ex NN 7/2008) – implemented by Germany for the restructuring of Deutsche Industriebank AG. 5 Commission Decision of 5 December 2007 on Rescue aid to Northern Rock, UK, (ex CP 269/07) (NN 70/2007), Commission Decision of 2 April 2008 on Restructuring aid to Northern Rock, UK, (C 14/08) (ex NN 1/08), Commission Decision of 7 May 2009 on Restructuring aid to Northern Rock, UK, (C 14/08) (ex NN 1/08). See also Christoph Arhold, ‘Financial Sector’ in Leigh Hancher, Tom Ottervanger and Piet Jan Slot (eds), EU State Aids (Sweet & Maxwell 2012), 634. 6 See, for example, Thomas J Doleys, ‘Managing State Aid in a Time of Crisis: Commission Crisis Communications and the Financial Sector Bailout’ (2012) 34(6) Journal of European Integration 549. 7 Commission Decision of 13 October 2008 on Guarantee scheme for banks in Ireland, (NN 48/2008). 8 European Commission, Directorate-General for Economic and Financial Affairs, ‘Economic Crisis in Europe: Causes, Consequences and Responses’, European Economy 7/2009, ˂https://​ec​.europa​ .eu/​economy​_finance/​publications/​pages/​publication15887​_en​.pdf˃ accessed on 28 February 2020.

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State aid and the financial sector: the crisis and beyond  135 in Europe remained largely intact even though the Member States injected massive amounts of public money into the banking sector.9 It was possible thanks to a prompt and balanced response from the European Commission exercising State aid control and the Member States’ commitment to coordinate the response to the crisis on the EU level.10 When the crisis broke out, the EU had no specific regulation in the financial sector. Moreover, while State aid control was the only regulatory instrument available at the EU level to deal with the economic turmoil and impose restructuring obligations on systemically important banks that needed aid,11 there were no sector-specific rules on granting aid to financial institutions. The Commission’s State aid policy was thus put to a tough test. Failing that test could in fact not only severely impact the financial sector and the economies of the Member States, but also question the whole system of State aid control and the role of the Commission. Although the Commission had a powerful instrument at its disposal, it had to use it with great care. A well-functioning State aid control was essential to safeguarding the competition in the internal market when the governments were rescuing banks that were ‘too big to fail’,12 but (too) strict or simply ordinary State aid rules may not always be adequate in extreme situations.13 Unsurprisingly, the economic turmoil initially led to calls by some to suspend the application of State aid control and give Member States maximum freedom for crisis management.14 Article 108(2) Treaty on the Functioning of the European Union (TFEU) would have allowed the Member States to circumvent the Commission and go for political unanimity on crisis measures within the Council.15 It is, however, rather difficult to deny that the Commission and the DG COMP were best prepared to tackle the unprecedented situation

9 According to the 2018 State Aid Scoreboard, in the period 2008–2017 the Commission approved €5118 billion aid of which €1961,6 billion was used, see ˂https://​ec​.europa​.eu/​competition/​state​_aid/​ scoreboard/​index​_en​.html​#crisis˃ accessed 28 February 2020. 10 The coordinated policy action at the EU level included measures taken by the European Central Bank and national central banks as well as raising deposit guarantees by the Member States and actions taken by the Council, such as to set up a European Financial Stabilisation Mechanism with a total volume of up to €500 billion, see European Commission Competition, ‘The effects of temporary State aid rules adopted in the context of the financial and economic crisis’ (2011) Commission Staff Working Paper SEC(2011)1126 final. 11 On the impact of the financial crisis upon global and EU developments that led to regulating the banking system, see Rosa M. Lastra, ‘Multilevel Governance in Banking Regulation’ in Mario P Chiti and Vittorio Santoro (eds), The Palgrave Handbook of European Banking Law (Palgrave Macmillan 2019) 3. 12 For a discussion on the ‘too-big-to-fail’ phenomenon see, Ioannis Kokkoris, ‘The social nature of banks and its challenges for competition policy’ in François-Charles Laprévote, Joanna Gray and Francesco de Cecco (eds), State Aid in the Banking Sector (Edward Elgar Publishing 2017) 3. 13 Raymond Luja, ‘State Aid and the Financial Crisis: Overview of the Crisis Framework’ (2009) 8(2) EStAL 145. See also Philipp Werner and Martina Maier, ‘Procedure in Crisis? Overview and Assessment of the Commission’s State Aid Procedure during the Current Crisis’ (2009) 8(2) EStAL 177. 14 Herbert Ungerer, ‘State Aids 2008/2009: 12 months of crisis management and reforms’ (7th Experts’ Forum on New Developments in European State Aid Law 2009, Brussels, 14 May 2009). 15 Luja (n 13) 146.

136  Research handbook on European State aid law if ‘prepared’ is the right word.16 As the then Competition Commissioner Neelie Kroes stressed on many occasions, ‘State aid rules [were] part of the solution, not part of the problem’.17 Still, the Member States accepted the role of DG COMP in dealing with the crisis only after the Commission had changed its initial approach and declared to act quickly, apply flexibility in State aid decisions and shortly issue guidance setting out the broad framework within which the State aid compatibility could be rapidly assessed. Prior to the collapse of Lehman Brothers aid to financial institutions was approved under the Rescue and Restructuring Guidelines of 2004 (R&R Guidelines), which applied to all sectors and were based on Article 107(3)(c) TFEU.18 This legal basis was applied in such ‘early crisis cases’ as WestLB,19 SachsenLB,20 Roskilde I,21 Northern Rock22 and Bradford & Bingley.23 While the R&R Guidelines were too restrictive and too general,24 the Commission explicitly and consistently denied considering aid to the financial institutions as remedies to a serious disturbance in the economy of the relevant Member State within the meaning of Article 107(3)(b) TFEU. That provision had to be applied restrictedly; it could not benefit one company or one sector, but had to tackle a disturbance in the entire economy of a Member State.25 Until 2008, the Commission approved aid under Article 107(3)(b) TFEU on three occasions.26 On 6 October 2008, however, Commissioner Kroes announced not to shy away if need be from applying the special provisions of Article 107(3)(b) TFEU.27 Moreover, ‘for the first time in fifty years [the Commission] had to use

16 As Jaeger pointed out, ‘2008 was supposed to be a quiet year, when the Commission would focus on the enactment of the last or next-to-last reform measures as laid out in the State Aid Action Plan and cosily inch towards the evaluation phase of the reform in 2009’, Thomas Jaeger, ‘How much flexibility do we need?’ [2009] 8(1) EStAL 3. 17 See European Commissioner for Competition, ‘Briefing to Economics and Finance Ministers on financial crisis measures on 2 December 2008’, MEMO/08/757. 18 European Commission (EC) Communication on Community guidelines on State aid for rescuing and restructuring firms in difficulty [2004] OJ C244/2. See also Matthew Hall, ‘Competition law and the credit crunch: do the usual State aid rules still apply?’ [2009] PLC. 19 WestLB (n 3). 20 SachsenLB (n 2). 21 Commission Decision of 31 July 2008 on Roskilde Bank, Denmark, (NN 36/2008). 22 Northern Rock (n 5). 23 Commission Decision of 1 October 2008 on Rescue aid to Bradford & Bingley, UK, (NN 41/2008). Yet, in both Northern Rock and Bradford & Bingley, the final restructuring decisions were adopted under Article 107(3)(b) TFEU. 24 In particular, the Irish guarantee scheme of 30 September 2008 put political pressure on the Commission to seek for an alternative and less strict State aid regime. See also Werner and Maier (n 13) 178. 25 WestLB (n 3) paragraph 41. 26 In the early 1970s, Italy adopted a series of decree laws as emergency measures to deal with the serious difficulties then besetting the national economy, see European Commission, ‘Second Report on Competition Policy’ (April 1972) 120. Following a serious economic downturn that had started in 1974, several Member States introduced various State measures, see European Commission, ‘Fifth Report on Competition Policy’ (April 1976) 130. In the 1980s, the Commission concluded that the crisis in Greece covered the whole economy, see European Commission, ‘Seventeenth Report on Competition Policy’ (1988) 185. 27 Neelie Kroes, ‘Address Before the Monetary Affairs Committee, European Parliament: Dealing with the Current Financial Crisis’ (6 October 2008) accessed 28 February 2020.

State aid and the financial sector: the crisis and beyond  137 broadly the concept of a “serious disturbance of the economy”’.28 Importantly, in spite of triggering Article 107(3)(b) TFEU, the Commission signalled that there would be no departure from the existing State aid discipline.29

2.

THE ‘CRISIS COMMUNICATIONS’

In just three months, the Commission adopted three Communications that served as a basis for its assessment of crisis measures and provided the Member States some certainty in the financial turmoil. In total, the Commission adopted seven ‘Crisis Communications’: the Banking Communication of 13 October 2008,30 the Recapitalisation Communication of 5 December 2008,31 the Impaired Assets Communication of 25 February 2009,32 the Restructuring Communication of 23 July 2009,33 the Prolongation Communication of 1 December 2010,34 the Prolongation Communication of 1 December 201235 and the Banking Communication of 10 July 2013.36 The 2008 Banking Communication set out the general principles a state intervention had to comply with to be approved under Article 107(3)(b) TFEU, in particular to benefit from the ‘rapid treatment of state aid investigations’. Aid had to be granted in an objective and non-discriminatory manner, the need for aid had to be clearly defined while aid was limited in time and scope. In order to limit aid to the strict minimum, the state support had to be adequately paid for by the beneficiaries that should bring an appropriate contribution. In order to minimise competition distortions, granting aid was subject to behavioural constraints.

Ungerer (n 14). See European Commission, ‘Communication on the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis’ (‘2008 Banking Communication’) [2008] OJ C270/8, paragraph 11. 30 Ibid. 31 European Commission, ‘Communication on the recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition’ (‘Recapitalisation Communication’) [2009] OJ C10/2. 32 European Commission, ‘Communication on the treatment of impaired assets in the Community financial sector’ (‘Impaired Assets Communication’) [2009] OJ C72/1. 33 European Commission, ‘Communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules’ (‘Restructuring Communication’) [2009] OJ C195/9. 34 European Commission, ‘Communication on the application of State aid rules to support measures in favour of financial institutions in the context of the financial crisis’ (‘First Prolongation Communication’) [2010] OJ C329/7. 35 European Commission, ‘Communication on the application of State aid rules to support measures in favour of financial institutions in the context of the financial crisis’ (‘Second Prolongation Communication’) [2012] OJ C356/7. 36 European Commission, ‘Communication on the application of State aid rules to support measures in favour of banks in the context of the financial crisis’ (‘New Banking Communication’) [2013] OJ C216/1. 28 29

138  Research handbook on European State aid law The Commission’s response to the crisis has been carefully assessed37 and received rather positive review.38 Still, the ‘special treatment’ of banks, some of them arguably being the architects of their own demise,39 led to claims from other sectors whose downturn had significant consequences for the economies of the Member States. This gave an impression of a State aid policy U-turn, which could also reverse the positive trends indicated by the Commission’s State Aid Scoreboards prior to the crisis.40 Some legal experts were particularly sceptical about the fast track procedure and the exceptional flexibility in the Commission’s crisis management.41 The main characteristics of the crisis procedure were speed, a streamlined consultation process within DG COMP and the Commission, a more liberal approach to language requirements and the empowerment of Commissioner Kroes to take certain decisions outside the college of all Commissioners.42 Moreover, the Commission was willing to approve emergency measures quickly but with a possibility and necessity of later re-assessment.43 The unprecedented speed of the procedure of approving, in some cases taking a few days or even less than 24 hours,44 raised doubts concerning the quality of the Commission’s economic examination of state interventions that were highly complex and of significant size.45 However, after some ultra-quick, panicky-looking decisions early on, the average time between notification and clearance settled at about one month.46 Still, the deficiencies in the reasoning of decisions, lack of transparency and very few formal investigations procedures were problematic for the safeguarding of undistorted competition and effective legal protection.47 Interestingly, the ‘more economic approach’, which was a staple of the State Aid Action Plan was not even mentioned in the Crisis Communications.48 Despite the identified risks, however, the crisis procedure was considered to be a well-designed tool to steer State aid control through the storm of the financial and economic crisis.49 The 2008 Banking Communication covered: (1) guarantees of financial institutions’ liabilities; (2) recapitalisation; (3) controlled winding-up; and (4) provision by central banks of short-term liquidity assistance, which usually falls outside the scope of aid. The focus was on the evaluation of liability guarantees. A detailed guidance on recapitalisation measures was provided in the Recapitalisation Communication.50 In particular, this Communication established detailed principles for the remuneration of the capital injections made by States

37 See, for example, European Court of Editors, ‘Do the Commission’s procedures ensure effective management of State aid control?’ (Special Report No 15, 2011), Christian Koenig, ‘“Instant State Aid Law” in a Financial Crisis, State of Emergency or Turmoil’ (2008) 7(4) EStAL 3. 38 Christian Ahlborn and Daniel Piccinin, ‘The Application of the Principles of Restructuring Aid to Banks during the Financial Crisis’ (2010) 9(1) EStAL 47. 39 Rose D’Sa, ‘“Instant” State Aid Law in a Financial Crisis – A U-Turn?’ (2009) 8(2) EStAL 6. 40 Ibid. 41 Jaeger (n 16). 42 Werner and Maier (n 13). 43 Ibid. 44 For example, the decision on a package of measures to ensure the orderly winding down of Bradford & Bingley was taken within 24 hours. 45 Jaeger (n 16). See also Werner and Maier (n 13). 46 Jaeger (n 16). 47 Ibid. 48 Jaeger (n 16) and Werner and Maier (n 13) 183. 49 Werner and Maier (n 13). 50 The Recapitalisation Communication (n 31).

State aid and the financial sector: the crisis and beyond  139 into banks, which should reflect the price that a normally functioning market would require for the relevant capital. The pricing was crucial, because in the absence of an appropriate risk-based justification, access by banks in one Member State to capital at considerably lower rates than that available to competitors from other Member States could have a significant impact on their competitive position in the internal market. Likewise, an inappropriate price would distort the level playing field between aided and non-aided banks. Both the 2008 Banking Communication and the Recapitalisation Communication drew a distinction between banks that were ‘fundamentally sound’ but suffering from the liquidity effects of the (exogenous) financial crisis and those that had endogenous problems.51 According to the Banking Communication, the former would require less restructuring than the latter, while under the Recapitalisation Communication, the ‘fundamentally sound’ banks could avoid restructuring altogether. That was creating uncertainty as to whether aid will require restructuring or not and if so, what principles will apply to the assessment of restructuring plans.52 The next two sets of guidelines indicated a change in the Commission’s approach to crisis aid. At the beginning of 2009, the situation in the market stabilised and the banks that received aid at the end of 2008 were due to submit restructuring plans or report on their viability. The Impaired Asset Communication provided guidance for aid linked to ‘relieving’ banks from assets which were broadly considered as ‘toxic’ or ‘impaired’.53 As regards asset purchases, impaired assets were transferred from the balance sheet of the recipient to another entity, often a special purpose vehicle, fully or partially sponsored by the State. The transfer price paid by the State to the recipient for the asset was above market value (that difference amounted to aid) but should not be above real economic value (which leaves a potential upside for the State). Moreover, the transfer price was usually below book value, which led to a write-down of the asset by the beneficiary. As regards asset guarantees, impaired assets remained in the balance sheet of the recipient, but losses related to those assets were guaranteed by the State (often only up to a certain level) beyond a first tranche of losses fully borne by the beneficiary bank. In exchange for the guarantee, the State received a yearly fee. The State thus partially bore the downside risk linked to the asset but has no upside other than the fee revenue.54 Importantly, the distinction between ‘fundamentally sound’ and unsound banks was abandoned, and the Commission stressed that banks would need a deep restructuring in a wider range of cases. Even though some banks would not need to undergo such a process, the Communication did no longer provide for a ‘safe harbour’ from compensatory measures for banks meeting the criteria in the Recapitalisation Communication.55 The Restructuring Communication clarified the requirements concerning restructuring plans submitted by banks.56 In particular, (1) the restructuring of banks should ensure their return to long-term viability over a reasonable timeframe without any State support; (2) any stakeholders in the banks (shareholders and bondholders) should participate in the costs of restructuring, thus limiting moral hazard; while (3) any distortion of competition caused by

See Ahlborn and Piccinin (n 38). Ibid. 53 The Impaired Asset Communication (n 32). 54 Commission, Competition (n 10), 29. 55 See Ahlborn and Piccinin (n 38) 51. 56 The Restructuring Communication (n 33). 51 52

140  Research handbook on European State aid law the aid should be minimised.57 Long-term viability required that any State aid received was either redeemed over time, as anticipated at the time the aid was granted, or was remunerated according to normal market conditions, thereby ensuring that any form of additional aid was terminated. This Communication represented a further hardening of the Commission’s stance with respect to State aid bank restructuring. Instead of focusing on reducing the scale of the aid recipient bank’s activities and protecting competitors as in the R&R Guidelines, the Commission proposed to use aid recipient banks’ restructuring plans to increase competition in banking markets through compensatory measures, calling for divestments to be made in national markets with high barriers to entry ‘to enable entry or expansion of competitors’.58 The Restructuring Communication was prolonged by the First Prolongation Communication until 31 December 2011.59 The three remaining Communications were intended to apply as long as the ‘serious disturbance in the economy’ was present. The Second Prolongation Communication prolonged all four Crisis Communications, this time indefinitely and set out the necessary amendments to the parameters for the compatibility of crisis aid to banks as from 1 January 2012.60 In particular, this Communication (1) supplemented the Recapitalisation Communication, by providing more detailed guidance on ensuring adequate remuneration for capital instruments that do not bear a fixed return; (2) explained how the Commission would undertake the proportionate assessment of the long-term viability of banks in the context of the banking package; and (3) introduced a revised methodology for ensuring that the fees payable in return for guarantees on bank liabilities were sufficient to limit the aid involved to the minimum, with the aim of ensuring that the methodology takes into account the greater differentiation of bank credit default swap (CDS) spreads in recent times and impact of the CDS spreads of the Member State concerned. The last Crisis Communication, the New Banking Communication of 2013, replaced the 2008 Banking Communication.61 It marked the end of the bail-out era and the beginning of the bail-in era, which enhanced the burden-sharing.62 This Communication continued to tighten the rules on granting crisis aid. The fiscal cost of resolving the banking crisis made it evolve into a sovereign crisis. Therefore, it became crucial to minimise the cost of bank restructuring for taxpayers.63 As the New Banking Communication stipulated, adequate burden-sharing would normally entail, after losses are first absorbed by equity, contributions by hybrid capital holders and subordinated debt holders. Hybrid capital and subordinated debt holders had to contribute to reducing the capital shortfall to the maximum extent. The Commission would not require contribution from senior debt holders (in particular from insured deposits, uninsured deposits, bonds and all other senior debt) as a mandatory component of burden-sharing under State aid rules and, finally, the ‘no creditor worse off principle’ should be adhered to. Thus,

57 See Max Lienemeyer and Laurent Le Mouël, ‘The European Commission’s Phasing-Out Process for Exceptional Crisis-related Measures’ (2011) 10(1) EStAL 41. 58 See Ahlborn and Piccinin (n 38). 59 The First Prolongation Communication (n 34). 60 The Second Prolongation Communication (n 35). 61 The New Banking Communication (n 36). 62 See Max Lienemeyer, Clemens Kerle and Helena Malikova, ‘The New State aid Banking Communication: The Beginning of the Bail-In Era Will Ensure a Level Playing Field of Enhanced Burden-Sharing’ (2014) 13(2) EStAL 277. 63 Ibid.

State aid and the financial sector: the crisis and beyond  141 subordinated creditors should not receive less in economic terms than what their instrument would have been worth if no aid were to be granted. The requirement of burden-sharing has led to a few legal challenges lodged either by investors who suffered losses or by banks whose activities were constrained by the conditions attached to the aid they received. Those legal actions were unsuccessful as no one proved that their losses were caused by a Commission decision or that the conditions imposed by a Commission decision were unnecessary or disproportional.64 In a preliminary ruling on the interpretation of the effects of the New Banking Communication, and on the interpretation and the validity of its framework of burden-sharing being a prerequisite for granting State aid to banks, Tadej Kotnik,65 the CJEU concluded that investors and creditors could not claim that they were deprived of their property, given that investment always entails the risk of loss.66 The New Banking Communication contributed to re-establish a level playing field for burden-sharing in bank restructuring.67 This level playing field had been tilted in the last phases of the crisis, and the Communication ensured that banks in Member States with deep pockets were not treated more favourably than those in Member States in a weaker fiscal position.68 From now, banks must submit a restructuring plan that must: (1) restore long-term viability without further need for aid in the future, by restoring sustainable profitability and reducing risk; if this proves not possible, consider an orderly winding-down; (2) minimise the use of taxpayers’ money, through appropriate burden-sharing measures, including aid remuneration and contributions by the bank, shareholders and junior creditors; (3) limit distortions of competition through proportionate remedies.

3.

GRANTING AID UNDER THE BANKING UNION REGULATIONS

Just after the break of the financial crisis it became clear that a deeper integration of the banking system was needed and that this need was urgent.69 While in 2008 the first victims of the crisis and beneficiaries of national rescue mechanisms were banks, within a couple of years several Member States had to benefit from European solidarity mechanisms.70 The financial

64 See Case T-319/11 ABN v Commission [2014] EU:​ T:​ 2014:​ 186, and Case T-457/09 Westfälisch-Lippischer Sparkassen [2014] EU:​T:​2014:​683. See also Marco Lamandini and David Ramos Muñoz, ‘Minimum Requirement for Own Capital and Eligible Liabilities’ in Chiti and Santoro (n 11) 321. 65 Case C-526/14 Tadej Kotnik, C-526/14 [2016] EU:​C:​2016:​570. 66 See Phedon Nicolaides, ‘Ten Years of State Aid to Financial Institutions: Is there still a “Serious Disturbance”?’ (2019) 18(2) EStAL 122; Ana Vlahek and Matija Damjan, ‘European Commission's Banking Communication: Question of Validity in the Slovenian Banking Bail-in Puzzle’ (2016) 15(3) EStAL 458. 67 See also Jochem de Kok, ‘Competition Policy in the Framework and Application of State Aid in the Banking Sector’ (2015) 14(2) EStAL 224. 68 Lienemeyer, Kerle and Malikova (n 62) 278. 69 See, for example, Chiti and Santoro (n 11) Preface. See also, Commission, ‘Communication from the Commission to the European Parliament and the Council: A Roadmap towards a Banking Union’ COM(2012)0510 final. 70 François-Charles Laprévote and Mélanie Paron, ‘The Commission’s Decisional Practice on State Aid to Banks: An Update’ (2015) 14(1) EStAL 88.

142  Research handbook on European State aid law and sovereign crises revealed the existence of undesirable links between national banking sectors and their sovereigns – the so-called doom loop. The Banking Union was created to break that link and avoid that taxpayers were first in line to bail out ailing banks.71 In this respect, it goes beyond the New Banking Communication. It concerns banks which are ‘failing or likely to fail’ and requires the bail-in of shareholders and creditors for a minimum amount of 8% of total liabilities before any funds may be injected into a bank under the resolution.72 From 1 January 2016, granting aid must comply with not only the 2013 Banking Communication, but also the requirements of Bank Recovery and Resolution Directive (BRRD)73 or Regulation establishing the Single Resolution Mechanism (SRMR)74 if aid is granted by a Member State in the Eurozone. The foundation of the Banking Union is the Single Rulebook for all financial actors in the 27 countries.75 On the basis of the European Commission Roadmap for the creation of the Banking Union of 2012,76 the EU institutions agreed to establish a single supervisory mechanism (SSM),77 which is the first pillar of the Banking Union, and a single resolution mechanism (SRM)78 for banks, which is the second pillar. The Regulation establishing the Single Resolution Mechanism implements the BRRD within the Eurozone. While those two pillars of the Banking Union are operative, the third one, a common system for deposit protection, has not yet been established and further measures are needed to tackle the remaining risks of the banking sector (in particular, those related to non-performing loans, or the initiatives to help banks diversify their investment in sovereign bonds).79 The Banking Union applies to countries in the Eurozone, but non-Eurozone countries can also join.

71 See Commission, ‘Communication to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions on completing the Banking Union’ COM(2017)592 final. 72 For extended discussion, see Maria Rosaria Miserendino, ‘State Aid for the Banking Sector: What has Changed After the New BRRD and SRM Regulation?’ (2018) 17(2) EStAL 2014. 73 European Parliament and Council Directive 2014/59/EU of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council [2014] OJ L173/190. 74 European Parliament and Council Regulation (EU) No 806/2014 of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 [2014] OJ L225/1. 75 For a detailed analysis of the Banking Union, see Chiti and Santoro (n 11). For more information on the Single Rulebook, see ˂www​.consilium​.europa​.eu/​en/​policies/​banking​-union/​single​-rulebook/​ https://​eba​.europa​.eu/​regulation​-and​-policy/​single​-rulebook˃ accessed 28 February 2020. 76 Commission, ‘Communication to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions on completing the Banking Union’ COM(2017)592 final. 77 For more information on SSM, see ˂www​.consilium​.europa​.eu/​en/​policies/​banking​-union/​single​ -supervisory​-mechanism/​˃ accessed 28 February 2020. 78 For more information on SRM see ˂www​.consilium​.europa​.eu/​en/​policies/​banking​-union/​single​ -resolution​-mechanism/​˃ accessed 28 February 2020. 79 For more information on further steps in completing the Banking Union, see ˂www​.consilium​ .europa​.eu/​en/​policies/​banking​-union/​risk​-reduction​-european​-deposit​-insurance​-scheme/​˃ accessed 28 February 2020.

State aid and the financial sector: the crisis and beyond  143 One of the key objectives of the BRRD and SRM is to safeguard that insolvent banks can be resolved in an orderly and uniform manner in the EU without aid.80 In order to prevent using taxpayers’ money to keep alive a bank that is ‘failing or likely to fail’, such bank must be either resolved if it is in the public interest81 or liquidated. A systemically important bank will be resolved while a non-systemic bank will be liquidated. In some cases, however, it is possible to grant aid without resolution or liquidation. Under Article 32 of the BRRD and Article 18 of the SRMR, banks are deemed not to be ‘failing or likely to fail’ when all the following conditions are met: (1) they are solvent under the normal scenario in stress tests conducted by the European Central Bank or bank regulators of non-Eurozone countries, (2) the aid must accompany a precautionary recapitalisation of the bank, meaning that its objective is to meet shortfalls of capital in the adverse scenario in stress tests, and (3) the aid has to be in the form of either a guarantee on newly issued liabilities or injection of own capital.82 The coexistence of the Banking Union and State aid law, however, raises certain problems that have been identified when the legal framework was adopted.83 The Commission decision-making practice has confirmed that there are unclarities and ambiguities. As pointed out by Nicolaides, it is unclear whether aid under Article 107(3)(b) has to counteract and/or prevent a ‘serious disturbance’ in the economy of a Member State and how Article 107(3)(b) can apply to aid that addresses regional rather than national problems. Moreover, it is unclear how the double requirement of remedying a serious disturbance and preserving financial stability is applied to solvent banks which are not systemically significant and whether the requirement that resolution aid must be in the ‘public interest’ also implies that aid must be limited to banks with systemic significance.84

4.

THE MARKET ECONOMY OPERATOR PRINCIPLE UNDER THE EXTRAORDINARY MARKET CONDITIONS

Expectedly, the majority of state interventions in favour of financial institutions have been undertaken by the Member States acting as public authorities. Those amounted to either aid that was subject to the compatibility assessment or liquidity assistance that was provided by public authorities exercising their tasks within the monetary policy. As a rule, the latter fell outside the scope of State aid rules.85 Under certain conditions also dedicated support to a specific financial institution could be considered aid-free.86 State interventions that were undertaken by the Member States acting as private market operators were rather an exception. Nevertheless, those rare instances have contributed to some valuable though to some extent controversial clarifications. The crisis and the conse80 See also Ginevra Bruzzone, Miriam Cassella and Stefano Micossi, ‘The new regulatory framework for bank resolution’ in Laprévote, Gray and de Cecco (n 12) 505. 81 SRRM 18(1)(c) and BRRD 32(5). 82 Nicolaides (n 66) 123. 83 See, for example, François-Charles Laprévote and Amélie Champsaur, ‘Hand in hand or parallel paths? Reflections on the future coexistence of State aid control and bank resolution in the EU’ in Laprévote, Gray and de Cecco (n 12) 538. 84 Nicolaides (n 66). 85 The 2008 Banking Communication (n 29) paragraph 51. 86 Ibid. See also Northern Rock (n 5) paragraphs 32–4.

144  Research handbook on European State aid law quences of crisis aid provided a unique opportunity to verify the logic and the limits of the Market Economy Operator Principle (MEOP). First of all, the extraordinary market conditions could question the applicability of the MEOP. It is rather undisputed that the situation following the collapse of Lehman Brothers considerably deviated from what is perceived to be ‘normal’.87 In this respect, EFTA Surveillance Authority (ESA) in a few of its financial crisis decisions claimed that Iceland could act only as public authority that granted aid.88 In Sjóvá, ESA argued that ‘[e]ven in cases with an apparently genuine private investor behaviour from the State, the Commission has taken the view that the circumstances surrounding the financial crisis are so unusual that in general the market investor principle cannot be applied’.89 As ESA argued to have based its approach on the Commission’s practice, the relevant three Commission decisions should be analysed. In the Danish guarantee scheme for banks, the MEOP was inapplicable because of absence of a ceiling on the guarantee and remuneration.90 Yet, under no conditions the provision of an unlimited guarantee would mirror the behaviour of a prudent private guarantor. Only the State has at its disposal ‘effectively infinite financial resources’91 while it is impossible to calculate a market-conform price for an unlimited guarantee. A similar reasoning was applied to the unnotified Irish guarantee scheme that was announced on 30 September 2008. The MEOP was not met because of the very large scope of the guarantee.92 There was no cap and the Irish authorities did not show that the fee imposed in exchange for the guarantee was market-conform. The recapitalisation of IKB did not comply with the MEOP because of the scale of the State’s involvement.93 The State increased the public shareholding from 38 to 91%. In fact, the KfW’s exposure became unlimited, the banking associations limited their risk and the other shareholders in IKB did not participate in recapitalisation at all. In a case concerning the Swedish recapitalisation scheme for fundamentally sound banks, although the State provided capital only on equal terms with private investors,94 the scheme did not comply with requirements for pari passu transactions. The investment decisions of the private investors were very likely to be influenced to a decisive degree by the very fact that

See also Jérôme Philippe, ‘Euro 4.6 trillion’ (2011) 10(1) EStAL 3. EFTA Surveillance Authority, Decision of 27 June 2012 on restructuring aid granted to Íslandsbanki, 244/12/COL. See, likewise, EFTA Surveillance Authority, Decision of 13 April 2011 on State aid for the establishment and capitalisation of Byr hf., 126/11/COL; EFTA Surveillance Authority, Decision of 11 July 2012 on restructuring aid to Landsbankinn, 290/12/COL. 89 EFTA Surveillance Authority, Decision of 22 September 2010 to initiate the formal investigation procedure with regard to the recapitalisation of Sjóvá insurance company, 373/10/COL. 90 Commission Decision of 10 October 2008, (NN 51/2008) – Guarantee scheme for banks in Denmark. 91 Commission Decision of 4 August 1993, notice pursuant to Article 93(2) of the EC Treaty to other Member States and other parties concerned regarding aid which Italy has decided to grant to EFIM, [1993] OJ C349/2, 3. 92 The Irish scheme (n 7) covered all existing deposits, covered bonds, senior debt and dated subordinated debt and any new such facilities issued from on 30 September 2008, up to 29 September 2010 inclusive. 93 Commission Decision of 21 October 2008 on State aid measure implemented by Germany for the restructuring of IKB Deutsche Industriebank AG [2009] OJ L 278/32. 94 Commission Decision of 10 February 2009 (N 69/2009) Sweden – Recapitalisation scheme for fundamentally sound banks. 87 88

State aid and the financial sector: the crisis and beyond  145 the State was investing alongside them. One could thus not assume that the private investors at stake behaved as rational and profit-oriented market operators, which is the benchmark for the State’s behavior under the MEOP. Under the scheme, the State could provide up to 70% of capital.95 While none of the Commission’s decisions on which ESA relied supported ESA’s approach, the Commission did duly take into account the crisis conditions under Article 107(1) TFEU.96 In particular, the Commission clarified in a concrete manner how the financial turmoil affected the expected profitability and risk associated with the given intervention.97 For example, in Sachsen LB98 the Commission explained that ‘the demand for mortgage-backed [commercial papers] CPs had practically dried up and … therefore there was no longer any effective market for this type of investment’. Yet, ‘[s]uch lack of demand should, … not be confused with the absence of a market benchmark. Instead the market benchmark was simply that such CPs had at that time no reasonable economic value’. When the Commission opened for granting crisis aid, it attempted to reduce the distortion of competition by minimising its amount. The Crisis Communications not only relied on market rates as benchmarks in assessing the presence of aid and its compatibility, but also referred to the private vendor test.99 Even though the business hostile market conditions made it difficult to comply with the MEOP, one may refer to a few instances in which the State’s intervention met the test. As regards pari passu transactions, the lack of foreseeability, lower profitability and increased risks could question the independence of private operators acting in concomitance with the State.100 Yet, one of the exceptions concerned the recapitalisation of Hypo Steiermark.101 It was undertaken by the bank’s shareholders: the Austrian Federal State Land Steiermark (holding 25% plus one share), and a private bank, Raiffeisen Landesbank Steiermark (holding 75% minus one share). Both shareholders executed the capital increase pro rata according to the existing ownership structure and the purchase of the shares was

Ibid, paragraphs 25–7. For example, in ABN AMRO Group NV, the Netherlands claimed that ‘given ABN AMRO N’s conservative risk profile (namely no toxic assets, good funding position, etc.)’, there was no need for a correction to the ‘current conditions’ market valuation. The Commission noted, however, that ‘[t]he market decline was widespread, and especially so amongst banking stocks, indicating that it was not so much linked to stock-specifics but rather to worsened economic and financial market conditions and the associated increase in required risk premiums’, Commission Decision of 5 April 2011 on the measures implemented by the Dutch State for ABN AMRO Group NV [2011] OJ L 333/1, paragraphs 248–9. 97 For example, in Parex the subordinated capital and guarantee arrangements failed the MEOP because the return did not commensurate with the risk perceived for the investment under consideration, Commission Decision of 24 November 2008, (NN 68/2008) – Public support measures to JSC Parex Banka, Latvia, paragraphs 38–40. 98 SachsenLB (n 2). 99 The Recapitalisation Communication also introduced a kind of concomitance test under the compatibility assessment. 100 See, for example, Commission Decision of 18 November 2009 (N 428/2009) on Restructuring of Lloyds Banking Group, UK; Commission Decision of 2 October 2008 on Rescue aid for Hypo Real Estate, Germany, C(2008)5735, and Swedish recapitalisation scheme (n 94). 101 Commission Decision of 22 July 2009 (NN 40/2009) – Recapitalisation of Landes-Hypothekenbank Steiermark Aktiengesellschaft, Austria. 95 96

146  Research handbook on European State aid law subject to identical conditions while the private shareholder’s participation in the capital increase was of real economic significance.102 As regards the valuation of assets, the Impaired Assets Communication required that those should be valued on the basis of their current market value, whenever possible.103 Given the extraordinary market conditions, such value was not necessarily fair, but only market-conform prices excluded aid.104 The valuation of assets had to be particularly prudent, conservative and thorough.105 The Commission often relied on independent evaluators.106 Importantly, as the market value of assets could rise and fall significantly within a relatively short period of time during the crisis,107 establishing the correct point of time in which one carried out the valuation for the purposes of applying the MEOP could be conclusive.108 In cases of privatisation or nationalisation of a financial institution, the Commission had to verify whether the process could confer aid to two potential beneficiaries: the purchaser or seller, respectively, and the institution at stake.109 As regards the financial institution sold, it did not receive any advantage if the Member State’s behaviour was consistent with that of a market economy vendor.110 As regards the purchaser or seller, the entity had to be sold

102 See also Dexia BIL where Luxembourg participated in the sale of Dexia BIL as a buyer of a 10% holding under the same conditions as Precision Capital, which confirmed a market-conform nature of the transaction. Commission Decision of 25 July 2012 on measure implemented by Luxembourg concerning the sale of Dexia BIL [2012] OJ L 357/15. 103 The Impaired Assets Communication (n 32), paragraph 39. 104 Commission Decision of 2 May 2016 on the State aid and measures in favour of HSH Nordbank AG [2016] OJ L 319/3. See, likewise, Commission Decision of 10 February 2016, case SA.43390 (2016/N) – Italian securisation scheme, paragraph 51; Commission Decision of 10 February 2016, case SA.38843 (2015/N) – Asset purchase programme by the Magyar Reorganizációs és Követeléskezelő Zrt., a Hungary. 105 See HSH Nordbank (n 104), paragraph 114. 106 See, for example, Magyar Reorganizációs és Követeléskezelő Zrt. (n 104), paragraphs 46 and 84; HSH Nordbank (n 104), paragraph 111. 107 For example, in ABN AMRO, the Commission noted that ‘a correction to the “current conditions” market valuation would be needed in any event to take into account the deterioration of the market conditions between 3 October 2008 (namely the date of the […] valuation report) and the actual date when the acquisition of ABN AMRO N by the Dutch State was decided upon (December). In that period, the Euro Stoxx 50 index fell by 22.2% while the Euro Stoxx Banks index fell by 45.3%’, see ABN AMRO (n 96). 108 See Commission Decision of 3 December 2008 (NN 42/2008, NN 46/2008, NN 53/2008) – Restructuring aid to Fortis Bank and Fortis Bank Luxembourg, paragraphs 53–9; ABN AMRO (n 96), paragraphs 247–9; Commission Decision of 12 May 2009 (N 255/2009) – Additional aid for Fortis Banque, Fortis Banque Luxembourg and Fortis holding, paragraph 42; Commission Decision of 12 May 2009 on State aid which Germany proposes to grant towards the restructuring of WestLB AG [2009] OJ L 345/1, paragraph 54. 109 See, for example, Commission Decision of 28 December 2012 on State aid SA.33760 (12/N-2, 11/C, 11/N); SA.33763 (12/N-2, 11/C, 11/N); SA.33764 (12/N-2, 11/C, 11/N); SA.30521 (MC 2/10); SA.26653 (C9/09); SA.34925 (12/N-2, 12/C, 12/N); SA.34927 (12/N-2, 12/C, 12/N); SA.34928 (12/N-2, 12/C, 12/N) implemented by the Kingdom of Belgium, the French Republic and the Grand Duchy of Luxembourg in favour of Dexia, DBB/Belfius and DMA, paragraph 438. 110 See also the Commission’s decision on nationalisation of Anglo-Irish Bank Corporation plc where the Commission concluded that the purchase of existing shares and the takeover of assets, when these were not accompanied by a capital injection, assumption of liabilities or some other State measure, did not favour the financial institution inasmuch as they amounted to a mere change of ownership. The nationalisation as such did not entail a transfer of State resources to the bank nor did it represent a burden

State aid and the financial sector: the crisis and beyond  147 at a market price. Such price could be established through a tender procedure or an ex ante expert assessment.111 As regards a tender procedure, excluding an economic advantage to the seller or purchaser required that the procedure was open, transparent and unconditional and that the asset or shareholding was sold to the bidder who made the highest binding and credible offer.112 Yet, as an ordinary tender procedure was often impossible to carry out, the Commission had to assess whether alternative solutions did not compromise the objective of selling the entity at a market price. In Nea Proton Bank, the seller decided to contact only those banks, financial institutions and sponsors that – in light of the requirements and the time frame for the sale – were deemed to be potential buyers.113 Still, the Commission concluded that the procedure was open and non-discriminatory. Even though the bank was sold at a negative price, the Commission accepted that it reflected the market value of Nea Proton Bank that was expected to generate more losses.114 Also in Piraeus Bank contacting a limited number of potential buyers did not preclude considering the procedure to be open. In this case, only the domestic banks were invited by the seller as it was reasonable not to expect a formal bid from foreign banks exiting Greece at that time.115 Moreover, a very short timeframe made domestic banks more likely to enter a sale transaction and quickly stabilise the entity in question. The extraordinary market conditions often required that the sale of a bank was carried out in a seamless and rapid manner and that the buyer was properly equipped.116 This necessarily reduced the number of potential buyers and excluded running time-consuming ordinary tender procedures. Under certain conditions, even bilateral negotiations with a potential buyer without call for an open, transparent and non-discriminatory tender procedure could safeguard a sale at a market price. This was the case in Dexia BIL, where the price was based on a fairness opinion that considered the precise conditions and scope of the transaction.117

for the national budget towards the bank over and above the already existing State exposure under the guarantee scheme, Commission Decision of 16 February 2009 (N 356/2009) – Change of ownership of Anglo-Irish Bank, Brussels. 111 European Commission, XXIII Report on Competition Policy of 1993 (Luxembourg: Office for Official Publications of the European Communities, 1994), 255. See also Commission Staff Working Document of 10 February 2012 on State aid-compliant financing, restructuring and privatisation of State-owned enterprises, swd(2012)14 final. 112 See, for example, Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland v Commission, [2013] EU:​C:​2013:​682, paragraph 94. 113 Commission Decision of 29 April 2014 on the State aid implemented by Greece for the Eurobank Group related to: Recapitalisation and Restructuring of Eurobank Ergasias S.A.; Restructuring aid to Proton bank through creation and capitalisation of Nea Proton and additional recapitalisation of New Proton Bank by the Hellenic Financial Stability Fund; Resolution of Hellenic Postbank through the creation of a bridge bank [2014] OJ L 357/112. 114 Commission Decision of 29 April 2014 (n 113), paragraph 235. 115 Commission Decision of 23 July 2014 on the State aid implemented by Greece for Piraeus Bank Group relating to the recapitalisation and restructuring of Piraeus Bank SA [2015] OJ L 80/49. 116 See Commission Decision of 9 July 2014 on the State aid implemented by Greece for Alpha Bank Group relating to: Recapitalisation and restructuring of Alpha Bank S.A.; Resolution of Cooperative Bank of Western Macedonia through a transfer order to Alpha Bank S.A.; Resolution of Evia Cooperative Bank through a transfer order to Alpha Bank S.A.; Resolution of the Cooperative Bank of Dodecanese through a transfer order to Alpha Bank S.A. [2014] OJ L 80/1. 117 Dexia BIL (n 102) paragraphs 91–2.

148  Research handbook on European State aid law In the Bank of Peloponnese, the Commission assessed a sale of a cooperative bank that was unable to raise the required regulatory capital.118 The Bank of Greece determined that it was ‘failing or was likely to fail’ and thus met the condition for resolution provided in BRRD. When establishing whether the sale entailed aid to the buyer, in line with the 2013 Banking Communication and the Restructuring Communication, the Commission assessed whether (1) the sale process was open, unconditional and non-discriminatory; (2) the sale took place on market terms; and (3) the credit institution or the government maximised the sale price for the assets and liabilities involved. While the buyer submitted the preferred offer in the framework of a non-discriminatory tender procedure open to other banks, the Bank of Greece only contacted four banks. Still, those represented in fact the totality of the Greek banking sector excluding the cooperative banks. Moreover, foreign credit and financial institutions at that time showed limited interest in engaging in banking activities in Greece. Moreover, as only limited assets and liabilities were to be transferred, only banks that were already present in the Peloponnese peninsula had the capacity to integrate those assets and liabilities. Finally, the Bank of Greece determined in advance the portfolio of the assets and liabilities to be transferred and the timetable the offers should meet in order to be valid. As regards the relatively low price paid by the buyer (EUR 5 million) for the assets and liabilities of Bank of Peloponnese in comparison with the funding gap covered by the Resolution Fund (up to EUR 99.6 million), it did not preclude that the sale price reflected the market value of the business. The Commission had no reason to consider that the offer made and the price paid did not reflect the market price of the business. Moreover, under Greek law, the fair value of the transferred assets was initially estimated by the Bank of Greece and then verified and adjusted by external experts during the following six months. The sale took place on market terms. In Hypo Niederösterreich, the Commission assessed whether a publicly-owned entity granted aid by selling its stake in Raiffeisen Zentralbank Österreich (RZB), a privately-owned entity, to other shareholders of RZB.119 No tender procedure was held due to a shareholders’ agreement according to which Hypo Niederösterreich had first to offer its shares to the remaining parties to the shareholders’ agreement before it could sell them to a third party (i.e. the remaining parties to the shareholders' agreement had been granted a pre-emption right in proportion to their participation in the event of a sale of shares in RZB by a party to the shareholders’ agreement). When assessing the sale price of the shares, the Commission verified the quality of the expert evaluations while taking into account the point in time when they were delivered. The sale price was not only above the price estimated by the experts, but also took into account valuation ratios observed for other financial institutions in European and non-European countries at the time of the expert opinions. There was no indication that the expert opinions underestimated the price of the RZB shares. As regards aid to institutions, during the crisis the State was more likely to act as a public authority trying to remedy the systemic crisis than carrying out business transactions. For example, in Nea Proton Bank, a private owner would rather liquidate the bank than sell

118 Commission Decision of 17 December 2015, case SA.43886 (2015/N) – Resolution of Cooperative Bank of Peloponnese. 119 Commission Decision of 20 December 2011, case SA.33805 (2011/N) – Sale of RZB shares by Hypo Niederösterreich.

State aid and the financial sector: the crisis and beyond  149 it for EUR 1 after injecting EUR 395 million to recapitalise it. State intervention was not profit-motivated but aimed to allow the bank to stay on the market.120 The application of the MEOP to state measures granted to financial institutions hit by the crisis raised some novel issues and tested the limits of the MEOP. In ING, the General Court (GC) concluded that the Commission should have applied the MEOP to an amendment to repayment terms of the recapitalisation measure that was granted to ING.121 According to the Commission, the State simply waived its right to obtain revenues, which amounted to additional aid. Yet, according to the GC, when granting aid, the State acted as a public authority that aimed to save a systemic national bank, but when it renegotiated the terms of its repayment, it (could have) acted as an entrepreneur that aimed to obtain better terms.122 This judgment raised controversy, amongst others due to the fact that just three days earlier the GC handed down a judgment that seemingly contradicted ING, Bank Burgenland.123 Following a tender procedure, Bank Burgenland was sold to GRAWE, although the second bidder submitted a significantly higher offer. According to the Commission, a private seller could accept a lower bid where the sale to the highest bidder was evidently not realisable or where taking into account factors other than price was justified. In Bank Burgenland, the authorities relied on a financial risk stemming from Ausfallhaftung, an unlimited State guarantee. In line with Gröditzer Stahlwerke,124 the Commission denied its relevance under the MEOP. This was confirmed by the GC and the CJEU.125 Although in both ING and Bank Burgenland, the previously granted measures amounted to aid, the judgments are not in contradiction.126 First, ING concerned the applicability of the MEOP, while Bank Burgenland its application.127 Second, one could not calculate aid stemming from an unlimited guarantee while this was possible in case of the amendment to the repayment terms. ING was not only the first judgment on bank bail-outs, but it also recalled the so-called pollution theory.128 It excludes the application of the MEOP to a newly granted state measure

Nea Proton Bank (n 113) paragraph 188. Joined Cases T-29/10, T-33/10 Netherlands and ING v Commission [2012] EU:​T:​2012:​98, upheld in Case C-224/12 P Commission v Netherlands and ING [2014] EU:​C:​2014:​213. See also Morten Qvist Fog Lund and Preben Sandberg Pettersson, ‘The ING-Case – The First Court Ruling on Bank Bailouts and the Market Economic Investor Principle’ (2013) 12(3) EStAL 561. 122 Netherlands and ING v Commission (n 121) paragraph 125. 123 Joined Cases T-268/08 and T-281/08 Land Burgenland and Austria v Commission [2012] EU:​T:​ 2012:​90. 124 Case C-334/99 Gröditzer Stahlwerke [2003] EU:​C:​2003:​55. 125 Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland, Grazer Wechselseitige Versicherung and Austria v Commission [2013] EU:​C:​2013:​682. 126 For extended discussion, see Małgorzata Agnieszka Cyndecka, ‘The Applicability and Application of the Market Economy Investor Principle: Lessons Learnt from the Financial Crisis’ (2017) 16(4) EStAL 512; Birgit Haslinger, ‘Tender Procedures in State aid Law: The Bank Burgenland Case Before the General Court’ (2013) 12(3) EStAL 589. 127 More on this distinction in Malgorzata A Cyndecka, The Market Economy Investor Test in EU State Aid Law: Applicability and Application (Wolters Kluwer 2016). 128 Jose Manuel Paneri Rivas, ‘Testing the Soundness of the Commission’s Practice on State Aid to the Financial Sector. Annotation on the Judgment of the Court of Justice of 3rd of April 2014 in C-224/12 P Commission v ING’ in Caroline Buts and Jose Luis Buendía Sierra (eds), Milestones in State Aid Case Law. EStAL’s First 15 Years in Perspective (Lexxion 2017) 652, 655. 120 121

150  Research handbook on European State aid law if the beneficiary benefitted from aid in the past.129 In BP Chemicals130 the GC clarified, however, that while the mere fact of benefitting from aid in the past does not exclude the possibility of using the MEOP in the future, a new state measure must be separable from aid.131 Yet, it was not until the Danish case FIH that the treatment of previously granted aid under the MEOP was clarified, though this clarification raised controversy. FIH benefitted from crisis aid in 2009, but its liquidity problems in 2012 triggered notification of new aid that the Commission declared compatible. FIH argued, however, that the Commission should have considered the pre-existing risk for the state of suffering very large losses on the previously granted aid and apply the private creditor test instead of private investor test. The Commission refused to take into account those risks as the 2009 measures amounted to aid. While the GC agreed with FIH,132 the CJEU rejected the seemingly economically sound solution.133 While this conclusion seems to confirm the importance of making a distinction between the public authority and entrepreneurial dimension of the state,134 FIH is also being strongly criticised for being at odds with both the purpose of the MEOP and previous European case law.135 In any case, the interesting evolvement of the MEOP is one of the consequences of the financial crisis that has had a unique impact on State aid law.

5.

CONCLUSIONS AND THE WAY FORWARD: HAS THE NOT FULLY RECOVERED PATIENT CONTRACTED A VIRUS?

The application of State aid law in the financial sector during the last 13 years has put State aid control to a tough test. The extraordinary market conditions required extraordinary actions and the Commission’s response seems to have contributed to saving a level playing field, not only in the financial sector, but also in the internal market. The Commission remained at the helm in the most difficult times, adapted its response to the changing situation, and continued working on completing the Banking Union. When speaking at a conference in October 2019, the Competition Commissioner Margrethe Vestager was rather optimistic about tackling non-performing loans, the legacy of the financial crisis, through a joint effort of banks, Member States and the European institutions. Although Article 107(3)(b) TFEU was still being used to support banks, the financial sector appeared to be more resilient and, hopefully,

129 On the ‘pollution theory’ see, for example, Maria Muñoz de Juan, ‘The Bouygues Case: A never ending Story, Annotation on the Judgment of the General Court (Sixth Chamber) of 2 July 2015 in Joined cases T-425/04 RENV and T-444/04 RENV, Bouygues (France Télécom/Orange v European Commission)’ in Buts and Buendía Sierra (n 128) 652, 655. 130 Case T-11/95 BP Chemicals v Commission [1998] EU:​T:​1998:​199. 131 Ibid, paragraphs 170–1. 132 Case T-386/14 FIH v Commission [2016] EU:​T:​2016:​474. 133 Case C‑579/16 P Commission v FIH [2018] EU:​C:​2018:​159. 134 See, for example, Malgorzata Agnieszka Cyndecka, ‘The FIH-Case and the MEIP – A Step Forward or a Step in the Wrong Direction’ (2017) 16(1) EStAL 86 and ‘The MEOP in the FIH Case – Where Law and Economics Meet, but Law Prevails’ (2018) 17(4) EStAL 546. 135 See, in particular, Jan Bonhage, ‘Previous State aid and Subsequent Financial Assistance. The FIH Judgment and the Future of the MEOP’ (2019) 18(1) EStAL 29. See also Phedon Nicolaides, ‘Is there a Need for a New Concept of ‘Ex-ante Creditor’? Consequences of the FIH Holdings Judgment’ (2018) 17(3) EStAL 368.

State aid and the financial sector: the crisis and beyond  151 better prepared for another credit crunch.136 Quite unexpectedly, this may soon be verified. The same concerns the question of coexistence of the rules on State aid and the Banking Union. In March 2020, the Commission and the State aid law regime had to face another challenge following the outbreak of coronavirus (COVID-19) and its unprecedented impact on the real economy businesses in addition to being a severe public health emergency. This time the Commission almost immediately triggered Article 107(3)(b) TFEU in addition to qualifying the COVID-19 outbreak as an ‘exceptional occurrence’ for the purpose of Article 107(2)(b) TFEU.137 It also recalled possibilities of supporting businesses without falling under Article 107(1) TFEU such as non-selective tax measures.138 The experience gathered in 2008 allowed the Commission and DG COMP to address the urgent needs of European businesses in a swift manner by not only providing new guidelines within days, but also safeguarding that those will be applied. The notified measures are being assessed and approved within days or even 24 hours.139 The Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak that is based on Article 107(3)(b) TFEU was announced on 19 March 2020. The new guidelines opened for granting five types of aid measures: (1) direct grants, selective tax advantages and advance payments, (2) State guarantees for loans taken from banks, (3) subsidised loans to companies, (4) safeguards for banks that channel State aid to the real economy, and (5) short-term export credit insurance.140 Following consultations with the Member States, the Temporary Framework was updated just a few days later, on 3 April.141 The first amendment opened for an additional five types of aid: (1) direct grants, repayable advances or tax advantages for coronavirus and other relevant antiviral R&D, (2) direct grants, tax advantages, repayable advances and no-loss guarantees to support investments enabling the construction or upscaling of infrastructures needed to develop and test products useful to tackle the coronavirus outbreak, (3) direct grants, tax advantages, repayable advances and no-loss guarantees to support investments enabling the rapid production of coronavirus related products, (4) deferrals of payment of taxes and of social security contributions in those sectors, regions or for types of companies that are hit the hardest by the outbreak, and (5) wage subsidies for employees to help limit the impact of the coronavirus crisis on workers of those

136 Commissioner Margrethe Vestager, ‘A level playing field for banks in the Union’ (SRB Conference, Speech of 10 October 2019) accessed 6 April 2020. 137 On 12 March, the Commission concluded that the COVID-19 outbreak qualifies as an ‘exceptional occurrence’ for the purpose of Article 107(2)(b) TFEU, which is also being used to approve coronavirus related aid, see Commission Decision of 12 March 2020, case SA.56685 (2020/N) – Denmark – Compensation scheme for cancellation of events related to COVID-19. 138 COVID-19: Commission sets out European coordinated response to counter the economic impact of the Coronavirus, Press release of 13 March 2020, accessed 6 April 2020. 139 For an updated list of approved aid measures and Temporary Framework, see accessed 6 April 2020. 140 Communication from the Commission: Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, Brussels, 19 March 2020 C(2020)1863 final (‘COVID-19 Communication’). 141 Commission, ‘Amendment to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak’ C(2020)2215 final.

152  Research handbook on European State aid law companies in sectors or regions that have suffered most from the coronavirus outbreak, and would otherwise have had to lay off personnel. The amendment of 3 April also expanded the original Framework by, amongst others, increasing the amount of aid that may be granted per company. By allowing to combine the maximum amount of EUR 800,000 with de minimis aid, the state may now grant up to EUR 1 million per undertaking. While the real economy businesses are the first to experience the major economic shock caused by the coronavirus outbreak, the question is what impact it will have on the recovering banking sector. In some Member States, the level of non-performing loans remains high. The situation may rapidly become worse given the financial problems of households and real economy businesses that will not be able to repay their loans. One should thus expect that the financial sector will be affected by the COVID-19 outbreak. As regards the Temporary Framework on COVID-19 aid and the financial sector, the new guidelines allow for granting aid in the form of public guarantees and reduced interest rates to the undertakings facing a sudden liquidity shortage directly or through credit institutions and other financial institutions as financial intermediaries. While such aid is directly targeting undertakings facing a sudden liquidity shortage and not credit institutions or other financial institutions, the Commission admitted that it may also constitute an indirect advantage to the latter. Still, such indirect aid does not have the objective to preserve or restore the viability, liquidity or solvency of the credit institutions. According to the Commission, such aid should thus not be qualified as extraordinary public financial support according to Article 2(1)(28) BRRD and Article 3(1)(29) SRMR, and should not be assessed under the State aid rules applicable to the banking sector. In any event, the COVID-19 Communication introduces certain safeguards in relation to the possible indirect aid in favour of the financial institutions to limit undue distortions to competition. Such institutions should, to the largest extent possible, pass on the advantages of the public guarantee or subsidised interest rates on loans to the final beneficiaries. The financial intermediary shall be able to demonstrate that it operates a mechanism that ensures that the advantages are passed on to the largest extent possible to the final beneficiaries in the form of higher volumes of financing, riskier portfolios, lower collateral requirements, lower guarantee premiums or lower interest rates. When there is a legal obligation to extend the maturity of existing loans for SMEs no guarantee fee may be charged.142 Given the expected economic downturn, however, some banks will probably require aid. As mentioned in Section 3, granting aid under the Banking Union regulations creates serious doubts given the unclarified scenarios in which the question of aid may be considered.143 The coexistence of the two sets of rules may be thus put to a tough test and clarifications may be needed much sooner than one could expect when we welcomed the year 2020.

See the COVID-19 Communication (n 140), paragraphs 28–31. See also Phedon Nicolaides ‘The Corona Virus Can Infect Banks Too. The Applicability of the EU Banking and State Aid Regimes’ (2020) 19(1) EStAL 29. 142 143

8. Material selectivity outside the field of taxation Andreas Bartosch

I.

THE THREE-STEP TEST – A UBIQUITOUS PHENOMENON

Material selectivity is, in my personal view, the most jelly fish-like creature that roams in the Animal Kingdom of European State aid law. Once one has started to have gained an initial confidence of having established a firm grasp on it, preventing it to escape, it has already, once again, slipped off one’s hands. The trap devised by the EU jurisprudence in an attempt to capture it is the so-called three-step test, which, admittedly so, originates from the field of fiscal measures. This test needs to be carried out as follows: ●● First, the ordinary or “normal” so-called reference system applicable in the Member State concerned must be identified. ●● Second, the measure at issue must be a derogation from that ordinary system, in so far as it differentiates between economic operators who, in the light of the objective pursued by that ordinary tax system, are in a comparable factual and legal situation. ●● Third, this differentiation must not be justified by the nature or general scheme of the system of which it forms part.1 In the following, it is first shown that the three-step test is indeed applied outside taxation matters (see hereto thereafter Section 1). Thereafter I shall explain why this three-step test is indeed the only one available at present, the alternative of a so-called “general availability test” resembling more a fata morgana (see hereto below Section 2). 1.

The Presence of the Three-Step Test outside the World of Fiscal Measures

Sometimes it is believed that the three-step test solely applies to tax measures. Therefore, outside the field of taxation this method would not be appropriate for the assessment of material selectivity.2 However, such belief is betrayed by the pertinent EU jurisprudence. Indeed, numerous rulings handed down by the European Courts’ jurisprudence prove exactly the opposite, i.e. that the three-step analysis is also applied in cases where the contested measures are not relevant to the taxation system. This can easily be demonstrated. In the following three subsections selected examples of this shall be presented.

1 See on this the classic formula as firstly pronounced by Case C-143/99 Adria-Wien Pipeline GmbH v Finanzlandesdirektion [2001] EU:​C:​2001:​598, paras 41–2. 2 Bizarrely so, these voices are even heard from inside the Commission’s own services.

153

154  Research handbook on European State aid law a. The Mediaset case The Mediaset case3 was concerned with the grant of subsidies disbursed by the Italian Republic, by way of offering a cash grant to every consumer that has “fulfilled his obligations regarding payment of the relevant subscription fee for the year in progress and who purchases or rents equipment for the reception … of television signals transmitted using digital terrestrial technology … and the associated interactive services”,4 in order to promote the purchase of digital decoders, i.e. a measure that beyond any doubt cannot be classified as tax-related. In its judgment issued on the appeal against the ruling handed down by the General Court, the Court of Justice, when examining the issue of material selectivity, made explicit reference to the first two steps of the three-step analysis, as follows: Article 87(1) EC5 requires assessment of whether, under a particular legal regime, a national measure is such as to favour “certain undertakings or the production of certain goods” in comparison with others which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation … In order to determine whether a measure is selective, it is therefore appropriate to examine whether, within the context of a particular legal system, that measure constitutes an advantage for certain undertakings in comparison with others which are in a comparable factual and legal situation.6

The Court applied this method in the course of examining the facts in the above case, although it was not mandated to proceed to the third step of the test, i.e. whether the deviation from the general rule that constitutes the reference system was justified, by either the nature or the design of the reference system, since it found that: “the distortion of competition was such that the aid at issue could not be declared compatible with the common market under Article 87(3) (c) EC”.7 b. The Black Cabs case The Court of Justice also applied the three-step analysis in the Eventech case, commonly referred to as the so-called Black Cabs case.8 This case was concerned with a measure of making a bus lane on a public road in the city of London available to Black Cabs, but not to the competing minicabs; again, this was outside the hemisphere of taxation. Here, the Court of Justice of the European Union (CJEU) referred to the Court’s settled case-law that Article 107(1) TFEU requires an assessment of whether, under a particular legal regime, a national measure is such as to favour “certain undertakings or the production of certain goods” in comparison with others which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation.9

The mentioning of the “particular legal regime” concerns the definition of the relevant reference system, i.e. the first step of the three-step analysis, while the latter part of the above quote

5 6 7 8 9 3 4

Case C-403/10 P Mediaset v Commission [2011] EU:​C:​2011:​533. ibid para 2. Now Article 107(1) TFEU. Case C-403/10 P Mediaset v Commission [2011] EU:​C:​2011:​533, para. 36. ibid para 37. Case C-518/13 Eventech Ltd v The Parking Adjudicator [2015] EU:​C:​2015:​9. ibid para 55.

Material selectivity outside the field of taxation  155 (“a national measure is such as to favour ‘certain undertakings or the production of certain goods’”) undoubtedly makes reference to the second step, i.e. whether a specific measure introduces differences between economic operators who, in view of the objectives inherent to the system, are in a comparable legal and factual situation. In this case, after finding that “Black Cabs and minicabs are in factual and legal situations which are sufficiently distinct to permit the view that they are not comparable”10 and therefore answering the question of the presence of material selectivity in the negative within the second step, the Court then expressly mentioned that it was not necessary to proceed to the third step of the analysis, i.e. the justification test.11 It is clear from the above that the Court of Justice applied the three-step analysis in this case, which does not relate at all to a tax measure. c. The Hansestadt Lübeck case The Hansestadt Lübeck case12 was concerned with the question whether the schedule of charges of Lübeck Airport was capable of conferring State aid within the meaning of Article 107(1) Treaty on the Functioning of the European Union (TFEU), i.e. once again a measure not related to taxation. Here the Court explicitly stated that the three-step test commencing with the delineation of the relevant reference system is not limited to tax measures as follows: That examination therefore in principle requires prior definition of the reference framework within which the measure concerned fits. As the Advocate General argues in points 77 and 86 to 89 of his Opinion, this method is not limited solely to the examination of tax measures, the Court having merely observed that the determination of the reference framework is of particular importance in the case of tax measures since the very existence of an advantage may be established only when compared with “normal” taxation.13

Furthermore, in the abovementioned judgment, the Court of Justice makes explicit reference to the second step of the analysis, stating that: In order to determine whether a measure is selective, it should therefore be examined whether, within the context of a specified legal regime, that measure constitutes an advantage for certain undertakings over others which are, in the light of the objective pursued by that regime, in a comparable factual and legal situation.14

As it further held “that the airlines serving other German airports were not in a situation comparable to that of the airlines using Lübeck airport”,15 it was not required to move on towards the third step of the test. In view of the above, it is obvious that the three-step analysis is clearly applicable outside the field of taxation. This case body, the presentation of which could be continued for a good while, shows that the three-step test is not a particularity of assessing tax cases, but that it is moreover ubiquitous.

12 13 14 15 10 11

ibid para 61. ibid para 62. Case C-524/14 P Hansestadt Lübeck v Commission [2016] EU:​C:​2016:​971. ibid para 55. ibid para 54. ibid para 63.

156  Research handbook on European State aid law 2.

Is the Three-Step Test the Correct Approach?

The three-step test was challenged more recently by the opinion delivered by Advocate General Saugmandsgaard Øe in a case referred to the European Court of Justice by a national court in a tax case. The Advocate General argued to give up the three-step test in favour of what he called a “general availability test”. According to this, as he put it, “traditional method of analysis” a measure is not selective, if it is general, and it is a general measure, if it is open to any undertaking present on the territory of the Member State concerned.16 The requirement that the measure under review must be open to all economic operators does however not mean that all economic operators must actually benefit from this measure.17 In tax cases the eligibility of any given economic operator to benefit or not to benefit from a given measure always depends on one or more condition(s). This said, Advocate General Saugmandsgaard Øe held that the “mere existence of one or more conditions of eligibility cannot be enough to classify a tax advantage as ‘selective’, since otherwise all tax arrangements of the Member States would be subject to the rules on State aid”.18 Still, the Advocate General applied the three-step approach to the scheme presented by the national court and reached both under this one and under the “general availability test”, which he explicitly asked the Court to endorse, the identical result, i.e. that the measure at issue did not fulfil the criterion of material selectivity. The CJEU however applied the three steps, without following the change of course the Advocate General so fervently suggested.19 The “general availability test” was hence explicitly rejected.20 The fact that according to the jurisprudence the three-step approach is at least appropriate in tax cases does however not answer the more far-reaching question of whether it could not be justified to deviate from it in scenarios outside the field of taxation, the latter being the subject-matter of this chapter. I would like to invite the readers of this piece to have a look at a ruling, that first concerns a measure outside the field of taxation and that second seems, at least at an initial glance, to convey the alluring message that the “general availability test” may well be a solid ground on which to judge the presence, respectively absence, of material selectivity. This is the so-called MOL case. Here the Commission had to deal with a complaint relating to an agreement of mining fees concluded between the Hungarian authorities and the company MOL. In 2005 this agreement had been concluded setting the mining fee rates for all of MOL’s hydrocarbon fields, whether in production or subject to an extension, for each of the 15 years of its duration. In 2008 the 2005 agreement was amended, increasing mining fee rates for all fields under authorisation, but lacking any provisions relating to fields that had already been subject to an extension agreement. The Commission held these two elements, i.e. the 2005 base agreement and the 2008 amendment to form one single measure to be assessed under State aid control law, on the basis of the pertinent EU jurisprudence.21 Case C-374/17 A-Brauerei [2018] EU:​C:​2018:​741, Opinion of AG Saugmandsgaardøe, para 8. ibid para 110. 18 ibid para 111. 19 Case C-174/17 A-Brauerei [2018] EU:​C:​2018:​1024, paras 35 et seq. 20 ibid paras 25 et seq. 21 See as to this jurisprudence which holds that a combination of different elements forms one single State aid measure if, having regard to their chronology, their purpose and the circumstances of the undertaking at the time of their intervention, those elements are so closely linked to each other that they 16 17

Material selectivity outside the field of taxation  157 Both the General Court and the Court of Justice disagreed with this finding (of the Commission), arguing, in essence, that the type of agreement that Hungary had concluded with MOL could have been concluded with any other company and the fact alone that no other company had had an interest in entering into such an agreement was, self-standing, not sufficient to regard it to be materially selective.22 This reasoning resounds very vigorously the “general availability test”. However, when digging deeper, there is, at least in my view, no doubt that the classical three-step test has in fact been applied, albeit without a nicely written preceding paragraph that, for all fools watching, calls it by its name.23 The reasoning is as follows: ●● First, the MOL case was concerned with an individual aid measure and not with a scheme.24 This makes a crucial difference with regard to the classical three-step test, the latter only being applicable to schemes,25 not to individual aid measures.26 Still, the further reasonings were provided. ●● Second, the classical three-step test is then, most aptly and beautifully camouflaged, expressed in paragraph 61 of the CJEU’s ruling where it reads that the procedure for concluding and setting the terms and conditions of the agreement extending mining rights, laid down in Article 26/A(5) of the Mining Act, draws a distinction between operators that are, in the light of the objective of the measure, in a comparable factual and legal situation, a distinction not justified by the nature and general scheme of the system at issue.

Applying the State aid scalpel to the latter quotation it transcends very easily that, as for Step One, i.e. the definition of the pertinent reference system, this is described as the “procedure for concluding and setting the terms and conditions of the agreement extending mining rights, laid down in Article 26/A(5) of the Mining Act”, as for Step Two, i.e. the prima facie discrimination test, it is written that it matters whether “a distinction between operators that are, in the light of the objective of the measure, in a comparable factual and legal situation” is drawn, and, as for Step Three, i.e. the justification test, it matters whether the “distinction [is] not justified by the nature and general scheme of the system at issue”.

are inseparable from one another: Joined Cases C-399/10 P and C-401/10 P Bouygues and Bouygues Télécom v Commission and Others and Commission v France and Others [2013] EU:​C:​2013:​175, paras 103–104 as well as prior to this Case T-11/95 BP Chemicals v Commission [1998] EU:​T:​1998:​199, paras 170 et seq. 22 Case C-15/14 P MOL v Commission [2015] EU:​ C:​ 2015:​ 362, confirming Case T-499/10 Commission v MOL [2013] EU:​T:​2013:​592. 23 This lack of transparency is, perhaps so, the reason why I was asked to write this chapter. 24 This of course is both provocative, as the following will tell, and elucidating, as it shall demonstrate the power that this classical test carries even beyond the boundaries set by the EU judicature, meaning into the valleys of individual aid measures. 25 See as to the respective definition Article 1 lit. d of Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (codification) [2015] OJ L 248/9; cf. the most instructive ruling concerning the so-called Belgian excess profit measure that the General Court did not regard as a scheme: Joined Cases T-131/16 and T-263/16 Belgium v Commission (“Belgian Excess Profit Exemption”), [2019] EU:​T:​ 2019:​91, para 79; under appeal in Case C – 337/19 P (pending). 26 C-15/14 P MOL v Commission (n 22) para 60.

158  Research handbook on European State aid law This analysis that I carried out on the example of the MOL case has been repeated in other scenarios which are likewise concerned with individual aid measures rather than general aid schemes. In other words, even in cases where (only) individual aid measures are at stake, the three-step test is duly performed.27 One may wonder whether this is so, given the constant jurisprudence that absent a scheme the finding of an economic advantage leads straightforward to material selectivity. Maybe this is because the Commission is not always sure whether its premiss that the measure under review is truly a scheme is in fact the correct one. Maybe it simply wishes to avoid any subsequent criticism by, cautiously so, carrying out the three-step test anyhow. However, arguably so, the fact alone that the classical three-step analysis has been extended, in contravention to what the EU jurisprudence has ruled, to individual aid cases is, perhaps so, an argument in favour of the test´s general attractiveness; however, it does not answer the more interesting question why said test should be applied outside the field of taxation. On this I would like to expound as follows. The main controversy around whether the one or the other of the two tests should be applied concerns the issue of whether the fact that a given measure hinges on the fulfilment of one or more individual preconditions should be giving rise to the carrying out of the three-step test, which, quite rightly so, proves to be quite onerous, which is why it, in my personal point of view, resembles said jelly fish I mentioned earlier. However, the “general availability test”, meaning that a given measure is cleansed from the verdict of its material selectivity, once it is available to all economic operators, without the actual benefit having to be distributed to all of those, only looks like being the easier test. When moving somewhat closer however, the very identical issues resurface. How does one judge whether or not a given measure is generally available? More precisely: What is the meaning of the “generally” versus the “non-generally”, respectively “specifically”, respectively “selectively”? Here Advocate General Saugmandsgaard Øe argued that the “generally” condition would be satisfied, if the measure is open to any undertaking present on the territory of the Member State concerned.28 However, no measure is in effect open to any undertaking within the borders of a given Member State, because the award of each such measure depends on certain conditions, respectively requirements to be fulfilled. To make the foregoing statement somewhat more understandable, the following examples may serve: ●● In the Mediaset scenario the economic advantages were only available to purchasers or leaseholders “of equipment for the reception … of television signals transmitted using digital terrestrial technology … and the associated interactive services”. They were not available to those who did not fall into the aforementioned category. ●● In the Blackcabs scenarios, the preferential right to drive on bus lanes was only available to a specific group of cabs. It was not generally available to all undertakings. ●● In the Hansestadt Lübeck scenario the measure under review only pertained to airlines and not, generally so, to all undertakings. 27 See inter alia Commission Decision of 21 October 2015, Case SA. 38375 (2014/NN) – State aid which Luxembourg granted to Fiat, paras 191 et seq; cf, Joined Cases T-755/15 and T-759/15 Luxembourg and Fiat Chrysler Finance Europe v Commission [2019] EU:​T:​2019:​670, paras 360 to 363; see also Commission Decision of 4 October 2017, Case SA.38944 (2014/NN) – Aid to Amazon – Luxembourg, paras 585 et seq. 28 See above (n 16).

Material selectivity outside the field of taxation  159 In essence, each measure, irrespective of which test applies, hinges on one, two, or more conditions, the fulfilment of which determines who benefits from it and who doesn´t. And at this point it becomes clear that the “general availability test”, despite the attractiveness it seems to offer at first glance, does not provide any further material guidance, because the crucial question is then to decide what “general” is. As demonstrated in the few selected examples drawn from the EU jurisprudence, none of these measures could be classified as truly “general”, because they pertained to a given economic sector, excluding by definition that all companies, irrespective of which sector they belong to, could benefit from them. Therefore, the “general availability test” does not provide any further guidance on how to judge the generality. And in the absence of such guidance one is deprived of any other solution but to take recourse to the three-step test. Here the circle closes. So, in order to close this first part of my contribution, I argue that the classical three-step test, applied by the EU jurisprudence, is indeed a ubiquitous phenomenon, which may have had its origins in fiscal cases, but which, in the absence of any alternative, applies in quite the same manner outside this field.

II.

THE COMPETENCE TO DELINEATE THE REFERENCE SYSTEM

As explained above (see Section I), it is my personal viewpoint that the test of material selectivity has to be carried out in the very same fashion irrespective of whether it is applied to a fiscal or to a non-fiscal measure. This means that the definition of the respective reference system, meaning the first step of the analysis, follows the very same guidelines in all cases, respectively scenarios. Despite the title of this contribution, limiting me to referring to non-fiscal cases, I would like to grasp the opportunity to expound on a subject-matter which has, to the extent I can see this, not received a lot of attention either in academic writings or in the jurisprudence. This is the first step of the three limbs, i.e. the delineation of the pertinent reference system. 1.

The National Boundaries of the Reference System

As the CJEU held in the Hansestadt Lübeck case, which, as reported above, concerned a fee regulation, the delineation of the (correct) reference system must be carried out on the basis of national legislation. In this case it would be held that [i]n this regard, in paragraphs 32 and 51 of the judgment under appeal the General Court, in the exercise of its power to interpret national law, found — as is clear from paragraphs 16 to 21 of the present judgment — that, in accordance with Paragraph 43a(1) of the LuftVZO, the operator of an airport, exercising a power of its own, draws up the scale of airport fees applicable to that airport.29

What therefore was decided in a non-fiscal context, proved likewise correct in the fiscal sphere. This has, most prominently so, been decided in the jurisprudence of the General Court. In a more recent ruling the latter found that it “follows that the Commission does not have, at

Case C-524/14 P Hansestadt Lübeck (n 12) para 61.

29

160  Research handbook on European State aid law this stage of the development of EU law, competence to allow it to define in an autonomous manner the ‘normal’ taxation of an integrated undertaking, by disregarding national tax rules”.30 What is alluded to in the words of the aforementioned quotation, i.e. “at this stage of the development of EU law”, leads however to the duty to check whether a given reference framework has been subjected to EU law harmonisation, which then may well lead to a wider perspective. For example, in the French UMTS licence case it was the applicable rules of EU law that formed the relevant reference system.31 However, this does not provide an answer to a most interesting issue, which is whether the delineation of the pertinent reference system, as required by the first step of the material selectivity test, is a question of fact rather than of law. If the former were true, it would not be eligible to form the subject-matter of an appeals procedure before the CJEU.32 It would however go far beyond the boundaries of what the editors of this book confined me to, to dive into this discussion. 2.

The Delineation of the Pertinent Reference System – One or Two Steps

Another crucial issue is whether the three-step approach, i.e. the classical discrimination test, as Advocate General Saugmandsgaardøe called it,33 applies in all instances without exemption. The Commission´s Notice on the Notion of an Aid34 contains a passage denying that this is the case, which reads as follows: This means that in certain exceptional cases it is not sufficient to examine whether a given measure derogates from the rules of the reference system as defined by the Member State concerned. It is also necessary to evaluate whether the boundaries of the system of reference have been designed in a consistent manner or, conversely, in a clearly arbitrary or biased way, so as to favour certain undertakings which are in a comparable situation with regard to the underlying logic of the system in question.35

When looking at the MOL case, which has already been mentioned in this chapter, it seems that this viewpoint is indeed backed by the jurisprudence. Here, the CJEU did not expressly mention the three steps of this classical approach, but referred, as pointed out above, to the “procedure for concluding and setting the terms and conditions of the agreement extending mining rights, laid down in Article 26/A(5) of the Mining Act”. I interpret this as the way in which the CJEU delineated the pertinent reference system in this case. The Court of Justice verified the analysis carried out by the General Court, whether or not the mining fee rate was

30 Joined Cases T-760/15 and T-636/15 Netherlands and Starbucks v Commission [2019] EU:​T:​ 2019:​669, para 159. 31 Case C-431/07 P Bouygues and Bouygues Télécom v Commission [2009] EU:​C:​2009:​223, paras 116 et seq, upholding Case T-475/04 Bouygues SA and Bouygues SA v Commission [2007] EU:​T:​2007:​ 196. 32 See hereto Juliane Kokott, Das Steuerrecht der Europäischen Union (CH Beck 2018), § 3 para 175. 33 Case C-374/17 AG Saugmandsgaardøe (n 16) para 8. 34 Commission 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] OJ C 262/1. 35 ibid para 129.

Material selectivity outside the field of taxation  161 set on the basis of objective criteria applicable to any potentially interested operator;36 in this it coincided with the lower instance that, indeed, had found that there was nothing biased in the way this rate had been set. This may, at first glance, suggest that only such a (Member State) act is eligible to qualify as the pertinent reference system, that contains objective rules, rather than biased and arbitrary ones. I personally hold that qualifying such a (national) framework as a reference system, only if it contains objective rather than biased and arbitrary provisions, does not alter the test, as suggested by the Commission’s 2016 communication. Moreover, the test remains exactly the same, but the way in which it is applied gets modified. The pertinent reference system is the respective Member State act, however without the (potentially) arbitrary distinction that forms part of it. In the second step, meaning when verifying whether a derogation exists from that ordinary system, in so far as it differentiates between economic operators who, in the light of the objective pursued by that ordinary tax system, are in a comparable factual and legal situation, the arbitrary and biased nature has to play its role, meaning that in case there is an arbitrary element present the requirement of the second step is met. 3.

How Many Reference Systems Are There?

Finally, there is no source whatsoever that gives any guidance as to who shall be competent to define what the pertinent reference system is. Is it the Commission? Is it the Member State? Is it a potential complainant? Is a national court that is asked to look into whether a given measure amounts to an aid within the meaning of Article 107(1) TFEU? Or is this an exclusive prerogative of the EU Courts in Luxemburg? In my personal view, there is no specific instance, body, or court which is competent. All of them are competent in parallel, subject to the review that they in turn are subjected to. The Commission and the national courts share a common task to apply the notion of aid,37 which includes analysing the criterion of material selectivity.38 What matters is, whether in a given context an issue of discrimination arises. The criterion of material selectivity is one of discrimination, as Advocate General Saugmandsgaardøe39 rightly described it, by referring to pertinent EU jurisprudence.40 Wherever discrimination is at stake, the body respectively called upon is competent to define the pertinent reference system. This may in some cases lead to the emergence of several reference systems existing in parallel, depending on the unequal treatment taken into focus. Exactly this occurred e.g. in a case pertaining to an Austrian tax regime that foresaw the amortisation of the goodwill associated with newly acquired shareholdings; such amortisation did however not apply to acquisitions of foreign shareholdings or acquisitions by taxable entities which, as natural persons, were com C-15/14 P MOL v Commission (n 22) para 76. Consistent jurisprudence since: Case C-354/90 FNCE v French Republic [1991] EU:​C:​1991:​ 440, para 12; cf Case C-349/17 Eesti Pagar [2019] EU:​C:​2019:​172, para 89; Case C-75/18 Vodafone Magyarország Mobil Távközlési Zrt v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága [2020] EU:​C:​2020:​139, para 23. 38 See inter alia, Case C-385/18 Arriva Italia ua v Ministero delle Infrastutture e dei Trasporti [2019] EU:​C:​2019:​1121, para 31. 39 Case C-374/17 AG Saugmandsgaardøe (n 16) para 8. 40 Joined Cases C-20/15 P and C-21/15 P Commission v World Duty Free Group [2016] EU:​C:​2016:​ 981, para 54 with further references. 36 37

162  Research handbook on European State aid law pulsorily excluded from the group taxation rules or which, as legal persons, choose themselves to opt out of those rules. The referring court named three different possibilities of the grant of a materially selective advantage, first, by treating legal persons differently from natural persons, second, by treating entities liable for corporation tax within the context of group taxation differently from those liable to corporation tax outside that context, and, third, within the context of group taxation, treating taxable entities with domestic shareholdings differently from entities with foreign shareholdings.41 Exactly here lies the crux of the issue of material selectivity, which is precisely why I call it the jelly fish of European State aid law. Depending on what one considers to be an act of discrimination, differing reference systems emerge, leading to the danger that the premiss (of what one considers to constitute a discrimination) determines the outcome (of which difference in treatment is materially selective).42 Such led, in my view quite rightly so,43 to the General Court quashing a Commission decision that was based on exactly such a form of reasoning.44

III. SUMMARY This chapter carries – this is my ambition – a few messages which, hopefully so, make it a valuable contribution to the research on material selectivity in general, meaning both inside and outside the field of taxation. First, I wish to argue that there is no alternative to the classical three-step test carried out when assessing the requirement of material selectivity. The “general availability test” is like the “emperor´s new clothes”, as it cannot fulfil what it promises to do. No measure is truly available to all undertakings. However, when being asked what “generally available” really means, no answer is provided by this test. Second, the delineation of the pertinent reference system is indeed the core for finding out which measure, respectively scheme is materially selective and which is not. Some aspects of this are clear like e.g. that a reference system must, absent EU law harmonisation, be firmly rooted in the legal system of the given Member State. Therefore, the definition of a reference system by relying on provisions of EU primary law, most importantly the prohibition of the grant of illegal aid itself, is bound to fail. However, the jelly fish lives up to its fullest when having to decide on whether discrimination is present or not. In my view the reference system must, in theory, be defined as the applicable rules absent any potential discrimination they contain. Whether such discrimination is present is an issue that must, methodologically, be resolved within Step 2 of the analysis. Essentially, it is therefore already within Step 1 that one has to decide whether there is discrimination, which leads to the risk of making a premise of something that awaits proof.

41 See hereto Case C-66/14 Finanzamt Linz v Bundesfinanzgericht [2015] EU:​C:​2015:​242, Opinion of AG Kokott. 42 See as to such pitfalls Commission Decision of 4 July 2016, Case SA.41187 (2015/NN) – Hungarian health contribution of tobacco industry businesses; Commission Decision of 4 November 2016, Case SA.39235 (2015/NN) – Hungarian advertisement tax; Commission Decision of 30 June 2017, Case SA.44351 (2016/NN) – Polish tax on retail sector with progressive rates. 43 A Bartosch, EuZW 2018 (2018), 891 et seq. 44 Joined Cases T-836/16 and 624/17 Poland v Commission [2019] EU:​T:​2019:​338, paras 72/73.

9. EU State aid and arbitration Kai Struckmann, Genevra Forwood, Aqeel Kadri and Irina Trichkovska1

1. INTRODUCTION Until recently, the domains of EU State aid and arbitration co-existed without particular controversy. A combination of factors, which emerged at the beginning of this century, however, has increased the interaction between these two spheres of law. The liberalization of various markets in the EU, which led to a number of privatizations and the introduction of certain EU policies, such as tackling climate change, has pushed many Member States and public entities, acting in their commercial capacity, to grant State aid through contracts governed by commercial and international investment law in order to attract private and, in some cases, foreign investors.2 These practices have increased the number of State dealings whereby the resolution of disputes is reserved to the forum of arbitration, rather than litigation in national courts. At the same time, the rise of investor-state arbitration, since the end of the last century, has provided investors with the opportunity to challenge the sovereign actions of defendant States, including in relation to the grant or withdrawal of State support. The application of State aid law has thus become increasingly relevant in both commercial and investor-state arbitration. In this context, the Commission has asserted that, in light of its exclusive competence to assess and approve various State aid measures, arbitral tribunals hearing disputes in which State aid issues arise, should not be allowed to make any assessment of measures under the State aid rules (lest their assessment differ from the Commission’s). As early as 2009, the Commission began intervening as amicus curiae in various arbitrations dealing with State aid, and argued that there is no “right to aid” principle based on which investors can claim damages for aid withdrawal or alteration, where this was in accordance with State aid rules. The clash between these two spheres of law escalated in March 2015, when the Commission adopted its final State aid decision in the Micula case, which held that the payment of compensation awarded in an investor-state arbitration was unlawful State aid, and ordered Romania not to execute the International Centre for Settlement of Investment Disputes (ICSID) Award in the claimants’ favour, and to recover any sums that may have been paid.3 As well as the 1 The authors practice law with White & Case LLP in Brussels. They are grateful to William De Catelle for his valuable research and contribution. White & Case LLP represents Mr Ioan Micula, and the corporate claimants in the Micula v Romania arbitration, in proceedings before the European Courts in relation to the Micula State aid Decision, and in a number of other jurisdictions in relation to the enforcement of the Micula v Romania Award. 2 Manuel Kellerbauer, Marcus Klamert and Jonathan Tomkin (eds), The EU Treaties and the Charter of Fundamental Rights: A Commentary (Oxford University Press 2019) 1206. 3 Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania – Arbitral award Micula v Romania of 11 December 2013 [2015] OJ L 232/43 (“Micula Commission Decision”).

163

164  Research handbook on European State aid law Micula decision,4 State aid issues have attracted the attention of the Commission in the context of a number of other arbitration claims, including several pending and recently concluded cases relating to the Energy Charter Treaty (ECT).5 Thus the interface of State aid rules with arbitration remains very topical.

2.

STATE AID LAW IN ARBITRATION TO DATE

It is useful to distinguish between (international) commercial and international investment (investor-state or ISDS) arbitration. After summarizing the key differences between the two types of arbitration discussed in Section 2.a, this chapter considers how State aid issues have arisen in those proceedings in Sections 2.b and 2.c below. 2.a

Overview of the Arbitration Dispute Resolution Mechanisms

International commercial arbitration is a means of resolving disputes arising from State actions in a private (commercial) capacity (jure gestionis). Commercial arbitration can determine the State’s rights and obligations (or, more often, those of State-owned or controlled entities) under private law contracts, where the parties have agreed that any dispute arising from the contract be resolved through arbitration. In these arbitrations, the public entity effectively acts as a private party. If the governing law is the law of a Member State, the tribunal may have to apply State aid rules to determine the dispute. Additionally, national courts have a degree of oversight over awards made in commercial arbitration, whether in a supervisory role during the arbitral process6 or at the stage of enforcement or annulment of the award.7 These factors may explain why few controversies have arisen in relation to the application of the State aid rules in commercial arbitration, in stark contrast to investor-state arbitration. Investor-state arbitration, or investor-state dispute settlement (ISDS) is different to commercial arbitration in that it is based on an international investment treaty, under which the contracting States, in their capacity as a sovereign State (jure imperii), extend their consent to arbitrate disputes with investors from the other State under public international law. Such disputes typically involve investors claiming damages against the host State as a result of the host State breaching its obligations under the investment treaty to afford protection to the claimant’s investments. The most prevalent form of investment treaties are those between

4 The General Court annulled the Micula Commission Decision (n 3) in Cases T-624/15, T-694/15 and T-704/15 European Food & Others [2009] EU:​T:​2019:​423 (“European Food & Others”), currently under appeal in Case C-638/19 P. 5 Energy Charter Treaty (adopted 17 December 1994, entered into force 16 March 1998) 2080 UNTS 36116 (ECT). 6 The judicial oversight depends on the chosen seat of the arbitration. “Courts at the place of arbitration can be called upon to provide assistance (e.g., by appointing or replacing arbitrators, by ordering provisional and conservatory measures, or by assisting with the taking of evidence), and may also interfere with the conduct of the arbitration (e.g., by ordering a stay of the arbitral proceedings).” IBA Council, “Guidelines for Drafting International Arbitration Clauses” (2010), para 21. 7 Case C-102/81 Nordsee [1982] EU:​C:​1982:​107, para 14. These national courts could refer disputes on EU (State aid) law that arise during the arbitration to the CJEU; Case C-284/16 Slowakische Republik v Achmea [2018] EU:​C:​2018:​158, para 54 (“Achmea”).

EU State aid and arbitration  165 two States – so-called bilateral investment treaties (BITs) – but there also exist multilateral treaties.8 In the EU, all the Member States, except Ireland and Italy, have BITs with a number of non-EU States (EU-third country BITs). Until recently, most EU Member States had at least one BIT with other EU Member States (intra-EU BITs). A significant change occurred in May 2020, when 23 Member States signed an Agreement on the Termination of intra-EU BITs.9 As a result, currently, only Austria, Sweden and Finland have intra-EU BITs. These BITs were mostly concluded in the 1990s with States that have joined the EU since 2004. At their inception, these were EU-third country BITs, concluded as part of a drive to encourage inward investment to candidate countries as they strived to develop their economies in readiness for accession. Offering international law protections to investors of the then Member States was a key element of the strategy for promoting the development of Eastern bloc countries.10 Apart from BITs, there is also one widely ratified multilateral investment treaty in the EU, the ECT, to which all but one Member State, and the EU itself, are parties.11 These international investment treaties provide an additional layer of protection to investors, over and above the national legal order of the host States, which may have different standards of investment protection. Arbitrations under these treaties may be governed by different rules and/or institutions, but the majority of ISDS disputes are resolved under the auspices of the International Centre for Settlement of Investment Disputes (ICSID), established by the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention),12 or ad hoc tribunals established under the UNCITRAL Rules.13 All Member States, except Poland, are parties to the ICSID Convention, and all but the six founding Member States and Spain ratified it before their accession to the EU.14 8 Many multilateral and bilateral free trade agreements contain provisions on investment protection: see the database of other investment treaties at accessed 27 April 2020. Of particular note is the Energy Charter Treaty (ECT), to which the EU is a party. 9 Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [2002] OJ L 169 (“Termination Agreement”), which entered into force on 29 August 2020. Signatories are Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia and Spain. Ireland had no intra-EU BITs in force, while the United Kingdom did not participate in the Termination Agreement because of its departure from the EU on 31 January 2020. Apart from those, only Austria, Finland and Sweden do not participate in the Termination Agreement. 10 The various “Europe Agreements” entered into by the European Communities and its Member States with candidate countries prior to their accession to the EU all refer to BITs as a means of promoting and protecting inward investment (e.g. Article 73 of the Europe Agreement with Poland, and Article 74 of the Europe Agreement with Romania). 11 Energy Charter Treaty [1994] OJ L 380/24. The ECT is an international agreement that was signed in 1994 and has more than 50 signatories worldwide including all EU Member States, except Italy, which withdrew, but remains subject to the ECT until 2036 for any existing investments at the time of withdrawal. 12 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (adopted 18 March 1965, entered into force 14 October 1966) 575 UNTS 159 (“ICSID Convention”). 13 Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration (Oxford University Press 2007) 52. The majority of cases are filed under the ICSID Convention, see: UNCTAD, “Fact sheet on ISDS cases in 2018” (May 2019) IIA Issues Note Volume 2. 14 List of Contracting States and other Signatories of the ICSID Convention accessed 28 April 2020.

166  Research handbook on European State aid law 2.b

State Aid Law in Commercial Arbitration

State aid issues in commercial arbitration usually arise where a contract, concluded between the public body of a Member State and a private party, gives rise to the grant of State aid. Thus, commercial arbitral tribunals may be called on to apply State aid rules, much in the same way as national courts. Just as national courts have the competence to determine whether a measure amounts to State aid, arbitral tribunals adjudicating on commercial disputes are understood to be similarly empowered.15 As before a national court, it may serve a party in commercial arbitration to argue that, for example, a contractual arrangement or State guarantee gives rise to State aid and to seek suspension of that measure, or indeed compensation (e.g. where the claimant is a competitor of the aid beneficiary). If the tribunal finds the measure constitutes State aid, it may also have to ascertain whether the standstill obligation of Article 108(3) of the Treaty on the Functioning of the European Union (TFEU) was complied with. The determination of whether an aid measure is compatible with the internal market pursuant to Article 107(2) or 107(3) TFEU, of course, remains within the Commission’s exclusive competence. The interpretation and application of EU law by national courts is ultimately subject to the oversight of the Court of Justice, and so it appears to be the case for commercial arbitral tribunals. While such tribunals cannot make references for preliminary rulings pursuant to Article 267 TFEU, there are two avenues for ensuring the uniform application of EU law in the context of commercial arbitration. Firstly, the Notice on cooperation with national judges applies by analogy to commercial arbitrators, and arbitrators have the possibility of asking the Commission to present its opinion on a question of State aid.16 The authors are aware of one case in which this happened, Neckarpri v EDF.17 Secondly, references for preliminary rulings may be made by national courts with the role of overseeing commercial arbitration, whether in the context of a review of the validity of an arbitral award at the stage of enforcement,18 or in the exercise of its supporting role during the arbitral proceedings.19 Since commercial arbitration proceedings are generally confidential in nature, it is difficult to ascertain how frequently they give rise to State aid issues. The case of Neckarpri v EDF case is therefore a rare illustration. The case concerned the sale by EDF of its stake in the German utility company Energie Baden-Württemberg to Neckarpri, a company wholly-owned by the German Federal State of Baden-Württemberg. The Claimant, Neckarpri, sought to argue that the purchase price was excessive and amounted to State aid that had not been notified to the Commission, and was thus in breach of the Claimant’s own obligations (and those of the State of Baden-Württemberg) under the sale agreement. The Tribunal sought the Commission’s opinion on whether a failure to notify State aid in a transaction between one Member State and a company domiciled in another Member State amounted to a breach of Article 107 15 Damien Geradin and Emilio Villano, “Arbitrability of EU Competition Law-based Claims: Where do we stand after the CDC Hydrogen Peroxide Case?” (2017) 40(1) World Competition 67, 81. 16 Commission notice on the enforcement of State aid law by national courts [2009] OJ C 85/1, para 13. 17 The Commission’s submission to the International Chamber of Commerce in Neckarpri GmbH (Germany) v EDF International S.A.S. (France) v Federal State of Baden-Württemberg (Germany) (“Neckarpri v EDF”) [2016] ICC Case No 18519/GFG is available at accessed 27 April 2020. 18 Case C-126/97 Ecoswiss [1999] EU:​C:​1999:​269. 19 Case C-102/81 Nordsee [1982] EU:​C:​1982:​107, para 14.

EU State aid and arbitration  167 TFEU and/or Article 108 TFEU. The Commission responded in the affirmative, but also gave its broader views on the State aid issues raised by the dispute, such as the application of the market economy operator principle, the standstill obligation, and the principle of legitimate expectations. Notably, the Commission stated that the case law of the Court of Justice did not preclude the tribunal deciding that the transaction at issue entailed a grant of State aid.20 The tribunal concluded (by majority) that the transaction did not entail a grant of State aid. However, even if the tribunal had found the existence of State aid, the claim would, nonetheless, have failed because the tribunal unanimously took the view that the Claimants and the Land could not rely on their own failure to meet their contractual obligations to notify the aid in order to effectively reduce the purchase price.21 Indeed, the tribunal appears to have taken a dim view of the Claimant’s attempts to use State aid law to reduce the negotiated price, referring to these arguments as amounting to an abuse of the EU’s State aid rules. However, had the tribunal in Neckarpri v EDF concluded that the price paid did give rise to a grant of State aid and proceeded as suggested above, a further issue could have arisen in that, by affirming the purchase price, the tribunal would arguably have failed to draw the correct consequences of the breach of the State aid rules (i.e. failure to notify).22 This raises the question of how a losing party could challenge a commercial arbitral award that appears to misapply State aid law. The answer appears to lie in the Court of Justice’s judgment in Eco Swiss.23 In Eco Swiss, the Court of Justice confirmed that, when national law provides for annulment of arbitration awards that infringe rules of a public policy nature, a national court exercising powers of review over an arbitral award must set aside an award that is contrary to (what is now) Article 101 TFEU. The Court considered that Article 101 TFEU was a matter of EU public policy that, if offended, would lead to the annulment of an arbitral award under the terms of the New York Convention.24 It is submitted that the Court’s reasoning in Eco Swiss would apply equally where the arbitral award was inconsistent with State aid rules, as the control of State aid is also a fundamental principle of EU law.25 2.c

State Aid Law in Investor-State (ISDS) Arbitration

State aid issues in ISDS arbitration could arise when a Member State revokes or amends an existing State support measure. Other potential examples include where a Member State does not grant the maximum amount of aid that the investor was hoping for, or reneges on or alters an alleged promise to grant State support. In those instances, the investor could seek damages (or other relief) by initiating ISDS arbitration. There are two particular differences which make ISDS awards more prone to State aid controversies than commercial arbitration: (i) the role Commission’s submission in Neckarpri v EDF (n 17), page 9. ibid, paras 322–5. 22 It should be noted that the Commission could, where it considered that aid did arise, open an investigation, or an aggrieved competitor of EDF could have filed a complaint. Of course the generally confidential nature of commercial arbitration makes such scenarios unlikely (though in the Neckarpri v EDF case the Commission was effectively “tipped off” about a potential State aid issue by the tribunal’s request for an opinion). 23 Case C-126/97 Eco Swiss [1999] EU:​C:​1999:​269. 24 ibid para 39. 25 Case C-505/14 Klausner Holz Niedersachsen [2015] EU:​C:​2015:​742, para 45. 20 21

168  Research handbook on European State aid law of State aid law in resolving these disputes is less straightforward, because even where State aid issues are at the core of the dispute, the primary task of the tribunal will be to determine whether there is a breach of the investment treaty, rather than whether the measure constitutes State aid; and (ii) national courts have a more limited role in reviewing ISDS awards, including those that deal with State aid issues. The role of State aid law in ISDS i A key element in the resolution of ISDS disputes is the tribunal’s appreciation of the applicable law. Fundamentally, arbitral tribunals are called upon to determine whether the relevant treaty has been violated, and thus apply international law, but in doing so they will invariably be required to assess the conduct of the parties under national and (when the respondent is a Member State) EU law. State aid rules (including an appreciation of whether a measure is or is not State aid) may be relevant to the tribunal’s consideration of whether the respondent State breached its treaty obligations, and in such circumstances, a tribunal may be required to take a view on this. In Invesmart v Czech Republic26 the dispute (under the Netherlands – Czech Republic BIT) concerned Invesmart’s investment in the failing Union Banka. Invesmart alleged a breach of its legitimate expectations (and thus a breach of the fair and equitable treatment standard) because the Czech Republic failed to grant State aid to Union Banka. Invesmart essentially alleged that it would not have made the investment if it had not understood that such State aid would be granted. The tribunal considered that Czech law was relevant to the extent it governed the making of the investment and the granting of State aid, but noted that international law prevailed in the event of any conflict with Czech law. As to the relevance of EU law, the tribunal observed that the governing law “includes the law of the host State and other relevant international agreements to which the Contracting States are party”.27 At the time, this would have included the Europe Agreement, which contained provisions (equivalent to those in the then EC Treaty) relating to State aid, but not the EC Treaty directly. The tribunal considered the Czech Republic’s impending accession to the EU and its commitments in respect of State aid control, without carrying out any substantive assessment (whether under the Europe Agreement or the EC Treaty). The existence of State aid regulation appears to have been relevant in determining whether the investor’s legitimate expectations were breached, but the tribunal was not called upon to apply or interpret State aid law. Whilst Invesmart v Czech Republic concerned a grant of State aid that failed to materialise, the dispute in Micula v Romania arose when Romania withdrew investment incentives from the claimants because the Commission considered them to be State aid (and thus needed to be withdrawn before Romania could join the EU). At the time the claim was brought under the Romania – Sweden BIT, Romania was not a Member State, and thus was only subject to the State aid disciplines of the Europe Agreement that applied to the candidate country as

Invesmart v Czech Republic, Award, UNCITRAL Case of 26 June 2009. ibid para 257.

26 27

EU State aid and arbitration  169 a matter of international law,28 and not the EC Treaty/TFEU.29 In the tribunal’s view, neither the Accession Treaty of Romania to the EU nor the EC Treaty were directly relevant, as they were not in force in Romania at the relevant time (the incentives were withdrawn in February 2005, before Romania joined the EU).30 The tribunal acknowledged though that the general context of Romania’s accession (or rather its preparations and negotiations for accession) had to be taken into account when interpreting the BIT;31 indeed the parties agreed that EU law was part of the “factual matrix” of the dispute.32 In both Invesmart v Czech Republic and Micula v Romania the disputes concerned events prior to the defendant States joining the EU. Thus, the tribunals in those cases were not called on to apply EU State aid rules as such,33 since EU law had no application in the defendant States at the relevant time. That view is confirmed by the General Court’s judgment in European Food & Others v Commission,34 which found that the arbitral tribunal in Micula v Romania was not required to apply EU law to events occurring prior to Romania’s accession.35 Notwithstanding that no issue as to the uniform interpretation of EU law can arise in such circumstances, it may be the case that the tribunal takes a view on the interpretation of State aid rules. For example, in Micula v Romania, the tribunal considered expert evidence on whether the incentives could have been deemed compatible under the State aid provisions of the Europe Agreement, had Romania decided to maintain or adapt them. Such considerations may be of relevance to a tribunal determining whether a defendant State has breached its commitments to the investor (e.g. whether it failed to pursue a course of action that could have seen the investments maintained) without it being necessary for the conclusion on the issue to have legal effect.36 For example, if a defendant State, before accession, withdraws an incentive scheme on the basis that it believes it would amount to State aid under the State aid provisions of the Europe Agreement, a tribunal that was satisfied that it was likely to have been found to be compatible with the internal market might conclude there had been a breach of the relevant BIT. The fact that, in reality, only the Commission can determine whether an aid measure is actually compatible, would not seem to be an obstacle to the tribunal’s hypothetical assessment for the purpose of assessing conduct against the standard set out in the BIT.

28 Treaty between the Member States of the European Union and the Republic of Bulgaria and Romania, Concerning the Accession of the Republic of Bulgaria and Romania to the European Union [2005] OJ L 157/11. 29 This was in essence the conclusion of the General Court in European Food & Others under appeal in Case C-638/19 P. 30 Ioan Micula, Viorel Micula, SC European Food SA, SC Starmill SRL and SC Multipack SRL v Romania, Award, ICSID Case No ARB/05/20, ICC 621 (2013) despatched 11 December 2013, para 321 (“Micula Award”). 31 ibid para 327. 32 ibid para 328. 33 Whilst the Commission made submissions as amicus curiae to the effect that payment of any award rendered would be unenforceable as it would amount to State aid at a time when EU law did apply to Romania, the tribunal declined to rule on this point, considering it a matter relating to enforcement rather than the merits of the claim. 34 European Food & Others, under appeal in Case C-638/19 P. 35 ibid para 87. 36 This was the context in which the tribunal’s consideration of State aid rules in Micula v Romania arose.

170  Research handbook on European State aid law The relevance of EU State aid rules is more obvious in situations that arise after the accession of the respondent State to the EU, and where the Commission has exercised its powers of State aid review in relation to matters pertinent to the investment dispute. This has been the situation in several arbitrations concerning claims brought under the Energy Charter Treaty, connected with the termination of Power Purchase Agreements (found by the Commission to contain unlawful State aid), notably in Hungary. The tribunal in Electrabel v Hungary concluded that EU law was “part of the rules and principles of international law applicable to the Parties’ dispute”,37 but also that, as part of Hungary’s national law, EU law was also to be taken into account as part of the factual matrix of the dispute.38 The tribunal went on to recognize the particular nature of the EU legal order, including its status in the Member States and the position of the Court of Justice as arbiter of EU law. The tribunal, though, took the view that “these important features do not arise in this case”, on the basis that, while the tribunal had to interpret the Commission’s State aid Decision on the Hungarian Power Purchase Agreements (PPAs),39 and thus apply EU law, it was not required to adjudicate on the validity of that Decision. It seems doubtful that the distinction between interpretation of EU law and concluding on its validity is correct, given that the EU legal order is premised on both the interpretation and validity of acts of the EU institutions being subject to the ultimate jurisdiction of the Court of Justice. ii The role of national courts in ISDS arbitration The interpretation and application of State aid law by ISDS tribunals could only exceptionally be subject to the oversight of the Court of Justice. These tribunals cannot make references for preliminary rulings pursuant to Article 267 TFEU, and thus the avenues for ensuring the uniform application of EU law in these arbitrations are limited. For ICSID awards, national courts of Contracting States to the ICSID Convention are obliged to enforce these awards without any further review, i.e., providing all the same mechanisms for enforcement as are available for domestic judgments.40 For non-ICSID awards, enforced pursuant to the New York Convention,41 if enforcement is sought before the court of a Member State, that court

37 Electrabel SA (Belgium) v Republic of Hungary, Award, ICSID Case No ARB/07/19, ICC 759 (2015), despatched 25 November 2015 (“Electrabel Award”), para 4.195. 38 The tribunal in AES Summit Generation Limited and AES-Tisza Erömü Kft v Republic of Hungary, Award, ICSID Case No ARB/07/22, IIC 455 (2010), despatched 23 September 2010 (“AES Award”) took a similar view (not disputed by the parties) that EU law was both an international law regime and part of national law to be considered as a matter of fact. 39 Commission Decision of 4 June 2008 on the State aid C 41/05 awarded by Hungary through Power Purchase Agreements [2009] OJ L 225/53 (“Hungarian PPAs Commission Decision”). 40 Article 54 ICSID Convention. The only scope for review of ICSID awards is before an ad hoc committee of arbitrators, which may annul an award in the limited circumstances set out in Article 52(1) of the ICSID Convention: (a) the tribunal was not properly constituted; (b) it manifestly exceeded its powers; (c) an arbitrator was corrupt; (d) there was a serious departure from procedure; or (e) the tribunal failed to state reasons. For a fuller discussion on enforcement of ICSID Awards, see Christoph Schreuer and Loretta Malintoppi, The ICSID Convention – A Commentary (2nd edn, Cambridge University Press 2011) 1121. 41 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (adopted 10 June 1958, entered into force 7 June 1959) (“New York Convention”)

EU State aid and arbitration  171 may review the validity of the award on public policy grounds, including EU public policy42 which includes competition law.43 The lack of oversight by the Court of Justice has been one of the main objections raised by the Commission in arguing that tribunals lack jurisdiction to decide on EU law issues, as well asserting that any award of these tribunals dealing with EU law issues, including State aid, breaches the primacy of EU law and would be unenforceable.44 The Commission’s position as concerns intra-EU BITs specifically was confirmed by the Court of Justice in Achmea,45 in which the Grand Chamber held that the ISDS clauses in intra-EU BITs are incompatible with EU law, among other reasons, because the agreement by Member States to submit disputes concerning the interpretation and application of EU law to arbitration (with no possibility of a preliminary reference to the Court of Justice), and thus removing such disputes from the jurisdiction of their own courts, and hence from EU legal order, amounted to a breach of Articles 267 and 344 TFEU.46 The Court explicitly excluded commercial arbitration from the above considerations,47 but remained silent whether the ruling applies to intra-EU multilateral investment treaties, such as the ECT, signed by both the EU and its Member States. That said, in the aftermath of Achmea, the Commission issued a communication in which it asserted that the effects of Achmea are not limited to intra-EU BITs but that, by analogy, the Court’s reasoning also applies to intra-EU ISDS arising from the ECT.48

3.

ENFORCEMENT OF ISDS ARBITRAL AWARDS THAT RAISE STATE AID ISSUES

If the implementation of an ISDS award risks contravening State aid rules, it will likely encounter difficulties at the implementation and enforcement stage. As recently witnessed in Micula, if the Commission takes the view that payment of the award would involve incom42 McLachlan, Shore, Weiniger (n 13) 60. These public policy grounds could also involve EU public policy, see Case C-126/97 Eco Swiss (n 23). 43 EU public policy includes competition law. See Marketing Display Intl Inc v VR Van Raalte Reclame BV Gerechtshof Den Haag (decided 2005) YCA XXXI (2006) 808, 816. Herbert Kronke, Patricia Nacimiento, Dirk Otto and Nicola Christineport (eds), Recognition and enforcement of foreign arbitral awards: A global commentary on the New York Convention (Kluwer 2010) 383. Hanno Wehland, ‘The Enforcement of Intra-EU BIT Awards: Micula v Romania and Beyond’ (2016) 17(6) Journal of World Investment & Trade 942, 953. 44 Commission Decision of 28 November 2016, case SA.40171 (2015/NN) – Czech Republic Promotion of electricity production from renewable energy sources (“Czech RES Commission Decision”), para 143; Commission Decision of 10 November 2017, case SA.40348 (2015/NN) – Support for electricity generation from renewable energy sources, cogeneration and waste (“Spain RES Commission Decision”), para 160. See also, Commission, “Commission provides guidance on protection of cross-border EU investments – Q&As” MEMO(2018) 4529. 45 Achmea (n 7), para 60. 46 ibid 32, 49 and 60. 47 ibid 54-55. 48 Commission, “Protection of intra-EU investment” (Communication) COM (2018) 547 final. The question whether Achmea applies to the ECT is currently pending before the Svea Court of Appeal in Stockholm, which has considered that a preliminary reference to the Court of Justice is not necessary to decide on the question – see Svea Court of Appeal, Novenergia II – Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v the Kingdom of Spain, SCC Case No. 2015/063.

172  Research handbook on European State aid law patible State aid, it can use its powers under Article 108 TFEU to prevent the Member State concerned (as well as potentially other Member States) from honouring the award and order the recovery of any payments already made, as discussed in Section 3.a. The effects of the classification of the compensation awarded in arbitration as State aid on its enforcement are still in flux and subject to ongoing litigation and may vary depending on where the enforcement is sought (e.g. within or outside the EU), as well as the rules and procedures relied on, as discussed in Sections 3.b–3.d. 3.a

The Commission’s Approach Towards ISDS Awards Involving State Aid

The Commission indicated its intention to pursue State aid cases against compensation awarded in ISDS, in violation of the State aid rules, long before it adopted its decision in the Micula case. Already in the first wave of ISDS in the EU, which occurred after the 2004 enlargement (when the State aid rules became applicable in the newly acceded Member States), the Commission started to intervene as amicus curiae in cases involving State aid and took a position that ISDS tribunals lack jurisdiction to decide on disputes involving State aid, and that investors cannot use arbitration as a tool to challenge discontinued (or modified) State aid measures, regardless of their compatibility. The first examples of the Commission reviewing the outcome of ISDS arbitrations under the State aid rules, concern the three ECT arbitrations against Hungary, brought separately by three foreign investors in the Hungarian power generators – Electrabel (BE), AES (US) and EDF (FR).49 The arbitrations were triggered by the early termination of PPAs concluded before Hungary’s accession by the foreign investors and the State-owned Magyar Villamos Muvek (MVM), and which were the basis for the investors’ entry into the Hungarian market. Post-accession, in 2008, the Commission found that the PPAs involved incompatible aid, and ordered their discontinuation and aid recovery.50 The Commission, however, allowed Hungary to implement a stranded cost scheme to compensate the generators for their un-recouped investment and approved the compensation awarded under the scheme as compatible aid.51 In the course of these arbitrations, the Commission argued that the ISDS tribunals had no jurisdiction to deal with State aid and that any compensation awarded for the PPAs’ discontinuation could not be enforced and would remain subject to the State aid rules. In its amicus curiae submission in Electrabel v Hungary, it noted that: the European Commission reminds the Tribunal that any payment obligation by the Respondent to the Hungarian Generators based on the PPAs or their termination (be it agreed consensually or derived

49 Electrabel Award (n 37); AES Award (n 38); EDF International SA v Hungary (UNCITRAL), 14 December 2014, Award not public (“EDF Award”). One of the amicus curiae filed in the EDF case is publically available at accessed 4 May 2020. The views of the Commission in the Electrabel case are sensibly quoted in the Decision of the tribunal on Jurisdiction of 30 November 2012, available at accessed 4 May 2020. 50 Hungarian PPAs Commission Decision (n 39). 51 Commission Decision of 27 March 2010, case N 691/2009 – Hungarian stranded costs (“Hungarian stranded costs scheme”).

EU State aid and arbitration  173 from an arbitration award) remains subject to EU law on State aid. Such payment can thus not take place lawfully if it would contradict the rules of EU State aid. 52

While the tribunal held that it had jurisdiction to decide on disputes that involve State aid, it dismissed the claims of two investors (AES and Electrabel). EDF, on the other hand, was awarded compensation in the amount of €107 million,53 which the Commission did not pursue. One possible explanation for the Commission’s lack of action may be that the level of compensation awarded by the Tribunal remained below the maximum amount of aid permissible under the State aid rules.54 The Hungarian arbitrations and also subsequent ISDS procedures showed that the Commission’s efforts to prevent arbitral tribunals deciding on disputes which involved State aid issues had limited effect, as tribunals continued to render awards on the merits. Subsequently, the Commission resorted to the use of its powers under Article 108 TFEU to block the payment of compensation awarded in arbitration. That said, despite a number of existing awards granting compensation in the context of withdrawal or modification of aid schemes, the Micula case to date remains the only instance where the Commission has taken action to tackle the outcome of an individual arbitral award under the State aid rules.55 The case concerned a slightly different scenario than the Hungarian arbitrations, because the aid scheme was revoked prior to Romania’s accession to the EU (as a direct result of pressure during the accession negotiations) without it ever having been the subject of a negative Commission decision declaring it to involve aid which is incompatible with the EU State aid rules. On 11 December 2013, the ICSID tribunal awarded damages to the claimants, having found that Romania breached its obligation under the Sweden – Romania BIT to ensure the claimants’ investments were treated fairly and equitably. Following the award, the Commission (which had already made submissions to the tribunal, as amicus curiae, to the effect that any award rendered by the tribunal would amount to unlawful State aid) adopted the Micula Decision in 2015. The Decision declared that the payment of the compensation to the investors (though seemingly not the award itself), granted by the ICSID tribunal was unlawful State aid. It also prohibited Romania from paying out the compensation under the award, and ordered the recovery of any sums that had already been paid. The Decision was annulled by the General Court, primarily because it found that the Commission had applied the State aid rules retroactively to events that pre-dated Romania’s accession to the EU.56

52 Electrabel v Hungary, Decision on Jurisdiction, ICSID Case No ARB/07/19, ICC 567, 30 November 2012, paras 5.18 and 4.110. 53 EDF Award (not public) (n 49). 54 See Hungarian stranded costs scheme (n 51), para 20 as well as paragraph 225 and footnote 186 of Electrabel Award (n 37), which states that “The E.D.F. tribunal awarded €107 million as compensation calculated on a different basis, whereas the total figure for net stranded costs was apparently €300 million, leaving uncompensated net stranded costs far in excess of such compensation” and refers to para 681 of the EDF Award. 55 Micula Commission Decision (n 3). 56 European Food & Others, para 90, under appeal in Case C-638/19 P. The General Court, however, did not fully address the other conceptual issues which arise from the Commission’s approach, and usually arise at the enforcement stage, as discussed below in Section 3.b.

174  Research handbook on European State aid law The Commission’s approach in respect of the Spanish and the Czech energy arbitrations, which deal with the scaling-back of incentive schemes for renewables, differs from Micula in that, while the Commission has stated that it would pursue any compensation awarded under the State aid rules, to date, despite positive awards having been rendered, it has taken no such action.57 Both cases concern a modification of existing non-notified incentive schemes for the support of renewable energy sources (RES), which the Commission approved as compatible aid.58 The facts of the cases are as follows: i Czech RES arbitrations The original Czech scheme was introduced in 2005, without notification to the Commission. Upon a complaint regarding the draft law for the scheme in 2003, the Commission issued a letter stating that it considered the scheme did not constitute State aid due to the lack of involvement of State resources. The Czech Republic modified the scheme in 2011, reducing the support to the RES producers, in order to avoid overcompensation, and also changed the financing model of the scheme, to involve State resources. Dissatisfied with the cutbacks, ten investors initiated arbitration against the Czech Republic under the ECT and the Germany-Czech Republic BIT.59 The Czech Republic notified the modified scheme to the Commission in 2014, while the arbitrations were still ongoing. The Commission approved the scheme as compatible aid in 2016 (Czech RES Decision).60 In this decision, the Commission states that the original scheme constituted unlawful State aid because it was not notified without, however, adopting a formal finding as to the (in)compatibility of this previous aid.61 The Commission reasoned its rejection of the investors’ request to rule on compatibility of the original scheme as follows: The Commission considers, first, that it is the sovereign decision of the Member State whether or not to grant State aid. The assessment of the Commission is therefore limited to assessing the aid, as notified by the Member State. The Commission cannot oblige a Member State to grant more aid than it has notified, as there is “no right to State aid”. Therefore, that argument is moot.62

Czech RES Commission Decision (n 44); Spain RES Commission Decision (n 44). The events which led to arbitration occurred while both countries were Member States to which the State aid rules apply. 59 See Antaris Solar v Czech Republic, Award, PCA Case No. 2014-01, ICC 1413, 2 May 2018; Natland Investment Group NV, Natland Group Limited, GIHG Limited, and Radiance Energy Holding SARL v Czech Republic, Award, PCA Case No 2013-35, 20 December 2017; Voltaic Network GmbH v Czech Republic, Award, PCA Case No. 2014-20, IIC 1563, 15 May 2019; ICW Europe Investments Limited v Czech Republic, Award, PCA Case No 2014-22, IIC 1560, 15 May 2019; Photovoltaik Knopf Betriebs-GmbH v Czech Republic, Award, PCA Case No 2014-21, IIC 1561, 15 May 2019; WA Investments-Europa Nova Limited v Czech Republic, Award, PCA Case No 2014-19, ICC 1562, 15 May 2019; Jürgen Wirtgen, Stefan Wirtgen, Gisela Wirtgen and JSW Solar (zwei) GmbH & Co. KG v Czech Republic, Award, PCA Case No. 2014-03, IIC 1311, 11 October 2017. The Commission sought a request to intervene as a non-disputing party in the arbitrations against the Czech Republic, see Commission Decision [2014] C(2014) 3457 final. 60 Czech RES Commission Decision (n 44). 61 ibid paras 1, 88, 92, 136. 62 ibid paras 91 and 92. 57 58

EU State aid and arbitration  175 While the Czech Republic has generally prevailed in ISDS cases, it reportedly lost (partially) in at least one case.63 ii Spanish RES arbitrations Spain had put in place its original support scheme for renewable energy in 2007, without notifying it to the Commission, and decided to reform it later in 2011 and 2014, among other reasons, to bring it in line with the State aid rules and avoid overcompensation. Spain obtained approval for the amended scheme from the Commission in November 2017 (Spanish RES Decision).64 Similarly to the Czech RES Decision, the Commission stated that the original scheme constituted unlawful State aid because it was not notified without, however, adopting a formal finding as to the (in)compatibility of this previous aid.65 In the context, the Commission noted that the investors cannot rely on their legitimate expectations “in the lawfulness of aid that has not been notified to the Commission”.66 The modified scheme, however, left numerous investors dissatisfied, and who brought around 30 arbitrations against Spain concerning the revised Spanish renewable energy scheme, based on the ECT and various BITs for the retroactive withdrawal of its support measures for RES production. Spain prevailed in some of the arbitrations,67 but Spain lost in Eiser,68 Novenergía,69 Antin,70 Masdar71 and 9REN;72 the claimants in these cases were awarded compensation for breach of fair and equitable treatment because of the disproportionate and “radical and unexpected” change of the benefits that occurred with the amendments of 2014.73 The Commission has not addressed any of these awards in an individual State aid decision. Instead, it addressed the hypothetical awards in favour of the investors in its decisions approv-

63 Damien Charlotin, “Natland v Czech Republic (part 2 of 2): On the Merits, Tribunal Finds Stabilisation Commitment in Czech Legislation and Breach of that Commitment with Introduction of Solar Levy” [2018] Investment Arbitration Reporter accessed 4 May 2020. 64 Spain RES Commission Decision (n 44). 65 ibid para 89. 66 ibid para 158. 67 For example Charanne and Construction Investments v Spain, Award, SCC Case No 062/2012, IIC 758, 21 January 2016, paras 539–42; Isolux Netherlands, BV v Kingdom of Spain, Award, SCC Case No V2013/153, IIC 979, 12 July 2016. 68 Eiser Infrastructure Ltd and Energia Solar Luxembourg v Spain, Award, ICSID Case No ARB/13/36, IIC 950, despatched 4 May 2017, para 387 (“Eiser Award”). 69 Novenergia II – Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v the Kingdom of Spain, Award, SCC Case No 2015/063, IIC 1369, 15 February 2018, para 681. 70 Infrastructure Services Luxembourg Sàrl and Energia Termosolar BV (formerly Antin Infrastructure Services Luxembourg Sàrl and Antin Energia Termosolar BV)​v Kingdom of Spain, Award, ICSID Case No ARB/13/31, IIC 1439, 15 June 2018, paras 564–73. 71 Masdar Solar & Wind Cooperatief UA v Kingdom of Spain, Award, ICSID Case No ARB/14/1, IIC 1375, 16 May 2018, paras 520–522 (“Masdar Award”). 72 9REN Holding Sarl v Kingdom of Spain, Award, ICSID Case No ARB/15/15, 31 May 2019, para 311. 73 Novenergia II (n 69) para 695; Masdar Solar & Wind Cooperatief (n 71) para 562. By the same token, in Eiser, the tribunal held that Spain has failed to fulfil its ECT obligation in summary, because it adopted modifications that are disproportionate to the aim of the legislative amendment.

176  Research handbook on European State aid law ing modifications to the support scheme.74 In both the Czech and Spanish RES Decisions, it held that “any compensation which an Arbitration Tribunal were to grant to an investor on the basis that [the countries have modified the scheme] … would constitute in and of itself State aid” which cannot be enforced, unless the Commission approves it.75 As a result, the respondent States are now notifying these awards to the Commission and are resisting their enforcement on State aid grounds (in addition they argue that the awards themselves offend EU law following the judgment of the Court of Justice in Achmea).76 This approach was recently challenged before the General Court in FVE Holýšov I, in which two Czech RES associations contested the Commission’s powers to render an a priori assessment of hypothetical awards.77 The General Court upheld the Czech RES Decision, and considered that the Commission’s assessment of any hypothetical compensation was present “purely for the sake of completeness”, and not necessary for the adoption of the Czech RES Decision or the assessment of its legality.78 While not entirely consistent, the Commission’s current approach of tackling ISDS awards involving State aid seems to be to oppose implementation and enforcement in one way or another by declaring the payment of compensation awarded to be incompatible State aid. 3.b

The Enforcement of Arbitral Awards Said to Involve State Aid Within and Outside the EU

The clash between State aid rules and international law is most prominent at the enforcement stage.79 The tension is primarily triggered because the approach of the Commission taken in Micula, to qualify the payment of the compensation awarded for the wrongdoing of the host State (not the award itself) as State aid. This arguably departs from the established Asteris case-law, whereby State aid is “fundamentally different in its legal nature from damages they have caused to individuals”.80 Under Asteris, State measures which are not discretionary, but merely serve to fulfil the State’s legal obligation to pay compensation for damages to individuals do not amount to preferential treatment (i.e., a selective economic advantage) under the

74 Spain RES Commission Decision (n 44) para 165; Czech RES Commission Decision (n 44) para 150. 75 ibid. 76 In its attempts to prevent the enforcement of the arbitral awards concerning the Spanish RES arbitrations, the Commission relied on its Spanish RES decision to argue that the Commission considered that any compensation awarded would amount to incompatible aid. See for e.g., Proposed brief of the Commission on behalf of the European Union as amicus curiae in support of the Kingdom of Spain for the US District Court for the District Court of Colombia concerning the enforcement of Masdar Award, 3 May 2019, p 3; Proposed brief of the Commission as amicus curiae in support of the Kingdom of Spain for the US District Court for the Southern District of New York concerning the enforcement of Eiser Award, 19 March 2019, pp 4 and 16. 77 Case T-217/17 FVE Holýšov I v Commission [2019] EU:​T:​2019:​633, para 159; currently under appeal in Case C-850/19 P. 78 ibid para 151. 79 Leigh Hancher, Adrien de Hauteclocque and Francesco Maria Salerno, State aid and the Energy Sector (Hart Publishing 2018) 342. 80 Joined Cases C-106/87–120/87 Asteris v Greece [1988] EU:​C:​1988:​457 (“Asteris”). See also Case 61/79 Amministrazione delle finanze dello Stato v Denkavit Italiana [1980] EU:​C:​1980:​100, para 31 (repayment for improper tax does not constitute State aid).

EU State aid and arbitration  177 State aid rules.81 Compensation paid to companies for damage incurred as a result of illegal State actions therefore fall outside the scope of Article 107(1) TFEU. The Commission has itself found that compensation for losses suffered by an undertaking as a result of the State actions do not constitute State aid.82 Furthermore, for a measure to constitute State aid, it must be attributable to the Member State, which requires that the grant of aid has to be “unilateral and autonomous”.83 The enforcement of an arbitral award issued pursuant to an international investment treaty, however, does not fall square within this definition of imputability. If a respondent State refuses to pay the award voluntarily, and the investor is compelled to enforce the award pursuant to the New York or ICSID Conventions, is it debatable whether any payment that might ensue can be imputable to the respondent State, in particular if enforcement is ordered by a court of another Member State, or even a third country. The Micula case – still pending before the Court of Justice – has raised a number of questions about the situations in which an arbitral award compensating a claimant for breaching an investment treaty can fall foul of the State aid rules. In Micula, the Commission sought to narrow down the Asteris principle to cases of liability based on the wrongful conduct of national authorities, no advantage is granted to an undertaking where such liability merely ensures that the damaged party is given what it is entitled to, just as any other undertaking would be, under the general rules of civil liability in that Member State.84

Furthermore, the Commission also contested the legality of the arbitral award because it was granted pursuant to an intra-EU BIT (Romania-Sweden), which cannot be a basis for indemnification under the rules of civil liability in that Member State.85 In relation to imputability, the Commission held that any order of national courts given in proceedings brought to enforce payment of the award would also be an act imputable to the State (since courts are organs of the State) and would therefore amount to a grant of aid (assuming the other criteria for finding State aid are satisfied).86 These questions have not (yet) been fully explored by the European Courts, since the General Court annulled the Micula decision on the grounds that the Commission did not have competence under Article 108 TFEU and Regulation No 659/1999 as regards events predating Romania’s accession to the EU.

Asteris (n 80) paras 23–4. Commission Decision (EC) 1999/268 of 20 January 1999 on the Acquisition of land under the German Indemnification and Compensation Act [1999] OJ L 107/21 (payment for damages); Commission Decision (EC) 2008/408 of 20 November 2007 on the State aid C 36/A/06 (ex NN 38/06) implemented by Italy in favour of ThyssenKrupp, Cementir and Nuova Terni Industrie Chimiche [2008] OJ L 144/37, para 70 (compensation for expropriation); Commission Decision of 16 June 2004, case N 304/2003 – Akzo Nobel, para 18 (compensation for expropriation). 83 Case 61/79 Amministrazione delle finanze dello Stato (n 80) para 31; Case T-351/02 Deutsche Bahn AG v Commission [2006] EU:​T:​2006:​104, para 100. 84 Micula Commission Decision (n 3), para 101. 85 ibid. 86 ibid 117–21. 81 82

178  Research handbook on European State aid law i Enforcement within the respondent Member State Naturally, due to the convenient access to State assets, the territory of the respondent State is the preferred jurisdiction for enforcing an arbitral award against that State. However, if that State is the addressee of a negative Commission decision preventing the implementation of the award, then the effects of such a decision will apply to all organs of that Member State, including bailiffs and courts. Ultimately, a Member State which does not comply with the decision (including any order for recovery of damages paid), can be referred to the Court of Justice,87 and be subject to penalty payments under Article 260 TFEU. In this context, the national courts of the specific Member State that is subject to the State aid decision – and subject to any prior international law obligations that are covered by Article 351 TFEU – might be unwilling to enforce the award. ii Enforcement in countries other than the respondent Member State Under both New York and ICSID Conventions, it is possible for a claimant to seek enforcement of an arbitral award before the courts of all contracting States of those conventions. The challenge, of course, will be to determine a jurisdiction in which the respondent Member State has assets. Seeking enforcement in other EU Member States or outside the EU raises the obvious question: what is the impact of the State aid classification in connection with the award for its enforcement in jurisdictions outside the respondent Member State? Two aspects are relevant to answer this question: (i) can enforcement outside the respondent State (and addressee of the State aid decision) amount to a grant of aid? and (ii) would enforcement outside the respondent Member State violate the Commission decision or EU law generally? If a court of one Member State orders seizure of assets owned by another Member State, it can be questioned whether the resulting “payment” to the claimant is attributable to the actions of the Member State whose assets have been seized. Since State aid law does not prohibit measures that are not imputable to the granting State, 88 payment arising out of enforcement action taken on the order of a national court in another Member State arguably does not result from a unilateral or autonomous act of the respondent Member State, which is required for the purpose of imputability. Though such arguments have been raised, they remain ultimately untested at the level of the European Courts.89 Of course, even if it could be said that payment following enforcement in a different Member State would not be imputable to the respondent State, the courts of the 87 Article 108(2) TFEU. See for example, Commission, ‘State aid: Commission refers Romania to Court for failure to recover illegal aid worth up to €92 million’ (Press Release, 7 December 2018) IP 18/6723. 88 Case T-351/02 Deutsche Bahn AG (n 83). 89 The issue of imputability was raised by the Applicants in Cases T-624/15, T-694/15 and T-704/15 European Food & Others challenging the Micula Commission Decision (n 3), although the General Court did not consider this issue when annulling the Decision. During the enforcement proceedings of the Micula Award, the Brussels Court of Appeal referred questions that are of importance to the issue of imputability (Case C-333/19, currently suspended, awaiting the outcome of Case C-638/19 P). Also in relation to the Micula Award, a Swedish district court held that an investor could not enforce an ICSID award where this would be contrary to EU law. See Swedish District Court of Nacka, Ruling of 23 January 2019, case reported in Tom Jones, “Miculas suffer setback in Sweden” (Global Arbitration Review, 4 February 2019) accessed 9 May 2020.

EU State aid and arbitration  179 second Member State would still need to be satisfied that allowing enforcement of an award the implementation of which the Commission considers would lead to a grant of State aid would be compatible with the duty of sincere cooperation under Article 4(3) TFEU.90 Indeed enforcement in such circumstances has been refused by national courts.91 Before courts outside the EU, where the duty of sincere cooperation does not apply, the Commission has raised arguments of international comity. In the Micula case, the Commission intervened in proceedings to enforce the award in the United States, raising such arguments, though these were dismissed by the District Court.92 3.c

The Impact of Article 351 TFEU on the Enforcement of Arbitral Awards said to Involve State Aid

Another layer of complexity arises when the implementation or enforcement of the award is pursuant to prior international obligations of the relevant Member States, as a result of which they are protected by Article 351 TFEU and the general principle of (international) law that pacta sunt servanda. Article 351 TFEU stipulates that the EU Treaties will not affect the rights and obligations arising from international agreements concluded before 1 January 1958 or, for acceding States, before the date of their accession to the EU. To the extent that implementation or enforcement of an arbitral award is pursuant to such prior international law obligations owed to third countries, then based on Article 351 TFEU, EU law should not stand in the way. The importance of Article 351 TFEU has been largely overlooked in literature on State aid and arbitration, although it has played a key role in a number of cases. The Commission argued in Electrabel v Hungary that: “in case of any contradiction [between EU law and the ECT], EU law prevails.”93 The tribunal agreed with the Commission and held that EU law would prevail over the ECT in case of any material inconsistency in cases between EU Member States.94 The tribunal reasoned that Article 351 TFEU only applied to the rights of third parties under prior treaties; the rights of Member States themselves under such treaties are to be considered renounced by virtue of concluding the EC Treaty.95 That interpretation is consistent with the case law of the Court of Justice.96 The Commission, in its decision in Micula, stated that the Sweden-Romania BIT was a treaty concluded between two Member

Also the issues referred to the Court of Justice by the Brussels Court of Appeal in Case C-333/19. Enforcement of the Micula Award was refused by the English Courts on precisely this basis (see Micula & Others v Romania [2017] Bus LR 1147). The judgment was ultimately overturned by the UK Supreme Court but on the basis that Article 351 TFEU operated to exclude the application of Article 4(3) TFEU in the particular circumstances. 92 Note that this ruling was in the context of an annulled State aid decision. See also US proceedings in relation to the enforcement of the Micula award reported by Wehland (n 43). 93 Electrabel SA, Decision on Jurisdiction (n 52) para 4.109; Tamás Kende, ‘Arbitral Awards Classified as State Aid under European Union Law’ [2015] ELTE LJ 37, 48. 94 The tribunal did not find that such inconsistency existed. Electrabel SA, Decision on Jurisdiction (n 52) para 4.191. 95 Electrabel SA, Decision on Jurisdiction (n 52) para 4.187. See a similar conclusion in AES Award (n 38), para 7.6.11. 96 Case C-478/07 Budĕjovický Budvar [2009] EU:​ C:​ 2009:​ 521, paras 97–9; Case C-264/09 Commission v Slovakia [2011] EU:​C:​2011:​580, para 41; Case 235-87 Matteucci [1988] EU:​C:​1988:​460, para 21. 90 91

180  Research handbook on European State aid law States of the EU, Sweden and Romania, and not a treaty between “one or more Member States on the one hand, and one or more third countries on the other”.97 However, the situation is different where Member States have obligations to third countries that arose prior to their accession. This is the case for multilateral treaties, where many of the signatories are outside the EU, such as the ICSID and New York Conventions. This interpretation of Article 351 TFEU is confirmed by the case-law of the Court of Justice. In particular, the Grand Chamber judgment of the Court of Justice in Commission v Austria applied Article 307 EC (now 351 TFEU) to a convention of the International Labour Organisation.98 Under the ICSID Convention, all signatories are under an obligation to enforce awards, and that obligation is owed to all other contracting states, not only the state parties to the investment agreement under which the dispute arose.99 In proceedings for the enforcement of the award in the Micula arbitration, the UK Supreme recently confirmed that the obligation to enforce arbitral awards under Article 54 of the ICSID Convention was owed not only to the State of the nationality of an award beneficiary, but also to all other countries, including outside the EU, that are party to the Convention.100 On this ground, the Supreme Court confirmed that Article 351 TFEU applied to the UK’s pre-existing obligations under the ICSID Convention to enforce the award.101 3.d

Compatibility of ISDS Clauses with EU Law and its Implications for State Aid Cases

An overview of the relationship between EU law and, in particular, ISDS arbitrations would not be complete without noting the longstanding debate as to the compatibility of intra-EU ISDS with EU law. As noted above, the Court of Justice has recently shed more light on this issue, in two (non-State aid) judgments in Achmea102 and CETA,103 which concluded that not all ISDS is compatible with the EU legal order. In Achmea, the Court of Justice held the ISDS clause contained in the Netherlands – Slovakia BIT to be incompatible with the EU legal order.104 While the Court held that establishing a court pursuant to an international agreement charged with the interpretation of the provisions of that agreement, is not in principle incompatible with EU law,105 it found that

Micula Commission Decision (n 3) implemented by Romania. Case C-203/03 Commission v Austria [2005] EU:​C:​2005:​76, para 59. 99 Kai Struckmann, Genevra Forwood and Aqeel Kadri, ‘Investor-State Arbitrations and EU State Aid Rules: Conflict or Co-Existence’ (2016) 15(2) Eur St Aid LQ 258, 261. 100 See Micula and others (Respondents/Cross-Appellants) v Romania (Appellant/Cross-Respondent) UKSC 2018/0177, para 108. 101 This was in the context of an annulled Micula Commission Decision (n 3), with the appeal by the Commission of that annulment pending before the Court of Justice. The UK Supreme Court noted that the possibility that the Court of Justice would rule on Article 351 TFEU was contingent and remote, and in such circumstances, the duty of sincere co-operation did not require a stay on the enforcement of the award. See Micula and others (Respondents/Cross-Appellants) (n 100) para 117. 102 Achmea (n 7). 103 Case Avis 1/17 CETA, Opinion of the CJEU 1/17 of 30 April 2019, pursuant to Article 218(11) TFEU on the Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part [2019] EU:​C:​2019:​341. 104 Achmea (n 7), para 59. 105 ibid 32 and 57. 97 98

EU State aid and arbitration  181 the ISDS clause in this case offended EU law, because the arbitral tribunal, which may be called upon to interpret and apply EU law, did not qualify as “a court or tribunal of a Member State” and could not refer questions concerning EU law for a preliminary ruling by the Court of Justice, in breach of Article 267 and 344 TFEU.106 Central to the Court’s reasoning was the need to preserve the Court’s position as the final arbiter on the interpretation and application of EU law. By agreeing to submit disputes that could concern the interpretation or application of EU law to a judicial body outside the EU legal order, the Member States in question would breach their obligations under the EU Treaties. It was in the aftermath of the Achmea judgment that, in May 2020, 23 Member States decided to terminate their intra-EU BITs. The Court revisited the issue of ISDSs’ compatibility with EU law in its CETA Opinion of 30 April 2019. Unlike the tribunal at issue in Achmea, the Court considered that the jurisdiction of the CETA tribunals is strictly confined to the provisions of CETA, and they thus do not pose a threat to the autonomy of the EU legal order.107 The Court explicitly ruled that the CETA tribunals will examine EU law as a matter of fact and not engage in interpretation of points of law.108 In terms of State aid, Article 8.9.4 of the CETA, confirms that where the Commission declares State aid incompatible and orders its repayment, the CETA tribunals are precluded from ruling that that decision is contrary to the CETA.109 The effects of these rulings, some of which are noted in Section 2(c)(ii) above, are still crystalizing. While these judgments do not address all types of investment treaties (such as, for example, multilateral agreements, such as the ECT), they indicate the compatibility prospects are higher if the ISDS complies with the CETA criteria. This is a relevant development for parties in cases where the Commission argues that the payment of any compensation awarded would amount to State aid. Any party seeking to argue that compensation for the wrongful act of the State could not be qualified as State aid, pursuant to the Asteris case-law, will likely be met with the argument that Asteris does not apply as the underlying BIT provides no valid legal basis for the award on compensation.110 Numerous issues arise in relation to these theories, which will most likely be contested at a certain point before the European Courts, but these are beyond the scope of this work. In the wake of Achmea, the Commission has adopted the practice of making submissions to any tribunal hearing a dispute pursuant to an intra-EU BIT (or a dispute under the ECT between an EU investor and a Member State) to the effect that the tribunal has no jurisdiction to hear the dispute in light of the incompatibility of the ISDS clause with EU law. To date, no tribunal has agreed with these submissions, presumably because incompatibility with EU law does not automatically result in invalidity or inapplicability of the investment treaties under international law. Recently, two ICSID tribunals, separately deciding under the

106 ibid 32, 49 and 60. The Court further held that the ISDS in intra-EU BIT is in breach of the principles of mutual trust (Article 19 TEU) and sincere cooperation (Article 4(3) TFEU) between Member States, as a result of which it has an adverse effect on the autonomy of EU law and is incompatible with EU law (paras 34, 58 and 60). 107 CETA (n 103), paras 106–7 and 118. 108 ibid 76 and 121. 109 “Nothing in this Section shall be construed as preventing a Party from discontinuing the granting of a subsidy or requesting its reimbursement where such measure is necessary in order to comply with international obligations between the Parties or has been ordered by a competent court, administrative tribunal or other competent authority, or requiring that Party to compensate the investor therefor.” 110 Micula Commission Decision (n 3), para 102.

182  Research handbook on European State aid law France–Hungary BIT, rejected the submission that the effect of Achmea was that they had no jurisdiction over the dispute, finding jurisdiction and handing down an award on the merits.111 In UP and CD Holding, the tribunal held that: Regardless of what may be argued from the Achmea Decision regarding BITs between EU Member States, as regards jurisdiction under the ICSID Convention it is undisputed that Hungary did not expressly terminate its participation in and submission to arbitration pursuant to the ICSID Convention when it joined the EU in 2004.112

In Vattenfall, the tribunal constituted under the ECT issued a Decision on the Achmea issue and concluded that nothing indicates that the ECT’s ISDS are not applicable to an EU investor pursuing arbitration against a Member State. 113 The tribunal also stated that “it is not for this Tribunal to assume that the Court of Justice’s decision in relation to a BIT applies equally to a multilateral treaty [the ECT] with both EU and non-EU parties, under which the EU itself has consented to investor-State arbitration”.114 The impact of Achmea on the enforcement of arbitral awards is still a live issue and with pending procedures in a number of Member States at some point is likely to come before the Union courts.

4. CONCLUSION As we have seen, there are a number of ways in which State aid issues can arise in arbitration procedures – some more controversial than others. However, notwithstanding the recent debate surrounding cases such as Micula or the Czech and Spanish renewables arbitrations, which seem to suggest that there is a “clash of cultures” between EU (State aid) law and arbitration and ISDS in particular, the two worlds are not irreconcilable. Where a tribunal’s jurisdiction can validly be established it is perfectly feasible to conduct these proceedings taking full account of the State aid rules, be it as part of the applicable law or because they form part of the factual context of the case. Moreover, even where the outcome of an arbitration is perceived to contravene State aid law, this situation is not without remedy as arbitral awards may under certain conditions be reviewed and, ultimately, it is also open to the Commission to challenge the outcome of an arbitration under the State aid rules as it did with Micula. That said, whether the implementation of an award involves incompatible aid or breaches State aid law in some other way is a question which is fully reviewable by the Union courts and a number of key questions yet remain unanswered. While the pending litigation in Micula may provide some of these answers, given the very specific pre-accession context of this case, many questions will likely remain unanswered even after those proceedings are concluded. State aid and arbitration will therefore remain an area where much of the legal landscape still needs to be mapped out.

111 Sodexo Pass International v Hungary, ICSID Case No ARB/14/20 (unpublished); UP and CD Holding Internationale v Hungary, ICSID Case No ARB/13/35. 112 UP and CD Holding (n 111), para 259. 113 Vattenfall AB and others v Federal Republic of Germany, Decision on the Achmea issue, ICSID Case No ARB/12/12, IIC 1421, despatched 31 August 2018, para 207. 114 ibid para 213. Similar conclusions were reached in RREEF v Spain, Award, ICSID Case No. ARB/13/30, IIC 1637, 11 December 2019, paras 211–13.

10. State aid and Brexit George Peretz

BREXIT: GENERAL BACKGROUND The 2016 Referendum In the UK general election in 2015, the Conservative Party led by Mr David Cameron obtained a narrow majority of seats in the House of Commons. Its manifesto promised to hold a referendum on whether the United Kingdom should remain a Member State of the EU. The UK Parliament accordingly passed the European Referendum Act 2015, which required a referendum to be held on the question “Should the United Kingdom remain a member of the European Union or leave the European Union?”1 That referendum was held on 23 June 2016: just over 51% of those voting voted to leave the EU (though in Scotland and Northern Ireland substantial majorities voted to remain). Events After the Referendum The result of the referendum led to one of the most turbulent periods of modern UK political history. The following section does no more than briefly summarise those events, which are the necessary background to understanding the shifts in UK government policy in relation to Brexit in general, and State aid in particular, over the period. The May Government 2016–17 Mr Cameron, who had campaigned in favour of Remain, announced his resignation as Prime Minister on the morning after the referendum. His successor, Mrs Theresa May, had campaigned in favour of Remain (though she played no prominent role in that campaign) but became leader of the Conservative Party and Prime Minister on the basis of the Delphic promise that “Brexit means Brexit”. She soon announced that the UK Government would serve notice of its intended withdrawal from the EU under Article 50 Treaty on the Functioning of the European Union (TFEU) by March 2017. That announcement led to a judicial review challenge in which it was decided by the Supreme Court of the United Kingdom that as a matter of UK domestic law the Prime Minister had no power to serve such notice though, importantly, it also decided that the (anti-Brexit) Scottish Parliament and Welsh and Northern Ireland Assemblies had no constitutional power to prevent an Act of the UK Parliament giving her that power.2 In response to that judgment, Parliament passed a short Act3 that gave the Prime Minister power to serve notice under Article 50, defeating all amendments that would have constrained the Government’s powers 3 1 2

European Union Referendum Act 2015, s 1(4). Miller v Secretary of State for Exiting the EU [2017] UKSC 5, [2018] AC 61. The European Union (Notification of Withdrawal) Act 2017.

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184  Research handbook on European State aid law to negotiate the terms on which withdrawal would take place. The Prime Minister duly served notice of the United Kingdom’s withdrawal under Article 50 on 29 March 2017, starting the two-year period at the end of which, absent a withdrawal agreement, EU law would simply cease applying to the United Kingdom. In the meantime, Mrs May announced4 that the United Kingdom would not pursue a strategy of seeking to remain in the single market from outside the EU (either as a member of the EEA or under a separate agreement). She proposed that the United Kingdom would “seek the greatest possible access to [the single market] through a new, comprehensive, bold and ambitious free trade agreement” which might “take in elements of current single market arrangements in certain areas”. Having served notice under Article 50, Mrs May decided to call a general election, in the hope of increasing the Conservative Party’s narrow majority: as the Labour Party agreed to a general election, the necessary two-thirds vote of the House of Commons required by the Fixed Term Parliaments Act 2011 was obtained. However, that decision proved to be a serious miscalculation, since the result of the election was that Mrs May lost her overall majority and was able to survive as Prime Minister only with the support of the Democratic Unionist Party (DUP), the major Unionist party of Northern Ireland (and which had supported Leave, contrary to the majority of votes in Northern Ireland). The May Government 2017–19 The fact that Mrs May survived as Prime Minister after June 2017 only with the support of the DUP proved to be a crucial element in her subsequent approach to negotiations with the EU. That was in turn because the EU made it clear at an early stage that it regarded it as an imperative aspect of the withdrawal agreement that it provided arrangements under which the border between Ireland (which remains an enthusiastic member of the EU) and Northern Ireland remained, in effect, invisible: that is to say without checks or controls. That reflected the urgent importance to Ireland of maintaining the 1998 settlement between Ireland and the United Kingdom, and between the different communities in Northern Ireland, that ended the terrorist campaigns in Northern Ireland: a critical element of which settlement was the invisibility of the border as well as complex networks of co-operation across the border, all negotiated against the background of the membership of both Ireland and the United Kingdom of the EU. The logic of that position was that, at least, Northern Ireland would have to remain, in effect, in the single market (at least for goods) and in the EU customs territory. That position confronted the UK Government with a dilemma with which it struggled for the next two and a half years. One option was to accept that Northern Ireland would go its separate way and remain in the EU single market/customs territory, while enabling the rest of the United Kingdom to operate a separate commercial and regulatory policy. That would, however, require regulatory and customs checks on goods moving between Great Britain and Northern Ireland, as well as causing a very substantial difference in governance as between those two parts of the United Kingdom. Unsurprisingly, the DUP was vigorously opposed to that option, which effectively ruled it out as an option if Mrs May wished to avoid the fall of her government and a further general election. The only other option, however, was for 4 PM Theresa May, “The government’s negotiating objectives for exiting the EU” (Speech at Lancaster House, London, 17 January 2017) accessed on 23 March 2020.

State aid and Brexit  185 the whole of the United Kingdom to remain in the EU single market (at least for goods) and customs territory: an option unacceptable to those for whom a major benefit of Brexit was the regaining of UK control of its regulation and tariff schedules. Faced with those unattractive options, the instinct of many Conservative and DUP politicians was to find increasingly imaginative ways in which there could be an invisible border between Ireland and Northern Ireland while allowing Northern Ireland to be in the separate UK regulatory area and customs territory: but none of their attempts to square this circle, commonly known as “alternative arrangements”, resulted in any convincing proposal (or at least any proposal that convinced the Irish government or the EU). In July 2018 Mrs May persuaded her cabinet – though at the price of several resignations, including that of Mr Boris Johnson, then foreign secretary – to accept what became known as the Chequers proposal,5 which was developed into a White Paper later that month (the Chequers White Paper)6 that proposed a “common rulebook” for goods as between the EU and United Kingdom, with detailed proposals on State aid which will be discussed below, as well as a somewhat complex proposal for tariffs, the details of which are beyond the scope of this work. That approach led to a withdrawal agreement between the EU and the United Kingdom in November 20187 which contained, in the Protocol on Ireland/Northern Ireland, a set of rules, designed to protect the invisibility of the Irish border, that would govern the relationship between the EU and the United Kingdom if a final relationship could not be agreed by the end of the transition period created by the withdrawal agreement. Those rules – which came to be known as “the backstop” – had extensive provisions on State aid, which will be discussed below: but in general they extended to the whole United Kingdom arrangements to remain in the single market for goods (as well as the EU customs territory). Further, the Political Declaration agreed at the same time envisaged that the final relationship would build on those backstop arrangements.8 The backstop provisions were however unacceptable both to the DUP and to a large part of the Conservative Party: their position was that the “alternative arrangements” referred to above would enable the United Kingdom as a whole to leave the EU customs territory and avoid accepting any aspect of single market legislation while maintaining the invisibility of

5 Statement from HM Government, 6 July 2018, accessed on 23 March 2020. 6 Department for Exiting the European Union, The Future Relationship between the United Kingdom and the European Union (Cm 9593, 2018) accessed on 23 March 2020. 7 Department for Exiting the European Union, Withdrawal Agreement and Political Declaration (2018), at accessed on 23 March 2020. 8 Department for Exiting the European Union, Draft Political Declaration setting out the framework for the future relationship between the United Kingdom and the European Union (2018) accessed on 23 March 2020, 79.

186  Research handbook on European State aid law the Irish border. Combining with opposition parties, they succeeded in defeating the May Government three times on motions to approve the 2018 Withdrawal Agreement. During that period, the May Government was also making proposals for domestic legislation that would come into effect if the Article 50 period ended without a withdrawal agreement in place (a scenario that became known as “no-deal Brexit”). Those proposals included proposals for a domestic State aid regime, which will be discussed below. After a last-ditch attempt to secure agreement with the Labour Party, Mrs May’s position had become politically impossible, and she announced her resignation in June 2019, after having asked to extend the withdrawal period under Article 50, which the EU agreed to do until 31 October 2019. The Johnson Government Her successor as Prime Minister, elected by Conservative Party members, was Mr Johnson. In contrast to Mrs May, Mr Johnson had been an enthusiastic supporter of Leave during the referendum. He had also resigned as foreign secretary over the Chequers proposal. He came to office in July 2019 having promised that the United Kingdom would leave the EU on 31 October 2019 “do or die”, though also claiming that a withdrawal agreement could be negotiated with the EU and ratified before then. Mr Johnson’s government did not, however, command a majority in the House of Commons on Brexit issues, even with the support of the DUP. A significant number of Conservative MPs were horrified at the prospect that the United Kingdom might leave the EU without a withdrawal agreement, a prospect that would have severed at a stroke all the trade and other arrangements between the United Kingdom and its neighbours. They therefore voted for an Act9 (known as the “Benn Act” after its main sponsor), passed against the wishes of the government of the day (an extraordinary event in UK constitutional history) that forced the Prime Minister to request a further extension of the Article period to 31 January 2020 if no withdrawal agreement had been ratified by late October. However, and unexpectedly, the Johnson Government succeeded in mid-October 2019 in concluding a fresh withdrawal agreement with the EU, with a wholly revised Ireland/Northern Ireland Protocol. That success was based on the Johnson Government accepting the other option available to the United Kingdom as a result of the EU’s position on Northern Ireland, namely to accept that Northern Ireland would remain in the EU single market for goods and customs territory and would therefore be in a separate regulatory area and (in effect10) customs territory to that of the rest of the United Kingdom. That outcome outraged the DUP, which promptly withdrew its support for the Government. Though he obtained a majority in the House of Commons in support of the legislation required to implement and ratify this agreement (a group of Labour MPs supporting that legislation outnumbering the DUP opposing it) the Johnson Government was defeated on a motion for a speedy passage of the legislation through the House, thus ruling out ratification before Mr Johnson was required by the Benn Act to seek an extension to the Article 50 period. Though



The European Union (Withdrawal) (No 2) Act 2019. See Stephen Weatherill, “The Protocol on Ireland/Northern Ireland: What it says is not what it does” (EU Law Analysis, 17 March 2020) accessed on 23 March 2020. 9

10

State aid and Brexit  187 he had intimated that he might defy the Benn Act, Mr Johnson did, albeit with an ostentatious display of reluctance, seek such an extension, which was obtained. At that point, two of the opposition parties indicated that they would support legislation permitting an immediate general election: a general election for which Mr Johnson had been calling for some time. The necessary legislation was swiftly passed by Parliament. In the election campaign, the Conservative Party led by Mr Johnson made it clear that it wanted a long-term relationship with the EU that resembled that of Canada: that is to say, with no participation in the single market. It made specific proposals about how the United Kingdom would regulate subsidies which will be discussed below. In December 2019 that election returned a Conservative government, now shorn of almost all of those MPs who had voted for the legislation requiring an Article 50 extension to be sought, and with an overall majority in the House of Commons of 80. The position of the DUP thus became irrelevant. In January 2020 the new Parliament swiftly approved the revised withdrawal agreement, which was ratified by both the United Kingdom and EU and which came into force on 31 January 2020, the date on which the United Kingdom ceased to be a Member State of the EU. In February 2020 both the United Kingdom and the EU set out their negotiating positions, the State aid aspects of which will be discussed below. But it became clear that a clear dividing line between the United Kingdom and the EU was that the EU regarded it as a critical aspect of even the type of UK/EC relationship proposed by the Johnson Government that the United Kingdom accept conditions (known as “level playing field” (LPF) conditions) as to the maintenance of EU standards on matters such as employment and environmental protection and also State aid, while the Johnson Government regarded such conditions as an unacceptable limitation on UK sovereignty.11 Negotiations began in March 2020, at which point the authorities of both the United Kingdom and EU became overwhelmed by the Covid-19 crisis. It is impossible at the time of writing (spring and early summer 2020) to predict the effects of that crisis with any confidence, though by the end of June 2020 it became clear that, despite the crisis, the United Kingdom would not agree to any extension of the transition period beyond the end of 2020.

11 See Boris Johnson, “PM Speech in Greenwich” (Greenwich, 3 February 2020) accessed on 25 March 2020: “There is no need for a free trade agreement to involve accepting EU rules on competition policy, subsidies, social protection, the environment, or anything similar any more than the EU should be obliged to accept UK rules. The UK will maintain the highest standards in these areas – better, in many respects, than those of the EU – without the compulsion of a treaty”. See also David Frost, “Top UK Brexit negotiator David Frost on his plans for an EU trade deal” (The Spectator, 17 February 2020) accessed on 25 March 2020: “It is central to our vision that we must have the ability to set laws that suit us – to claim the right that every other non-EU country in the world has. So to think that we might accept EU supervision on so-called level playing field issues simply fails to see the point of what we are doing. That isn’t a simple negotiating position which might move under pressure – it is the point of the whole project”.

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THE UNITED KINGDOM’S ATTITUDE TO THE EU STATE AID RULES BEFORE BREXIT The UK’s Experience as an EU Member State During the United Kingdom’s membership of the EU and its predecessors, it generally – under both Conservative and Labour governments – supported strong enforcement of the State aid rules as part of the structure of the single market.12 The United Kingdom also tended to give less State aid as a proportion of its GDP than most other Member States.13 During the 2010–15 coalition Government, the UK Government published a series of reviews considering the balance of competence between EU and the Member States. The review of competition policy and State aid concluded that On State aid control, there are … strong arguments that competence needs to remain at EU level. Critiques of the current balance of competence are focused more on the “how” the Commission controls State aid and the “what” in terms of the court broadly defining what constitutes State aid, rather than the question of where competence sits. There is also discussion about how the State aid rules reflect market realities, and how responsive the Commission is in its processes.14

However, the review also noted that “some [consultees] expressed concern about [the] limits [of the State aid rules], about real or apparent extension of EU competence into areas of domestic policy, and about the way State aid controls are exercised”15 though others felt that “perceived problems might be attributable to an overinterpretation or under-interpretation at national level of what was allowed, either too laissez-faire or too restrictive, with the feeling being that many UK authorities fell into the latter camp; effectively ‘hiding behind’ the State aid regime”.16 Even after the referendum, a report by the House of Lords EU Committee noted that Given the public debate on this matter, we expected to receive greater evidence on the possibility for the Government to pursue a more “interventionist” approach to State aid post-Brexit. Most witnesses to this inquiry, however, were keen to emphasise that, despite frustrations with the application of the

12 HM Government, “Review of the Balance of Competences between the United Kingdom and the European Union: Competition and Consumer Policy Report” (July 2014) accessed on 23 March 2020, records at para 2.56 that “At our stakeholder engagement event it was agreed that ‘as an instrument of economic policy, the regime has been very helpful for the UK in tackling more industrially active Member States’”. 13 See DG Comp’s, “State aid scoreboard 2018” accessed on 23 March 2020. This point was picked up by Mr Johnson in his speech of 3 February 2020 (n 11): “France spends twice as much on state aid as the UK, and Germany three times as much, who is using subsidies to undercut? Not the UK. In fact, the EU has enforced state aid rules against the UK only four times in the last 21 years, compared with 29 enforcement actions against France, 45 against Italy – and 67 against Germany”. 14 HM Government, “Competition and Consumer Policy Report” (n 12) 7. 15 ibid para 3.27. 16 ibid para 3.30.

State aid and Brexit  189 rules, it was unclear how far they had actually curtailed successive UK Governments’ ability to grant State aid.17

State Aid and the Referendum The EU State aid rules were one issue in the referendum campaign, although probably not one of the most decisive issues for most voters. During the campaign, a Tata steel plant in Wales experienced financial difficulties, and Mr Johnson (who was a leader of the Leave campaign) claimed that, out of the EU, the UK Government would have been more able to support the UK steel industry by, for example, subsidising energy costs.18 On the left of UK politics, there were a number of politicians who expressed concerns as to the operation of the State aid rules and their potential to hinder the political programme of a future Labour government: indeed, the then leader of the Labour Party, Mr Jeremy Corbyn, although ostensibly a supporter of Remain, said during the campaign that “There are certainly problems about EU State aid rules, which need reform”.19 (He did not suggest what such reform might consist of.) It should however be noted that the evidence that EU State aid rules would actually have imposed a significant restriction on what a Labour Government would have wanted to do was thin, as a careful analysis of its 2016 election manifesto showed.20

THE POSITIONS OF THE MAY AND JOHNSON GOVERNMENTS ON A POST-BREXIT STATE AID REGIME As might be expected, the major shifts in UK Government policy described above were reflected in the various different positions adopted by the May and Johnson Governments on a future UK State aid regime. Before examining those positions, however, there are four background factors that help explain why it became generally accepted among UK policy-makers that the United Kingdom was going to need to retain some form of anti-subsidy regime after Brexit, even though UK Government policy as to the nature of that regime changed markedly over the period. As the House of Lords EU Committee noted in April 2020: On balance, however, witnesses felt that some form of subsidy control will be required. The two most compelling reasons put to us for that were the need to ensure transparency over the use of public money and to avoid a race to the bottom among devolved and regional authorities, with witnesses

European Union Committee, 12th Report of Session 2017–19 (HL Paper 67), para 171. See David Cornock, “Boris Johnson on Brexit, steel and Wales” (BBC News, 14 June 2016) accessed on 23 March 2020. 19 George Peretz, “A Star Is Torn: Brexit and State Aid” (2016) 15(3) European State Aid Law Quarterly 334, fn 9: original source no longer available. 20 Biondi and Tarrant, “EU law is no barrier to Labour’s economic programme” (RENEWAL, 22 September 2017) accessed on 25 March 2020. See also George Peretz, “Four reasons why Jeremy Corbyn is dead wrong about State aid” (The Guardian, 27 December 2018) accessed on 25 March 2020. 17 18

190  Research handbook on European State aid law pointing to the example of Amazon in the US, which “held an auction” among cities to find “who could give the greatest incentive” to the firm.21

The first factor was an appreciation that the EU would need some form of assurance – even if not in the form of a binding treaty commitment – that the United Kingdom would not go down the route of systematically subsidising industries in a way that was likely seriously to impact the EU. Thus, even Mr Johnson has been keen to make the point that the United Kingdom was not likely to go down that route,22 even though he has resisted the idea of any binding commitment to do so going beyond the types of commitment typically found in modern free-trade agreements between advanced economies. The second factor was that, given the volume of trade between the United Kingdom and the EU, the United Kingdom would be at continuous risk of the EU imposing countervailing measures permitted by the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) on UK exports to the EU if it did not have some mechanism for domestic review of decisions of public authorities that might amount to an actionable or prohibited subsidy under the SCM Agreement. Such concerns became even more powerful after the Commission’s White Paper in June 202023 set out proposals for action to be taken in relation to foreign subsidies to companies established or operating in the EU: such action could include requiring those companies to pay those subsidies to the EU or Member States. The White Paper explained at section 6.8, no doubt with part of an eye on the UK negotiations, that where the foreign country had effective subsidy controls agreed with the EU, the mechanisms of such an agreement would be used before such action was taken. The third factor – alluded to by the House of Lords EU Committee in the passage quoted above – was that the devolution settlement in the United Kingdom – under which the Scottish Parliament and Welsh and Northern Ireland Assemblies now have very wide legislative powers, substantial budgets, and the ability to raise and set taxes in certain areas – was predicated on the basis that there was no need in UK legislation to restrict their ability to use those powers to subsidise their own domestic producers in a way that might harm other parts of the United Kingdom, because that job was effectively done by the EU State aid rules. But the complete removal of those rules would risk actions being taken by one devolved administration that seriously affected the UK internal market.24 On the other hand, the devolved administrations expressed some concerns that a State aid system administered by UK central government and accountable only to the UK Parliament failed to reflect the devolution settlement.25 Finally, many Conservative politicians (and politicians outside the Conservative Party) took the view that, as the May Government put it in its evidence to the House of Lords EU Committee inquiry, “the UK had ‘always been in the vanguard of supporting open markets’” and that “trying to beat other countries’ industries by unfairly subsidising one’s own is a serious mistake”.26 21 Available at accessed on 23 June 2020, §67. 22 See the quote from Johnson, ‘Speech’ (n 11). 23 Available at accessed on 23 June 2020. 24 See EU Committee Report (n 17) paras 189 and 213. 25 ibid paras 190–2. 26 ibid para 212.

State aid and Brexit  191 The May Government Policy in relation to State aid control The first clue as to the intentions of the May Government as to a State aid regime after Brexit came on publication of the “Explanatory Notes” to the European Union (Withdrawal) Bill in 2017 (that Bill being the legislation that provided the framework for the replacement of EU law by domestic UK law after Brexit). Those notes recorded a list of provisions of the EU Treaties that had direct effect in the United Kingdom and which would continue, under the Bill, to form part of UK law: and that list included Article 108(3) TFEU.27 That that was no accident was confirmed by the Government’s evidence to the House of Lords EU Select Committee inquiry, where it stated that “the intention of the EU (Withdrawal) Bill was to ‘preserve the EU State aid rules and to give a UK body the power to police those rules’”.28 That intention was given concrete expression by the May Government’s draft Regulations that would have established a UK domestic State aid regime in the event of “no deal”.29 Those Regulations essentially endeavoured to replicate the EU State aid regime at domestic level, with the UK Competition and Markets Authority (CMA), an independent department of the UK Government, taking over the role of the Commission. There were a number of interesting aspects of those proposals: in particular, that it was (somewhat anomalously, in the circumstances) felt necessary to retain the “effect on trade between Member States” threshold (albeit in the form of an “effect on trade between the UK and the EU” test) for State aid; that the CMA was not given power to overturn Acts of the UK Parliament on the basis that they conferred unlawful State aid (a power wholly alien to the English constitutional principle of the sovereignty of Parliament and the absence of any power of the Crown to suspend Acts of Parliament) but was given power to overturn Acts of the devolved Parliaments and Assemblies on that basis; and that there was a division between the implementation of the State aid rules (for the CMA) and the setting of State aid policy (to be done by the Secretary of State, a member of the UK Cabinet).30 The 2018 Withdrawal Agreement The fact that the May Government was in any event intending to retain a simulacrum of EU State aid rules in UK law after Brexit makes it easier to understand why it appears to have had little difficulty in accepting the far-reaching State aid provisions in the 2018 version of the Ireland/Northern Ireland Protocol (the “backstop”).31 Those provisions – which would have come into force at the end of the agreed transition period after the United Kingdom’s withdrawal – had two aspects. First, under Article 12 of the Protocol, EU State aid law (including enforcement by the Commission) would continue to apply in full to the United Kingdom in relation to “meas27 European Union (Withdrawal) HC Bill (2019–20), Explanatory Notes, accessed 14 May 2020, p 89. 28 EU Committee Report (n 17) para 210. 29 The State Aid (EU Exit) Regulations 2019 accessed on 14 May 2020. Those draft Regulations were never laid before Parliament. 30 For a more detailed commentary on the draft Regulations see G Peretz, ‘The State Aid (EU Exit) Regulations 2019: some initial comments’ (UK State Aid Law Association, 19 February 2019) accessed on 25 March 2020. 31 Department for Exiting the European Union, Withdrawal Agreement (n 7).

192  Research handbook on European State aid law ures that affect that trade between the part of the territory of the United Kingdom to which Regulation (EU) No 952/2013 applies by virtue of Article 6(2) of this Protocol and the Union which is subject to this Protocol” (that is to say, in essence, UK measures that affected trade in goods between Northern Ireland and the EU). Second, under Part Four of Annex 4 to the Protocol, the United Kingdom was required, in relation to all other UK measures, to operate the EU State aid regime in full but enforced by an operationally independent authority (which would have been the CMA, and is conveniently referred to as such here). The CMA would have been given “powers and functions equivalent to those of the European Commission acting under [EU] State aid law” and its decisions would have produced the same legal effects in the United Kingdom as Commission decisions do in the EU:32 which (startlingly from the perspective of UK constitutional law) meant that it would have had power to annul Acts of the UK Parliament if they conferred unlawful State aid. The CMA and the Commission were required to consult closely with each other: but the essentially subordinate role of the CMA was made clear by Article 10(4) of Annex Four, which required the CMA to give three months’ notice of its decisions to the Commission and to take “utmost account” of the Commission’s opinion. Finally, although there was no provision for references to be made by UK courts to the Court of Justice of the EU, under Article 11 of Annex Four they were to have review jurisdiction over the CMA and UK public authorities’ compliance with State aid rules and to be able to award damages: the Commission was also given the right to bring cases and appear as an intervener before the UK courts. As noted above, however, the 2018 Withdrawal Agreement was never ratified and in July 2019 Mr Johnson became UK Prime Minister, with a very different approach. The Johnson Government Policy In the particularly turbulent politics of autumn 2019, the Johnson Government was able to avoid saying anything significant about its attitude to State aid control. However, as noted above, during the December 2019 general election campaign, the Conservative Party produced a document handed to journalists that set out proposals for an apparently rather different type of anti-subsidy control after Brexit.33 The document started off by complaining that “[State aid] law is notoriously vague”. Under a later section headed “Permissive” it then asserted that the “vagueness” of State aid law was due to the formula “in any form whatsoever” in Article 107(1) TFEU. It also complained that the requirement to obtain prior clearance from the Commission meant that the government could not “take steps quickly and effectively to help companies that are in danger”. It stated that the new system “will instead align more closely with WTO rules” which, it asserted, would “allow UK Governments to have greater discretion over whether or not an aid is appropriate”. It went on to claim that under the new regime “[a]t all stages, we will be cautious to ensure that we have a system which makes clear that we will not bail out failure, but will take immediate action to support industries that are struggling due to events outside their control”. Ireland/Northern Ireland Protocol 2018, Annex 4 Art 9(2) and (3). No online version of this document was ever made available, but a photographed copy of the relevant part of the document can be seen at accessed on 25 March 2020. 32 33

State aid and Brexit  193 Those proposals raised a number of difficulties.34 Its claim that the EU rules caused delay in critical cases ignored both the wide category of aid covered by block exemptions and the willingness of the Commission to move very fast in cases of real urgency (a clear example at the time of writing being the Commission’s clearance decisions of aid relating to the Covid-19 crisis). More significantly, its claim that “WTO rules” (that is to say, the SCM Agreement) when incorporated into domestic law would result either in greater clarity or in greater “discretion” than EU State aid rules is highly dubious. The definition of “subsidy” in Article 1 of the SCM Agreement expressly covers direct transfers of funds, potential direct transfers such as loan guarantees, government revenue foregone (i.e. tax advantages), provision of goods or services other than general infrastructure, purchases by government, government payments to a funding mechanism, and directing a private body to make a financial contribution. As will be clear from other chapters in this work, that definition bears a distinct resemblance to the definition in the EU case-law of what counts as a State aid,35 and raises corresponding difficulties of interpretation and boundary-setting: and that impression is borne out by the case-law of the WTO Appellate Body.36 It therefore seems that the (unknown) authors of the document confused the (correct) proposition that the SCM Agreement constrains governments far less than do the EU State aid rules with the (false) proposition that that was because the SCM Agreement has a more “permissive” definition of what counts as a “subsidy”. (It is of course true that the SCM Agreement does not cover services: but nothing in the Conservative Party document indicated that the new UK regime would not extend to services.) The real reasons why the SCM Agreement is less of a constraint on governments in practice than are EU State aid rules are (a) that it is not enforceable by private bodies or domestic courts and has no international enforcement body equivalent to the European Commission, relying instead on State-to-State WTO dispute resolution and the self-help remedy of countervailing duties; and (b) that – leaving aside the small class of prohibited subsidies – it only gives rise to any remedy where there is a provable domestic injury to the industry of another State (a threshold far higher than the “effect on trade” threshold in Article 107(1)). But since the Conservatives’ proposal was expressly envisaged as a way of constraining governments from “bailing out failure”, it appeared to be contemplating a domestically-enforceable regime and a regime that would bite even without proof of injury to the industry of another State (indeed, the latter condition would make no sense in a regime designed at least in large part for the benefit of the UK internal market). Further, the authors of the document failed to acknowledge that the SCM Agreement has no provision for clearance or exemption at all. It is therefore highly doubtful that replacing the State aid rules with a regime based on the SCM Agreement concept of “subsidy” would make any real difference to “clarity” or “discretion”, let alone a difference in a “permissive” direction. 34 See George Peretz, ‘The Conservatives’ new state aid proposals are the worst of all worlds’ (Prospect, 3 December 2019) accessed on 26 March 2020. 35 Indeed, the Art 1 definition arguably goes beyond the definition of “State aid” in its last limb, bearing in mind the case-law to the effect that requirements by the State that undertaking A pay money to undertaking B do not in themselves engage State resources: see Case C-379/98 Preussen Elektra [2001] EU:​C:​2001:​160. 36 For a detailed discussion of Art 1 of the SCM Agreement and the cases decided under it, see P Van der Bossche and W Zdouc, The Law and Policy of the World Trade Organization (Cambridge University Press 2017), Chapter 12, section 3.

194  Research handbook on European State aid law But perhaps the most serious difficulty with the document was that it entirely ignored the implications of the State aid provisions in the revised Ireland/Northern Ireland Protocol to the 2019 Withdrawal Agreement – provisions to which the Johnson Government was now committed (and indeed was busily describing to voters as an “oven-ready deal”). The 2019 Withdrawal Agreement As noted above, the 2018 version of the Ireland/Northern Ireland Protocol had two limbs that related to State aid. The first limb applied the EU State aid rules as such to any UK measure that (in essence) affected trade in goods between Northern Ireland and the EU; under the second limb, other UK measures were to be subject to a parallel and closely aligned domestic State aid regime administered by the CMA but under the intense supervision of the Commission. In accordance with the Johnson Government’s decision to resolve the Irish border issue by accepting that Northern Ireland would remain, for most purposes, in the EU customs territory and the single market (for goods), while Great Britain would be free after the end of the transition to diverge, the 2019 Protocol dropped the second limb completely, leaving the United Kingdom free after the transition period (subject to any further agreement it might reach with the EU) to replace the EU State aid regime – or to have no anti-subsidy regime at all – for UK measures that do not affect trade in goods as between Northern Ireland and the EU. However, the first limb – the full application of EU State aid law to UK measures that do have such an effect – remains in place: see Article 10 of the Protocol, which provides that “The provisions of Union law listed in Annex 5 to this Protocol37 shall apply to the United Kingdom … in respect of that trade between Northern Ireland and the Union which is subject to this Protocol”.38 The result of that approach is that – if the Protocol comes into force – the question of whether a UK measure (that is to say, the act of any UK public authority) is subject to the EU State aid rules on the one hand or, on the other hand, what may be a very different anti-subsidy regime, or no anti-subsidy regime at all, turns on the question of whether it affects trade in goods between Northern Ireland and the EU. In other words, a lot of weight is placed on a variant of the notoriously imprecise and low “effect on trade” threshold in EU State aid law. A couple of examples will illustrate the issues that are likely to arise. A UK measure setting a lower corporation tax rate for companies in the widget sector will, if it applies to Northern Ireland widget manufacturers, be likely to affect Northern Ireland/Ireland trade and thus be caught. It could even extend to measures that reduced the rate only of a Great Britain-wide tax (that is to say, a tax that does not apply at all in Northern Ireland) if the effect of the measure is to benefit (confer an advantage on) GB companies that trade substantially in goods in Northern Ireland. Further, the very large UK-wide subsidies being granted across all sectors of the economy as a result of Covid-19 – subsidies that will almost certainly need to continue to a considerable extent into 2021 – would also appear to be almost certainly caught by Article 10. Four further aspects of the 2019 Withdrawal Agreement and of the State aid provisions of the Protocol are also important in this context. First, enforcement of the State aid rules as extended to the United Kingdom by Article 10 is by the Commission, which enjoys (in relation

37 It is also important to note that subsequent new EU law in the area of State aid can be incorporated into Annex 5 by means of the Joint Committee procedure set out in Art 13(4) of the Protocol: but Annex 5 is to be read as including any subsequent EU legislation that amends or replaces instruments listed in that Annex (Art 13(3)). 38 Ireland/Northern Ireland Protocol 2019, goods, and, by Art 9, electricity.

State aid and Brexit  195 to Article 10) all the powers over the UK authorities (in any part of the United Kingdom) and natural and legal persons based in (any part of) the United Kingdom as it has in the EU.39 That would include the power to set aside Acts of the UK Parliament which constituted State aid falling within Article 10. Second, the Court of Justice of the EU is to have all the jurisdiction in the United Kingdom in relation to measures falling under Article 10 as it has in the EU.40 Third, the United Kingdom is required, by Article 4 of the withdrawal agreement, to have in place legislation that ensures that UK courts disapply any measures that (in the present context) are unlawful under the State aid rules to the extent that they fall within Article 10: an obligation now implemented by section 7A of the European Union (Withdrawal) Act 2018:41 and UK courts are required, in relation to such measures, to make references to the Court of Justice in accordance with Article 267 TFEU.42 Fourth, the Joint Committee set up by the withdrawal agreement to define and adjudicate on various aspects of the agreement and its Protocols has no role in defining or limiting the effect of Article 10.43 As noted above, the coming into force and continued operation of the Protocol are conditional. That is so in two senses. First, it is contemplated that the agreement as to the final relationship between the EU and the United Kingdom may make the Protocol or parts of it unnecessary: thus, Article 13(8) of the Protocol requires the final agreement to set out which parts of the Protocol it supersedes. However, the commitment of the Johnson Government to a limited free trade agreement makes it less likely that the final agreement will replace any substantial element of the Protocol. Second, Article 18 requires the United Kingdom, shortly before the expiry of the period of four years from the date the Protocol comes into force, to seek democratic consent in Northern Ireland to the continued operation of the Protocol, through the Northern Ireland Assembly. If that decision is not a decision that the Protocol should continue to operate, then the Protocol will cease to apply two years later. However, assuming that the State aid provisions of the Protocol do come into force at the end of the transition period, then UK policy-makers face a difficult issue: since a significant number of UK measures will remain subject to the full panoply of EU State aid rules under the Protocol (the extent to which those rules apply under the “effect on trade in goods between Northern Ireland and the EU” test being entirely outside the control of the UK Government or Parliament, short of denouncing the Protocol), is it sensible to create a substantially different regime that applies to other measures? Until September 2020, there was little sign that the UK Government had engaged with that issue. Indeed, the Cabinet Minister responsible for negotiations with the EU, Mr Michael Gove, appeared to deny that the difficulty existed at all, giving the impression, incorrectly, that the scope of Article 10 of the Protocol is a matter for determination by the Joint Committee (while promising that the UK would produce a domestic subsidy regime that was robust 39 See, ibid Art 12(4), which provides that as regards Art 10 “the institutions, bodies, offices and agencies of the Union shall in relation to the United Kingdom and natural and legal persons residing or established in the territory of the United Kingdom have the powers conferred on them by Union law”. And see also Art 12(5), which provides that acts of those institutions etc “shall produce in respect of and in the United Kingdom the same legal effects as those which they produce within the Union and Member States”. 40 Ireland Protocol 2019 (n 38) Art 12(4), second sentence. 41 A provision inserted by the European Union (Withdrawal Agreement) Act 2020. 42 Ireland Protocol 2019 (n 38) Art 12(4), final sentence. 43 Apart from its role in relation to new EU law (n 35).

196  Research handbook on European State aid law enough to satisfy the EU).44 That impression of lack of engagement was noted by the House of Lords EU Committee in a letter written to the UK Government on 2 April 2020, where it commented that “It is troubling that no one we heard from thought that the UK Government had a clear understanding of what state aid provisions it had signed up to in the Protocol”:45 and the UK Government’s response to that letter carefully avoided any engagement with the question of the scope of Article 10,46 though it promised that it was “working at pace” and “in tandem with the EU negotiations” on a domestic UK subsidy regime. An interesting attempt to develop the Conservatives’ 2019 election proposal was made in a paper published by the right-wing think tank Politeia in February 2020 (the Webber paper).47 The Webber paper argues that: it is essential that any level playing field commitment by the United Kingdom in this area avoid reference to State aid rules, as (1) that would inexorably mean that the final arbiter of the meaning of those rules in the United Kingdom would be the Court of Justice; and (2) it would be preferable to base a UK regime on the WTO anti-subsidy regime because the State aid rules have too wide a reach (particularly in relation to infrastructure and tax), and therefore require a complex exemption regime that is over-prescriptive, and are unclear, and that the procedures for clearance are slow and inconsistent. The claim made in (2) has already been discussed in considering the Conservatives’ 2019 proposals, and the claim made in (1) will be evaluated below, but for present purposes it is interesting to note that the Webber paper accepted that the potentially wide scope of Article 10 of the Protocol posed a serious problem for anyone proposing a radically different regime for UK measures not covered by that Protocol. The Webber paper therefore suggested a determined attempt by the UK to negotiate these provisions away or to try to limit their scope or – alternatively – a unilateral UK attempt to limit their scope. In September 2020 it became clear that the UK Government had realised the consequences of what it had agreed to and that it was prepared to take a unilateral approach to escaping from those consequences. On 9 September, the UK Government published a Bill (the UK Internal Market Bill48), clause 4349 of which gave the Secretary of State the power, by regulations, to “make provision about the interpretation” of Article 10 and to “disapply” it or to “modify” its effect. Clause 45 went on to make it clear that such regulations could not be challenged on the ground of incompatibility with international law and that section 7A of the EU Withdrawal Act

44 See Q25 of Rt Hon Michael Gove MP, House of Commons Select Committee on the Future Relationship with the European Union inquiry on the progress of the negotiations on the UK’s future relationship with the EU (HC 203, 11 March 2020) available at accessed on 27 March 2020. The answer is carefully worded, being more of a suggestio falsi than an outright inaccuracy. 45 Available at accessed on 23 June 2020, para 56. 46 Available at accessed on 23 June 2020. 47 James Webber, “All Change? UK State Aid after Brexit. What Law? Whose Courts?” (UK State Aid Law Association, 13 February 2020) available on accessed on 27 March 2020. 48 Bill available at , accessed on 2 October 2020 – which were “rolled over” into the FTA between Japan and the UK agreed in September 2020 – also included, at Article 12.7, commitments not to provide unlimited State guarantees or to subsidise failing firms without a recovery plan. Not even those Article 12.7 commitments were originally offered by the UK Government to the EU. 70 Council Decision (EU, Euratom) 2020/266 of 25 February 2020 for authorising the opening of negotiations with the United Kingdom of Great Britain and Northern Ireland for a new partnership agreement [2020] OJ L58/53. The addendum containing the negotiating objectives is at accessed on 30 March 2020. 71 European Commission, “Draft text of the Agreement on the New Partnership with the United Kingdom” UKTF (2020) 14 at accessed on 30 March 2020. 72 The difficulty that that would create in UK constitutional law has been noted above: see the paragraph starting “That intention was given concrete expression by the May Government’s draft Regulations that would have established a UK domestic State aid regime in the event of ‘no deal’”. 73 See at https://​assets​.publishing​.service​.gov​.uk/​government/​uploads/​system/​uploads/​attachment​ _data/​file/​886010/​DRAFT​_UK​-EU​_Comprehensive​_Free​_Trade​_Agreement​.pdf, accessed on 23 June 2020, Art.21

State aid and Brexit  203 that the EU’s demand was “simply not a provision any democratic country could sign, since it would mean that the British people could not decide our own rules to support our own industries in our own Parliament”.74 Towards a Possible Agreement To say that there is a wide gap between the two side’s positions looks like a serious understatement: the United Kingdom wants (in effect) no treaty commitment at all; while the EU wants to require the United Kingdom to retain EU State aid rules in full and ultimately subject to the interpretation of the Court of Justice. If the EU continues to insist on a continued role for the Court of Justice of the EU – as its current draft proposed agreement does – then it is hard to see room for agreement: the objection to remaining under the jurisdiction, for sometimes critical questions of national policy, of what will after the end of transition be on any view a “foreign court” is strong and will have significant political traction in the United Kingdom. But it may well be that that is a provision drafted in so as to provide room for subsequent concessions (and, as of 2 October, it was generally reported that the EU position has shifted in that respect). Further, insistence on the UK maintaining the EU State aid rules in full – rules over which the United Kingdom will have no say – is almost certainly unacceptable to the United Kingdom (and not just to its current Government). On the other hand, the United Kingdom’s position of offering no treaty commitment at all ignores the very different position of the United Kingdom (from an EU perspective) compared to Canada or Japan: the United Kingdom is not only closer but has an economy that is far more integrated into that of the EU than either of those two states, leaving the EU far more exposed to UK subsidies than it is to Canadian or Japanese ones. Moreover, the UK Government’s open and avowed intention to breach its obligations in relation to State aid under the Protocol was not a factor designed to generate the trust necessary to reach a final agreement in this area. However, there are some grounds for tentative optimism. First, as already noted (and repeated in the United Kingdom’s February 2020 paper), the United Kingdom is committed to set up a domestic anti-subsidy regime: and, in the words of Mr Johnson, the UK “will maintain the highest standards in these areas – better, in many respects, than those of the EU”.75 Moreover, as already noted, the commitment to base that regime on WTO anti-subsidy rules rather than the EU State aid rules may in fact not be that significant, given the overlap in the basic concepts. It is therefore possible that a domestic UK regime based on WTO concepts would, in the words of the political declaration, “uphold the common high standards applicable in the Union and the United Kingdom at the end of the transition period in the areas of state aid” and “maintain a robust and comprehensive framework for competition and state aid control that prevents undue distortion of trade and competition … rely[ing] on appropriate and relevant Union and international standards” (emphasis added). In short, a UK regime might look different, but on analysis produce much the same level of anti-subsidy control. 74 Letter from David Frost to Michel Barnier, 19 May 2020, , accessed on 23 June 2020. 75 See Johnson, “PM speech” (n 11).

204  Research handbook on European State aid law Second, the UK Government is not in fact strongly committed to basing its regime on the concepts used in the SCM. The document produced by the Conservatives in the 2019 general election campaign was not part of their manifesto (which reduces the extent to which it is politically binding). Further, it is notable that, as pointed out above, the Webber paper (which represents the most thorough articulation of the thinking that appears to lie behind that document) does not develop any account of why such a regime would be clearer or more permissive than the EU regime. In fact, the most important argument it raises against basing a UK regime on EU State aid rules is that it would necessarily mean accepting the jurisdiction of the Court of Justice. The concern there is that the European Union cannot, in accordance with the case-law of the Court of Justice,76 enter into international agreements that give any other judicial body the power to interpret EU law. However, it would be possible – at least in principle – for the United Kingdom to base its future system on EU legal concepts (and on the corpus of EU case-law to date) while not as such continuing to apply EU law (a comparison being the way in which States, such as Australia, which gained their independence from the United Kingdom continued to apply statutes and case-law inherited at independence as their own law (until changed or developed) without applying English law in doing so). Given that the United Kingdom is to a significant extent tied to the EU State aid regime under the Protocol, there would be further advantages of consistency in retaining a regime that is in its essentials the same as EU State aid law (while perhaps differing on questions of procedure and remedies). It might therefore be possible for the United Kingdom to commit – in some broad form – to maintain the essential structure of the State aid rules and to enforce those rules while retaining the ability to adapt those rules (particular in the area of procedure and remedies, subject perhaps to an overriding principle of effectiveness). Further, as Kotsonis77 points out, it would be possible for both sides to agree that their regimes should be equivalent in effect, with the onus being on the complaining party to demonstrate a lack of equivalence by reference to actual effects. Such a provision would (contrary to the current UK position) be subject to dispute resolution through the Joint Committee, with the possibility (if that fails) of unilateral interim measures such as countervailing duties as an interim measure pending arbitration (which, since it would not involve questions of EU law, but rather adjudication on whether the measure at issue had sufficient distortionary or anti-competitive effect to amount to a breach, would not require a reference to the Court of Justice). However, whether that suggestion, or any other proposal, is sufficient to bridge the current large gap between the parties is, at the time of writing, impossible to gauge. Pessimism that the UK Government was prepared to go down that route as a way of resolving the barrier to concluding an FTA with the EU was increased after it announced that no such regime would be announced until at least 2021, with a commitment in the interim only to abide by WTO and other international commitments:78 but only time will tell if that announcement was part of

See Opinion 1/91 on the EEA Agreement [1991] EU:​C:​1991:​490, and subsequent case-law. Totis Kotsonis, “Squaring the circle: Level playing field provisions and the negotiation of a UK-EU free trade agreement” (Kluwer Competition Law Blog, 3 March 2020) at accessed on 30 March 2020. 78 See at , accessed on 2 October 2020. 76 77

State aid and Brexit  205 a negotiating strategy or reflected a settled intention to avoid setting up any robust domestic subsidy regime even at the expense of an FTA with the EU.

11. Social services and State aid: new steps towards a more ‘Social Europe’? Delia Ferri

1. INTRODUCTION It is well known that health and social services lie at the heart of the welfare state and ‘are not provided based on an individual (economic) interest, but are classified as being of public or general interest, hence important to everyone’.1 In its 2011 Communication ‘A Quality Framework for Services of General Interest in Europe’, the Commission highlights that ‘[i]n areas such as health care, childcare or care for the elderly, assistance to disabled persons or social housing’ services provide ‘an essential safety net for citizens and help promote social cohesion’.2 The Commission also clarifies that social services of general interest (SSGI) ‘include social security schemes covering the main risks of life and a range of other essential services provided directly to the person that play a preventive and socially cohesive/inclusive role’.3 It acknowledges that those services may be economic or non-economic in nature, depending on how they are regulated at the national level.4 However, only services that are economic are relevant for the purpose of the European Union (EU) State aid law,5 as they fall within the scope of services of general economic interest (SGEI), or, as it will be discussed further, in the remit of social services of general economic interest (SSGEI). SGEI are explicitly mentioned in the Treaties. Article 14 TFEU recognizes that SGEI form part of the common values of the Union and promote social and territorial cohesion. It also requires that both ‘the Union and the Member States, each within their respective powers and within the scope of application of the Treaties, shall take care that such services operate on the basis of principles and conditions, particularly economic and financial conditions, which enable them to fulfil their missions’. This provision tallies with Article 36 of the Charter of Fundamental Rights (CFR), which states that the EU ‘recognises and respects access to services of general economic interest as provided for in national laws and practices, in accordance with the Treaties, in order to promote the social and territorial cohesion of the Union’.6 Article 1 Martina Melcher, ‘Article 106 (2) TFEU in Case Law: Internalization and Customized Balancing of Welfare and Market Interests’ (2019) 6(1) Austrian Law Journal 1, 1. 2 Commission, ‘A Quality Framework for Services of General Interest in Europe’ COM(2011) 900 final, 3–4. 3 Ibid. 4 Ibid. 5 Inter alia Commission, ‘Guide to the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest’, SWD(2013) 53 final/2, 21 (2013 SGEI Guide). Non-economic services are not subject to EU law and are not covered by Internal market and competition rules. 6 Fiedziuk suggests that the formulation of this Article should be regarded as the outcome of a political compromise, which does not legitimize a shift in approach to SGEI, nor obliges Member States to provide SGEI. See Natalia Fiedziuk, Services of general economic interest in EU law: The role of the

206

Social services and State aid  207 106 TFEU is the key provision on SGEI. In particular, Article 106(1) TFEU establishes that the conduct of public undertakings and of those undertakings entrusted with special or exclusive rights must respect other Treaty norms. Article 106(2) TFEU mitigates the latter prescription, and provides an exception to the application of competition rules to SGEI, in order to ensure that they can carry out the tasks assigned to them. Article 106(3) TFEU empowers the Commission to adopt directives and decisions in order to ensure the application of that Article. In Viasat Broadcasting, the Court of Justice (CJEU) held that [i]n allowing derogations to be made from the general rules of the Treaty in certain circumstances, Article 106(2) TFEU seeks to reconcile the Member States’ interest in using certain undertakings, in particular in the public sector, as an instrument of economic or fiscal policy with the Union’s interest in ensuring compliance with the rules on competition and the preservation of the unity of the common market.7

More generally, as noted by Jääskinen, ‘Treaty provisions relating to SGEIs do not grant a carte blanche to Member States from their obligation to adhere to competition rules’, but require that the ‘interpretation relating to a grey area […] must be compatible with general constitutional values of the Treaties as a whole’.8 Notwithstanding Protocol No. 26,9 the EU has retained (and exercised) an important regulatory role when it comes to SGEI. The rules currently in force were adopted by the Commission in 2012, and are commonly referred to as ‘SGEI Package’ (or ‘Almunia Package’).10 This ‘SGEI Package’ succeeded the previous ‘Monti-Kroes Package’, which had been released in 2005.11 It was approved after a wide consultation process, launched on 23 March 2011. It

'public service' exception in the light of recent developments in EU law (Wolf Legal Publishers 2013), p 59, available at accessed 2 February 2020. 7 C‑660/15 P Viasat Broadcasting v European Commission [2017] EU:​C:​2017:​178, para 31. 8 Niilo Jaaskinen, ‘The New Rules on SGEI’ (2011) 10(4) European State Aid Law Quarterly 599, 600. See also Opinion of Advocate General Wahl delivered on 17 January 2019, Achema AB and Others v Valstybinė kainų ir energetikos kontrolės komisija (VKEKK) [2019] EU:​C:​2019:​38 para 75. 9 Protocol No 26 on services of general interest, annexed to the Treaty, recognizes the wide discretion retained by Member States in providing, commissioning and organising SGEI. 10 For a synthesis, see the press release ‘State aid: Commission publishes updated Guide on services of general economic interest (SGEI)’ at last accessed 20 January 2020. For a discussion, see generally Adinda Sinnaeve, ‘What’s New in SGEI in 2012? – An Overview of the Commission’s SGEI Package’ (2012) 11(2) European State Aid Law Quarterly 347; Lorenzo Coppi, ‘SGEI Compensation in the Almunia Package – An Economics View’ (2012) 11(2) European State Aid Law Quarterly 37; Daniele Gallo, ‘State Aids, Social Services and Healthcare in EU Law’ in Bruno Nascimbene and Alessia Di Pascale (eds), The Modernisation of State Aid for Economic and Social Development (Springer-Studies in European Economic Law and Regulation 2018), 280 ff. See also Albert Sanchez-Graells, ‘The Commission’s Modernization Agenda for Procurement and SGEI’ in Erika Szyszczak and Johan van de Gronden (eds), Financing SGEIs: State Aid. Reform and Modernisation (TMC Asser Press/Springer 2012). 11 As noted by Gallo, this Package, in force until November 2011, distinguished between public measures that could not be considered State aid, State aid measures that were permitted under Article 106(2) TFEU and were not subject to notification, and State aid schemes potentially compatible with the internal market pursuant to Article 106(2) TFEU and to be notified to the Commission, see Gallo (n 10) 275.

208  Research handbook on European State aid law was intended to clarify the Altmark criteria12 and the relationship between State aid, SGEI and public procurement.13 On the whole, the 2012 ‘SGEI Package’ has introduced a differentiated approach to SGEI, taking into account their nature and the extent to which they may distort competition.14 It includes four core documents, which will be further discussed in the remainder of the chapter: the Commission Communication on the application of the State aid rules to compensation granted for the provision of SGEI (known as ‘SGEI Communication’);15 the Commission Decision on the application of Article 106(2) TFEU to State aid in the form of public service compensation granted to undertakings entrusted with the operation of SGEI (so called ‘SGEI Decision’);16 the Commission Communication on the EU framework for State aid in the form of public service compensation (better known as ‘SGEI Framework’);17 and the SGEI de minimis Regulation.18 Notably, the latter Regulation provides that SGEI compensation under the threshold of 500.000 Euros over any period of three fiscal years does not fall under State aid. In June 2019, approximately seven years after the adoption of the ‘SGEI Package’, the Commission launched an Evaluation and Fitness Check Roadmap on the rules related to health and social services that fall within the remit of SGEI.19 The evaluation and prospective revision of the ‘SGEI Package’ have been triggered, as explicitly stated in the Commission’s Roadmap, by the ‘conceptual and methodological challenges when applying the SGEI rules applicable to health and social services’ reported by Member States and relevant stakeholders.20 Through this evaluation, linked to a wide consultation of stakeholders, the Commission aims to verify to what extent it has so far allowed Member States to effectively deliver services that are crucial to fulfil certain rights, such as the right to health and the right to social protection, while respecting competition law.21

Case C-280/00 Altmark [2003] EU:​C:​2003:​415. See Albert Sanchez Graelles, ‘State Aid and EU Public Procurement: More Interactions, Fuzzier Boundaries’, in this volume. 14 Sinnaeve (n 10) 347. 15 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest [2012] OJ C 8/4 (‘SGEI Communication’). 16 Commission Decision on the application of Article 106(2) of the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest (notified under document C(2011) 9380) [2012] OJ L 7/3 (‘SGEI Decision’). 17 Communication from the Commission on the European Union framework for State aid in the form of public service compensation [2012] OJ C 8/15 (‘SGEI Framework’). 18 Commission Regulation (EU) 360/2012 of 25 April 2012 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to undertakings providing services of general economic interest [2012] OJ L 114/8. The text is due to stay in force until 31 December 2020, after a modification was approved in 2018: Commission Regulation (EU) 2018/1923 of 7 December 2018 amending Regulation (EU) No 360/2012 as regards its period of application C/2018/8088 [2018] OJ L 313/2. 19 Evaluation of State aid rules for health and social services of general (economic) interest and of the SGEI de minimis Regulation – Ref. Ares(2019)3858696 – 17/06/2019, at last accessed 20 January 2020. 20 Ibid. 21 SGEI de minimis Regulation (n 18). 12 13

Social services and State aid  209 In March 2020, just after the completion of this chapter, the outbreak of the COVID-19 pandemic has profoundly impacted on the EU State aid law landscape. The priority for the Commission has been to create a framework that allows Member States to safeguard the health of European citizens, by reinforcing national healthcare systems and adopting a range of measures to contain not only the spread of the virus, but also its detrimental socio-economic side-effects. The fast-paced legal developments in the field of State aid, however, have not dramatically affected the application of the ‘SGEI package’ as yet. Subsidies to hospitals or healthcare facilities during the COVID-19 pandemic that do not fulfil the Altmark criteria and do not fall under the de minimis are still evaluated in light of the ‘SGEI Package’. Against this background, this chapter examines the application of the ‘SGEI Package’ and, more broadly, of Article 106(2) TFEU to healthcare and social services, taking into account the most recent Commission’s decisions and CJEU case law. Inevitably, this chapter builds on the wide scholarly work in this field.22 However, it adopts a particular standpoint, in that it aims to reflect on the ‘social dimension’ of the Package and on whether the Commission’s practice is contributing to shape a more ‘Social Europe’. In that, this chapter, while tallying with the scholarship on the ‘social market economy’,23 proposes a novel contribution to the debate in light of current developments and of the recent public consultation, conducted as part of the Evaluation and Fitness Check Roadmap. Further to these introductory remarks, Section 2 focuses on the scope of application of EU law, and examines the circumstances in which healthcare and social services have been deemed to be economic in nature in light of the most recent Commission’s practice and CJEU jurisprudence. Section 3 discusses when and to what extent public compensation constitutes State aid and, if so, when it is exempted from notification in light of the ‘SGEI Package’. While providing an account of the existing rules under the ‘SGEI Package’, it does not engage in a detailed description, nor does it debate the differences between the ‘SGEI Package’ and the previous ‘Monti-Kroes Package’ which have been extensively examined in previous research. By contrast, the Section aims to provide a critical commentary of the current rules, taking into account the results of the public consultation. Building on this analysis, Section 4 examines the most recent decisions of the Commission, while Section 5 concludes by reflecting on the quest for modification of the ‘SGEI Package’ and on whether this goes in the direction of creating a more ‘Social Europe’. In doing so, the chapter identifies areas that necessitate further research.

2.

THE BOUNDARIES OF EU LAW: THE ‘ECONOMIC NATURE’ OF HEALTHCARE AND SOCIAL SERVICES

Both healthcare and social services are generally referred to as ‘social services of general interest’ (SSGI),24 and, as mentioned in the Introduction above, when they entail an economic 22 Among others Caroline Wehlander, Services of General Economic Interest as a Constitutional Concept of EU Law (TMC Asser Press/Springer 2016); Erika Szyszczak and Johan van de Gronden (eds), Financing SGEIs: State Aid. Reform and Modernisation (TMC Asser Press/Springer 2012); Gallo (n 10); Erika Szyszczak, ‘Altmak Assessed’ in Erika Szyszczak (ed), Research Handbook in EU Law (Edward Elgar Publishing 2011). 23 Juan Jorge Piernas Lopez, ‘Services of General Economic Interest and Social Considerations’ in Delia Ferri and Fulvio Cortese (eds), The EU Social Market Economy and the Law (Routledge 2018). 24 Gallo (n 10) 267.

210  Research handbook on European State aid law activity, they fall within the remit of Social Services of General Economic Interest (SSGEI) and, consequently, fall within the scope of EU law. SSGEI are not mentioned in the Treaties and the CJEU has not engaged with this concept as such. The SGEI Decision defines them as services of economic interest ‘meeting social needs as regards health and long term care, childcare, access to and reintegration into the labour market, social housing and the care and social inclusion of vulnerable groups’.25 This notion rests, first and foremost, on the economic nature of the service in question. It is well known that such economic nature is linked to the performance of an ‘economic activity’. In that connection, the CJEU considers as economic ‘any activity consisting in offering goods or services on a given market’.26 This flexible notion of economic activity is underpinned by ‘a functional and objective – rather than institutional and subjective – interpretation’,27 which deems irrelevant the legal status of the entity carrying out the activity, as well as its structure and organization and the way in which it is financed. However, the Commission has also highlighted that ‘whether a market exists for certain services may depend on the specific way those services are organised and carried out in the Member State concerned’.28 Hence, ‘[t]he economic nature of the same kind of services can therefore differ from one Member State to another’ and can change over time.29 Consistent case law of the CJEU has established that activities which fall within the exercise of public or sovereign powers are non-economic in nature as they ‘intrinsically form part of official authority and are performed by the State’.30 For the purpose of this analysis, it is important to recall that the social aim of an entity is not in itself sufficient to exclude the classification of its activity as economic, but the CJEU has given due account to that aim in most recent case law.31 In Dôvera, the General Court held, consistently with well-established case law, that: the fact that the offer of goods or services is made without profit motive does not prevent the entity which carries out those operations on the market from being considered an undertaking where that offer exists in competition with that of other operators which do seek to make a profit.32

It is possible that a single entity carries out a number of activities, both economic and non-economic, ‘provided that it keeps separate accounts for the different funds that it receives so as to exclude any risk of cross-subsidisation of its economic activities by means of public

Recital 11 and Article 2(1)(c) of the SGEI Decision (n 16). Inter alia Case C-437/09, AG2R, EU:​C:​2011:​112, para 42. 27 Gallo (n 10) 268. 28 Commission Decision (EU) 2015/248 of 15 October 2014 on the measures SA.23008 (2013/C) (ex 2013/NN) implemented by Slovak Republic for Spoločná zdravotná poisťovňa, a. s. (SZP) and Všeobecná zdravotná poisťovňa, a. s. (VZP) [2015] OJ L 41/25, para 78. 29 Ibid. The emphasis on the national context in some recent Commission’s decisions, as Gallo suggests, shows ‘an attenuation of the functional approach’ on the side of the Commission (Gallo (n 10) 271). 30 SGEI Communication (n 15) para 16 and case law cited in the Communication. 31 Joined Cases C‑262/18 P and C‑271/18 P, Commission v Dôvera and Slovak Republic v Dôvera [2020] EU:​C:​2020:​450. 32 Case T-216/15 Dôvera zdravotná poist’ovňa, a.s. v European Commission [2018] EU:​T:​2018:​64, para 48. 25 26

Social services and State aid  211 funds received for its non-economic activities’.33 For example, in relation to healthcare providers, the Commission found that the ‘ecclesiastical, non-for-profit body’ Provincia Italiana della Congregazione dei Figli dell'Immacolata Concezione in Amministrazione Straordinaria – PICFIC was engaged in both economic and non-economic activities.34 PICFIC operated specialized health clinics and some of its services were provided privately for remuneration.35 Irrespective of the legal status and the non-profit nature, the Commission highlighted ‘as far as those clinics provide healthcare services privately (at market prices and in competition with other private centres), they perform an economic activity’.36 With regard to healthcare, the Commission acknowledges that ‘healthcare systems differ significantly between Member States’, and that ‘the degree to which different healthcare providers compete with each other in a market environment largely depends on these national specificities’.37 Where hospitals and other healthcare providers offer their services for remuneration, the fact that a health service is provided by a public entity does not exclude the economic nature of the activity.38 For example, in the decision on the funding to public hospitals in the Hradec Králové Region, the Commission did not even discuss the economic nature of the activity of the public hospitals which were undoubtedly considered undertakings.39 In that decision, the Commission ultimately affirmed that the public grants to the hospitals did not constitute State aid as they were not liable to affect trade between Member States, but ‘would in any event be block exempted and therefore compatible with the internal market by virtue of Article 3 of the 2012 SGEI Decision’.40 Similarly the economic nature of healthcare activities carried out by public hospitals was uncontested in the IRIS Decision.41 In that decision the Commission clearly distinguished between the national healthcare system and hospital activities: [t]he solidarity aspects underpinning the Belgian national healthcare system do not call into question the economic nature of such hospital activities. … the Commission considers that there is a need to differentiate between the management of the national health system, carried out by public bodies implementing for this purpose the prerogatives of the State, and the provision of hospital care against remuneration in a competitive environment (which is at stake in the case at hand …).42

33 Case C-74/16 Congregación de Escuelas Pías Provincia Betania v Ayuntamiento de Getafe [2017] EU:​C:​2017:​496, para 51. 34 Commission Decision of 10 December 2014, case State aid SA.39426 (2014/N) – Italy Rescue aid to PICFIC in A.S., health care services operator in the Region of Lazio. 35 Ibid para 11, which states ‘[t]he Italian authorities have indicated that, when PICFIC’s clinics provide healthcare services privately, they function as private clinics, providing their services at market prices and in competition with other private centres. Patients pay directly or through their private insurance for the services they receive’. 36 Ibid para 24. 37 SGEI Communication (n 15) para 21. 38 Ibid para 24. 39 Commission Decision of 29 April 2015, case SA.37432 (2015/NN) – Czech Republic Funding to public hospitals in the Hradec Králové Region. 40 Ibid paras 24 and 26. 41 Commission Decision (EU) 2016/2327 of 5 July 2016, case SA.19864 (2014/C) (ex 2009/NN54) implemented by Belgium – Public financing of Brussels public IRIS hospitals (notified under document C(2016) 4051), para 108 (see also infra section 4 of this chapter). 42 Ibid para 109.

212  Research handbook on European State aid law Only hospitals funded from social security contributions and that provide their services free of charge on the basis of universal coverage, being thus based on the principle of solidarity,43 do not exercise an economic activity. In a similar vein, with regard to social security systems, the CJEU has consistently argued that an activity is non-economic if it is solidarity-based,44 and has distilled a number of criteria that are relevant to determine the non-economic nature. These include: compulsory affiliation to the social security scheme; exclusively social purpose of the scheme; non-profit character of the scheme; benefits that are independent of the contributions made and non-proportionate to the insured persons’ earnings; and State supervision of the scheme.45 The evaluation as to whether a healthcare or social security system is solidarity based is at the core of recent decisions, in which the Commission found that some elements of competition do not alter the non-economic nature of the activity of systems in question. Those decisions place themselves in continuity with the CJEU’s reasoning in AOK Bundesverband and Others,46 in which the Court held that the activity of providing health insurance in Germany was not an economic activity. It contended that, in encouraging the insurance bodies to operate as effectively as possible and in injecting some competition in the system, the German legislature was only geared towards the attainment of the social objective of the system. The first significant decision in this context is the one on the alleged compensation of public hospitals in the Lazio region, in Italy.47 In that instance, the Commission reiterated that elements of competition did not make the system economic in nature and, in sum, the finding was that ‘freedom of patients to choose hospitals or doctors does not alter the non-economic nature of the system, as long as the universality of the service is not affected’.48 A similar approach was taken in decision 2015/248 concerning health insurance schemes in Slovakia,49 which was annulled in February 2018 by the General Court,50 whose judgement was, however, overturned in the appeal by the CJEU in June 2020.51 The Commission contended that the Slovak compulsory health insurance system was based on the solidarity principle and that the insurance companies were not undertakings.52 It supported his decision by observing that ‘participation in the public health insurance programme is compulsory by law for most of the population in 43 Case T-319/99 FENIN [2003] EU:​T:​2003:​50. Similarly Danish hospitals are not considered undertakings: see Danish Report on SGEI 2018 accessed 19 December 2019. 44 Joined cases C-159/91 and C-160/91 Christian Poucet v Assurances Générales de France and Caisse Mutuelle Régionale du Languedoc-Roussillon [1993] EU:​C:​1993:​63. 45 SGEI Communication (n 15), paras 18 and 19. 46 Joined Cases C‑264/01, C‑306/01, C‑354/01 and C‑355/01 AOK Bundesverband and Others [2004] EU:​C:​2004:​150. 47 Commission Decision of 4 December 2017, case SA.39913 (2017/NN) – Italy Alleged compensation of public hospitals in Lazio. 48 Phedon Nicolaides, ‘What Makes a Public Health Care System Non-economic?’ (StateAidHub, 10 April 2018) accessed 19 December 2019. 49 Commission Decision (EU) 2015/248 of 15 October 2014 on the measures SA.23008 (2013/C) (ex 2013/NN) implemented by Slovak Republic for Spoločná zdravotná poisťovňa, a. s. (SZP) and Všeobecná zdravotná poisťovňa, a. s. (VZP) [2015] OJ L 41/25. 50 Dôvera zdravotná poist'ovňa, a.s. v European Commission (n 31). 51 Joined Cases C‑262/18 P and C‑271/18 P, Commission v Dôvera and Slovak Republic v Dôvera [2020] EU:​C:​2020:​450. 52 Commission Decision (EU) 2015/248 (n 49) para 85 et seq.

Social services and State aid  213 the Slovak Republic and medical services covered under the compulsory health insurance are provided regardless of the contributions paid by the insured person’.53 In that connection, the Commission highlighted that, while an insured person is free to choose any health insurance company operating on the market, that company ‘cannot refuse that person insurance on the grounds of his age, state of health or disease risks’.54 Secondly, the Commission observed that ‘Slovak compulsory health insurance is based on contributions that are fixed by law proportional to the income of the insured’, without any direct link between the amount of contributions paid by an individual and the value of the benefits received by that individual from the scheme.55 Third, the Commission stated that all the insured were guaranteed by law to receive the same basic level of benefits, which covers almost all healthcare procedures provided in Slovakia, and insurers are not allowed to differentiate premiums according to insurance risk.56 Fourth, it recalled that the Slovak compulsory health insurance was carried out under a strong regulatory framework and was ‘subject to tight supervision by the State’.57 Interestingly, and quite importantly, the Commission acknowledged that ‘certain features of the Slovak compulsory health insurance system could point to the economic nature of the activities involved’, including some degree of competition between health insurers. However, it concluded that those limited features did not call into question the non-economic nature of the Slovakian system. Those Commission’s decisions seem to show a certain willingness to respect national welfare systems, and a certain deference to Member States’ discretion in the organization of those systems. The Commission decision 2015/248 was annulled by the General Court in Dôvera. The judges of first instance, on the whole, examined whether the Commission committed an error of assessment in concluding that the profit-making objective pursued by health insurance companies and the competition elements present in the Slovak compulsory health insurance sector did not call into question its predominant social, solidarity and regulatory features.58 Without examining the judgement in detail, it is worth recalling that, first, the General Court noted that ‘the social aim of a health insurance scheme is not in itself sufficient to exclude classification as an economic activity’.59 Hence, it focused on whether the Slovak scheme was based on solidarity and agreed with the Commission’s finding that the Slovak compulsory health insurance scheme had predominant social, solidarity and regulatory features.60 However, the European judges went on to affirm that, contrary to what the Commission stated, ‘the existence of a certain amount of competition as to the quality and scope of services provided by the various bodies within the Slovak compulsory health insurance scheme also has a bearing on the economic nature of the activity’.61 The General Court indicated that while the ‘health insurance bodies may not freely set the amount of the contributions or formally compete via their tariffs’, they can ‘differentiate themselves in terms of quality and scope of services in order to attract insured persons, who, by law, are free to choose their health insurance company and switch Ibid. Commission Decision (EU) 2015/248 (n 49) para 85 et seq. 55 Ibid para 86. 56 Ibid para 87. 57 Ibid para 88. 58 Dôvera zdravotná poist'ovňa, a.s. v European Commission (n 32). 59 Ibid para 51. 60 Ibid para 58. 61 Ibid para 65. 53 54

214  Research handbook on European State aid law company once a year’.62 Ultimately, it concluded that ‘the activity of providing compulsory health insurance in Slovakia is economic in nature’ and the Commission erred in its assessment. It might be argued that this decision had the effect to place this national welfare system under the longa manus of the EU. Moreover, and that constituted a ground of appeal, the General Court did not seem to limit itself (as it should) to ‘verifying whether the Commission complied with the rules governing procedure and the statement of reasons, whether the facts on which the contested finding was based have been accurately stated and whether there has been any manifest error of assessment or a misuse of powers’.63 In fact, the European judges deeply and quite extensively questioned the assessment of the Commission. The judgment of the General Court in Dôvera was appealed by both the Commission and the Slovak Republic, and the CJEU released its ruling on 11 June 2020,64 after AG Pikamäe had published his opinion on 19 December 2019.65 The Commission and the Slovak Republic raised three grounds of appeal, alleging, inter alia, the misinterpretation of the concepts of ‘undertaking’ and ‘economic activity’. The Slovak Republic also alleged that the General Court exceeded the limits of its judicial review. While the AG firmly rejected the view that the General Court went beyond its power of judicial review,66 he fundamentally disagreed with the General Court’s conclusions and stated that it ‘overestimated the impact of the degree of competition permitted under the Slovak compulsory health insurance scheme’ and wrongly concluded that their activity was economic in nature.67 The CJEU, along the lines traced by the AG, set aside the General Court’s decision. The Court of Justice stated that the General Court, in finding that Slovak compulsory health insurance scheme was an undertaking for the mere fact it was ‘able to seek profits and, moreover, engaged in a certain amount of competition as regards both the quality and scope of the services offered and in procurement’, ‘attributed undue significance to the latter elements’.68 Moreover, the Luxembourg judges explicitly mentioned that the General Court had given ‘insufficient account’ of ‘the social, solidarity and regulatory features of the scheme at issue’.69 Remarkably, the CJEU also held that the General Court erred in finding that those features that introduced a certain amount of competition into the Slovak compulsory health insurance scheme ‘were such as to call into question the social and solidarity-based nature of that scheme’.70 The Court went on to state that the ‘competitive element’, being merely intended ‘to encourage operators to operate in accordance with principles of sound management’, does not change the nature of that scheme.71 In this respect, the CJEU’s decision is in line with what was held in AOK Bundesverband and Others. On the whole, until the most recent decision of the CJEU in Dôvera, the Commission decisions showed a somewhat blurred dividing line between economic and non-economic

Ibid para 66. Case C‑56/93 Belgium v Commission [1996] EU:​C:​1996:​64, para 11. 64 Commission v Dôvera and Slovak Republic v Dôvera (n 51). 65 Opinion of Advocate General Pikamäe delivered on 19 December 2019, Joined Cases C‑262/18 P and C‑271/18 P European Commission v Dôvera zdravotná poisťovňa, a.s. (C‑262/18 P) and Slovak Republic v Dôvera zdravotná poisťovňa, a.s. (C‑271/18 P) [2020] EU:​C:​2019:​1144. 66 Ibid para 52. 67 Ibid para 130. 68 Commission v Dôvera and Slovak Republic v Dôvera (n 51) para 37. 69 Ibid para 38. 70 Ibid para 41. 71 Ibid. 62 63

Social services and State aid  215 activities. By affirming that healthcare insurance schemes predominantly based on solidarity do not entail an economic activity, even though insurance operators can make profit and have some discretion, the Commission (seemingly in line with previous decisions of the CJEU) set a limit to the reach of EU law. The question that remained contentious (and unsolved) until the latest CJEU’s judgement in Dôvera, is on how much competition can stay in the national system for the social service to be still considered non-economic.72 The CJEU, however, seems to have finally clarified that those limited elements of competition do not entail the economic nature of the activity at stake. In giving particular emphasis to the social aim of the scheme and its compliance to the solidarity principle, the Court has shown some self-restraint in the application of State aid rules to national social services.

3.

PUBLIC COMPENSATION OF SOCIAL SERVICES OF GENERAL ECONOMIC INTEREST IN THE ‘SGEI PACKAGE’

3.1

Public Compensation Falling under the De Minimis

Public support to SSGEI does not constitute State aid if the compensation does not exceed 500.000 Euros over any period of three fiscal years, satisfying the requirements contained in the de minimis Regulation.73 This threshold is higher than the general de minimis threshold in the field of State aid,74 with a view to compensating the extra costs incurred for the provision of a public service. In the original intention of Commissioner Almunia, the de minimis would have facilitated ‘the provision of many small, local public services’, in line with the Commission’s intention to prioritize ‘cases where State aid has a real impact on competition and trade between Member States’.75 It is unclear how many public support measures fall under the de minimis. However, the most recent Member States’ reports, in some cases,76 show that the Regulation allowed, in fact, to support small social services.77 During the 2019 consultation (as part of the Evaluation and Fitness Check Roadmap)78 a few organizations suggested to raise the current threshold, to allow Member States more flexi-

72 Phedon Nicolaides, ‘Non-Economic Activities’ (StateAidHub, 10 March 2015) accessed 19 December 2019. 73 SGEI de minimis Regulation (n 19). 74 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid [2013] OJ L 352/1. 75 Press Release ‘State aid: Commission adopts de minimis Regulation for services of general economic interest (SGEI)’ at accessed 20 January 2020. 76 It is not compulsory to report de minimis measures. In some cases, however, these measures are published on national websites (see eg the Romanian Competition Council’s website at accessed 19 December 2019). 77 E.g. the Order EIE/609/2016, ARINSER programme, establishing the regulatory bases for the granting of subsidies for the social and labour integration of people suffering or at risk of exclusion, through integration undertakings, reported in the Spanish 2018 Report (for the years 2016 and 2017) pursuant to the 2012 SGEI Decision and the 2012 SGEI Framework, available at accessed 31 January 2019. 78 See supra Introduction to this chapter.

216  Research handbook on European State aid law bility in supporting the provision of public services. The European Hospital and Healthcare Federation, while expressing a positive opinion on the rules currently in place, suggested, ‘based on practice’, to raise the de minimis level to 600.000 Euros.79 In a similar vein, the CEEP (the European Centre of Employers and Enterprises providing Public Services and Services of general interest),which represents employers and enterprises providing SGI, suggested ‘increasing the maximum amount of aid open to SGEI providers from currently 500.000 Euros to 1.000.000 Euros over a period of three financial years’.80 It remains to be seen whether the Commission will follow those suggestions, in an attempt of increasing simplification for public authorities and service providers, but also in view of enhancing the provision of social services in the Member States. Even if the Commission should decide to increase the threshold, it is not to be taken for granted that the Court of Justice would accept that in those cases that there is no distortion of competition and effect on trade. The CJEU has, so far, trodden very carefully and often held that the relatively small amount of aid or the small size of the undertaking which receives it does not, as such, exclude the possibility that intra-EU trade might be affected.81 3.2

Public Compensation Fulfilling the Altmark Conditions

If the funding cannot be included within the scope of the de minimis Regulation, it may still comply with the Altmark conditions. It is well known that those four cumulative conditions entail that: (i) the recipient undertaking must actually have public service obligations to discharge, and the obligations must be clearly defined; (ii) the parameters of the compensation have been established beforehand in an objective and transparent manner; (iii) the compensation does not exceed what is necessary to cover all or part of the costs incurred in discharging the public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations; (iv) where the undertaking which is to discharge public service obligations is not chosen pursuant to a public procurement procedure, the level of compensation must be determined on the basis of an analysis of the costs that a typical undertaking, well run and adequately provided with the relevant means, would have incurred. Those conditions, and particularly the first, require the existence of a SGEI. However, the notion of SGEI is not as clear as one might expect. SGEI are left undefined in Article 106(2) TFEU and, more generally, in the Treaty. The absence of an explicit definition of SGEI has been acknowledged by the European Courts.82 In the SGEI Communication, the Commission ‘has shied away from providing a clear definition of the concept’,83 acknowledging that the concept of SGEI ‘is an evolving notion that depends, among other things, on the needs of

79 Feedback from European Hospital and Healthcare Federation (HOPE), 12 July 2019, at accessed 6 February 2020. 80 CEEP Position on State Subsidies for Social and Health Services of General Economic Interest at accessed 6 February 2020. 81 Case C-142/87 Belgium v Commission [1990] EU:​C:​1990:​125, para 43. See also C-351/98 Spain v Commission (Plan Renove I) [2002] EU:​C:​2002:​280, para 61. 82 Lopez (n 23). See inter alia Case T-289/03 BUPA [2008] EU:​T:​2008:​29, para 165. 83 Grith Skovgaard Ølykke and Peter Møllgaard, ‘What is a Service of General Economic Interest?’ (2016) 41(1) European Journal of Law and Economics 205.

Social services and State aid  217 citizens, technological and market developments and social and political preferences in the Member State concerned’.84 However, in its 2011 Quality Framework and, subsequently, in the 2013 Guide on SGEI, the Commission has indeed tried to provide some clarity and affirmed that SGEI are: ‘economic activities which deliver outcomes in the overall public good that would not be supplied (or would be supplied under different conditions in terms of objective quality, safety, affordability, equal treatment or universal access) by the market without public intervention’.85 In the SGEI Communication, it is recalled that SGEI are undertakings entrusted with a ‘particular public service task’.86 The latter implies the supply of services87 that are ‘addressed to citizens or be in the interest of society as a whole’.88 The Public Service Obligation (PSO) is imposed on the provider by way of an entrustment act, which ‘may take the form of a legislative or regulatory instrument or a contract’,89 and on the basis of a general interest criterion which ensures that the service is provided under conditions allowing it to fulfil its mission.90 The CJEU’s approach is considered ‘functional rather than formalistic’: a wide range of measures issued by public authorities is considered to fulfil the definition of public act and the Court has placed less emphasis on formal requirements.91 Since the Altmark decision, the CJEU has consistently held that the PSOs must be clearly defined in national law, in order to ensure transparency and legal certainty.92 On the whole, while SSGEI must comply with general SGEI criteria93 (i.e. an act of public authority entrusting the operators concerned with an SGEI mission, and the universal and compulsory nature of the SGEI mission),94 the requirement that the service is universal must be considered to be met in the case of social services that address specific segments of population

SGEI Communication (n 15) para 45. Commission, ‘A Quality Framework for Services of General Interest in Europe’ COM(2011)900. This definition is also reported in the Commission, 2013 SGEI Guide (n 5). For a comment, see Caroline Wehlander, Services of General Economic Interest as a Constitutional Concept of EU Law (TC Asser Press/Springer 2016), 177 ff. 86 SGEI Communication (n 15) para 45. 87 Ibid para 47. 88 Ibid para 50. 89 Ibid paras 51 and 52. 90 COM(2011)900 (n 79) p 3. 91 Skovgaard Ølykke and Møllgaard (n 83), citing AG2R (Case C-437/09 AG2R [2011] EU:​C:​2011:​ 112). 92 Inter alia Cases C‑91/17 P and C‑92/17 P Cellnex Telecom and Telecom Castilla-La Mancha v Commission [2018] EU:​C:​2018:​284, para 44 et seq. In the absence of a clear definition of nature, duration and scope of the PSOs, it is not possible to verify whether a particular activity may be covered by the concept of an SGEI. Along this line of cases, the Commission has clarified that the entrusting act must specify: the content and duration of the public service obligations; the undertaking and the territory concerned; the nature of any exclusive or special rights assigned to the undertaking; the parameters for calculating, controlling and reviewing the compensation of the services carried out; and the arrangements for avoiding and recovering any overcompensation (SGEI Communication (n 15) para 52). 93 In BUPA, the General Court contended that Member States’ discretion in the determination of which services are SGEI is not unlimited as they must ensure that the minimum criteria all SGEIs must fulfil according to the Treaties are satisfied (BUPA (n 82)). 94 As highlighted inter alia by Melcher, these conditions also correspond to the first Altmark criterion, ‘thereby suggesting that SGEI in EU law generally have to be identified by reference to an objective of general interest and the imposition (entrustment) of a public service obligation’ (Melcher (n 1) p 7). 84 85

218  Research handbook on European State aid law or certain vulnerable groups.95 The Commission’s competence is limited to checking whether the Member State has made a ‘manifest error’ when defining the social service as an SGEI.96 The European Courts, since Analir,97 have somewhat restricted the room for manoeuvre of the Member States by stating that they could only impose public service obligations if they demonstrate the existence of a real need for public service, and address a specific market failure.98 In that vein, some scholars have argued in favour of the adoption of a more pronounced ‘economic definition’ of SGEI.99 Arguably, the benefit of this definition of SGEI is that it allows a deeper economic assessment of relevant cases,100 but, with regards to SSGEI, it seems that it might undermine their delivery at the national level. Moreover, a more economic approach might clash with the ideal of a social market economy, envisaged in Article 3 TEU.101 It should be noted that Analir and other decisions were issued in the context of broadband networks. Hence, as argued by Piernas Lopez, with reference to the Andersen decision of the General Court and other judgments of the EU courts, it may not be deduced from that judgement that all SGEI (including SSGEI) may only be defined in the presence of a market failure.102 The CEEP, in the 2019 evaluation, has also stressed the need to effectively confine the regulatory competence of the Commission to intervene in the definition of SGEI only in cases of manifest error, and to protect Member States discretion.103 In that, the CEEP suggests the need to respect national, regional and local levels’ role in defining the public need, the scope, organisation and financing of SGEI performance, in a way that reflects their cultural, economic and democratic choices.104 Alongside the blurred contour of the notion of SGEI, some scholars also criticize the flexible approach to the Altmark test, which has not been applied consistently so far, oscillating from a ‘lenient stance’ in BUPA and ‘a more strict interpretation in TF1’.105 However, a degree

95 Lopez (n 23). In that connection, European Courts have in fact clarified that the universal nature of the SGEI mission does not imply that the service has been provided to the whole population, or to the whole territory of a Member State. 96 Inter alia Case C-171/17 Commission v Hungary [2018] EU:​C:​2018:​881, para 49. See also Case C-265/08 Federutility [2010] EU:​C:​2010:​205, para 29. 97 Case C-205/99 Analir [2001] EU:​C:​2001:​107, para 71. See also Case T-92/11 Andersen [2017] EU:​T:​2017:​14, paras 69 ff. 98 The European Commission has also made reference to Analir in a communication on SGEI, in relation to the conditions to be met in order to define a service as an SGEI (SGEI Communication, para 48). See in this respect Lopez (n 23). 99 Ølykke and Møllgaard state: ‘Our suggestion is that, based on the underlying economics and in concordance with case law, it is possible to define an SGEI as the strengthening of a component of a network that underprovides services to a significant share of the population of a Member State. This definition is consistent with the majority of more than 100 cases determined by the Courts, although the Courts have relied on formal legal criteria rather than on the underlying economic rationale for the cases’. Skovgaard Ølykke and Møllgaard (n 83). 100 Ibid. 101 Lopez (n 23). 102 Ibid. 103 CEEP, Position on State Subsidies (n 80). 104 Ibid. 105 Maarten Aalbers, ‘How State Aid saved Borgen’ (Leiden Law Blog, 3 October 2015) accessed 2 February 2020.

Social services and State aid  219 of flexibility is not negative as it might allow social aspects to be taken into account by the European Courts, which have not remained insensitive to the type of service at stake.106 3.3

Public Compensation that Constitutes State Aid

When the Altmark conditions are not fulfilled,107 the public financing may come under the scope of Article 106(2) TFEU. It is worth recalling that Article 106(2) TFEU envisages a necessity test to be carried out. The exemption is permitted provided that they are necessary for performance of the particular tasks assigned to an SGEI. Consistent case law has stated that: it is not necessary that the financial balance or economic viability of the undertaking entrusted with the operation of a service of general economic interest should be threatened. It is sufficient that, in the absence of the rights at issue, it would not be possible for the undertaking to perform the particular tasks entrusted to it, or that maintenance of those rights is necessary to enable the holder of them to perform tasks of general economic interest which have been assigned to it under economically acceptable conditions.108

It then requires a proportionality test, to reconcile Member States’ prerogatives with the Union interest. The CJEU has held that restrictions on competition should not go ‘beyond what is necessary’ to ensure that the service is carried out.109 The SGEI Decision110 clarifies the conditions under which public service compensation that constitutes State aid is compatible with the Internal market and does not need to be notified to the Commission. With regard to its scope, the Decision applies to public service compensation not exceeding 15 million Euros on an annual basis, granted for SGEIs in areas other than transport and transport infrastructure.111 It also applies to the compensation for the provision of services ‘by hospitals providing medical care, including, where applicable, emergency services’ (Article 2(1)(b) of the Decision) and ‘the compensation for the provision of services of general economic interest meeting social needs as regards health and long term care, childcare, access to and reintegration into the labour market, social housing and the care and social inclusion of vulnerable groups’ (Article 2(1)(c) of the decision), irrespective of the amount of the compensation.112 This means that there is no economic threshold to the compensation

106 In the Coordination bruxelloise d’institutions sociales et de santé (CBI), the Court clearly stated that the Altmark criteria ‘laid down by the Court of Justice in the Altmark judgment concerning transport, which is unquestionably an economic and competitive activity, cannot be applied as strictly to the hospital sector, which does not necessarily have such a competitive and commercial dimension’ (Case T-137/10 CBI [2011] EU:​C:​2011:​280, para 89). See the arguments of Lopez (n 23). 107 The CJEU has held that in order to assess a measure under Article 106(2) TFEU, the Commission is not required to examine whether the conditions laid down by the case-law in Altmark, in particular the second and fourth of those conditions, are met. C‑660/15 P Viasat Broadcasting v European Commission [2017] EU:​C:​2017:​178, para 33. 108 Ibid para 30 and case law cited. 109 Case C-1/12 Ordem dos Técnicos Oficiais de Contas [2013] EU:​C:​2013:​127, para 107. See also BUPA (n 82), paras 131 ff. 110 SGEI Decision (n 16). 111 There was a reduction of the compensation threshold from 30 to 15 million compared to the previous decision. 112 Article 2(1)(b) and 2(1)(c) of the SGEI Decision (n 16). Compared to the Monti-Kroes package, the 2012 Decision extends the scope of the exemption from notification to a larger plethora of social

220  Research handbook on European State aid law that the providers of this type of services may receive. This exemption is premised on the idea that ‘[h]ospitals and undertakings in charge of social services, which are entrusted with tasks of general economic interest, have specific characteristics that need to be taken into consideration’.113 The Commission also believes that ‘[a] larger amount of compensation for social services does thus not necessarily produce a greater risk of distortions of competition’.114 The Decision is aimed to allow Member States to fund their social activities, giving them a relatively wide room for manoeuvre. While the Commission has clarified that ‘the list of social services in Article 2(1)(c) is an exhaustive list,115 ‘as long as they stay within the scope of Article 2(1)(c), Member States can of course specify in more detail in the entrustment act the specific services they want to be provided, for example which types of childcare, under which conditions and for which beneficiaries’.116 Moreover, the wording ‘meeting social needs’ can apply to all services (as long as they qualify as genuine SGEIs), and does not only cover services for low-income groups of population.117 Similarly, the phrase ‘social inclusion of vulnerable groups’ can include, in accordance with the needs of each Member State, different types of services addressed to different groups, such as ‘social integration services for people with disabilities, social assistance services for migrants, services for the homeless, parenting support services, services supporting over-indebted persons or social services for the lesbian, gay, bisexual and transgender (LGBT) community’.118 Stakeholders seem to suggest that any update of the Decision should maintain this approach (exemption from threshold) for social and health services ‘in order to guarantee their continued fair and high-quality service provision capacity’.119 Major issues have been raised in relation to housing, which is one of the most sensitive areas, as demonstrated by recent decisions of the Commission, which will be discussed in the remainder of the chapter.120 The Decision exempts from notification public funding for social housing targeting disadvantaged groups, even when the amount of compensation exceeds the threshold of 15 million Euros. However, when social housing is targeting broader segments of the population, the Commission considers that the exemption does not apply. In this regard, the Association of Housing Corporations (Aedes), the national organisation promoting the interests of the social housing sector in the Netherlands, claims that:

services. 113 Recital 11 of the SGEI Decision (n 16). This recital also affirms that ‘[a]ccordingly, undertakings in charge of social services, including the provision of social housing for disadvantaged citizens or socially less advantaged groups, who due to solvency constraints are unable to obtain housing at market conditions, should also benefit from the exemption from notification provided for in this Decision, even if the amount of compensation they receive exceeds the general compensation threshold laid down in this Decision. The same should apply to hospitals providing medical care, including, where applicable, emergency services and ancillary services directly related to their main activities, in particular in the field of research. In order to benefit from the exemption from notification, social services should be clearly identified services, meeting social needs …’. 114 Ibid. 115 2013 SGEI Guide (n 5) p 57. 116 Ibid. 117 Ibid 58. 118 Ibid 58. 119 CEEP Position on State Subsidies (n 80). 120 See infra Section 4.

Social services and State aid  221 … since the introduction of the SGEI decision, the housing market has changed. The group that is unable to obtain housing at market conditions has moved beyond disadvantaged citizens or socially less advantaged groups to middle income households. There is therefore a need for a SGEI Decision that is fit to this new housing reality and that will help local authorities implement the European Pillar of Social Rights. … the Decision should apply to the provision of social housing for groups whose housing needs cannot be met at market conditions.121

A similar position is expressed by the International Union of Tenants (IUT).122 Housing Europe also suggests the amendment of the Decision to ‘reflect the evolving situation of local housing markets in Europe’ and the inclusion of ‘a reference to the public need as defined by the relevant Member States authorities based on relevant clear criteria’.123 By contrast stakeholders representatives of builders and landlords, such as the European Property Federation, claim that the restriction ‘is crucial’ to ensure fair competition on the housing market.124 Notably, the SGEI Decision requires, in line with the SGEI Communication, that operation of the SGEI is entrusted to the undertaking ‘by way of one or more acts, the form of which may be determined by each Member State’.125 It makes explicit that the amount of compensation must not exceed what is necessary to cover the net cost incurred in discharging the public service obligations, including a reasonable profit,126 indicates the parameter to calculate the compensation, and obliges Member States to publish both the entrustment act (or a summary of it) and the amount of aid granted on a website or to make this information available through other means. If the public support to the service does not fall under the scope of the SGEI Decision, the compensation may be subject to prior notification in accordance with the SGEI Framework Communication. Notification implies that the aid must be assessed by the Commission in order to ensure that all the compatibility conditions are met.127

121 Contribution of Aedes Ref. Ares(2019)7406884 (2 December 2019) at accessed 2 February 2020 (emphasis added). 122 ‘Feedback from: International Union of Tenants (IUT)’ (25 June 2019) available at accessed 2 February 2020. 123 ‘Feedback from: Housing Europe’ (15 July 2019) available at accessed 2 February 2020. 124 European Property Federation, 27 June 2019, available at accessed 2 February 2020. 125 Article 4 SGEI Decision. 126 Article 5 SGEI Decision. 127 One of the most recent cases of public compensation assessed under the Framework is the State Aid SA.41702 (2016/NN) – Ireland Risk Equalisation Scheme – Health Insurance Risk Equalisation. Scheme 2016 (replaced SA.34515 Health Insurance Risk Equalisation Scheme 2013–2015). The Commission concluded that the compensation granted through the Risk Equalisation Scheme for the provision of private medical insurance in Ireland for the period 2016–20 constituted State aid that is compatible with the Internal market under the 2012 SGEI Framework.

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4.

THE MOST RECENT COMMISSION’S PRACTICE AND THE APPLICATION OF THE SGEI DECISION

Several contentious and interesting decisions concerning social services and healthcare predate the 2012 SGEI Package, and have been extensively examined by literature. Among the decisions in relation to healthcare, one of the most recent is that on the public financing of Brussels public IRIS hospitals.128 The Commission considered that the IRIS hospitals were undertakings and deemed that the public funding did not meet the Altmark conditions (namely the fourth one),129 and constituted State aid exempted from notification because of falling within the scope of the SGEI Decision. The Commission considered that the range of hospital and social activities carried out by the IRIS hospitals qualified as SGEI, or as activities purely ancillary to the provision of services. It concluded that ‘all medical and social services at issue in this case exhibit special characteristics as compared with those of other economic activities, i.e. primarily their importance for the medical and social well-being of society’.130 The Commission engaged in a very extensive examination of the nature of the activities and of the PSO carried out by the IRIS hospitals. Without going into the minutia of the decision,131 it is worth highlighting that the Commission concluded that the IRIS hospitals ‘are performing a social healthcare SGEI, which on top of their basic hospital mission’ includes their obligation to treat all patients in all circumstances irrespective of the financial capacity of the patient; to offer a full range of basic hospital services; and to complement the medical care with social services.132 The Commission recognised that these obligations ensure ‘that the specific social needs of the Brussels population with regard to hospital services are fulfilled and guarantees the accessibility to high quality hospital care for all and in particular for the poorest’.133 The Commission then examined the level of compensation and ultimately found that it fulfilled the requirements of the SGEI Decision and was compatible with the Internal market on the basis of Article 106(2) TFEU. On the whole, the Commission, on the basis of the information given by Belgian authorities, placed a great emphasis on the social purpose of the activities carried out by IRIS hospitals. It did not distinguish the activities covered by Article 2(1)(b) and those covered by Article 2(1)(c), but made a strong pivot on the fact that those activities were ancillary and inextricably linked to the provision of the SGEI and, as mentioned, that they were intended to meet social needs. Despite the thorough examination undertaken, the Commission seems underpinned by the willingness to leave a certain leeway to Belgium in the organization of its ‘welfare state’. Far less complex was the decision on Klinikum Osnabrück GmbH,134 in which the Commission applied both the 2012 SGEI Decision and its predecessor (the 2005 SGEI Decision). The Commission’s intervention was triggered by a complaint concerning the granting by the City of Osnabrück of a 100% guarantee for an amount of 28 million Euros and

Commission Decision (EU) 2016/2327 (n 41). Ibid para 125. 130 Ibid para 154. 131 For a full description see Gallo (n 10) 287 ff. 132 Ibid para 215. 133 Ibid. 134 Commission Decision of 21 October 2016, case SA.36798 (2016/NN) – Germany – Alleged unlawful State aid for Klinikum Osnabrück GmbH. 128 129

Social services and State aid  223 a capital increase to the Klinikum Osnabrück, a publicly-owned hospital, which provides both commercial services and SGEI. The Commission does not engage in a lengthy examination, but concluded that the services provided by the hospital fall within Article 2(1) of the 2012 SGEI Decision (and the related provision of its predecessor), and then that there had been no overcompensation. When it comes to social services, the most contentious decisions are those on the Dutch social housing, which provide a significant bedrock for discussion in light of the recent judgment of the General Court, in which the narrower approach of the Commission, mentioned before, was endorsed. The WOCOS (woningcorporaties – housing corporations) ‘saga’ commenced in 2005. Further to the notification by the Dutch authorities of the general system of State aid to the housing corporations, in July 2005 the Commission qualified the aid as existing but expressed serious doubts as regards the compatibility of that system with EU State aid law, asking the Netherlands to modify the scheme in order to target disadvantaged groups.135 In particular, the Commission asked that any commercial activities carried out by the wocos were subject to market terms and should not benefit from State aid. After a long process of consultations with the Commission and with Dutch stakeholders, the Dutch authorities undertook to modify several aspects of the provision of social housing. They committed inter alia to make aid available to the wocos for the construction and renting out of homes to socially disadvantaged individuals, identified on the basis of their income, and for infrastructure that is ‘strictly ancillary to social housing, e.g. public utilities and roads that connect the dwellings to the main network’.136 The Commission adopted a second decision in 2009 in which it accepted the commitments of the Dutch Government, including the definition of a target group of socially disadvantaged households eligible for social housing, and accepted that provision of social housing may qualify as SGEI. In that decision, the Commission also examined a new aid measure for special project aid for certain districts, aimed to improve the liveability of the most deprived urban communities. The beneficiaries of the new aid measure, in the form of direct grants, were those wocos operating in selected urban communities. In that regard, the Commission stated that the notified measure was compatible with the internal market,137 and that the aid for the activity of construction and renting out dwellings to individuals, including the construction and maintenance of ancillary infrastructure and construction and renting out of public purpose buildings was compatible under Article 106(2) TFEU.138 The Commission’s decision was appealed by various housing associations before the General Court in 2010, but after a ‘ping-pong’ of inadmissibility decisions and annulment of those, the General Court, finally released its judgement in November, 2018.139 The General Court rejected all the pleas advanced by the plaintiffs. Notably, the Court rejected the argument that the contested decision was based on an incomplete and manifestly inaccurate assessment of the Dutch legislation at stake and of the facts. In that connection, the Court recalled that while Member States have 135 Commission Decision of 15 December 2009, State aid No E 2/2005 and No 642/2009 – The Netherlands Existing and special project aid to housing corporations, para 38. 136 The Dutch authorities defined the target group of socially disadvantaged households as individuals with an income not exceeding EUR 33,000. This definition covers approximately 43% of the Dutch population. 137 Commission, State aid No E 2/2005 and No 642/2009 (n 135), para 107. 138 Ibid 108. 139 Joined Cases T-202/10 RENV and T-203/10 RENV II Stichting Woonlinie v Commission [2018] EU:​T:​2018:​795. The previous procedural steps and decisions are cited in paras 13–34.

224  Research handbook on European State aid law wide discretion in the definition of SGEI, this discretion cannot be exercised arbitrarily.140 It also concluded that the Commission had demonstrated the existence of a manifest error in the definition of the SGEI for social housing conferred on housing companies.141 The Court also rejected as unfounded the plea that the Commission did not show that the wocos received financial aid for renting to people with ‘relatively high income’, and did not define the concept of ‘relatively high income’.142 The Court held that the Commission had merely noted the lack of a precise delimitation of the SGEI and the risk that the aid granted to wocos would benefit ancillary renting activities which should be exercised under market conditions. The Court furthermore held that the Commission did not err in law, nor abuse its powers, by requiring the Dutch authorities to redefine social housing.143 In that connection, the European judges highlighted that the Commission did not impose the adoption of an income ceiling to define the target group of the housing measure. By contrast, the Commission only contested the absence a clear definition of the target group and required that the definition of the activities of wocos had a direct link with socially disadvantaged households.144 On the whole, the General Court endorsed the evaluation of the Commission, and the approach that social housing can only tackle a specific and well-defined group of disadvantaged households.

5.

CONCLUDING REMARKS

The recent launch of the Evaluation and Fitness Check Roadmap on the rules related to health and social services that fall within the remit of SGEI feeds into the intense regulatory work that has characterized the EU State aid policy since the 2005 State Aid Action Plan, launched by the then Competition Commissioner Neelie Kroes,145 and that makes the State aid rules a rather dynamic legal framework. However, it also calls for a deeper reflection on how, thus far, the rules in place have impacted on those specific services, which contribute to the fulfilment of fundamental rights such as the right to health and to social protection. The analysis conducted has tried to show that the current ‘SGEI Package’ (in particular the SEGI Decision) has a distinct and yet unclear social dimension. The Commission practice is somewhat bittersweet. On the one hand, it has excluded from the scope of State aid certain national insurance schemes predominantly based on solidarity, allowing for some competition to remain in the system. It has, also, in the application of the SGEI Decision to IRIS hospitals made a strong pivot on the social purpose of the activities carried out. By contrast, the current approach of the Commission to social housing is quite narrow, as clearly shown by Article 2(1)(c) read in combination with Recital 11 of the SGEI Decision. A newer approach to SSGEI should tally with the search for a more evident social dimension of the Union, which was evoked by the former President of the Commission Jean Claude Ibid para 80. Ibid para 104. 142 Ibid paras 106 et seq. 143 Ibid paras 125 et seq. 144 Ibid paras 125 et seq. 145 Commission, ‘State aid action plan - Less and better targeted state aid: a roadmap for state aid reform 2005–2009’ COM(2005) 0107 final. On the plan see Claire Micheau, ‘Evolution of State Aid Rules: Conceptions, Challenges and Outcomes’ in Herwig C H Hofmann and Claire Micheau (eds), State Aid Law of the European Union (Oxford University Press 2016), 31. 140 141

Social services and State aid  225 Juncker146 and ‘given shape’ in the European Pillar of Social Rights (EPSR).147 Importantly, the EPSR includes various references to services and Principle 20 recognizes that ‘[e]veryone has the right to access essential services of good quality, including water, sanitation, energy, transport, financial services and digital communications’. While the EPSR does not explicitly refer to SGEI, services described as ‘essential’, as noted by the European Economic and Social Committee (EESC), are in fact SGEI.148 Namely, the EESC has highlighted that: [t]he right to essential services is therefore not limited to those set out in principle 20, but also concerns other principles such as childcare and children’s services, healthcare, inclusion of people with disabilities, long-term care, housing, and assistance for the homeless. Implementation of the right to access essential services of good quality will therefore need to be backed up by specific measures for both SGEIs and the areas mentioned above. In this connection, the EESC points out the responsibility and wide discretion Member States have in defining, arranging and financing services of general interest that meet citizens’ needs.149

The willingness to deliver on the ‘social protection and inclusion’ chapter of the EPSR might in fact push the Commission to amend the de minimis regulation. A modification of the SGEI Decision could also be predictable, and, willingly or not, the Commission will have to carefully reconsider its own approach to social housing. In the 2019 European Semester reports,150 housing features prominently, and several countries, such as Ireland, highlight structural issues on the housing market and the need of more investment in social housing. More research seems, thus, necessary to grasp the balance between maintaining a level playing field for market players in the housing market and addressing social needs of peoples living in more and more expensive cities. Further to the COVID-19 pandemic, which is currently unfolding, it is likely that the Commission will be called to support Member States in making their healthcare and social services more resilient. This will then require a broader reflection on the extent to which new SGEI rules can alleviate the ever-present tension between the Internal market and the national welfare states and allow the EU as a whole to better respond to future health crises.

146 Juncker clearly stated that ‘Europe’s social dimension should be given the Cinderella treatment no more, but should instead be geared towards the future’; see Jean Claude Juncker, ‘State of the Union Speech 2018’ (State of the Union, Strassbourgh, 12 September 2018), 10, last accessed 20 January 2020. 147 Commission, ‘Establishing a European Pillar of Social Rights’ (Communication) COM (2017)250, and Commission, ‘Recommendation of 26 April 2017 on the European Pillar of Social Rights’ C(2017)2600. See also at , website last accessed 12 December 2019. 148 Opinion of the European Economic and Social Committee EESC/2019/00989 of 20 August 2019 for better implementation of the Social Pillar, promoting essential services [2019] OJ C 282/7. 149 EESC/2019/00989 (n 148) para 3.3. 150 Commission, ‘Communication on 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011’, COM(2019) 150 final.

12. The private enforcement of State aid law Fernando Pastor-Merchante1

1. INTRODUCTION The purpose of this chapter is to describe the state of play and to identify the topics that deserve further investigation in connection to the private enforcement of State aid law. As used throughout this chapter, the term ‘private enforcement of State aid law’ refers to third-party actions brought before national courts in order to fight the approval or implementation of State aid measures. For this purpose, third parties include competitors, taxpayers, trade associations, and any other actors negatively affected by the granting of State aid. The focus on third parties excludes from the scope of the inquiry national litigation triggered by State aid beneficiaries. Although some of the procedural problems raised by this type of litigation are similar to the problems raised by third-party actions, their logic is completely different, if only because they normally seek to sidestep rather than enforce the prohibition on State aid.2 Needless to say, it also excludes judicial proceedings triggered by granting authorities (eg, in order to recover State aid) or by any other non-private actors.3 The chapter unfolds as follows. The second section discusses the rationale behind the involvement of third parties and national courts in the enforcement of the rules on State aid and the evolution of the discipline on this front. The third section analyses the rights of third parties that fuel the private enforcement of State aid law and the way in which national courts are supposed to protect them. In this, as in most areas of Union law, national litigation is mostly governed by the domestic, procedural laws of Member States. This is not exempt from difficulties, which is why the fourth section discusses the main problems raised by the principle of procedural autonomy in the private enforcement of State aid law. Finally, the last section addresses the problems raised by the interplay between the Commission and national courts in the enforcement of the rules on State aid law. The chapter concludes with a more general reflection on the normative assumptions that inform the private enforcement of State aid law, which should also attract the attention of legal scholarship in the future.

1 The research at the origin of this chapter has benefitted from the support of the Pérez-Llorca IE Chair for Commercial Law. 2 Fernando Pastor-Merchante, ‘The European Perspective’ in Ferdinand Wollenschläger, Wolfgang Wurmnest and Thomas MJ Möllers (eds), Private Enforcement of European Competition and State Aid Law. Current Challenges and the Way Forward (Wolters Kluwer 2020), 198–9. 3 Martin Kohler, ‘Private Enforcement of State Aid Law – Problems of Guaranteeing EU Rights by Means of National (Procedural) Law’ (2012) 11(2) European State Aid Law Quarterly 369, 370.

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The private enforcement of State aid law  227

2.

THE INVOLVEMENT OF THIRD PARTIES AND NATIONAL COURTS IN THE ENFORCEMENT OF STATE AID LAW: RATIONALE AND EVOLUTION

Third-party actions before national courts are neither the only nor the main enforcement mechanism of State aid law. As is well known, one of the central pieces of the system of State aid governance is the preliminary control that the Commission exercises over new State aid measures. This is an important source of power for the Commission, which has the last say on the implementation of national, State measures of financial support to firms that fall within the definition of State aid. Yet, for this power to be effective, the Commission needs Member States to collaborate, both ex ante (complying with their standstill and notification obligations) and ex post (abiding by the decisions eventually adopted by the Commission). The Commission has certain tools to protect its own prerogatives against uncooperative Member States. To begin with, the Commission has the power to investigate of its own motion non-notified measures and to adopt vis-à-vis these measures the same type of decisions that it would adopt in response to notifications.4 Furthermore, the Commission has the power to order suspension and provisional recovery of State aid measures implemented in breach of the standstill obligation, irrespective of whether they have been notified or not.5 Finally, the Commission has the power to start infringement proceedings in order to curve the resistance of Member States to comply with its State aid decisions, following the fast-track procedure of Article 108(2) Treaty on the Functioning of the European Union (TFEU).6 However, the effectiveness of these ‘public enforcement’ tools presents some limitations, the most important of which is their dependence on the administrative capacity of the Commission, which is not boundless. From an institutional perspective, the association of third parties and national courts to the task of enforcing the rules on State aid can thus be seen as a strategy to complement the enforcement powers of the Commission – and, as a corollary, to strengthen the effectiveness of State aid law. This instrumental rationale is quite obvious in the jurisprudence of the Court of Justice, which recognized the direct effect of the standstill clause of Article 108(3) TFEU in its seminal Costa v Enel ruling7 and confirmed it a few years later in Lorenz, where it held that ‘the prohibition on implementation referred to in the last sentence of [Article 108(3) TFEU] has a direct effect and gives rise to rights in favour of individuals, which national courts must safeguard’.8 Thus, the doctrinal foundations for the private enforcement of State aid law were laid down at a relatively early stage. However, the topic did not attract much academic attention until the late 1990s and early 2000s.9 This is hardly surprising, given the cautious approach that characterized the State aid 4 Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union [2015] OJ L 248/9, Article 12 [hereinafter, ‘Procedural Regulation’ or ‘PR’]. 5 Article 13 PR. 6 Article 28(1) PR. See, eg, Miguel Sampoll Pucurull, ‘Economic Penalties and Recovery of State Aid: Some Lessons from the Spanish Experience’ (2017) 16(3) European State Aid Law Quarterly 431. 7 Case 6-64 Costa v ENEL [1964] EU:​C:​1964:​66, p 596. 8 Case 120-73 Lorenz v Germany [173] EU:​C:​1973:​152, para 8. 9 Philip Bentley, ‘State Aid, Subsidies and Complainants’ (1990) 1 European Business Law Review 91; Johannes Albertus Winter, ‘Supervision of State Aid: Article 93 in the Court of Justice’ (1993)

228  Research handbook on European State aid law policy of the Commission for a long time.10 It was only after the discipline acquired some bite in the 1980s that the role of private actors in the enforcement of the rules on State aid became an issue. Cases like Cook11 and Sytraval12 initially placed the focus on the position of third parties within the public enforcement procedures conducted by the Commission. However, the Commission forcefully resisted the attempts to reinforce the status of third parties within these procedures, as shown by the stance that it took in Sytraval13 and in the legislative proposal at the origin of the first procedural regulation in this area.14 In both the judicial and the legislative arenas, the Commission was successful in defending the ‘bilateral’ character of State aid procedures,15 as an almost exclusive dialogue between the Commission and Member States, with hardly any rights for private actors (be it beneficiary undertakings or competitors and other third parties).16 This is the context in which the Commission started promoting the private enforcement of State aid law. In 1994, the Commission published its first ‘Notice on cooperation between national courts and the Commission in the State aid field’, where it summarized the case law of the Court of Justice on the role of national courts in the enforcement of the rules on State aid.17 The Notice evinced the willingness of the Commission to foster third-party actions before national courts.18 The logic behind this move was clear: divesting third parties through national courts would relax the pressure to give them greater voice within the Commission’s own procedures; at the same time, it would transform those very same parties into the Commission’s allies in the task of spotting and fighting unlawful State aid. The interest raised by the private enforcement of State aid law at the turn of the century is also connected to the decentralization of the system of State aid control. The Enabling Regulation passed in 1998 allowed the Commission to establish a de minimis threshold and to 30(2) Common Market Law Review 311; Michel L Struys, ‘Questions choisies de procédure en matière d’aides d’état’ (1993) 29(1) Revue Trimestrielle de Droit Européen 17; Luc Gyselen, ‘La transparence en matière d’aides d’État: Les droits des tiers’ (1993) 3(4) Cahiers de Droit Européen 417; Evanna Fruithof, ‘Procedural Anomalies in State Aid Cases’ (1994) 10 European Business Law Review 227; Leigh Hancher, ‘State Aids and Judicial Control in the European Community’ (1994) 15(3) European Competition Law Review 134; Michel L Struys and Henry Abbott, ‘The Role of National Courts in State Aid Litigation’ (2003) 28(2) European Law Review 172. 10 Wolfgang Mederer, ‘Evolution of State Aid Control’ in Wolfgang Mederer et al (eds), EU Competition Law (Claeys & Casteels 2008). 11 Case C-198/91 Cook v Commission [1993] EU:​C:​1993:​197. 12 Case T-95/94 Sytraval v Commission [1995] EU:​T:​1995:​172. 13 Case C-367/95 P Commission v Sytraval [1998] EU:​C:​1998:​154. 14 Council Regulation No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union [1999] OJ L 83/1, repealed and replaced by Council Regulation (EU) 2015/1589 (n 4). 15 Jacques Derenne and Cédric Kaczmarek, ‘La récupération des Aides illégales: le rôle du juge national dans le “private enforcement” du droit des aides d’état’ (2009) 10(2) ERA Forum 251, 253. 16 See, eg, Claus-Dieter Ehlermann, ‘State Aids under European Community Competition Law’ (1994) 18(2) Fordham International Law Journal 410, 430; Michael Niejahr and Tibor Scharf, ‘Third Parties in State Aid Control: More Than Just a Source of Information?’ in EC State Aid Law/Le droit des aides d’État dans la CE. Liber Amicorum Francisco Santaolalla Gadea (Kluwer Law International 2008) 348–9; Adinda Sinnaeve, ‘Procedures before the Commission, Council Regulation 659/1999’ in Martin Heidenhain (ed), European State Aid Law (Verlag C.H. Beck 2010) 575. 17 Notice on cooperation between national courts and the Commission in the State aid field [1995] OJ C 312/8. 18 Ibid para 3.

The private enforcement of State aid law  229 exempt certain categories of State aid from the notification requirement.19 The Commission made use of this power for the first time in 2001, with the adoption of the first de minimis20 and block exemption regulations.21 In the following years, the Commission extended the exemption to other categories, in line with the decentralization philosophy of its State Aid Action Plan,22 before adopting a general block exemption regulation.23 As a result of these developments, it became possible for Member States to implement many State aid measures without going through the previous control of the Commission. The ultimate goal of the reform was to relieve the Commission from the need to scrutinize the most innocuous forms of State aid and to give priority to the most distortive cases.24 The point to note is that this shift made private enforcement all the more important, because third-party actions before national courts were called to play an important role in ensuring that Member States would not abuse the de minimis and block exemption regulations.25 The idea that less ex ante/centralized control called for more ex post/decentralized supervision was not new. It was one of the driving forces behind the reforms that EU antitrust law was also going through at that time, which were obviously an important source of inspiration for State aid.26 The evolution of the system of State aid control during the last decade has followed the same trends. The Commission’s State Aid Modernisation plan published in 2012 insisted on the idea of focusing Commission ex ante scrutiny on ‘cases with the biggest impact on internal market’.27 In order to achieve that goal, the Commission raised the de minimis threshold28 and

19 Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid [1998] OJ L 142/1, subsequently repealed and replaced by Council Regulation (EU) 2015/1588 of 13 July 2015 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to certain categories of horizontal State aid [2015] OJ L 248/1 [‘General Block Exemption Regulation’]. 20 Commission Regulation (EC) No 69/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to de minimis aid [2001] OJ L 10/30. 21 Commission Regulation (EC) No 68/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to training aid [2001] OJ L 10/20 and Commission Regulation (EC) No 70/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises [2001] OJ L 10/33. 22 Commission, ‘State Aid Action Plan. Less and better targeted state aid: a roadmap for state aid reform 2005–2009’ (Consultation document) COM (2005) 107 final. 23 Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty [2008] OJ L 214/3 (de minimis Regulation). 24 Commission, ‘State Aid Action Plan’ (n 22) para. 17. 25 Ibid para 56. 26 Commission, ‘White Paper on the Modernisation of the Rules Implementing Articles 85 and 86 of the EC Treaty’ COM (1999) 101 final, para 75 and Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty [2003] OJ L 1/1, Recital 7. 27 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions EU State Aid Modernisation (SAM) COM (2012) 0209 final, para 23. 28 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid [2013] OJ L 352/1.

230  Research handbook on European State aid law added new categories to the new block exemption regulation.29 As a result of these developments, most State aid granted by Member States need not go through the ex ante control of the Commission.30 This is one of the reasons why private enforcement is more important than ever as a tool to ensure compliance with the rules on State aid.31 It is also the main reason why the private enforcement of State aid law remains a topical issue in legal scholarship32 and why it is apposite to reflect upon the topics that warrant further academic elaboration.

3.

THE RIGHTS OF THIRD PARTIES AND THE ROLE OF NATIONAL COURTS IN THE PRIVATE ENFORCEMENT OF STATE AID LAW

The private enforcement of State aid law relies on a technique that is quite common in Union law, namely, the transformation of the objective obligations that Union law imposes upon Member States into subjective, actionable rights that private parties may litigate before national courts.33 From a doctrinal perspective, the first challenge raised by the private enforcement of State aid law is the determination of the scope and implications of this right. Before going any further, it is worth stressing that the reference to the rights of third parties and the reference to the obligations of national courts are essentially two different ways of framing the same problem.34 Some case law and scholarship place the lens on the legal status of third parties and use the language of rights to describe the outcomes to which they are entitled, as a matter of State aid law. The advantage of this formulation is that it highlights that, at the end of the day, the effectiveness of private enforcement depends on the willingness of third parties to institute proceedings and to apply for the remedies that Union law puts at their disposal. Other cases and studies place the lens on national courts and on the tasks and duties that State aid law place upon their shoulders, in order to achieve the objectives of the discipline. The added value of this court-centred formulation is that it highlights that the effective enforcement of State aid law ultimately depends on the willingness and capacity of national courts to achieve the outcomes mandated by Union law.

29 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty [2014] OJ L 187/1 (General Block Exemption Regulation). 30 According to the 2018 State Aid Scoreboard of the Commission, 96% of State aid measures reported since 2015 fell under the General Block Exemption Regulation. 31 Commission SAM (n 27) para 21. 32 See the monographic volume on the topic published in (2017) 16 European State Aid Law Quarterly Journal. See also, more recently, Ferdinand Wollenschläger, Wolfgang Wurmnest and Thomas MJ Möllers (eds), Private Enforcement of European Competition and State Aid Law: Current Challenges and the Way Forward (Wolters Kluwer 2020); Pier L Parcu, Giorgio Monti and Marco Botta (eds), EU State Aid Law. Emerging Trends at the National and EU Level (Edward Elgar Publishing 2020). 33 See, eg, Bruno de Witte, ‘Direct Effect, Primacy and the Nature of the Legal Order’ in Paul P Craig and Gráinne de Búrca (eds), The Evolution of EU Law (Oxford University Press 2011). 34 Martin Köhler, ‘Private Enforcement of State Aid Law – Problems of Guaranteeing EU Rights by means of National (Procedural) Law’ (2012) 11(2) European State Aid Law Quarterly 369.

The private enforcement of State aid law  231 3.1

The Right Against Unlawful State Aid

The private enforcement of State aid law rests upon the direct effect of the standstill clause of Article 108(3) TFEU, which grants upon third parties the right not to endure with State aid measures unless and until they receive the green light of the Commission.35 The interpretation of this provision in the broader context of the discipline makes it possible to refine even further the scope of this right. On the one hand, it is necessary to account for the fact that the Commission may authorize the implementation of State aid plans subject to certain conditions.36 When this is the case, third parties may request compliance with those conditions and take issue with instances of ‘misuse’ of State aid.37 Thus, it is more accurate to state that third parties are entitled not to endure with State aid measures unless, until and to the extent that they are authorized by the Commission. On the other hand, the right of third parties discussed here is not absolute, in the sense that there are exceptional circumstances in which Member States may lawfully implement their plans to grant State aid without securing the prior approval of the Commission. This is the case when the measures that they put in place are below the threshold defined by the de minimis regulation (although, technically speaking, this means that the measures in question do not constitute State aid),38 or when they are covered by the block exemption regulation (exempted State aid),39 or when they are the by-product of a previously authorized State aid scheme (in which case they constitute ‘existing State aid’).40 However, in order to qualify as de minimis, exempted or existing State aid, these measures have to satisfy all the formal and substantive conditions applicable in each case. Otherwise, they are still caught by the standstill and notification obligation.41 The jargon of the discipline has coined a specific term to refer to the different situations in which the implementation of State aid would be contrary to Union law. Article 1(f) PR defines ‘unlawful aid’ as ‘new aid put into effect in contravention of Article 108(3) TFEU’. In principle, this only encompasses State aid measures that have not been cleared by the Commission, despite their not being covered by a previously approved State aid scheme, the de minimis or the block exemption regulations.42 However, the concept of ‘unlawfulness’ can be predicated – more broadly – upon all State aid measures whose implementation is forbidden, including those that have been the object of a declaration of incompatibility embodied in a negative Case 120-73 Lorenz v Germany (n 8) para 8. Article 9(4) PR. 37 Paul Adriaanse, ‘Public and Private Enforcement of EU State Aid Law. Legal Issues of Dual Vigilance betweeen the Commission and National Courts’ in Hermann-Josef Blanke and Stelio Mangiameli (eds), The European Union after Lisbon (Springer 2012), 460. 38 Commission Regulation (EU) No 1407/2013 (n 28). See also Joined Cases C-197/11 and C-203/11 Eric Libert v Gouvernement flamand [2013] EU:​C:​2013:​288, para 81. 39 Commission Regulation (EU) No 651/2014 (n 29). 40 Article 108(1) TFEU. 41 See, eg, in the case of State aid incorrectly granted under the block exemption regulation: Case C-349/17 Eesti Pagar AS v Ettevõtluse Arendamise Sihtasutus and Majandus- ja Kommunikatsiooniministeerium [2019] EU:​C:​2019:​172, paras 87 and 94. 42 Viktor Kreuschitz and Nuria Bermejo, ‘The Role of National Courts in the Enforcement of the European State Aid Rules’ in Vesna Tomljenović et al (eds), EU Competition and State Aid Rules. Public and Private Enforcement (Springer 2017), 225, who note that EU courts indistinctly use the terms ‘unlawful’, ‘illegal’ and ‘invalid’ State aid. 35 36

232  Research handbook on European State aid law decision (or in a conditional decision, inasmuch as they contradict the restrictions imposed therein). This is because the main effect of these decisions is to confirm that the measures at stake are subject to the implementation ban to which State aid measures are subject by default, ex Article 107(1) TFEU. Understood in those terms, the concept of unlawfulness demarcates the scope of the right that drives the private enforcement of State aid law, which boils down to a ‘right against unlawful State aid’. In order to spell out the implications of this right, it is useful to analyse separately its ‘prophylactic’ and its ‘restorative’ dimensions.43 Both functions are considered separately. However, national courts are often called to discharge both functions simultaneously, especially in connection to State aid measures whose implementation is staggered over a long period of time (eg, because they are to be paid out in different instalments and/or because they have multiple potential beneficiaries). If seized when implementation is already underway, national courts may have to impede any further payments and to undo the effects produced by those which already took place. 3.2

The Prophylactic Dimension of the Right Against Unlawful State Aid

The prophylactic dimension of Article 108(3) TFEU implies that third parties are entitled, as a matter of Union law, to prevent unlawful State aid measures from actually reaching their beneficiaries. The other side of the coin is that the first mission of national courts, when faced with an action against unlawful State aid measures, is to impede their implementation (or to prevent it from going any further, if it is already underway). Interim remedies may be necessary to prevent the implementation of unlawful State aid measures in the course of national judicial proceedings.44 However, the recent Study on the enforcement of State aid rules and decisions by national courts observes that the award of this type of remedies is actually very low, an issue that deserves further attention.45 In any event, the role of national courts in this area ‘goes beyond that of a judge ruling on an application for interim relief’.46 This oft-repeated proposition is crucial to understand the prophylactic function of national courts, because it indicates that there is no reason why they should restrict themselves to administering interim (as opposed to definitive) remedies.47 If, for example, national administrative law treats the violation of the notification and standstill clause as a procedural flaw that affects the validity of unlawful State aid measures, a provisional suspension order may not be enough. While this may be the right thing to do in order to ensure the effectiveness of the action, national courts are expected to draw all ‘appropriate

43 Fernando Pastor-Merchante and Giorgio Monti, ‘The functions of national courts in the private enforcement of State aid law’ in Pier L. Parcu, Giorgio Monti and Marco Botta (eds), EU State Aid Law. Emerging Trends at the National and EU level (Edward Elgar Publishing 2020). 44 Case C-590/14 P Dimosia Epicheirisi Ilektrismou AE (DEI) v Commission [2016] EU:​C:​2016:​797, para 101. 45 Giorgio Monti, Leigh Hancher et al, Study on the enforcement rules and decisions of State aid by national courts (Publications Office of the European Union 2019), 89. 46 Case C-39/94 Syndicat Français de l’Express International (SFEI) v La Poste and others [1996] EU:​C:​1996:​285, para 67. 47 Kreuschitz and Bermejo, in Vesna Tomljenović et al (eds) (n 42) 240.

The private enforcement of State aid law  233 conclusions’ from the unlawfulness of the contested measures and in this hypothesis this would mean quashing the legal instrument through which that measure was approved.48 3.3

The Restorative Dimension of the Right Against Unlawful State Aid

The restorative dimension of Article 108(3) TFEU implies that third parties are entitled to the retroactive elimination of the effects produced by the unlawful implementation of State aid measures. In this context, third parties may request recovery of unlawful State aid measures. However, recovery is a necessary but not sufficient condition to wipe out the effects produced by unlawful State aid measures. This is the reason why third parties may also request recovery of the illegality interest and – under certain conditions – compensation of damages and restitution of the charges levied to finance unlawful State aid measures. a. Recovery Recovery is a term of art that generically refers to the process through which unlawfully implemented State aid measures are withdrawn from the market.49 Its meaning is straightforward in the case of subsidies and tax measures (where recovery means taking away from the beneficiaries the value of the subsidies or tax benefits initially granted upon them). However, its meaning is more elusive in other contexts, such as state guarantees 50 – something that requires further academic elaboration.51 One thing is clear, though: even if third parties could often prefer to avail themselves of the financial advantage granted to their competitors (rather than having it eliminated altogether), national courts may not grant this kind of remedy. Although, in theory, such an extension could serve to deprive State measures of financial support to firms from their selective character (and hence from their consideration as ‘State aid’), the Court of Justice does not accept this formal elimination of State aid measures as a substitute for their actual withdrawal.52 While the rationale behind this rule is clear (State aid law seeks the elimination of unlawful State aid measures, rather than their extension), there are certain problems attached to it. The main one is that the use of recovery as the main sanction for unlawfulness fares very poorly in terms of deterrence. After all, recovery inflicts a loss upon State aid beneficiaries but not upon granting authorities, which are – formally speaking at least – the ones responsible for the approval of unlawful measures and the ones bound by the discipline on State aid.53 Furthermore, from the 48 Case C-369/04 Transalpine Ölleitung in Österreich GmbH and others v Finanzlandesdirekction für Tirol and others [2006] EU:​C:​2006:​644, para 47. 49 Case C-39/94 (SFEI) (n 46) para 68; Case C-369/04 Transalpine (n 48) para 56. 50 Case C-672/13 OTP Bank Nyrt v Magyar Állam and Magyar Államkinscstár [2015] EU:​C:​2015:​ 185; Case C-690/13 Trapeza Eurobank Ergasias AE v Agrotiki Trapeza tis Ellados AE (ATE) and Pavlos Sidiropoulos [2015] EU:​C:​2015:​235. 51 Eg, Daniel Harrison, ‘The Curious Contractual Consequences of a Finding of Unlawful State Aid’ (2017) 16(3) European State Aid Law Quarterly 497; John Temple Lang, ‘EU State Aid Rules – The Need For Substantive Reform’ (2014) 13(3) European State Aid Law Quarterly 440; Pablo Ibáñez Colomo, ‘The Impact of EU State Aid Law on National Private Law’ in Hans-Wolfgang Micklitz and Carla Sieburgh (eds), Primary EU Law and Private Law Concepts (Intersentia 2017). 52 Joined Cases C-393/04 and C-41/05 Air Liquide Industries Belgium SA v Ville de Seraing [2006] EU:​C:​2006:​403, para 45; Case C-369/04 Transalpine (n 48) para 49. 53 Jeremy Lever, ‘EU State Aid Law – Not a Pretty Sight’ (2013) 12(1) European State Aid Law Quarterly 5, 7; John T Lang, ‘EU State Aid Rules’ (n 51); Giorgio Monti, ‘Recovery Orders in State Aid Proceedings: Lessons from Antitrust?’ (2011) 10(3) European State Aid Law Quarterly 415, 416.

234  Research handbook on European State aid law perspective of the private enforcement of State aid law, the prospect of securing recovery is not necessarily a strong incentive to litigate, since it does not entail a direct and tangible benefit for the applicant. From these two perspectives, the centrality of recovery to the remedial rules on State aid calls for further academic consideration. Despite the centrality of recovery to the restorative dimension of the right against unlawful State aid, there are exceptional circumstances where national courts may refrain from granting this remedy. The very narrow interpretation given to the ‘absolute impossibility’54 and ‘legitimate expectations’55 exceptions is something that requires further thinking, if only because it reflects a clear imbalance between the weight given to the goal of avoiding State aid and the competing public interest considerations served by these exceptions. However, it is the third exception that is the one that raises more problems: after some hesitations, the Court of Justice has made it clear that, as a matter of Union law, third parties are not entitled to request recovery of (procedurally) unlawful but (substantively) compatible State aid measures, once cleared by the Commission.56 The rationale behind this rule is that recovery becomes redundant from the moment it is lawful to implement a measure of State aid. Since the main effect of the Commission’s declaration of compatibility is to clear pro futuro the implementation of State aid measures, forcing granting authorities to recover those measures as a precondition to (re)implement them would be a meaningless formality. However, the rule is not exempt from difficulties, amongst other things because it seems to lower the incentives to comply with the standstill and notification obligation in the first place.57 Furthermore, its scope is also controversial: in theory, national courts may only dispense with recovery once the Commission has formally declared the compatibility of unlawful State aid measures; however, some authors believe that they should also be allowed to do so when they have reason to believe that the Commission will subsequently adopt that decision.58 There is a paragraph in the controversial Deutsche Lufthansa case that could support this idea, yet only in the context of third-party actions backed by an interlocutory decision of the Commission.59 Finally, it should be noted that recovery is not limited to the nominal amount of financial support unlawfully granted upon State aid beneficiaries, for it also includes the so-called ‘illegality interest’. Although secondary law only provides for recovery of the illegality interest

54 Joined Cases C-393/04 and C-41/05 Air Liquide Industries (n 52) para 45; Case C-369/04 Transalpine (n 48) para 49. See Monti, ‘Antitrust’ (n 53). 55 Joined Cases T-116/01 and T-118/01 P & O European Ferries (Vizcaya) SA and Diputación Foral de Vizcaya v Commission [2003] EU:​T:​2003:​217. The judgment of the (then) Court of First Instance was upheld in Joined Cases 442/03 P and C-471/03 P P & O European Ferries (Vizcaya) SA and Diputación Foral de Vizcaya v Commission [2006] EU:​C:​2006:​356. 56 Case C-199/06 Centre d’exportation du livre Français (CELF) v Société internationale de diffusion et d’édition (SIDE) [2008] EU:​C:​2008:​79, para. 52. 57 Paul C Adriansee, ‘Appropriate Measures to Remedy the Consequences of Unlawful State Aid’ (2009) 2(1) Review of European Administrative Law 73, 85; Paolisa Nebbia, ‘State Aid and the Role of National Courts’ in Erika Szyszczak (ed), Research Handbook on European State Aid Law (1st edition, Edward Elgar Publishing 2011), 394. 58 José Luis Buendía Sierra and Miguel Ángel Bolsa Ferruz, ‘State Aid Assessment: What National Courts Can Do and What They Must Do’ (2017) 16(3) European State Aid Law Quarterly 408, 414. A contrario, Denis Jouve, ‘Recovering Unlawful and Incompatible Aids by National Courts: CELF and Scott/Kimberly Clarks Cases’ (2017) 16 European State Aid Law Quarterly 367. 59 Case C-284/12 Deutsche Lufthansa AG v Flughafen Frankfurt-Hahn GmbH [2013] EU:​C:​2013:​ 755, para 43.

The private enforcement of State aid law  235 in the context of recovery orders made by the Commission,60 the Court of Justice has made it clear that granting authorities are equally obliged to demand from the recipient payment of the illegality interest in the absence of a recovery order from the Commission.61 This also affects national courts.62 In the absence of EU legislation on the subject, the calculation of interest must be done in accordance with national law, but the recipient must be ordered to pay interest for the whole period of unlawfulness ‘at a rate equivalent to that which would have been applied if the beneficiary had had to borrow the amount of the aid at issue on the market’.63 In theory, recovery of the illegality interest must be ordered as a complement to recovery of the value of the contested measure itself. However, it becomes a stand-alone remedy when unlawful State aid measures are subsequently declared compatible by the Commission.64 While the logic behind this remedy is clear, its administration is not easy in practice and there seems to be room for further academic reflection on the methodology that national courts should employ in order to calculate it.65 b. Damages Third parties are also entitled to claim compensation for any damages suffered as a result of the unlawful implementation of State aid measures.66 Since the addressees of the rules on State aid are Member States, the right to damages of third parties is in principle enforceable against granting authorities (rather than against State aid beneficiaries).67 This remedy is crucial to the private enforcement of State aid law, because it is one of the strongest incentives that third parties have to litigate in this area – for, as noted earlier, the benefit that they derive from securing recovery is more remote, since the financial advantage initially bestowed upon State aid beneficiaries simply goes back to the State. This is the reason why this remedy is so central to the literature on the private enforcement of State aid and why it is likely to continue looming large in the future.68 From an empirical perspective, it is necessary to continue working in the direction of the recent Study on the enforcement of State aid rules and decisions by national courts and to collect data on the recurrence and fate of this type of action.69 The Study, which covers 766 judgments ruled from 2007 to 2017, notes an increase in the volume of cases litigated before

Article 16(2) PR. Case C-349/17 Eesti Pagar AS (n 41) para 133. 62 Case C-199/06 CELF (n 56) para 52. 63 Case C-349/17 Eesti Pagar AS (n 41) para 141. 64 Case C-199/06 CELF (n 56) para 55. 65 Article 9 of Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty [2004] OJ L 140/1, as amended by Commission Regulation (EC) No 271/2008 of 30 January 2008 [2008] OJ L 82/1. See also Commission notice on the enforcement of State aid law by national courts [2009] OJ C 85/1, paras 37–42. 66 Case C-39/94 SFEI (n 46) para 75; Case C-199/06 CELF (n 56) para 55. 67 Ibid para 74. 68 See, eg, Michel Honoré and Nanna Eram Jensen, ‘Damages in State Aid Cases’ (2011) 10(2) European State Aid Law Quarterly 265; Barbara Brandtner, Thierry Beranger, and Christof Lessenich, ‘Private State Aid Enforcement’ (2010) 9(2) European State Aid Law Quarterly 23; Joanna Goyder and Margot Dons, ‘Damages Claims Based on State Aid Law Infringements’ (2017) 16(3) European State Aid Law Quarterly 418. 69 Monti, Hancher et al (n 45) 89. 60 61

236  Research handbook on European State aid law national courts in comparison with its precedent 2006 and 2009 studies.70 However, it also confirms that these actions are seldom successful.71 It is therefore necessary to continue exploring this phenomenon along the two axes followed so far by legal scholarship. On the one hand, it is necessary to take stock of the reasons why actions for damages are not more frequent and successful in State aid. Some of the reasons suggested so far are the fact that the rules on State aid are relatively complex and little known,72 the costs associated with cross-border litigation,73 and the incentives that some actors have to avoid biting the hand that feeds them.74 However, there is a broad consensus that the main hurdle lies in the need to establish causation and to quantify the loss suffered as a result of unlawful State aid measures.75 Proving causation is particularly problematic in this context, because it generally involves a ‘two-step test of causality’ – in the sense that it is necessary to prove, first of all, a causal link between the grant of State aid and the damaging behaviour of the beneficiary (‘upstream causation’) and, secondly, another causal link between that behaviour and the harm suffered by the applicant (‘downstream causation’).76 Proving and quantifying that harm is also problematic, especially when it consists in a loss of market share rather than in the forfeiture of a specific business opportunity.77 On the other hand, it is necessary to reflect upon the strategies that could be used to overcome these obstacles. The focus is normally put on the EU institutions rather than on national authorities, because the latter have no incentives to facilitate actions against themselves.78 Over the last two decades, the Commission has deployed an ambitious outreach policy aimed at promoting knowledge of the rules on State aid amongst all stakeholders, including national courts. The multiple communications and soft-law instruments that the Commission has adopted on this topic are part of that strategy79 and so are the training programs for national 70 Thomas Jestaedt, Jacques Derenne and Tom Ottervanger (coords), Study on the Enforcement of State Aid at National Level (Publication Office of the European Union 2006); Jacques Derenne (dir), 2009 Update of the 2006 Study on the Enforcement of State Aid Rules at National Level (Lovells 2009). 71 Study on the enforcement rules and decisions of State aid by national courts (Publications Office of the European Union 2019), 90; Alvaro Ummen Almeida, ‘Private Enforcement of EU State Aid Law through Damages Claims: Achieving Effective Redress’ (2019) 18(2) European State Aid Law Quarterly 169. 72 James Flynn, ‘The Role of National Courts’ in Andrea Biondi, Piet Eeckhout and James Flynn (eds), The Law of State Aid in the European Union (Oxford University Press 2004), 330–1; Adinda Sinnaeve, ‘Editorial: What to Expect from National Courts in the Fight against Unlawful State Aid?’ (2005) 4(1) European State Aid Law Quarterly 1, 2; Jacques Derenne and Cédric Kaczmarek, ‘La récupération des Aides illégales: le rôle du juge national dans le “private enforcement” du droit des aides d’état’ (2009) 10 ERA Forum 264, 264; 73 Derenne and Kaczmarek (n 72) 264. 74 Flynn, in Biondi, Eeckhout, and Flynn (eds) (n 72) 332. 75 Study on the enforcement rules and decisions of State aid by national courts (n 71), 90; Flynn, in Biondi, Eeckhout, and Flynn (eds) (n 72) 332; Derenne and Kaczmarek (n 72) 259; Brandtner, Beranger and Lessenich (n 68) 26; Honoré and Jensen (n 68); José Antonio Pérez Rivarés, ‘La aplicación del Derecho de la Unión Eropea sobre ayuduas estatales por los tribunales nacionales’ (2012) 42 Revista de Derecho Comunitario Europeo 37; Georg M Berrisch and Brian R Byrne, ‘Common EU Law Principles of Private Enforcement of State Aid’ in Leigh Hancher, Adrien de Hauteclocque and Francesco Maria Salerno (eds), State Aid and the Energy Sector (Hart 2018), 375. 76 Honoré and Jensen (n 68) 271; Almeida (n 71) 174. 77 Goyder and Dons (n 68) 423. 78 Honoré and Jensen (n 68) 282. 79 Honoré and Jensen (n 68) 284.

The private enforcement of State aid law  237 judges.80 Some commentators believe that the Commission could do more, for example addressing more squarely the problem of causation in its communications81 and individual decisions,82 or relaxing the rules on access to the file for third parties.83 Through its case law, the Court of Justice has also played a crucial role in clarifying the doctrinal foundations of these actions and, again, one of the tasks of legal scholarship is to identify issues that deserve further guidance on its side, such as the issue of upstream causation.84 Finally, the EU legislator is also under the spotlight, especially after the adoption of the Directive on antitrust damages actions.85 The question is whether a similar directive could be appropriate and useful in the field of State aid.86 Finally, a word is due on the possibility of seeking damages against the beneficiaries of State aid. As already noted, Union law does not provide a legal basis for third-party claims against State aid beneficiaries, because the addressees of the rules on State aid are Member States and not private undertakings.87 However, the Court of Justice has explicitly held that nothing precludes these horizontal claims when it is possible to ground them on national law,88 in what seems to be an invitation to try this course of action.89 Although the national laws on tort and on unfair commercial practices of some Member States allow this type of actions, it remains a relatively marginal phenomenon.90 In any event, some commentators believe that its potential has not been fully unlocked yet, which is why legal scholarship should keep an eye on it.91 c. Restitution of charges levied to finance unlawful State aid measures Finally, in certain circumstances, third parties are also entitled to request restitution of the charges levied to finance unlawful State aid measures. In order to understand this remedy, it is important to bear in mind that, as a general rule, ‘those liable to pay a tax cannot rely on the argument that the exemption enjoyed by other businesses constitutes State aid in order to avoid payment of that tax’.92 This would be tantamount to claiming an extension of the scope 80 John Coughlan et al, Study on judges’ training needs in the field of European competition law (Publication Office of the EU 2016); Erika Szyszczak, ‘National Judges and Training in EU State Aid Law’ (2017) 16(3) European State Aid Law Quarterly 470. 81 Goyder and Dons (n 68) 423. 82 Honoré and Jensen (n 68) 286. 83 Lang, ‘EU State Aid Rules’ (n 51). 84 Honoré and Jensen (n 68) 282. 85 Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union [2014] OJ L 349/1. 86 Ferdinand Wollenschläger and Wolfgang Wurmnest, ‘Comparative Analysis and the Way Forward’ in Ferdinand Wollenschläger, Wolfgang Wurmnest and Thomas MJ Möllers (eds), Private Enforcement of European Competition and State Aid Law. Current Challenges and the Way Forward (Wolters Kluwer 2020), 386. 87 Case C-39/94 (SFEI) (n 46) paras 74–5. 88 Ibid. 89 Fernando Pastor-Merchante, The Role of Competitors in the Enforcement of State Aid Law (Hart 2017), 62. 90 Goyder and Dons (n 68) 430. 91 Almeida (n 71) 170. 92 Case C-390/98 H.J. Banks & Co. Ltd v The Coal Authority and Secretary of State for Trade and Industry [2001] EU:​C:​2001:​456, para 80; Joined Cases C-393/04 and C-41/05 Air Liquide Industries (n 52) para 43.

238  Research handbook on European State aid law of unlawful State aid measures in lieu of their elimination, which is something proscribed by the rules on State aid. Third parties are only entitled to a refund of the taxes or fees levied upon them when they form ‘an integral part’ of the State aid measure.93 This is only when they are ‘hypothecated to the aid measure under the relevant national rules, in the sense that the revenue from the tax is necessarily allocated for the financing of the aid and has a direct impact on the amount thereof’.94 Such hypothecation exists, for example, when the only purpose behind the contested contribution is the financing of specific companies or sectors.95 From an academic perspective, the main challenge on this front is to polish the meaning of this test, whose open-worded formulation is an important source of uncertainty.

4.

THE INTERPLAY BETWEEN PROCEDURAL AUTONOMY AND EFFECTIVENESS IN THE FIELD OF STATE AID

The recognition of the rights that third parties derive from the rules on State aid has not gone hand in hand with a harmonization of the procedural rules that govern the actions to which they may give rise. It is therefore for the domestic law of Member States to govern procedural issues such as the type of legal action that is appropriate in each case, the courts that have jurisdiction over these actions, and the rules on standing and time limits to which they are subject.96 However, the so-called ‘principle of procedural autonomy’ is subject to certain restrictions, the most important of which are the principles of ‘effectiveness’ and ‘equivalence’.97 The principle of effectiveness is the most relevant here, because it is the main doctrinal tool used by the European judicature to make inroads into the procedural autonomy of Member States. Indeed, the principle of effectiveness provides that the procedural and remedial rules of Member States must not make it ‘practically impossible’ or ‘excessively difficult’ to exercise the rights that private parties derive from Union law.98 This opens an important field of research regarding the conformity of the procedural rules of Member States with the outcomes mandated by State aid law. 4.1

Standing

One of the issues that deserves further investigation is the interplay between the direct effect of the standstill clause of Article 108(3) TFEU and the rules of standing that govern access to national courts. The subjective scope of the right against unlawful State aid that the case law of the European judicature has read into Article 108(3) TFEU is very broad. Indeed, the beneficiaries of this right are ‘interested parties’, a very general category that comprises ‘any 93 Case C-174/02 Streekgewest Westelijk Noord-Brabant v Staatssecretaris van Financiën [2005] EU:​C:​2005:​10, para 26. 94 Joined Cases C-393/04 and C-41/05 Air Liquide Industries (n 52) para 45. 95 Eg, Fund for Animal Health and Livestock Production at stake in Case C-17/91 Lornoy and others v Belgium [1992] EU:​C:​1992:​514 and Case C-284/12 Van Calster and others [2013] EU:​C:​2013:​755. 96 Case C-33/76 Rewe-Zentralfinanz eG and Rewe-Zentral AG v Landwirtschaftskammer für das Saarland [1976] EU:​C:​1976:​188, para 5. 97 Case C-368/04 Transalpine Ölleitung in Österreich GmbH and Others v Finanzlandesdirektion für Tirol and others [2006] EU:​C:​2006:​644, para 45. 98 Ibid.

The private enforcement of State aid law  239 person, undertaking or association of undertakings whose interests might be affected by the granting of aid, in particular the beneficiary of the aid, competing undertakings and trade associations’.99 This is an open-worded definition, so other actors may have the consideration of ‘interested party’. For example, it is settled case law that in certain cases taxpayers fall within the scope of protection of the standstill clause, in the sense that they are entitled to request the refund of any fees specifically levied in order to fund an unlawful State aid scheme.100 In principle, the rules of standing that govern third-party actions based on the standstill clause of Article 108(3) TFEU are determined by national procedural law. The stringency of these rules varies across jurisdictions – and across different types of actions within each jurisdiction.101 The application of these rules to third-party actions lodged against the approval or implementation of State aid measures may be problematic, because it may prevent some interested parties from exercising the right that they derive from Article 108(3) TFEU.102 The question is how to solve this kind of clashes but also, more generally, to what extent it is acceptable for the procedural laws of Member States to narrow down the circle of potentially interested parties who have standing to fight unlawful State aid measures. 4.2

Actions and Remedies

Another issue that deserves further investigation is the very existence, under the national laws of Member States, of adequate actions and remedies to enforce the rights that third parties derive from State aid law. As already noted, the case law of the Court of Justice is very specific in the definition of the outcomes to which third parties are entitled in their fight against State aid (ie, the ‘remedies’ analysed in the previous section). However, the availability of these remedies ultimately depends on the national laws of Member States. The first problem is whether the national laws of Member States place at the disposal of third parties the procedural tools to challenge the approval and implementation of State aid measures. The issue is more complex than it seems, because the notion of State aid is an autonomous concept of Union law, which does not necessarily match the legal categories that structure the national procedural laws of Member States. From the standpoint of the national laws of Member States, different types of State aid are normally subject to different legal regimes, depending amongst other things on their location under the public/private law divide and, within the public law realm, on the nature of the legal instrument that embodies them (which may be an administrative decision, but also a general administrative regulation or even

Article 1(h) PR. Case C-174/02 Streekgewest Westelijk Noord-Brabant (n 93) para 19. 101 See, eg, François Lichère, ‘Private Enforcement in France’ in Ferdinand Wollenschläger, Wolfgang Wurmnest and Thomas MJ Möllers (eds), Private Enforcement of European Competition and State Aid Law. Current Challenges and the Way Forward (Wolters Kluwer 2020), 239; Sebastian Unger and David Hug, ‘Private Enforcement in Germany’ in ibid, 252; Roberto Caranta and Benedetta Biancardi, in ibid, 270; Jacobine E. van den Brink and Willemien den Ouden, ‘Private Enforcement in the Netherlands’ in ibid, 296 and 307; Luis Arroyo Jiménez and Patricia Pérez Fernández, ‘Private Enforcement in Spain’ in ibid, 320; Christopher Bovis, ‘Private Enforcement in the UK’ in ibid, 344. 102 Viktor Kreuschitz, ‘Decentralized Judicial Review and Enforcement of State Aid Decisions’ in Herwig C.H. Hofmann and Claire Micheau (eds), State Aid Law of the European Union (Oxford University Press 2016) 459; Brandtner, Beranger and Lessenich (n 68) 30. 99

100

240  Research handbook on European State aid law a piece of legislation).103 The point to note is that the litigation opportunities attached to these regimes may be heterogeneous, in the sense that some of them may be open to third-party challenges while others may restrict or foreclose this possibility. So the real question is whether the national laws of Member States foresee mechanisms to challenge each and every one of the very diverse set of measures that fall under the definition of State aid. Even if third parties have at their disposal the right tools to challenge State aid measures, the procedural rules that govern judicial proceedings may hamper the achievement of the outcomes mandated by Union law. For example, the national rules on evidence may place an excessive burden on the plaintiffs, making it virtually impossible to prove the existence of unlawful State aid. This is particularly problematic in the State aid context, given the information asymmetry between third parties and granting authorities.104 This is probably the reason why the Court of Justice has explicitly held that national courts must make use of all the tools at their disposal to facilitate the production of evidence (for example, requiring granting authorities and beneficiaries to produce particular documents).105 However, legal scholarship should not turn its back on this issue, because other procedural rules could raise problems in the future. Finally, the last problem is whether the remedial toolkit of national courts is adequate to safeguard their rights (ie, to achieve the outcomes mandated by State aid law).106 In order to frame this problem, it is necessary to observe that the case law of the European judicature does not constrain the means through which national courts are supposed to safeguard the rights of third parties. Indeed, the European jurisprudence is very clear when it comes to defining the outcomes to which third parties are entitled (immediate suspension of the prospective effects of State aid measures and retroactive elimination of their past effects). However, it does not constrain the means through which these outcomes must be achieved. So, for example, it does not require national courts to resort to definitive rather than to interim remedies if the latter are apt to effectively safeguard third-party rights. It does not require either to formally annul the instruments that approve State aid measures if it is possible to block and eliminate its effects through other means. This flexibility notwithstanding, the remedial toolkit of national courts may not always be sufficient to ensure the outcomes mandated by State aid law – for example, if it does not include any means to immediately thwart the implementation of certain State aid measures or to effectively recover them. 4.3

Legal Certainty

Another issue in need of further investigation are the obstacles to the private enforcement of State aid law arising from national procedural rules that serve the principle of legal certainty. As already noted, State aid law is not only concerned with the formal approval of State aid measures, but also with the effects that State aid measures deploy over time. This is the reason why it imposes on national courts the duty to block their implementation and to remove their effects, with no temporal limitation other than the ten-year period mentioned in Article 17

105 106 103 104

Pastor-Merchante and Monti in Parcu, Monti and Botta (eds) (n 43). Berrisch and Byrne in Hancher, Hauteclocque and Salerno (eds) (n 75) 364. Case C-526/04 Laboratoires Boiron [2006] EU:​C:​2006:​528, paras 55–7. Köhler (n 34) 369.

The private enforcement of State aid law  241 Procedural Regulation (PR). There are two different sets of national rules that can hinder the achievement of the outcome mandated by State aid law. The first set of rules are the national regimes on the withdrawal of administrative decisions. Indeed, the administrative laws of Member States often condition the possibility of suspending and ordering recovery of State measures to the withdrawal of the administrative decision through which they were originally approved. However, this possibility is normally subject to strict conditions, both substantive (eg, limited number of reasons that justify withdrawal) and procedural (eg, limitation periods and formalized procedures to sanction withdrawal).107 These conditions may hinder the achievement of the outcomes mandated by State aid law – for example, if the limitation period for withdrawal is shorter than the ten-year period mentioned above or if the breach of the standstill clause does not fall under any of the reasons that allow withdrawal after that period.108 Needless to say, this problem can also arise in other areas.109 However, the stance taken by the Court of Justice in the realm of State aid seems to be stricter than in other contexts, in the sense that it leaves hardly any room to balance the interest served by the rules on State aid against the principle of legal certainty and the values served by the national regimes on the withdrawal of administrative decisions.110 The second set of rules that can stand in the way of State aid litigation are the national regimes on res judicata, which entrench legal situations that have obtained the rubber stamp of a judgment against which there is no further appeal. The application of this principle in the State aid context is a source of problems. The problem typically arises when national courts dismiss third-party actions against State measures of financial support to firms, on the ground that they do not meet the definition of State aid. It may happen that the Commission subsequently investigates the same measures and reaches the opposite conclusion (ie, that they do meet the definition of State aid and that they must therefore be suspended and/or recovered). When this happens, the question is how to implement a Commission decision that is in flagrant contradiction with an earlier judgment, which is likely to have become final in the meantime. In Lucchini, the Court of Justice relied on the principle of primacy to hold that national courts are obliged to give full effect to the decisions of the Commission, even if this means sidestepping an earlier judgment.111 The reasoning of that judgment seems to rule out the possibility of balancing the Union interest against the interests served by the principle of res judicata, an option contemplated in other contexts.112 It is true that the Court has come back to this issue in subsequent cases and that, in Frucona, it even conceded that ‘Union law does not in all circumstances require

107 Xabier Arzoz Santiesteban, Revisión de actos administrativos nacionales en Derecho administrativo europeo (Civitas 2013). 108 Case C-24/95 Land Rheinland-Pfalz contra Alcan Deutschland GmbH [1997] EU:​C:​1997:​163, paras 27–38. 109 Eg, Case C-201/02 Delena Wells v Secretary of State for Transport [2004] EU:​C:​2004:​12, para 65; Joined Cases C-392/04 and C-422/04 i-21 Germany GmbH and Arcor AG & Co. KG v Germany [2006] EU:​C:​2006:​586, paras 58–72. 110 Florian Becker, ‘Application of Community Law by Member States’ Public Authorities: Between Autonomy and Effectiveness’ (2007) 44(4) Common Market Law Review 1035, 1049. 111 Case C-119/05 Ministero dell'Industria, del Commercio e dell’Artigianato v Lucchini SpA [2007] EU:​C:​2007:​434, para 63. 112 Case C-452/00 Kühne & Heitz NV v Produktschap voor Pluimvee en Eieren [2004] EU:​C:​2004:​17, para 28; Case C-2/06 Willy Kempter KG v Hauptzollamt Hamburg-Jonas [2008] EU:​C:​2008:​78, para 37.

242  Research handbook on European State aid law a national court to disapply domestic rules of procedure conferring the force of res judicata on a judgment, even if to do so would make it possible to remedy an infringement of European Union law by the judgment in question’.113 However, it is hard to escape the impression that the Court does not give a lot of weight to the principle of res judicata in the State aid context – as shown, for example, by Klausner Holz, where it held that the principle of effectiveness of Union law requires the circumvention of national judgments handed down in disputes that did not address the State aid dimensions of a case.114 The case law of the Court of Justice on the two problems analysed here suggests that the principle of legal certainty, as protected by the constitutional and administrative laws of Member States, deserves less deference in the field of State aid than in other areas of Union law. The reasons for that probably lie in the prophylactic philosophy that informs the rules on State aid and in the particular concerns raised by the problem of compliance in this field. In any event, it is an issue that calls for further academic thinking.

5.

THE INTERPLAY BETWEEN THE COMMISSION AND NATIONAL COURTS IN THE ENFORCEMENT OF STATE AID LAW

The Commission occupies a very peculiar position within the system of State aid control, which is why the interplay between judicial proceedings lodged before national courts and the administrative procedure of the Commission is – and will continue to be – a topical issue of research in the field of State aid law. The problem can be addressed from different angles. 5.1

The Separation Theory

The relationship between the Commission and national courts in the enforcement of State aid law is governed by the idea that their respective roles are ‘complementary but separate’.115 Through its case law, the Court of Justice has elaborated on this theory, which has a procedural and a substantive dimension.116 The procedural dimension of the separation theory manifests itself in the rule according to which the initiation by the Commission of a preliminary or formal investigation into an allegedly unlawful State aid measure does not release national courts from the obligation to safeguard the rights of individuals.117 This is the reason why national courts ‘may not stay’ proceedings where the Commission takes up a case concerning the same measure challenged by third parties.118 It is also the reason why national courts are not supposed to predict the likely 113 Case C-506/08 Commission v Slovak Republic [2010] EU:​C:​2010:​802, para 60 (where the national court judgment had become final prior to the adoption of the contradictory recovery decision of the Commission). 114 Case C-505/14 Klausner Holz Niedersachsen GmbH v Land Nordrhein-Westfalen [2015] EU:​C:​ 2015:​742, para 45. 115 Case C-284/12 Deutsche Lufthansa AG (n 59) para 27; Case C-505/14 Klausner Holz Niedersachen (n 114) para 20; Case C-39/94 (SFEI) (n 46) para 41. 116 Pastor-Merchante (n 89) 63. 117 Case C-39/94 (SFEI) (n 46) para 44. 118 Case C-199/06 CELF (n 56) para 40.

The private enforcement of State aid law  243 outcome of parallel Commission investigations: their task is to block and remedy the effects produced by unlawful State aid measures, irrespective of the likelihood that they ‘might’ turn out to be compatible with the common market.119 The substantive dimension of the separation theory manifests itself in the independence between the assessments made by the Commission and national courts in their respective decisions and judgments. The independence runs both ways. On the one hand, the procedural unlawfulness of State aid measures does not necessarily compromise their substantive compatibility: the Commission may not block State aid measures on the sole ground that they were granted in breach of the standstill and notification obligations.120 More importantly, the substantive compatibility of State aid measures does not cure their procedural irregularity: the adoption of a positive decision by the Commission does not release national courts from their restorative duty vis-à-vis the effects produced by those measures prior to their clearance by the Commission121 (although it does release them from the obligation of ordering recovery).122 The separation theory is not exempt from difficulties, which is why it should continue attracting the attention of legal scholarship. The main one is the risk of parallel outcomes leading to contradictory outcomes, an issue addressed in the next two sections. However, another issue worth mentioning are the practical difficulties raised by the procedural dimension of the theory. Indeed, there are good reasons why national courts may feel inclined to await or to predict the outcome of parallel Commission proceedings, the main one being that an eventual declaration of compatibility would make recovery redundant. In theory, this is not something that national courts should try to anticipate, but the temptation to halt or to slow down procedures to avoid the hassle of recovery is understandable, especially in complex and controversial cases. Some commentators have therefore advocated for the need to rethink this rule123 5.2

Conflict-Avoidance Tools

The separation theory cannot completely avert the risk of contradictory outcomes between Commission and national judicial proceedings. In theory, the substantive dimension of the separation theory implies that the issues ventilated before the Commission are different from the ones ventilated before national courts: the former turn on the substantive regularity (their ‘compatibility’) and the latter on the procedural regularity of the measures under scrutiny (their ‘lawfulness’).124 However, the Commission and national courts need to determine as a preliminary question whether the measures that they scrutinize meet the definition of State aid of Article 107(1) TFEU. This is where their respective findings may clash. The State aid discipline incorporates certain tools that seek to minimize the risk of contradiction. The broad interpretation given to the definition of State aid is one of them. As is well known, the administration of the notion of State aid does not require a fully-fledged economic analysis of the distortion of competition and effects on trade caused by State measures of

121 122 123 124 119 120

Case C-71/04 Administración del Estado v Xunta de Galicia [2005] EU:​C:​2005:​493, para 31. Case C-301/87 France v Commission (Boussac) [1990] EU:​C:​1990:​67, paras 12–24. Case C-354/90 FNCEPA and others v France EU:​C:​1991:​440, para 16. Case C-199/06 CELF (n 56) para 52. Sierra and Ferruz (n 58) 414. Case C-284/12 Van Calster and others (n 95) para 75.

244  Research handbook on European State aid law financial support to firms, despite the centrality of these elements to the language of Article 107(1) TFEU.125 One of the consequences of this arrangement is that national courts can easily presume the fulfilment of these conditions,126 which in turn reduces the risk of false negatives. It has also been argued that the standstill and notification obligation ‘does not only cover measures which unquestionably constitute aid … but also to measures whose very character as aid may appear to be in doubt’.127 This interpretation could be yet another choice in favour of overinclusion (although it remains contentious).128 It is clear, though, that the preliminary reference procedure is available in case of doubts.129 Furthermore, in the course of the last two decades, the Commission has developed an ambitious outreach policy aimed at increasing knowledge and awareness of the rules on State aid. The most obvious output of this policy are the numerous notices, communications and soft law instruments published by the Commission, many of which specifically target national courts.130 The training programs for national judges sponsored by the Commission also form part of this strategy.131 The effectiveness of this policy to ensure a uniform application of the rules on State aid is an issue worth of study. Another tool aimed at avoiding conflicts which has attracted a lot of attention in recent times are the so-called ‘cooperation tools’ between the Commission and national courts.132 The origin of these tools lies in the Notice on the enforcement of State aid law by national courts, where the Commission offered two forms of support for national courts: information requests (concerning pending Commission procedures and documents produced in that context)133 and opinion requests (concerning the economic, factual or legal matters at stake in national proceedings).134 These tools were subsequently incorporated into the Procedural Regulation, where they now have their own chapter . That chapter includes another cooperation tool, which is the Commission’s power to submit of its motion amicus curiae observations to the courts

125 See, eg, Christian Alhborn and Claudia Berge, ‘Can State Aid Control Learn from Antitrust? The Need for a Greater Role for Competition Analysis under the State Aid Rules’ in Andrea Biondi, Piet Eeckhout and James Flynn (eds), The Law of State Aid in the European Union (Oxford University Press 2004). 126 Conor Quigley, European State Aid Law and Policy (3rd edn, Hart 2015) 53. 127 Case 40/85 Belgium v Commission [1986] EU:​C:​1986:​152, Opinion of AG Bot, p 2332. See also Edoardo Gambaro, Alessandro Nucara and Luca Prete, ‘Pearle: So much Unsaid’ (2005) 4(1) European State Aid Law Quarterly 3; Honoré and Jensen (n 68) 272; Goyder and Dons (n 68) 423. 128 Cf, Adinda Sinnaeve, ‘State Aid Procedures. Developments since the Entry Into Force of the Procedural Regulation’ (2007) 44(4) Common Market Law Review 965, 968. 129 Eg, Case C-71/04 Administración del Estado (n 119). 130 Eg, Commission notice on the enforcement of State aid law by national courts [2009] OJ C 85/1; Communication from the Commission – Commission Notice on the recovery of unlawful and incompatible State aid [2019] OJ C 247/1. 131 Coughlan et al (n 80); Szyszczak (n 80). 132 Simone Donzelli, ‘The Role of the European Commission and the Cooperation with National Courts’ in Ferdinand Wolleschläger, Wolgang Wurmnest and Thomas MJ Möllers, Private Enforcement of European Competition and State Aid Law (Wolters Kluwer 2020); Simone Donzelli and Bernadette Willemot-Nieuwenhuys, ‘New trends in State Aid Enforcement by National Courts: Damages Claims and the State Aid Cooperation tools’ in Pier L Parcu, Giorgio Monti and Marco Botta (eds), EU State Aid Law. Emerging Trends at the National and EU level (Edward Elgar Publishing 2020). 133 Commission notice on the enforcement of State aid law by national courts (n 130), paras 82–88. 134 Ibid paras 89–96.

The private enforcement of State aid law  245 that are responsible for the application of the rules on State aid.135 Ten years after the entry of operation of the first cooperation tools, the Commission is making efforts to take stock of their usefulness. Indeed, this was one of the topics included in the tender at the origin of the recent Study on the enforcement of State aid rules and decisions by national courts, which concluded that national courts have not exploited these tools to their full potential and that the relatively little use of these tools is probably linked to the fact that many judges ignore their existence.136 5.3

The Principle of Primacy as a Conflict-Avoidance and Conflict-Resolution Tool

This overview of the tools incorporated into the rules on State aid to avoid conflicts between the Commission and national courts cannot conclude without a reference to the general constitutional principles that structure the interplay between the Union and the national legal orders – and, in particular, to the principle of primacy. One of the implications of this principle is the obligation of national courts to heed the determinations made by the Commission in its decisions. This can be seen as a conflict-resolution tool, because it means that national courts must abide by the determinations of the Commission when they rule on measures that have already been the object of a decision. In this scenario, their task is to impede their implementation (negative decisions), to ensure that recovery is effected without delay (recovery decisions), to ensure compliance with the conditions imposed by the Commission (conditional decisions), or to eliminate the effects produced by unlawful State aid measures prior to their clearance by the Commission (positive decisions). The only way that national courts can try to escape these outcomes is through the preliminary reference procedure, if they have reasons to believe that that decision of the Commission was wrong in the first place.137 The principle of primacy is also relevant – as a conflict-resolution tool – when things unfold the other way around, because national courts intervene first (holding that the contested measures do not constitute State aid) and the Commission subsequently rules on the same measure (holding that it constitutes State aid and must therefore be suspended and/or recovered). Indeed, the Court of Justice based on this principle its holding that the principle of res judicata cannot prevent recovery of a State aid ‘which has been found to be incompatible with the common market in a decision of the Commission which has become final’.138 As already noted, the rigour of this holding is problematic. A related but different contentious issue is the projection of the principle of primacy over the interlocutory decisions that the Commission adopts to move from the so-called ‘preliminary investigation stage’ to the ‘formal investigation phase’ (‘decision to open the formal investigation phase’). Given their provisional nature and the perfunctory analysis that supports their findings, one would normally expect this type of decisions to lack substantive effects.139 However, the adoption of these decisions is motivated by the tentative finding that the measure under scrutiny seemingly falls within the definition of State aid and that it may be incompatible with the internal market (for, absent both premises, the Commission would close the file

Chapter X, Article 29 PR. Monti, Hancher et al (n 45) 123. 137 Eg, Case C-222/04 Ministero dell’Economia e delle Finanze v Cassa di Risparmio di Firenze SpA [2006] EU:​C:​2006:​8. 138 Case C-119/05 Ministero dell'Industria (n 111), para 63. 139 Kohler (n 3) 385. 135 136

246  Research handbook on European State aid law at the preliminary stage, without going any further).140 Given the prophylactic philosophy that informs the rules on State aid, it is also possible to make the case that this signal should be sufficient to trigger the preventive and restorative action of national courts. The Court of Justice was confronted with this issue in the Deutsche Lufthansa case, where it held that national courts must ‘refrain from taking decisions which conflict with a decision of the Commission, even if it is provisional’.141 There has been some disagreement over the exact meaning of the ruling, because some commentators resist the idea that provisional decisions could have binding effects.142 Yet the general perception is that the ruling confirms that national courts are bound by the determinations on the existence of State aid contained in this type of decisions.143 Needless to say, national courts may resort to the preliminary reference procedure if they have reason to believe that determinations of the Commission are flawed.144 However, unless they do so, Deutsche Lufthansa seems to imply that they are obliged to treat the contested measures as State aid and to grant the appropriate remedies145 although they do seem to have some leeway on that front, in the sense that they may favour provisional over definitive remedies.146 This may also be read as an indication that recovery can be replaced with less aggressive measures. In any event, the ruling has been very controversial,147 especially in Germany.148 One of the main criticisms addressed against the judgment is that it ignores the right to due process of State aid beneficiaries, who are not entitled to participate in the preliminary phase of the Commission’s proceedings and whose standing to challenge the Commission’s decision to open the formal investigation phase is not always straightforward.149 More generally, this doctrine is yet another manifestation of the reluctance of the Court of Justice to let national courts engage in any kind of balancing of the Union interest served by the rules on State aid against any other kind of competing, legitimate interests. For that reason, it is an issue that warrants further academic thinking.

Case 84/82 Germany v Commission [1984] EU:​C:​1984:​117, para 17. Case C-284/12 Deutsche Lufthansa AG (n 59) para 41. See also Case C-27/13 Flughafen Lübeck GmbH contra Air Berlin plc & Co. Luftverkehrs KG [2014] EU:​C:​2014:​240, para 24. 142 Sierra and Ferruz (n 58) 313. 143 Kreuschitz and Bermejo, in Vesna Tomljenović et al (eds) (n 42) 246. Prior to the Deutsche Lufthansa ruling, see: Jean-Paul Keppenne and Kilian Gross, ‘Quelques considérations sur le rôle du juge national dans le contrôle des aides d’Etat’ in Le droit des aides d’Etat dans la CE, Liber Amicorum Fransisco Santaolalla Gadea (Kluwer Law International 2008), 400; Kohler (n 3) 385. 144 Case T-251/13 Gemeente Nijmegen [2015] EU:​T:​2015:​142, para 46. 145 Case C-284/12 Deutsche Lufthansa AG (n 59) para 42. 146 Ibid, para 43. 147 Lucyne Ghazarian, ‘Binding Effect of Opening Decisions – Lufthansa AG v. FFH’ (2014) 13(1) European State Aid Law Quarterly 108; Thomas Lübbig and Tom Morgan, ‘State Aid, National Courts and the Separation of Powers: Should Judges be Bound to the European Commission’s Unfinished State Aid Business’ (2014) 5(5) Journal of European Competition Law & Practice 256; Pierre de Bandt, ‘Lufthansa: A New Era for State Aid Enforcement’ (2014) 5(4) Journal of European Competition Law & Practice 206; Phedon Nicolaides, ‘Are National Courts Becoming an Extension of the Commission’ (2014) 13(3) European State Aid Law Quarterly 409. 148 Kreuschitz, in Hofmann and Micheau (eds) (n 102) 456 and references provided therein. 149 Eg, Ulrich Soltész, ‘Effet Utile Taken to Extremes: Does an Opening Decision Already Trigger the “Stand-Still Obligation”?’ (2013) 12(4) European State Aid Law Quarterly 643. 140 141

The private enforcement of State aid law  247

6.

FINAL REMARKS

The purpose of this chapter was to map out the main issues that deserve further investigation in connection to the private enforcement of State aid law. The doctrinal focus of the chapter can now give way to a more general reflection on the foundational problems surrounding this topic, which should also attract the attention of legal scholarship. The first problem concerns the economic incentives that are supposed to drive third-party actions against unlawful State aid measures. The legal frame that governs the private enforcement of State aid law is premised on the assumption that State aid is harmful for third parties. While this may be obvious in some cases, there is no consensus in the economic literature on the impact that subsidies and other state measures of financial support to firms have upon competitors (and even less upon other third parties).150 The practical difficulties raised by the proof and quantification of harm in actions for damages are one of the facets of this problem. However, the problem runs deeper than that: it goes to the core of the whole private enforcement enterprise, which is why it should be high on the research agenda. The second problem concerns the constitutional problems raised by the private enforcement of State aid law. As is well known, the large scope given to the definition of State aid has brought within the influence of this discipline a broad range of measures that would otherwise fall under the competence of Member States, some of which are actually connected to sensitive areas of economic and social policy. The issue is often formulated as a problem of allocation of powers between the Union and Member States.151 However, its ramifications also affect private enforcement, because the empowerment of third parties to enforce the provision on State aid places in their hands a tool to interfere with those policies (ie, with legitimate national choices of economic and social policy).152 Legal scholarship on the private enforcement of State aid law could probably address this problem more squarely. Finally, it is pretty obvious that the association of third parties and national courts to the task of enforcing the rules on State aid seeks to improve the effectiveness of the discipline. One of the tasks of legal scholarship should be to critically assess that assumption. Some scholars have argued that the legal community may have overestimated the importance of State liability as a tool to ensure compliance with Union law.153 Whether that thesis is correct or not, the same question is definitely worth asking in the specific area of State aid. Furthermore, private enforcement should not be studied in isolation, but rather in the context of the other 150 See, eg, Timothy Besley and Paul Seabright, ‘The Effects and Policy Implications of State Aids to Industry’ (1999) 14(28) Economic Policy 13; Hans W Friederiszick and others, ‘EC State Aid Control: An Economic Perspective’ in Michael Sánchez Rydelski (ed), The EC State Aid Regime – Distortive Effects of State Aid on Competition and Trade (Cameron May 2006); David Spector, ‘L’économie politique des aides d’État et le choix du critère d’appréciation’ (2006) 2 Concurrences 34; Mathias Dewatripont and Paul Seabright, ‘“Wasteful” Public Spending and State Aid Control’ (2006) 4(2–3) Journal of the European Economic Association 513. 151 Armin Von Bogdandy and Jürgen Bast, ‘The Federal Order of Competences’ in Armin Von Bogdandy and Jürgen Bast (eds), Principles of European Constitutional Law (2nd edn, Hart 2009), 294; Jürgen Schwarze, European Administrative Law (Rev 1st edn, Sweet & Maxwell 2006), 383. 152 See, eg, Herwig CH Hofmann, ‘Private Participation in the Control of Public Spending – The Multi-Level Subsidy Regimes’ (2003) 12 The Institute for International Integration Studies Discussion Paper Series. 153 Tobias Locke, ‘Is Private Enforcement of EU Law through State Liability a Myth? An Assessment 20 Years after Francovich’ (2012) 49(5) Common Market Law Review 1675.

248  Research handbook on European State aid law institutional mechanisms that serve – or could serve – the same objective. This obviously includes the enforcement powers of the Commission, which are particularly salient in this area (and which also give some voice to third parties, albeit with limitations).154 However, there is no reason why enforcement at the national level should be restricted to private litigation, as shown by the literature that advocates for a greater role for national competition or administrative authorities in the enforcement of State aid law.155 In order to get the full picture, private enforcement should be considered alongside these actual or potential alternatives.

Pastor-Merchante (n 89). Eg, Caroline Buts, Tony Joris and Marc Jegers, ‘State Aid Policy in the EU Member States’ (2013) 12(2) European State Aid Law Quarterly 330; Phedon Nicolaides, ‘State Aid Modernization: Institutions for Enforcement of State Aid Rules’ (2012) 35 World Competition 457. See also, on the role of criminal law, Christian Koenig and Julian Lindner, ‘Criminal Liability – An Efficient Tool of EU State Aid Law Enforcement?’ (2015) 14(1) European State Aid Law Quarterly 19. 154 155

13. State aid procedures Elisabetta Righini and Flavia Tomat1

1. INTRODUCTION Writing – or reading – about procedural rules may appear as a tedious task. However, no substantive rule that creates, defines, or regulates rights and obligations has much force if it is not accompanied by procedures and methods to enforce it and ensure redress if needed. This is what we shall discuss in this chapter. In the European Union, the respect of methods and procedures or, in more refined terminology, of the rule of law is one of its founding values, hallowed in the wording of Article 2 of the Treaty on the European Union (“TEU”): The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. These values are common to the Member States in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevail.

In the State aid field, procedural rules have been enshrined in the EU primary legislation since the redaction of then Article 93 of the Treaty of Rome in 1957 (now Article 108 of the Treaty on the Functioning of the European Union (“TFEU”)). As of then, State aid in the internal market is “to be kept under constant review and supervised by the Commission …, subject to review by the European Union judicature, by means of an appropriate procedure which it is the Commission’s responsibility to set in motion”.2 The purpose of this chapter is to provide, after a brief historic overview of the evolution of the procedural rules for State aid control (Section 2), a reasoned account of their main features and of the different actors involved in them (Section 3), and – last but not least – a critical overview of their most recent developments and of the issues freshly raised by the EU Courts with regard to the duties and powers of the European Commission in this regard (Section 4).

2.

A SHORT HISTORICAL OUTLINE

As mentioned, since the Treaty of Rome, now Article 108 TFEU has allowed the Commission to set out the procedural framework to follow when controlling Member States’ public interventions in the economy. The basic rule is that, unlike for other competition tools, the exclusive competence to review the compatibility of State aid with the internal market lies 1 The views expressed are the personal opinions of the authors. The authors thank Natália Solárová, Associate, and Piera Amato, law clerk, both with Latham & Watkins in Brussels, for their precious assistance in the redaction of this chapter. 2 Joined Cases T-443/08 and T-455/08 Freistaat Sachsen v Commission [2011] EU:​T:​2011:​117, para 202.

249

250  Research handbook on European State aid law with the European Commission. According to Article 93(1) of the Treaty of Rome and now Article 108(1) TFEU, “the Commission shall, in cooperation with Member States, keep under constant review all systems of aid existing in those States”. To do so, the Commission has to be notified by Member States of any plan to grant aid (the notification requirement). While the Commission examines the existence of aid and its compatibility, the Member States have to refrain from putting it into effect (the standstill obligation). This control is carried out under the full scrutiny of the EU courts, that revise the legality of the Commission’s enforcement to the benefit of beneficiaries, competitors and other Member States. National courts also play a key role in ensuring that the assessment of State aid measures is carried out as prescribed by the Treaty.3 As simple as this system might have appeared to our Founding Fathers, a certain idiosyncratic reluctance of the Member States to consult the Commission on every aid and the objective difficulty in following the constant evolution of what may constitute an aid have rendered these few basic principles not apt to regulate all aspects of State aid control. Thus, if little has changed in the Treaty text in the past 60 years, the procedural rules followed to exercise State aid control have evolved substantially, through case law, decisional practice, and more recently their codification. Until 1999, in fact, the rules on the basis of which the Commission was exercising its exclusive power of State aid control were never codified. While in antitrust, the first procedural regulation was adopted as early as 1962,4 the Commission had not managed to obtain from the Council a proper implementation of Articles 107 and 108 TFEU. In 1966 and in 1972, the Commission submitted to the Council two proposals based on then Article 89 to regulate the exemption from notification of certain categories of aid and the control of regional aid respectively, but none of them progressed to a regulation and the Commission withdrew them in 1975 and 1976.5 A turning point in the evolution of the State aid control was the adoption by the Commission, in the early 1980s, of a new policy of ordering the recovery of illegal aid. The Commission started to order Member States to require repayment from the recipients of the aid awarded in disregard of the obligations of notification and standstill.6 The Court had blessed this approach,7 which was not foreseen by the Treaty, and in the absence of which Member States had little or no incentive in adhering to the State aid rules. In parallel, the belief that greater control of State aid was a necessary concomitant of further liberalization and the Single Market pushed toward a new phase in State aid policy. Last but not least, the Single European Act8 gave the Commission greater powers to promote State aid control as a tool to orientate industrial and economic policies, so that, during the 1990s, State aid control followed the implementation

3 Davide Grespan and April Pelin, “Role of the national courts”, in Nicola Pesaresi, Koen Van de Casteele, Leo Flynn and Christina Siaterli (eds), EU Competition Law, Volume IV: State Aid (2nd ed Deventer, Claeys & Casteels 2016) 1489; see also Commission notice on the enforcement of State aid law by national courts [2009] OJ C85/1. 4 Council Regulation (EEC) 17/1962 First Regulation implementing Articles 85 and 86 of the Treaty [1962] OJ 13/204. 5 Adinda Sinnaeve and Piet Jan Slot, “The New Regulation on State Aid Procedures” (1999) 36(6) CML Rev 1153. 6 Commission Communication [1983] OJ C 318/3. 7 Case C-173/73 Italy v Commission [1974] EU:​C:​1974:​71, para 8. 8 Single European Act [1987] OJ L169/1.

State aid procedures  251 of the Single Market program and expanded its field of application to new sectors, imposing increased transparency of the financial relations between the States and the undertakings.9 This impetus in the policy and the concurrent case-law of the EU courts that was opening up the way to interested parties’ rights10 convinced the European Council to enact two important pieces of legislation for State aid control at the end of the 1990s. First, Regulation No. 994/1998 (known as the “Enabling Regulation”)11 allowed the Commission to introduce regulations allowing exemption from notifications for categories of compatible horizontal aid and to provide a legal basis for the de minimis rule. Second, Regulation No. 659/1999 (known as the “Procedural Regulation”)12 finally codified in one single binding text the Commission practice and the case law of the Court with regard to the administrative procedure to be followed in the assessment of State aid control. Following the adoption in 2005 of the State Aid Action Plan, aiming at “less and better targeted State aid”, in the second half of the 2000s the Commission concentrated its procedural efforts in a number of communications. Thus, in 2009 the Commission adopted the so-called Simplification Package, which included the Simplified Procedure Notice and the Best Practices Code. In the same year the Commission adopted also the Enforcement Notice on the role of national courts.13 A further procedural breakthrough came in May 2012, when – on the back of what had been the worst financial and economic crisis since the creation of the EU – the Commission adopted a communication launching a substantial reform of the State aid framework, the so-called State Aid Modernisation (“SAM”). The main objectives of SAM were: (i) to foster growth in a strengthened, dynamic and competitive internal market; (ii) to focus enforcement on cases with a major impact on the internal market; (iii) to achieve streamlined rules and faster decisions. The revision of the original Procedural Regulation (EC) No 659/1999 was one of the building blocks of SAM and focused mainly on the handling of complaints and on new instruments allowing the Commission to obtain complete information from the market. In a record six months of negotiations, on 22 July 2013, the Council adopted the new Procedural Regulation No 734/2013.14 Unlike the 1999 one, the provisions of the new Procedural 9 Massimo Merola, “The Forces Shaping State Aid Control in the EU” (Global Governance Programme, University of Birmingham, SHAPE: An Enquiry into the Forces Shaping Subsidy and State Aid Law, 18–19 May 2015). 10 Case T-95/94 Sytraval and Brink's France v Commission [1995] EU:​T:​1995:​172. 11 Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid [2008] OJ L142/1. 12 Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty [1999] OJ L83/1. Further implementing rules were adopted in 2004 with Commission Regulation (EC) 794/2004 of 21 April 2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty [2004] OJ L140/1 (“Implementing Regulation”). This contained provisions concerning the form, content and other details of notifications and introduced also rules on annual report forms, calculation of time limits and interest rate for the recovery of unlawful aid. 13 Commission notice on simplified procedure for treatment of certain types of State aid [2009] OJ C136/3; Code of Best Practice for the conduct of State aid control procedures [2009] OJ C136/13; Commission notice on the enforcement of State aid law by national courts [2009] OJ C85/1. 14 Council Regulation (EU) No 734/2013 of 22 July 2013 amending Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty [2013] OJ L204/15. In 2015, the Commission consolidated the Procedural Regulation in a new text (Council Regulation (EU)

252  Research handbook on European State aid law Regulation did not entail a codification of existing case-law or Commission practice but genuinely introduced new instruments in the existing State aid legal framework.

3.

THE STATE AID PROCEDURES

3.1

The Various Actors and the Respective Roles

Article 108 TFEU foresees the procedure for the control of aid granted by public authorities to undertakings as a rigid centralized Commission to Member States centric model. Over the years, however, with the intervention of the EU Courts, the system has slowly evolved into a more complex and sophisticated multi-centre enforcement system. In particular, next to the obligation to notify imposed on Member States, State aid measures are investigated also because of complaints or at the Commission’s own initiative. The obligation to notify is imposed on the Member States, and never on the recipients or addressees of the measure.15 It applies even where the Member State considers the measure to be compatible with the internal market pursuant to the provisions of Article 107(2) and (3) TFEU.16 An exception from the notification obligation is available where the measure in question is covered by a block exemption regulation, such as the General block exemption Regulation (referred to as “GBER”)17, Regulation No 1370/2007 on public passenger transport services by rail and by road,18 or it is considered de minimis aid.19 Complaints are an essential source of information for detecting State aid.20 Where a competitor lodges a complaint through a duly completed form and successfully demonstrates that

2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union [2015] OJ L248/9) and adopted a revised Implementing Regulation (Commission Regulation (EU) 2015/2282 of 27 November 2015 amending Regulation (EC) No 794/2004 as regards the notification forms and information sheets [2015] OJ L325/1). 15 Joined cases T-116/01 and T-118/01 P&O European Ferries (Vizcaya) v Commission [2003] EU:​ T:​2003:​217, para 64. 16 Kelyn Bacon QC, European Community Law of State Aid (1st edn, Oxford University Press 2009) 448. 17 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty [2014] OJ L187/1. 18 Regulation (EC) No 1370/2007 of the European Parliament and of the Council on 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70 [2007] OJ L315/1. 19 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid [2013] OJ L352/1; Commission Regulation (EU) No 1408/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the agriculture sector [2013] OJ L352/9; Commission Regulation (EU) No 717/2014 of 27 June 2014 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the fishery and aquaculture sector [2014] OJ L190/45; Commission Regulation (EU) No 360/2012 of 25 April 2012 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to undertakings providing services of general economic interest [2012] OJ L114/8. 20 Recital 32 of the Procedural Regulation.

State aid procedures  253 its interests might be affected by the granting of aid,21 the Commission is required to conduct a diligent and impartial examination of the complaint, which may make it necessary for it also to examine matters not expressly raised by the complainant.22 The handling of State aid complaints by the Commission was considerably modified by the new Procedural Regulation. Any interested party may submit a complaint to inform the Commission of any alleged unlawful aid or any misuse of aid. Such parties must however duly complete the standard approved form and are under a duty to provide the mandatory information requested therein. According to the second subparagraph of Article 24(2), where the Commission, after a prima facie examination, considers that there are insufficient grounds to show the existence of unlawful aid, it shall inform the interested party thereof.23 The Commission is also required to call upon the interested party to submit comments within a prescribed period of time, which is usually of one month. If the interested party fails to make known its views within the prescribed period, the complaint shall be deemed to have been withdrawn. It should be noted that, before these modifications, the Commission could limit itself to communicate to the interested parties that there were insufficient grounds for taking a view on a case. On the basis of the new rules, the interested parties are now invited to submit their comments, if the Commission informs them of its intention to reject the complaint. While the new rules give the interested parties, in such cases, the opportunity to present their views in a detailed manner, they do not substantially modify the nature of the proceedings in relation to the interested parties.24 This has been considered by some commentators one of the major shortcomings of the 2013 reform of the Procedural Regulation.25 Having however witnessed first-hand the importance that Member States place in this centralized Commission to Member States centric model of enforcement, the introduction of further third party rights would have been a difficult – if not impossible – objective to attain. As regards the relationship with Member States, the Commission must ensure that the Member State concerned is kept fully and regularly informed of the progress and outcome of the examination.26 The Commission has developed the habit to examine, on its own initiative, information on unlawful aid from whatever source, in order to ensure compliance with the State aid discipline, the so called ex officio cases. The Procedural Regulation codifies this ability in its Article 12(1). As for the role of national courts in supervising Member States’ compliance with their obligations under State aid law, they fulfil a complementary but separate role from the

See recital 33 and Article 24(2) of the Procedural Regulation. Case C-367/95 P Commission v Sytraval and Brink’s France [1998] EU:​C:​1998:​154, para 62. 23 The Commission must provide the complainant with an adequate explanation of the reasons for which the facts and points of law put forward in the complaint have failed to demonstrate the existence of State aid. See Case C‑367/95 P Commission v Sytraval and Brink’s France [1998] EU:​C:​1998:​154, para 64; Joined cases C‑341/06 P and C‑342/06 P Chronopost and La Poste v UFEX and Others [2008] EU:​C:​2008:​375, para 8. 24 Case T-728/17 Marinvest [2019] EU:​T:​2019:​325, paras 40–1. 25 John Temple Lang, “EU State Aid rules – The need for substantive reform” (2014) 13(3) European State Aid Law Quarterly 440. 26 See Article 12(1) of the Procedural Regulation. 21 22

254  Research handbook on European State aid law Commission’s one.27 National courts do not have jurisdiction to render a decision on whether State aid is compatible with the internal market, but can decide whether a measure constitutes aid or not and, if so, they can draw all possible consequences from the infringement of the notification and standstill obligations pursuant to Article 108(3) TFEU.28 The compatibility assessment under Article 107(2) and (3) TFEU falls, instead, within the exclusive competence of the Commission, subject to review by the EU courts.29 In the European architecture, the Commission acts as the EU’s politically independent executive body and represents the interests of the Union as a whole. In the competition area, in particular, it acts as the central EU competition authority. And, in State aid control this independence from national and political interests is fundamental to its mission of promoting the “common interest” of the European Union as a whole.30 Unlike in the case of antitrust, State aid control does not foresee a role for national competition authorities, if not – in some limited cases – as a facilitator of the exchanges between the national granting authorities and the Commission. Questions have been raised whether this complete centralization of State aid is not too much of a burden for the Commission, which is under the obligation to formally decide on all aid measures notified to it and on all complaints addressed to it, even those of a rather local nature and with insignificant impact on trade and competition. Whereas decentralization has proved to be successful in the field of EU antitrust enforcement,31 no consensus exists as to whether decentralization would also be feasible and necessary for the purpose of State aid control. In that regard, it is crucial to notice that the dynamics 27 Case C-39/94 SFEI and Others [1996] EU:​C:​1996:​285, para 41; Joined Cases C-261/01 and C-261/01 Van Calster and Cleeren [2003] EU:​ C:​ 2003:​ 571, para 74; Case C-368/04 Transalpine Ölleitung in Österreich [2006] EU:​C:​2006:​644, para 37; Case C-75/18 Vodafone Magyarország Mobil Távközlési Zrt [2020] EU:​C:​2020:​139, para 20. 28 Case C-590/14 P DEI and Commission v Alouminion tis Ellados [2016] EU:​C:​2016:​797, paras 96–7; Case C-75/18 Vodafone (n 27) para 21; Case C-150/16 Fondul Propietatea SA [2017] EU:​C:​2017:​ 388, para 42. 29 Case C-385/18 Arriva Italia [2019] EU:​C:​2019:​1121, para 83; Case C-587/18 CSTP Azienda della Mobilità SpA v Commission [2020] EU:​C:​2020:​150, paras 90–1; Case C-5586/18 P Buonotourist Srl [2020] EU:​C:​2020:​152, paras 90–1. It should be recalled that also the Council might have a role in deciding on the compatibility of a State aid measure. By virtue of Article 108(2) TFEU, if a Member State makes an application to that effect, the Council may decide unanimously that aid which a State has granted or it is intending to grant is compatible with the internal market if that decision is justified by exceptional circumstances. Where the Commission has already started the formal investigation, the application to the Council suspends the procedure before the Commission. On the role of the Council, Davide Grespan and April Pelin, “Role of the Council” in Nicola Pesaresi, Koen Van de Casteele, Leo Flynn and Christina Siaterli (eds), EU Competition Law, Volume IV: State Aid (2nd ed Deventer, Claeys & Casteels 2016). On the issue of how the competences of the Commission and the Council interact in the field of State aid, see also the recent judgments in the Alumina saga (see cases T-129/07 and T-130/07 Ireland and Aughinish Alumina Ltd v European Commission [2019] EU:​T:​2019:​610; T-119/07 and T-207/07 Italian Republic and Eurallumina SpA v European Commission [2019] EU:​T:​2019:​613). 30 Philip Lowe, “The design of competition policy institutions for the 21st century – the experience of the European Commission and DG Competition” (2008) 3 Competition Policy Newsletter. 31 Before the modernization reform in 2003 of the competition rules applicable to undertakings, a prior authorization procedure existed in the form of individual exemptions, negative clearances and comfort letters issued by the Commission upon notification of agreements by the parties thereto. The new regime provides for ex post facto control in which national courts, national competition authorities and the Commission play a role.

State aid procedures  255 for antitrust enforcement differ significantly from those of State aid control. Antitrust rules target the behaviour of undertakings active on the market whereas State aid rules target measures adopted by public administrations in the different Member States, essentially limiting the freedom of governments, even parliaments, to grant financial advantages to certain sectors of their economy.32 In light of this, the choice of a supranational entity, institutionally and politically independent from the granting body or administration, has proven a crucial step to ensure an effective and uniform application of State aid rules across the different Member States. In the context of State aid control, alongside the risk of regulatory capture by firms (recipients of State aid), national competition authorities may also be prone to political capture by the government (grantor of State aid),33 and, at best, be limited to a national perspective. 3.2

Investigation of the Measure

Once the Commission has received a notification of an aid measure by a Member State, or a complaint by an interested party, or has learned about an illegal aid, it has to start the process of assessment of such aid in order to verify whether the beneficiary is indeed an undertaking, i.e. it exercises an economic activity; whether the measure constitutes or not an aid within the meaning of Article 107(1) TFEU; and, finally, if it is an aid, whether it can be declared compatible on the basis of either Article 107(2) or (3) TFEU. This assessment happens in various phases. In a preliminary phase (also called “phase 1”), the Commission forms a prima facie opinion on the three elements of undertaking, existence of aid and compatibility. If at the end of phase 1, the Commission has doubts about its compatibility with the internal market and so cannot approve the aid directly or, in case of a complaint, simply reject the allegations, then it will have to start the actual investigation stage (so-called “phase 2”) envisaged by Article 108(2) TFEU.34 This is designed to enable the Commission to be fully informed of all the facts of the case, as well as to allow interested parties to make their views known.35 It must be noted that the Commission may restrict itself to the preliminary investigation under Article 108(3) TFEU in order to take a decision if it can satisfy itself, after such a preliminary investigation, that the measure is compatible with the Treaty. However, where that preliminary investigation has led the Commission to the opposite conclusion or if such an investigation does not permit all the difficulties involved in determining whether the aid is compatible with the internal market to be overcome, the Commission is under a duty to carry out all the requisite consultations and for that purpose to initiate the procedure under Article 108(2) TFEU.36

32 Claus-Dieter Ehlermann, “State aid control in the European Union: success or failure?” (1994) 18 Fordham Int’l LJ 1212. 33 Natalia Fiedziuk, “Towards Decentralization of State Aid Control: The Case of Services of General Economic Interest” (2013) 36(3) World Competition Law and Economics Review 387. 34 Case C-521/06 P Athinaïki Techniki v Commission [2008] EU:​C:​2008:​422. 35 ibid para 33; see also Case T-171/02 Regione autonoma della Sardegna v Commission [2005] EU:​ T:​2005:​219, para 32. Article 108(2), first paragraph, TFEU reads: “If, after giving notice to the parties concerned to submit their comments, the Commission finds that aid granted by a State or through State resources is not compatible with the common market having regard to Article 107, or that such aid is being misused, it shall decide that the State concerned shall abolish or alter such aid within a period of time to be determined by the Commission”. 36 Case C‑390/06 Nuova Agricast [2008] EU:​C:​2008:​224, paras 58–9.

256  Research handbook on European State aid law Even before phase 1 and phase 2, the Commission has established as a best practice to discuss any aid project with the Member State concerned, under the so-called pre-notification phase. Let’s analyse each of these phases in turn. Pre-notification phase (a) In an ideal scenario, the Commission and the Member States start engaging in informal discussions about the proposed aid measure even before the formal notification. This has the advantage of expediting and simplifying the Commission’s formal assessment by addressing potential concerns at a very early stage in the design of the aid measure. Pre-notification contacts provide the Commission and the notifying Member State with the possibility to discuss the legal and economic aspects of a proposed project informally and in confidence prior to notification, and thereby enhance the quality and completeness of notifications.37 The essential objective of the pre-notification phase is, therefore, to reduce the risk that the notification is found to be incomplete, thereby delaying the examination procedure of the notified project. The Commission can request all necessary additional information during the preliminary examination phase if it concludes that the information provided is incomplete. However, as outlined by the General Court in Tempus, “the purpose of the pre-notification phase is not to assess the compatibility of the notified measure with the internal market, especially in cases that are particularly novel or complex.”38 In Tempus the General Court concluded also that “[t]he Commission must not confuse the – possibly prior – phase of the preparation of the notification with the phase for the examination of the notification, which initially occurs as a preliminary examination and, where necessary, subsequently takes the form of a formal investigation …”.39 The timing of a pre-notification phase mainly depends on the complexity of the case. However, according to the Commission’s revised Code of Best Practices, the pre-notification contacts should not exceed, as a general rule, six months.40 In the Tempus Energy case, the General Court found that a period of 18 months of pre-notification contacts was significantly longer than the period that was envisaged, as a general rule, by the Code of Best Practices.41 The General Court thus concluded that the length and the circumstances of the pre-notification phase42 was one of the indicia that attested to the existence of doubts as to the compatibility of the notified measure with the internal market. The General Court annulled the Commission decision not to raise objections to the

37 Code of Best Practices for the conduct of State aid control procedures [2018] OJ C253/05, paras 9–13. 38 Case T-793/14 Tempus Energy and Tempus Energy Technology v Commission [2018] EU:​T:​ 2018:​790, para 90. Note that this judgment is subject to pending appeal before the Court of Justice (Case C-57/19 P Commission v Tempus Energy and Tempus Energy Technology (pending)). 39 ibid, para 91. 40 Code of Best Practices (n 37) para 16. It is noteworthy the latest Code of Best Practices extended the envisaged pre-notification phase duration from two months, laid down in the Code of Best Practices from 2009, to six months. 41 Case T-793/14 Tempus Energy (n 38) para 106. 42 Including an intervention of three operators expressing their concern as to the compatibility of the measure as well as the magnitude, significance, complexity and novelty of the measure and brevity of the preliminary investigation of one month.

State aid procedures  257 aid scheme on the ground that the assessment of the compatibility of the measure gave rise to doubts, which should have led the Commission to initiate a formal investigation under Article 108(2) TFEU.43 However, the General Court’s case-law shows that the length of pre-notification contacts may not necessarily demonstrate the existence of doubts. For instance, in the NMTA case, the General Court found that a pre-notification phase of nine months was not excessive, in view of the specific circumstances of that case.44 (b) Preliminary examination or phase 1 Once the notification by the Member State is complete or the Commission considers a complaint by an interested party worth being pursued, or it has learned about an illegal aid, the Commission starts its preliminary examination of the aid. In case of notified aid, the Commission has to form its view within two months.45 The two-month period starts running from the day following the receipt of a complete notification. If the Commission is analysing a complaint, “it shall examine [it] without undue delay”.46 Thus, where the measures were not notified by the Member State, the Commission is not required to carry out a preliminary examination within a specified period. In any case, the duration of such preliminary examination must be reasonable. Whether or not the duration of the preliminary examination stage is reasonable must be determined in relation to the particular circumstances of each case and, especially, its context, the various procedural stages to be followed by the Commission and the complexity of the case.47 At the end of phase 1, the Commission has to decide, by way of formal decision, in one of three ways.48 If it considers that the measure under examination does not constitute aid, it records that finding by way of a decision. If it finds that the measure constitutes aid but it is compatible with the internal market, it will adopt a “decision not to raise objections”, specifying which exception under the TFEU it has applied. On the contrary, if the Commission entertains doubts or serious difficulties in determining its compatibility, it has to initiate an in-depth investigation pursuant to Article 108(2) TFEU (“decision to initiate the formal investigation procedure”).49 Case T-793/14 Tempus Energy (n 38) para 267. Case T-140/13 Netherlands Maritime Technology Association v Commission [2014] EU:​T:​2014:​ 1029. In this case, the specific circumstances, which justified the length of pre-notification contacts, included the lack of clarity as regards the content of the measure and of three different proposals of the measure that the Spanish authorities had submitted to the Commission over the course of one year. 45 This period is not merely indicative, but is binding. See Joined Cases T-239/04 and T-323/04 Italy v Commission [2007] EU:​T:​2007:​260, paras 86–90. According to Articles 4(5) and (6) of the Procedural Regulation, authorization of the notified aid is deemed to be given where the Commission failed to take a decision within two months following the receipt of a complete notification, and has not taken an ultimate decision within 15 working days after having been given prior notice by the Member State that it would proceed to the implementation of the measure in question. 46 See Article 12(1) of the Procedural Regulation. 47 Case T-353/15 NeXovation Inc v Commission [2019] EU:​T:​2019:​434, para 90. Note that this judgment is subject to pending appeal before the Court of Justice (Case C-665/19 P NeXovation v Commission (pending)). 48 See Article 4, paragraphs (2), (3) and (4) and Article 15 of the Procedural Regulation. 49 Case T-27/02 Kronofrance v Commission [2004] EU:​T:​2004:​348, paras 51 and following; Case T-475/04 Bouygues v Commission [2007] EU:​T:​2007:​196, para 89; Case T-73/98 Société chimique Prayon-Rupel v Commission [2001] EU:​T:​2001:​94, para 43. 43 44

258  Research handbook on European State aid law With regard to the concept of “doubts” as to the compatibility of the notified measure with the internal market, three requirements have been established by the case-law to act as a framework for the Commission’s assessment. First, that concept is exclusive. Thus, the Commission may not decline to initiate the formal investigation procedure in reliance on other circumstances, such as third-party interests, considerations of economy of procedure or any other ground of administrative or political convenience.50 Second, when the Commission does not succeed in eliminating all doubts within the meaning of that provision, it is obliged to initiate the formal investigation procedure. It has no discretion in that regard.51 Third, the concept of doubts is an objective one; in other words, the criterion of serious difficulties is objective in nature.52 The lawfulness of a decision not to raise objections depends on the question whether the assessment of the information and evidence, which the Commission had at its disposal during the preliminary investigation phase, should objectively have raised doubts as to the compatibility of the measure with the internal market, given that such doubts must lead to the initiation of a formal investigation procedure.53 A long-lasting preliminary examination may be indicative of doubts or serious difficulties that trigger the Commission’s duty to open a formal investigation procedure. However, each case will be decided on its facts. A mere long-lasting preliminary procedure is only one of the factors to be taken into account.54 The duration of the procedure is not enough to conclude that the Commission should have had doubts or serious difficulties.55 In accordance with settled case-law, whether or not the duration of an administrative procedure is reasonable must be determined in relation to the particular circumstances of each case and, especially, its context, the various procedural stages to be followed by the Commission, the complexity of the case and its importance for the various parties involved.56 It is also apparent from the case-law

50 Case T‑388/03 Deutsche Post and DHL International v Commission [2009] EU:​T:​2009:​30, para 90 and the case-law cited; Case T‑304/08 Smurfit Kappa Group v Commission [2012] EU:​T:​2012:​351, para 78. 51 Case C‑487/06 P British Aggregates v Commission [2008] EU:​C:​2008:​757, para 113 and the case-law cited; Case T‑304/08 Smurfit (n 50) para 79. 52 See inter alia Case C-131/15 P Club Hotel Loutraki AE [2016] EU:​C:​2016:​989, para 31; Case T-578/17 A&O Hostel and Hotel Berlin v Commission [2019] EU:​T:​2019:​437, para 58. 53 Case C-131/15 P Loutraki AE (n 52) para 32. 54 Case T-135/17 Scor SE [2019] EU:​T:​2019:​287, para 107. 55 For instance, in Club Hotel Loutraki v Commission, the General Court found that a ten-month period for the preliminary examination phase “can be a reliable indicator of the existence of serious difficulties only if it is supported by other evidence”. Case T-58/13 Club Hotel Loutraki v Commission [2015] EU:​T:​2015:​1, para 61 and the case-law cited therein, para 59. However, having examined the other arguments raised by the applicant, the Court did not find “other indication of the existence of such difficulties” (Case T-58/13 para 60). Also, see a body of case-law referenced in Kelyn Bacon QC, European Community Law of State Aid (3rd edn, Oxford University Press 2017) 457, where the EU Courts found that the time usually required for a preliminary examination together with other factors, can justify the conclusion that the Commission encountered serious difficulties of assessment, necessitating initiation of the procedure under Article 108(2) TFEU. This case-law includes: Case C-84/82 Commission v Germany [1984] EU:​C:​1984:​117, paras 14–19; Case T-46/97 SIC v Commission [2000] EU:​T:​2000:​123; Case T-73/98 Prayon-Rupel (n 49) paras 89 and 107–108; Case T‑388/03 Deutsche Post (n 50), paras 96–106; Case C-148/09 P Belgium v Deutsche Post [2011] EU:​C:​2011:​603, paras 80–1; Case T-512/11 Ryanair v Commission [2014] EU:​T:​2014:​989, paras 70–4. 56 Joined Cases T-394/08, T-408/08, T-453/08 and T-454/08 Regione Autonoma della Sardegna v Commission [2011] EU:​T:​2011:​493, para 99 (confirmed by the Court in cases C-630/11 P to C-633/11P,

State aid procedures  259 that if the examination carried out by the Commission during the preliminary examination procedure is insufficient or incomplete, this constitutes evidence of the existence of serious difficulties.57 (c) Formal in-depth investigation or phase 2 and interim measures Following the opening of the formal investigation procedure, the Commission invites both the Member State concerned and any interested party to submit comments regarding the Commission’s preliminary findings.58 The period for submitting observations is usually one month. An interested party is defined as any person, undertaking, association, or even another Member State, whose interests might be affected by the granting of the aid and include, in particular, any beneficiary of the aid and its competitors.59 Article 24(1) of the Procedural Regulation provides that interested parties that submit comments to the Commission decision will then have to receive a copy of the final decision to such parties. However, according to settled case-law, interested parties cannot claim any right of defence60 and cannot be granted access to the administrative file.61 Where the information gathered by the Commission during the phase 1 examination has proven insufficient, the Commission may request supplementary information from the Member State concerned62 or address requests for information directly to market participants (“market information tools” or “MIT”).63 In case of unlawful aid, the Commission has also the ability to adopt interim measures addressed to the Member State concerned, which may take the form of information injunctions, suspension injunctions and recovery injunctions.64 Information injunctions are subject to a two-stage procedure. In a first stage, the Commission requests information from the Member State concerned. In a second stage, if the Member State, despite a reminder, does not provide the information, or it provides incomplete information, the Commission will issue the information injunction.65 The decision shall specify what information is required and prescribe an appropriate period within which to supply it. According to Article 14 of the Procedural Regulation, if the Member State fails to comply with a suspension injunction, the Commission is entitled to take a decision on the basis of the information available. Thus, the adoption of an information injunction is a preliminary

HGA Srl and Others v. Commission, point 82); Case T-135/17 Scor (n 54) para 107; Case T-108/16 Naviera Armas, SA v Commission [2018] EU:​T:​2018:​145, para 72. 57 See inter alia Case T-68/15 HH Ferries and others v Commission [2018] EU:​T:​2018:​563, para 62. It should be reminded that it is for the applicant to prove the existence of serious doubts (see Case T-578/17 A&O Hostel (n 52) para 60). 58 See Article 6 of the Procedural Regulation. 59 See Article 1 of the Procedural Regulation. 60 Case T-111/15 Ryanair [2018] EU:​T:​2018:​954, para 47 and case-law referred to. 61 See ex multis Case T-728/17 Marinvest [2019] EU:​T:​2019:​325, para 45; Case C-666/17 P AlzChem v Commission [2019] EU:​C:​2019:​196, para 31; Case T-111/15 Ryanair (n 60) para 47; Case C‑139/07 P Commission v Technische Glaswerke Ilmenau [2010] EU:​C:​2010:​376, para 61. 62 Articles 4 and 6 of the Procedural Regulation. 63 Articles 7 of the Procedural Regulation. For a more detailed analysis of MIT, see below Section 4.1. 64 See respectively Articles 12, 13(1) and 13(2) of the Procedural Regulation. 65 On the nature of the information injunction decision, see Joined Cases C-463/10 P and C-475/10 P Deutsche Post and Germany v Commission [2011] EU:​C:​2011:​656, paras 44 and following.

260  Research handbook on European State aid law step, which is mandatory in case the Commission intends to adopt a decision on the basis of available incomplete information.66 It should also be noted that the adoption of an information injunction allows the Commission to refer the matter to the Court of Justice directly and apply for a declaration that the failure to comply constitutes an infringement of the TFEU. The second type of interim measure that the Commission may adopt is the suspension injunction. In order to enable the Commission to ensure that the rules of Article 108(3) TFEU are complied with, the Commission has been granted the power to require the Member State concerned to suspend immediately the payment of any aid which it considers to be unlawful, after giving that Member State the opportunity to submit its comments. More precisely, according to Article 13(1) of the Procedural Regulation, after giving the Member State concerned the opportunity to submit its comments, the Commission may adopt a decision requiring the Member State to suspend any unlawful aid until the Commission has taken a decision on the compatibility of the aid with the internal market (“suspension injunction”). The conditions for the adoption of such an order are restricted to a substantive condition, namely the classification by the Commission, at that stage of the procedure, of the national measure concerned as unlawful State aid, and a procedural condition, namely giving the Member State concerned the possibility to submit its comments. Given that Article 108(3) already in itself provides for the stand-still obligations, the additional legal effect of a suspension injunction is to enable the Commission to refer directly the matter to the Court of Justice. A suspension injunction might be adopted by the Commission together with the decision opening the formal investigation procedure. In a recent judgment,67 the Court concluded that since the Commission has merely a power to adopt suspension injunctions, even if the two conditions imposed in Article 13(1) of the Procedural Regulation are met, particular grounds must lead the institution to adopt such a decision.68 In particular, the Commission is under an obligation to state reasons and to respect the principle of proportionality. Where the suspension injunction is adopted at the same time as the decision to initiate the formal investigation procedure, the grounds that prompt the Commission to issue it necessarily relate to foreseeing that the Member State concerned will not suspend implementation of the measure at issue despite initiation of the investigation procedure.69 Last, recovery injunctions require Member States provisionally to recover the aid, pending its decision on its compatibility, on the basis of the same procedure that applies to recovery of aid following a final decision. However, recovery injunctions are very seldom used as they are subject to the strict conditions that there must be an urgency to act, a serious risk of substantial and irreparable damage to a competitor, and no doubt about the aid character of the measure. (d) Final decisions Once it has gathered all necessary information and the observations of the Member State concerned, including its observations on the comments submitted by interested parties, and conducted its in-depth formal investigation so as to remove all doubts regarding the measure’s compatibility, the Commission has to adopt a final decision. The Commission should – as far

68 69 66 67

Case T-196/02 MTU Friedrichshafen [2007] EU:​T:​2007:​252, para 41. Case C-456/18 P Hungary v Commission [2020] EU:​C:​2020:​421. ibid para 58. ibid para 59.

State aid procedures  261 as possible – adopt a decision within a period of 18 months from the opening of the formal procedure but, contrary to phase 1, no mandatory time-limits are prescribed.70 Phase 2 can be closed in only two ways. The Commission adopts a “positive decision”, when either the measure does not constitute aid or, if it does, when it considers the aid compatible with the internal market. In some cases, the Commission may link the compatibility to a number of conditions (“conditional decision”). Else, the Commission may consider the measure to constitute aid which cannot be declared compatible with the internal market, and thus will adopt a “negative decision”.71 In such case, if the measure had been notified before being put into effect, the negative decision implies that it has to be abandoned by the Member State. If instead the Commission was investigating an illegal aid, the negative decision will be accompanied by an obligation for the Member State concerned to recover the aid from the beneficiary, provided that the recovery obligation is not contrary to a general principle of Union law.72 With regard to illegal aid, it is important to note that the Commission’s final decision does not have the effect of regularising, retrospectively or ex post facto, aid measures which were illegal because they had been taken in disregard of the standstill requirement.73 However, the Commission must always determine whether State aid subject to review by it is compatible with the internal market, even if that aid has not been notified to it. This does not mean, however, that the Commission is bound to declare such aid compatible.74 Rather differently, even if a national court reaches the conclusion that a measure constitutes aid, the Commission must ascertain also whether the Member State fulfilled the notification and standstill obligations and, if that is not the case, must declare that measure unlawful.75 The direct consequence of a finding of illegal aid is that the national judges must draw all the necessary inferences from the infringement of Article 108(3) TFEU, in accordance with domestic law, with regard both to the validity of the acts giving effect to the aid and to the recovery of the financial support granted in disregard of that provision.76 Importantly, the recovery obligation of the national court is not dependent on the compatibility of the aid measure with Article 107(2) or (3) TFEU. Unlike the Commission, the national court can and must limit itself to determining whether the measure constitutes State aid and whether the standstill obli-

70 It is a principle of good administration that the Commission must act within a reasonable time in adopting decisions following administrative proceedings relating to competition policy. Whether or not the duration of an administrative procedure is reasonable must be determined in relation to the particular circumstances of each case, and especially its context, the various procedural stages to be followed by the Commission, the complexity of the case and its importance for the various parties involved. In the case Regione Siciliana v Commission, the General Court ruled that a period of 22 months cannot be considered unreasonable merely because it exceeds 18 months, which is an objective to be observed and not a mandatory time-limit. Account should also be had of the fact that the relative inertia which occurred in the middle of the formal investigation procedure was attributable to the notifying authority. See Case T-190/00 Regione Siciliana v Commission [2003] EU:​T:​2003:​316, paras 136–9. 71 Articles 9 and 15 of the Procedural Regulation. 72 Article 16 of the Procedural Regulation. 73 Case C-368/04 Transalpine Ölleitung in Österreich [2006] EU:​C:​2006:​644, para 41. 74 Case C-301/87 France v Commission [1990] EU:​C:​1990:​67, para 11. 75 Case C-672/13 OTP Bank [2015] EU:​C:​2015:​185, para 68. 76 Case C-275/10 Residex Capital IV [2011] EU:​C:​2011:​814, para 29; Case C-385/18 Arriva Italia [2019] EU:​C:​2019:​1121, para 84 and ff. Moreover, even where unlawful aid is about to be disbursed, national courts are obliged to prevent this payment from taking place.

262  Research handbook on European State aid law gation was respected; they cannot and should not assess whether the aid can still be declared compatible or not. Moreover, the national court’s obligation to protect individual rights under Article 108(3) TFEU remains unaffected where the Commission has not yet taken a decision, regardless of whether a Commission procedure is pending or not.77 The national court's obligation to order full recovery of unlawful State aid ceases only if, by the time the national court renders its judgment, the Commission has already decided that the aid is compatible with the internal market, or where exceptional circumstances exist rendering the recovery of unlawful aid inappropriate.78 National courts are also competent to adopt interim measures in order to prevent the distortion of competition stemming from the grant of an aid in contravention of the standstill obligation.79 Where there is a risk that the payment of unlawful aid will happen during the course of national court proceedings, the court may find it necessary to issue an interim order preventing the illegal disbursement until the substance of the matter is resolved.80

4.

NOVEL INSTRUMENTS AND CRITICAL ASPECTS

As we have mentioned above, and had the occasion to note elsewhere,81 in its 60 years of existence State aid control has undergone a continuous process of evolution and adaptation. This continues to be true to this very moment, as the recent COVID-19 crisis shows, notwithstanding the by now considerable codification of its substantive and procedural rules. This last part of our chapter is therefore dedicated to a critical account of the main developments in the evolution of the State aid procedure since the adoption of the new Procedural Regulation. 4.1

New Commission’s Investigative Tools

Unlike with the 1999 Procedural Regulation, in 2013 the Commission has not limited itself to collate rules developed by the case-law or its decisional practice (as for the rules on complaints) but has created real new tools to enhance its investigative powers and diminish the reliance on information coming only from sometime reluctant Member States. According to well-settled jurisprudence of the EU courts, the Commission is under a duty to open a formal investigation in all cases in which, in the context of the preliminary phase, it was not able to overcome all the difficulties involved in determining whether the aid is compatible

77 Case C-199/06 CELF [2008] EU:​C:​2008:​79, para 36. As to the obligation of national courts in relation to situations where the formal investigation procedure was opened or not opened, see C-536/19 P (order) EDP España [2019] EU:​C:​2019:​965, paras 37–8. 78 Case C-199/06 CELF (n 77) paras 45–6 and 55; Case C-39/94 SFEI and Others (n 27) paras 70–1. 79 Case C-354/90 Fédération nationale du commerce extérieur des produits alimentaires et Syndicat national des négociants et transformateurs de saumon [1991] EU:​C:​1991:​440, para 11; Case C-284/12 Deutsche Lufthansa [2013] EU:​C:​2013:​755, para 34. 80 Case C-590/14 P DEI and Commission v Alouminion tis Ellados [2016] EU:​C:​2016:​797, para 101. 81 Andrea Biondi, Elisabetta Righini, “An Evolutionary Theory of EU State Aid Control” in Anthony Arnull and Damian Chalmers (eds), The Oxford Handbook of European Law (Oxford University Press 2015).

State aid procedures  263 with the internal market.82 Moreover, the EU Courts have made it clear that the Commission must open a formal investigation when it does not possess all the information necessary to overcome such difficulties.83 Therefore, where provided with information that is not sufficient to show compatibility of the aid, the Commission is under a duty to open a formal investigation, in order to gather the additional information needed. Until the SAM procedural reform of 2013, only the Member States were under an obligation to provide the Commission with the information needed to complete its assessment. Often, the slow progress in complex cases was due to the difficulty for the national administration to gather market data and factual information. Now, Article 7 of the Procedural Regulation allows the Commission to address requests for information directly to “any other Member State, an undertaking or an association of undertakings”. Not to excessively tamper the Commission to Member States centric model, MIT can however be used only after an opening of procedure, when the investigation is proving ineffective for lack of adequate information, and – in case it is addressed to the beneficiary – provided the Member State concerned has agreed.84 So far MIT has been used only in relation to the most complex fiscal State aid investigations into the preferential tax treatment of multinational enterprises.85 The hope is, however, that the Commission will make use of this new tool more extensively and that this, coupled with the possibility to issue sanctions for failure to provide the information requested or for providing false or misleading information,86 will guarantee a timely possession of reliable information and hence complete and speedier assessment of the aid measures investigated. The new Procedural Regulation also grants the Commission the possibility to conduct a sector inquiry across various Member States, when the information available substantiates a reasonable suspicion that State aid measures in a particular sector or based on a particular aid instrument materially restrict or distort competition, or that existing aid measures in a particular sector are not, or no longer, compatible. This instrument, modelled on the similar antitrust sector inquiry, should help the Commission to better understand a particular market from the point of view of State aid policy. If it finds grounds for doing so, the Commission may subsequently decide to open specific investigations to ensure the respect of EU State aid rules. In 2015, the Commission launched its first and only sector enquiry so far “to gain a better understanding of the existence and functioning of capacity mechanisms”.87 The aim of this enquiry was to obtain information from Member States and all other interested stakeholders on the design and use of capacity mechanisms, on issues capacity mechanisms raise and on possible capacity mechanism features that may affect competition between capacity providers and distort cross-border trade (or, to the contrary, that may promote the internal energy market

82 Case T-27/02 Kronofrance (n 49) para 51 and following; Case T-475/04 Bouygues (n 49) para 89; Case T-73/98 Prayon-Rupel (n 49) para 43. 83 Case T-49/93 SIDE v Commission [1995] EU:​T:​1995:​166, paras 68 and following; Case T-73/98 Prayon-Rupel (n 49) paras 107 and following. 84 Article 7(1) and (2) of the Procedural Regulation. 85 See for example Commission Decision of 21 October 2015, Case SA.38374 (2014/C ex 2014/ NN) – The Netherlands – State aid to Starbucks. 86 Article 8 of the Procedural Regulation. 87 Commission Decision initiating an inquiry on capacity mechanisms in the electricity sector pursuant to Article 20a of Council Regulation (EC) 659/1999 (2015) 2814 final.

264  Research handbook on European State aid law and ensure the respect of State aid rules).88 In its Final Report,89 the Commission concluded that many of the capacity mechanisms introduced in Europe were not designed to solve a clearly identified security of supply problem and recalled the need for a robust generation adequacy assessment. Thus, the Commission recommended that the design of most capacity mechanisms be significantly improved. Following this Report, the Commission investigated the capacity mechanisms of several Member States. The majority of cases examined by the Commission did not raise State aid concerns; therefore, the Commission adopted decisions not to raise objections. However, in a number of cases, the Commission decided to open a formal investigation procedure. It should be noted that in the investigations closed so far, the Commission found the aid to be compatible with the internal market.90 4.2

The Commission’s Duties in State Aid Procedures

The Commission generally benefits from a wide margin of discretion in State aid procedures when it comes to assessing the compatibility of an aid.91 Aside from this, however, the case law of the EU Courts has recognised an ever growing number of procedural duties onto the Commission. (a) Duty to seek additional information As seen above, it rests upon the Commission to determine, at the end of a preliminary examination of the aid measure, whether to conclude its analysis with a determination of no aid or compatible aid, or whether to open the formal investigation procedure and eventually issue requests for information and other measures of inquiry. Recently, however, the EU Courts have drawn a thin line between the Commission’s powers to investigate and its duty to do so. A first interesting issue arising in this context is whether, during the preliminary examination procedure, the Commission has an obligation to actively seek relevant evidence from the State, interested parties or other stakeholders. Alas, the answer provided by the Courts is not straightforward, and it differs from case to case. Therefore, as often holds true, the most prudent answer to that question is that it depends on the circumstances of each case. The General Court considers that the Commission should seek additional information, and is obliged to adopt measures of inquiry, if additional information is required to substantiate the Commission’s conclusions. In particular, in Tempus Energy it held that

88 See Elisabetta Righini and Juan Carlos González Fernández, “Capacity Mechanisms and State Aid: Between PSOS, Market Liberalisation, and Security of Supply” (2016) 7(10) JECLAP 661. 89 European Commission SWD, Final Report of the Sector Inquiry on Capacity Mechanisms, SWD (2016) 385 final, available at accessed 19 June 2020. 90 For an overview of the decisions adopted by the Commission, see the following link: accessed 2 November 2020. 91 Case C-310/85 Deufil v Commission [1987] EU:​C:​1987:​96, para 18; Case C-301/87 France (n 74) para 49; Case C-303/88 Italy v Commission [1991] EU:​C:​1991:​136, para 34; Case C-310/99 Italy v Commission [2002] EU:​C:​2002:​143, paras 45–6; Joined Cases T-298/97 etc Mauro Alzetta et al v Commission [2000] EU:​T:​2000:​151, para 130; Case C-409/00 Spain v Commission [2003] EU:​C:​2003:​ 92, para 93.

State aid procedures  265 to carry a sufficient examination for the purposes of the rules that apply to State aid, the Commission is not obliged to limit its analysis to the information contained in the notification of the measure at issue. It can and, where necessary, must seek relevant information so that, when it adopts the contested decision, it has at its disposal assessment factors that can reasonably be considered to be sufficient and clear for the purposes of its assessment. By way of illustration, it has already been held that the Commission had carried out an “active and thorough” examination of the compatibility of an aid measure as it had questioned the substance of the arguments put forward by the Member State (see, to that effect, judgment of 10 December 2008, Kronoply and Kronotex v Commission, T‑388/02, not published, EU:​T:​2008:​556, paragraph 127), whereas an examination was held to be “insufficient” on the basis that the Commission had failed to obtain information that would have allowed it to assess a measure (see, to that effect, judgment of 10 February 2009, Deutsche Post and DHL International v Commission, T‑388/03, EU:​T:​2009:​30, paragraphs 109 and 110).92

Similarly, in Fútbol Club Barcelona, the General Court ruled that when the Commission is confronted, during the preliminary phase proceedings, with evidence capable of leading to “doubt” as to the relevant aspect of the case, it is obliged to open an investigation and to adopt measures of inquiry. Following this rationale, the Court found that “the Commission failed to discharge, to the requisite legal standard, the burden of proving that the … measure conferred an advantage on the beneficiaries”.93 This line of case law of the General Court, still under review by the European Court of Justice, is also tempered by the finding that the Commission is not required to seek additional information to understand the relevant factors of the case if their existence was not raised during the administrative procedure. In Achemos Grupe and Achema v Commission, for instance, the applicants challenged the Commission’s practice to only rely on information provided by the Lithuanian authorities without undertaking further steps required to have a complete and unbiased view of the relevant market. The applicants argued that the Commission should have verified that the applicant had planned to construct another LNG terminal, which allegedly disproved the Commission’s finding of a market failure. The Court dismissed this argument and ruled that the Commission cannot be criticised for failing to take into account matters of fact or of law which could have been submitted to it during the administrative procedure but which were not, since it is under no obligation to consider, of its own motion and on the basis of prediction, what information might have been submitted to it.94

Two main conclusions can be drawn from this case-law. First, when the Commission bears a burden of proof, it must seek additional evidence in order to substantiate its conclusions 92 Case T-793/14 Tempus Energy (n 38) para 69. The Court further found in paragraph 113 that taking into account the characteristics of the aid scheme in the Tempus case and the particular characteristics of its pre-notification phase, “the Commission was not in a situation where it could simply rely on the information provided by the relevant Member State without carrying out its own investigation in order to examine and, if necessary, seek relevant information from, where appropriate, interested parties for the purposes of its assessment”. The judgment is under appeal, see Case C-57/19 P Commission v Tempus Energy and Tempus Energy Technology (pending). 93 Case T-865/16 Fútbol Club Barcelona v Commission [2019] EU:​T:​2019:​113, para 67. The judgment is under appeal, see Case C-362/19 P Commission v Fútbol Club Barcelona (pending). 94 Case T-417/16 Achemos Grupė UAB and Achema AB v European Commission [2019] EU:​T:​ 2019:​597, para 60. The judgment is under appeal, see Case C-847/19 P Achemos Grupė and Achema v Commission (pending).

266  Research handbook on European State aid law if it does not yet possess all the relevant information in the administrative file. Second, the Commission may rely on information exclusively provided by the national authorities, without taking any further steps. This is so if the information on file is consistent and does not prompt doubts. Therefore, complainants or other stakeholders challenging a State aid measure should always make sure to raise with the Commission any relevant facts during the preliminary procedure. Duty to carry out a diligent and impartial examination of a measure (b) Closely linked to the duty to seek additional information, if appropriate, is the duty to carry out a diligent and impartial examination of a measure that the EU Courts have recently reaffirmed. According to settled case law, the Commission is required, in the interests of sound administration of the fundamental rules of the Treaty concerning State aid, to carry out a diligent and impartial examination of a State aid measure.95 That obligation requires in particular a careful examination of the information provided by the Member State.96 This is to ensure that the Commission holds, when adopting the final decision, the most complete and reliable information for its assessment.97 The Commission, although it enjoys a discretion, cannot, however, in view of its duty to undertake a diligent and impartial investigation, omit to require the disclosure of information that could confirm or refute other information, which is relevant for the examination of the measure at issue, but whose reliability is not sufficiently established. 4.3

Scheme versus Individual Aid

Recent case law sheds new light also onto the very technical qualification of an aid measure as a scheme or an individual aid, a notion that the EU Courts have so far addressed on very rare occasions. Pursuant to Article 1(d) of the Procedural Regulation, an aid scheme is “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”. The Procedural Regulation thus identifies two different forms of aid scheme. An individual aid is any aid that is not awarded on the basis of an aid scheme or which is awarded on the basis of an aid scheme, but which must be notified.

95 Case C-559/12 P France v Commission [2014] EU:​C:​2014:​2017, para 63 and the case-law cited; Case T-808/14 Spain v Commission [2016] EU:​T:​2016:​734, para 154. 96 Case T-353/15 NeXovation, Inc v Commission [2019] EU:​T:​2019:​434, para 196. The judgment is under appeal, see Case C-665/19 P NeXovation v Commission (pending). It should be noted that it is in the light of both the information notified by the State concerned and that provided by any complainants that the Commission must form its assessment in the context of the preliminary examination instituted by Article 108(3) TFEU. 97 Case C-559/12 P France (n 97) para 63, also cited in Case T-865/16 Fútbol Club Barcelona (n 93) para 49.

State aid procedures  267 In the case of an aid scheme, the Commission may confine itself to examining the general characteristics of the scheme in question, and is not required to examine each particular case in which it applies in order to determine whether that scheme comprises aid elements.98 In a case of the 1990s, the Court acknowledged that a scheme could exist in the absence of a legislative act explicitly setting out the conditions under which aid is granted.99 That judgment specifically refers to the possibility that an administrative practice can form the basis for a scheme.100 In the recent judgments on the Sardinian airports, the General Court reminded that “even where no legal act establishing such an aid scheme is identified, the Commission may rely on a set of circumstances which taken as a whole indicate the de facto existence of an aid scheme”.101 In that case, the General Court concluded that, even though the airlines were not formally designated as beneficiaries of the aid scheme at issue, the Commission could rely on the set of elements of the mechanism put in place, formally in favour of the airport operators, to conclude that there actually was an aid scheme in favour of the airlines as they were the actual and final beneficiaries of that mechanism. According to the General Court, the aid scheme at issue identified the airlines in a general and abstract manner as stakeholders in the financing system put in place by the Autonomous Region of Sardinia. The General Court took however a much stricter approach in its judgment rendered on 14 February 2019 in the so-called Belgian Excess Profit case.102 In that case, the General Court examined in detail the notion of a scheme of the first type, which requires the fulfilment of three conditions. First, as regards the condition according to which individual aid awards must be made on the basis of an “act”, the General Court considered that the Commission was not able to demonstrate, to the requisite legal standard, the existence of a systematic approach in the administrative practice examined in its decision. Second, in relation to the notion of “further implementing measures”, the General Court examined the margin of appreciation that the national entity in charge of granting a tax exemption (the so-called “Ruling Commission”) enjoyed in verifying whether the conditions for the grant of such exemption were fulfilled. In particular, the General Court focused on what it considered the ability of this entity to influence the amount of the exemption, its characteristics and the conditions under which it was granted in individual cases. Finally, in relation to the third condition, the General Court considered that the beneficiaries of the “excess profit” scheme were not defined in a general and abstract manner.

98 See, inter alia, Joined Cases C‑106/09 P and C‑107/09 P Commission and Spain v Government of Gibraltar and the United Kingdom [2011] EU:​C:​2011:​732, para 122; Case T-68/15 HH Ferries and Others v Commission [2018] EU:​T:​2018:​563, para 68. See also Case C‑438/16 P Commission v French Republic and IFP [2018] EU:​C:​2018:​737, para 63. In this last case, however, the Court found that that, contrary to the Commission’s position, the measure under assessment did not come within the concept of “aid scheme” referred to in Article 1(d). 99 Joined Cases C-324/90 and C-342/90 Germany and Pleuger Worthingenton v Commission [1994] EU:​C:​1994:​129, paras 14–15. 100 ibid para 23. 101 Case T-8/18 EasyJet [2020] EU:​T:​2020:​182, para 164. The judgment is under appeal, see Case C-343/20 P easyJet Airline v Commission (pending). However, this aspect concerning the definition of “scheme” is not part of any ground of appeal. 102 Joined Cases T-131/16 and T-263/16 Kingdom of Belgium and Magnetrol International v European Commission [2019] EU:​T:​2019:​91.

268  Research handbook on European State aid law The General Court judgement in the Belgian Excess profit case has been appealed by the Commission.103 It is now therefore upon the European Court of Justice to decide what is the right standard of analysis under Article 1(d) of the procedural Regulation.

5. CONCLUSION As we go to press and write these conclusions, Europe has reopened its borders after several months of lock-down and suspension of most social life and economic activity. During these months, the European Commission has yet again shown the resilience and adaptation of the State aid system by issuing emergency rules to allow Member States to compensate, at least in part, the dire consequences of this unexpected and radical crisis on businesses and citizens and has approved in record times hundreds of COVID-19-related State aid measures. It is too early to evaluate the lasting impact that this new chapter in the history of the European internal market will have on its State aid rules and procedures. One thing is however already certain, this chapter can only offer a snapshot of a moving train. The voyage continues and will soon require more stories to tell, and analysis and reflection to comprehend them.

Case C-337/19 P Commission v Belgium and Magnetrol International (pending).

103

14. State aid to airports and airlines Brian R. Byrne and Ella Adler1

I. INTRODUCTION This chapter discusses the application of European Union (EU) State aid rules to airports and airlines. As early as 1984, the Commission of the European Communities (today, the European Commission (Commission)) issued a Memorandum on civil aviation, which advocated liberalisation of the sector, and already noted concerns regarding State aid to airlines, and more generally the financial relationship between Member States and State-owned carriers.2 In the decades that followed, the EU gradually liberalised the internal air transport market, granting (for example) the right to air carriers headquartered in one Member State to operate flights between two other Member States. In parallel, the Commission issued a series of increasingly detailed guidelines concerning State aid to airlines (and later, State aid to airports). The 1994 Guidelines on State aids in the aviation sector (1994 Guidelines) notably discussed the restructuring of flag (national) carriers, the public service obligations for air transport services, and State aid of a social character. The 1994 Guidelines did not discuss State aid to airports because, in the Commission’s view, the development of infrastructure was a ‘general measure of economic policy’, and therefore fell outside the scope of the EU State aid rules.3 However, the General Court subsequently took the opposite view, leading the Commission to include airports in the supplemental guidelines of 2005 (2005 Guidelines).4 The 2005 Guidelines also covered start-up aid to airlines. Regarding the air transport market, the 2005 Guidelines noted that the market share of low-cost carriers rose from 4% in 1998 to 21% in 2004.5 The Commission’s concerns related to low-cost carriers, and their financial relationships with public airports, are also reflected in the most recent aviation guidelines, the Guidelines on State aid to airports and airlines of 2014 (2014 Guidelines).6

1 The authors wish to thank Santos Miguel Leyva Rubio, a legal trainee, for his assistance with the research for and preparation of this chapter. Baker Botts has represented Ryanair in a number of EU Court cases, some of which are cited in this chapter. 2 Commission of the European Communities, ‘Civil Aviation Memorandum No. 2, Progress towards the development of a community air transport policy’ COM (84) 72 final. 3 European Commission, Application of Articles 92 and 93 of the EC Treaty and Article 61 of the EEA Agreement to State Aids in the Aviation Sector [1994] OJ C 350/5, paragraph 12 (1994 Guidelines). Regarding State aid of a social character, see Consolidated Version of the Treaty on the Functioning of the European Union [2012] OJ C 326/47 (TFEU), Art 107(2)(a). 4 European Commission, Community guidelines on financing of airports and start-up aid to airlines departing from regional airports (Communication) [2005] OJ C 312/1 (2005 Guidelines). This General Court case is further discussed in Section III.A. 5 2005 Guidelines (n 4), recital 16. 6 European Commission, Guidelines on State aid to airports and airlines [2014] OJ C 99/03 (2014 Guidelines).

269

270  Research handbook on European State aid law The airports sector in the EU has also undergone significant changes in recent decades. Regional airports have adapted their business model to cater to low-cost carriers, and the private ownership or operation of airports has grown. Passenger traffic in the EU has also grown, with the result that Europe’s hub airports are increasingly congested. At the same time, certain regions suffer from overcapacity, due to the prevalence of small regional airports. The 2014 Guidelines are particularly concerned by the profitability of smaller airports, and aim in particular to phase out public assistance to airports that duplicate the services provided by other airports within the same catchment area. This chapter describes the 2014 Guidelines, the Commission’s decisional practice, and the case-law of the Court of Justice of the European Union (EU Courts) related to State aid to airports and airlines. Each of these sources has a different legal weight or precedential value. These nuances are described in Section II. Section III discusses the constituent elements of State aid, as interpreted by the EU Courts, and applied by the Commission to the aviation sector. The compatibility of State aid to airports and airlines, including block exemptions, is described in Section IV. Finally, this chapter concludes with a discussion of potential future trends in the field of State aid to airlines and airports, in light of the Commission’s ongoing review of the 2014 Guidelines, the COVID-19 crisis, and the Commission’s comparatively new powers to investigate distortive practices by third countries (Section V). By contrast, this chapter does not analyse other relevant sources of law which are not industry-specific, but also apply to State aid to airports and airlines. An example would be the application of the Commission’s rescue and restructuring guidelines to airlines in difficulty.7 Those guidelines, which are not industry-specific,8 and the strict conditions reflected therein (e.g. ‘own contribution’, ‘one time, last time’ principle, etc.), have been applied to airlines in several cases,9 often resulting in negative Commission decisions followed ultimately by the collapse of the airline in question.10

7 European Commission, Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty [2014] OJ C 249/1, preceded by Community guidelines on State aid for rescuing and restructuring firms in difficulty [2004] OJ C 244/2 (2014 Guidelines). 8 Although certain sectors, notably financial institutions, are excluded. 9 See, e.g. Commission Decision of 8 January 2012, case SA.30584 (C 38/10) (ex NN 69/10) – on the State aid implemented by Hungary in favour of Malév Hungarian Airlines; Commission Decision of 9 January 2015, case SA.35888 (2013/C) (ex 2013/NN) SA.37220 (2014/C) (ex 2013/NN) SA.38225 (2014/C) (ex 2013/NN) implemented by Cyprus for Cyprus Airways (Public) Ltd; Commission Decision of 9 January 2015, case SA.37220 (2013/NN) – Restructuring aid for Cyprus Airways (Public) Ltd; Commission Decision of 6 November 2015, case SA.35956 (13/C) (ex 13/NN) (ex 12/N) – Rescue aid to Estonian Air; Commission Decision of 6 November, case SA.36868 (14/C) (ex 13/N) – Restructuring aid to Estonian Air; Commission Decision of 15 May 2013, case SA.35900 (2013/NN) – Rescue aid for LOT Polish Airlines; Commission Decision of 29 July 2014, case SA.36874 (2013/C) (ex 2013/N) – Restructuring aid for LOT Polish Airlines SA. 10 For a more detailed discussion of these guidelines in the context of the aviation sector, see Mathieu Guillaumond, ‘Aviation’ in Leigh Hancher, Tom Ottervanger and Piet Jan Slot (eds), EU State Aids (Volume II, 5th edition, Sweet & Maxwell 2016).

State aid to airports and airlines  271

II.

LEGAL STATUS OF THE COMMISSION’S GUIDELINES

This section describes the legal status of the Commission’s guidelines, which are only one element of a broader framework of rules governing State aid to airports and airlines. In particular, it is important to bear in mind that the text of the Treaty on the Functioning of the European Union (TFEU), as interpreted by the EU Courts, always takes precedence. A.

Role of the Commission

Pursuant to Article 108 of the TFEU, Member States must notify new State aid, as well as modifications to existing State aid, to the Commission. The Commission will then assess whether the notified measure indeed constitutes State aid, and if so, whether that aid is compatible with the internal market.11 According to the Court of Justice, the existence of State aid ‘must be determined on the basis of objective elements’.12 Therefore, the Commission has no margin of discretion in which to assess whether a measure constitutes State aid.13 By contrast, the Commission does enjoy discretion when assessing if the State aid in question is compatible with the internal market under Article 107(3) TFEU. The Court of Justice has held that ‘the assessment of the compatibility of aid measures with the internal market, under Article 107(3) TFEU, falls within the exclusive competence of the Commission, subject to review by the Courts of the European Union … In that regard, the Commission enjoys wide discretion …’.14 B.

Legal Effect of Commission Guidelines

In addition to these external limitations on the Commission’s powers – i.e. the TFEU and the jurisprudence of the EU Courts – the Commission also limits its discretion when it issues guidelines, such as the 2014 Guidelines, because the guidelines become binding on

11 The Commission may also assess measures which have not been notified. See generally Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (Procedural Regulation) [2015] OJ L 248/9. 12 Joined Cases T-443/08 and T-455/08 Freistaat Sachsen and Others v Commission [2011] EU:​T:​ 2011:​117, para 104 – upheld on appeal in Case C-288/11 P Mitteldeutsche Flughafen and Flughafen Leipzig-Halle v Commission [2012] EU:​C:​2012:​821, para 39. 13 See e.g. Case T-676/94 Ladbroke Racing v Commission [1988] EU:​T:​1998:​7, para 52. The Commission’s Notice on the Notion of aid describes the Commission’s role as follows (para 3): ‘Given that the notion of State aid is an objective and legal concept defined directly by the Treaty, this Notice clarifies the Commission’s understanding of Article 107(1) of the Treaty, as interpreted by the Court of Justice and the General Court … On issues that have not yet been considered by the Union Courts, the Commission will set out how it considers that the notion of State aid should be construed. The views set out in this Notice are without prejudice to the interpretation of the notion of State aid by the Union Courts; the primary reference for interpreting the Treaty is always the case-law of the Union Courts’. Similarly, the Commission’s State Aid Manual of Procedures for the Application of Articles 107 and 108 states that ‘[t]he concept of aid in Article 107(1) of the TFEU is an objective concept. The Commission has no margin of discretion to decide that a measure is not aid if it meets the conditions’ (para 5). 14 Case C-526/14 Kotnik and Others [2016] EU:​C:​2016:​570, paras 37–40 and the case-law cited.

272  Research handbook on European State aid law the Commission.15 It follows that ‘if a Member State notifies the Commission of proposed State aid which complies with [State aid] guidelines, the Commission must, as a general rule, authorise that proposed aid’.16 Indeed, the Court of Justice has held that the Commission cannot depart from the guidelines ‘at the risk of being found to be in breach of general principles of law, such as equal treatment or the protection of legitimate expectations’.17 However, the key exception to this general principle is if the guidelines themselves ‘depart’ in any way from the rules of the TFEU.18 Therefore, for instance, when the General Court overturned the Commission’s position regarding the applicability of State aid rules to aid to airports, the Commission was obliged to cease applying the provision of the 1994 Guidelines that enshrined this position.19 C.

Legal Effect of Commission Decisions

Although the Commission is typically bound by its own guidelines, in the manner described above, the Commission is not bound by its previous decisions.20 Therefore, to the extent that this chapter refers to Commission decisions, this is intended to be illustrative of the Commission’s typical practice, and should not be read as a statement of the law. D.

Interaction of 2014 Guidelines with Other Rules

The 2014 Guidelines operate in conjunction with, and do not override other Commission guidelines.21 Similarly, other relevant secondary legislation also continues to apply.22

15 Joined Cases T-443/08 and T-455/08 Freistaat Sachsen and Others (n 12) para 104 – upheld on appeal in Case C-288/11 P Mitteldeutsche Flughafen (n 12) para 39. 16 Case C-526/14 Kotnik and Others (n 14) para 43. 17 ibid para 40 and the case-law cited. In Case C-431/14 P Greece v Commission [2016] EU:​C:​2016:​ 145, the Court of Justice listed exceptions to the general rule that the Commission is bound by its own guidelines (see paras 70–2). 18 Case C-431/14 P Greece v Commission (n 17), para 70. Similarly, the guidelines cannot be applied if they ‘breach […] general principles of law, such as equal treatment, in particular where exceptional circumstances, different from those envisaged in those guidelines, distinguish a given sector of the economy of a Member State’, para 70. 19 Case T-128/98 Aéroports de Paris v Commission [2000] EU:​T:​2000:​290. Further discussed below, Section III.A. 20 See e.g. Case T-165/16 Ryanair v Commission [2018] EU:​T:​2018:​952, para 201, citing Joined Cases T‑319/12 and T‑321/12 Spain and Others v Commission [2014] EU:​T:​2014:​604, not published, para 46 and the case-law cited. ‘the classification of a measure as State aid cannot depend on a subjective assessment by the Commission and must be determined regardless of any previous administrative practice of that institution …’. 21 For example, 2014 Guidelines (n 7). By contrast, ‘the Commission will not apply the principles set out in the Guidelines on national regional aid for 2007–2013 and the Guidelines on regional State aid for 2014–2020 or any future guidelines on regional aid to State aid granted for airport infrastructure’, 2014 Guidelines (n 7), para 23. 22 2014 Guidelines (n 7), para 21. For example, Section 4 of 2014 Guidelines discusses the concept of Services of General Economic Interest (SGEI) to which Regulation 1008/2008, and the SGEI Framework also apply. SGEI is not discussed in this chapter.

State aid to airports and airlines  273 E.

Applicability of the 2014 Guidelines

In addition to the legal weight of the Commission’s guidelines, it is important to bear in mind their temporal scope. In general, the 2014 Guidelines apply from 4 April 2014.23 However certain aspects of the 2014 Guidelines are applicable retroactively.24 In practice, the transition from the 2005 to the 2014 Guidelines has been somewhat complex. Commission State aid investigations can last several years,25 and might concern aid that was granted many years prior.26 As a result, the 2005 Guidelines and the 2014 Guidelines have been applied to different aspects of the same case.27 The General Court has also overturned a Commission decision because the legal basis for the decision, which in this case included the 2014 Guidelines, was not sufficiently clear. In 2014, the Commission issued a recovery decision regarding State aid granted by Poland to convert the military airport of Gdynia-Oksywie into a civil airport.28 However, in 2015, the Commission withdrew this decision on the basis that certain elements of the investment did not constitute State aid, and issued a new decision, which did not order the recovery of these elements of the investment (but did order recovery of other elements).29 The Commission failed to open a new investigation procedure before issuing this new decision. The municipalities and the airport operator appealed the decision to the General Court. The applicants notably argued that the Commission should have opened a formal investigation procedure before it adopted the new decision, because the new decision had a different legal basis from the original decision. Specifically, the original decision was based on the Guidelines on National Regional Aid (and, to a lesser extent, the 2005 Guidelines).30 By contrast, the new decision was based on the 2014 Guidelines. By failing to provide the appli 2014 Guidelines, para 171. See 2014 Guidelines, paras 172–174. See also Question 20 of the Commission’s Memo of 20 February 2014, available at https://​ec​.europa​.eu/​commission/​presscorner/​detail/​en/​MEMO​_14​_121, accessed 24 May 2020. 25 For example, in the case of a formal investigation, the Procedural Regulation specifies, in Article 9, that the Commission must ‘endeavor to adopt a decision within an indicative period of 18 months from the opening of the procedure’ (emphasis added). 26 Article 17 of the Procedural Regulation limits the power of the Commission to recover State aid to ten years from the date on which the aid was awarded to the beneficiary. 27 For example, in 2015, the Commission decided to initiate a formal investigation procedure into aid allegedly granted by Romania to Wizz Air at Cluj-Napoca airport. Specifically, the Commission scrutinised marketing, ground handling, and other agreements entered into by the airline and the airport from 2007 to 2010. The Commission applied the 2014 Guidelines to the concept of economic advantage, while it applied the 2005 Guidelines and the 2014 Guidelines to the assessment of compatibility. See Commission Decision of 31 July 2015, case SA.32963 (2012/NN) (ex 2011/CP) – State aid to Wizz Air and Cluj-Napoca Airport. Similarly, in a decision issued in 2014, the Commission applied the compatibility criteria in the 2005 Guidelines to infrastructure financing between 2005 and 2011, and applied Article 107(3)(c) directly to infrastructure financing prior to 2005, because the 1994 Guidelines did not include any compatibility criteria. See Commission Decision of 15 October 2014, case SA. 26500 (2012/C) (ex 2011/NN, ex CP 227/2008) – State aid Flugplatz Altenburg-Nobitz GmbH and Ryanair Ltd, recital 278. 28 Commission Decision of 11 February 2014, case SA. 35388 (13/C) (ex 13/NN and ex 12/N) – Poland – Setting up the Gdynia-Kosakowo Airport. 29 Commission Decision (EU) 2015/1586 of 26 February 2015 on measure SA.35388 (13/C) (ex 13/ NN and ex 12/N) – Poland – Setting up the Gdynia-Kosakowo airport. 30 Commission, Guidelines on National Regional Aid for 2007–2013 [2006] OJ C 54/13. 23 24

274  Research handbook on European State aid law cants with an opportunity to comment on this change to the relevant legal basis, the applicants argued that the Commission failed to respect their rights of defence. The General Court agreed with the applicants, finding that the legal basis for the new decision differed substantially from the legal basis of the original decision.31 In this regard, the General Court implicitly acknowledged the important role of Commission guidelines in the State aid legal framework. Although the passage of time has rendered the transitional issues regarding the introduction of the 2014 Guidelines moot, the issue of the relevant applicable legal framework is likely to arise again when the Commission issues new guidelines. The 2014 Guidelines foresaw a review ‘at the latest six years after 4 April 2014’.32 At the time of writing, the Commission had undertaken a public consultation to evaluate the 2014 Guidelines. This consultation, and the potential outcome thereof, is discussed in Section V. Section V also contains a brief discussion of the Commission’s response to the COVID-19 crisis.

III.

CONSTITUENT ELEMENTS OF STATE AID

As described above, the notion of aid is an objective concept meaning that the Commission has no discretion regarding the assessment of the existence of State aid, nor can it create legally binding precedents in this regard through its decisional practice. Therefore, while this section references the 2014 Guidelines and prior Commission decisions, it focuses primarily on the jurisprudence of the EU Courts. A.

Existence of an Undertaking

This first element of State aid concerns the status of the alleged aid beneficiary. State aid can only be found to exist where the beneficiary to which the State has transferred resources is an ‘undertaking’. The Court of Justice has held that ‘the concept of an undertaking covers any entity engaged in an economic activity, regardless of the legal status of the entity or the way in which it is financed’.33 The Court of Justice has further defined ‘economic activity’ as ‘offering goods and services on a given market’.34 Economic activities may also be defined as the opposite of non-economic activities. An activity is non-economic where it is ‘connected’, by its ‘nature’, its ‘aim’ and ‘the rules’ to which it is subject, ‘with the exercise of powers which are typical of those of a public authority’.35

31 Case T-263/15 Gmina Miasto Gdynia and Port Lotniczy Gdynia Kosakowo v Commission [2017] EU:​T:​2017:​820, para 78. 32 2014 Guidelines (n 7), para 175. The 2014 Guidelines also establish a fixed transitional period for certain compatibility criteria. This is further discussed in Section IV, Compatibility. 33 Joined Cases C-180/98 to C-184/98 Pavlov and Others [2000] EU:​C:​2000:​428, para 74 and the case-law cited. 34 ibid para 75 and the case-law cited. 35 Case C-364/92 SAT Fluggesellschaft v Eurocontrol [1994] EU:​C:​1994:​7, para 30.

State aid to airports and airlines  275 The first Commission guidelines – the 1994 Guidelines – only applied to ‘aid in favour of air carriers’.36 The 1994 Guidelines did not apply to ‘the construction or enlargement of infrastructure projects … such as airports’, because these projects were considered a ‘general measure of economic policy’, falling outside the scope of the State aid rules.37 However, in 2000, in the context of an abuse of dominance investigation under Article 102 TFEU, the General Court held that ‘[t]he provision of airport facilities to airlines …, in return for a fee …, must be regarded as an economic activity’.38 This specific finding was confirmed on appeal.39 By holding that airports were carrying out economic activities, the EU Courts opened the door for State aid rules to be applied to funding or other resources granted to airports. It does not follow, however, that every activity carried out by an airport is an ‘economic activity’. Rather, airports undertake a combination of both economic and non-economic activities. Therefore, as a first step in a State aid analysis, the Commission must consider whether the activity in question is an economic or a non-economic activity. 1. Economic activities The EU Courts have defined economic activity broadly in the context of State aid to airports. In 2004, the airport of Leipzig-Halle and the parent company of the airport decided to construct a new runway, to be financed by their public shareholders. The Commission concluded that this financing constituted compatible State aid;40 nonetheless, the parties appealed the Commission’s finding insofar as the Commission had found that the financing of the runway constituted State aid.41 In support of their action, the applicants argued that the construction of a runway is not an economic activity because (inter alia): (1) the decision to construct the runway was political in nature; (2) a private investor would not engage in such an activity; and (3) engaging in economic activities is not the principal purpose of an airport. The General Court rejected these arguments. The Court noted that ‘the management of airport infrastructure is an economic activity’, in line with previous case-law.42 In this case, the activity consisted of ‘providing services for remuneration in the regional airport market’. The Court also noted that operating the runway constituted ‘part’ of the airport’s ‘economic activity’.43 The Court then held that it would be inappropriate to ‘dissociate the activity of building or enlarging infrastructure’ from ‘the subsequent use to which it is put’. In other words, the classification of the construction activity as economic or non-economic depends on the classi36 1994 Guidelines (n 3) para 10. That said, the 1994 Guidelines allowed the Commission to also evaluate ‘activities carried out inside airports which could directly or indirectly benefit airlines’: 1994 Guidelines, para 12. 37 ibid para 12. 38 Case T-128/98 Aéroports de Paris (n 19) para 121. 39 Case C-82/01 Aéroports de Paris v Commission [2002] EU:​C:​2002:​617, para 78. See also Case C-288/11 P Mitteldeutsche Flughafen (n 12) para 44. 40 Note that this case arose prior to the 2014 Guidelines. However, the court’s findings in this case have been reflected in the 2014 Guidelines (paras 27–8). 41 The Commission’s decision also concerned an agreement between the airport, the airport’s parent company, and the company DHL. However, this section focuses only on the Commission’s and the Court’s findings regarding the concept of an undertaking. 42 Joined Cases T-443/08 and T-455/08 Freistaat Sachsen and Others v Commission [2011] EU:​T:​ 2011:​117, para 93. 43 ibid para 94.

276  Research handbook on European State aid law fication of the subsequent use of that infrastructure. As runways are an essential element of the economic activity of the airport operator, the construction of the runway is therefore also an economic activity.44 The Court of Justice upheld these findings of the General Court.45 The General Court also took a broad approach to the concept of ‘economic activity’ in Brussels South Charleroi Airport v Commission.46 Here, the General Court addressed whether investments in an instrument landing system (ILS), a ground approach instrument, was an economic activity, such that the State aid rules would apply.47 The General Court acknowledged that ‘the control and supervision of air space are typically the activities of a public authority’.48 Nevertheless, the General Court concluded that investment in an ILS is an economic activity, because ‘it contributes to the delivery of the services offered by a civil airport in a competitive context to airlines within the framework of its general activity, which is an economic activity’.49 2. Non-economic activities By contrast, as mentioned above, where the State exercises a public power, or acts in its capacity as a public authority, it engages in a non-economic activity. The 2014 Guidelines set out the following examples of non-economic activities: ‘air traffic control, police, customs, firefighting, activities necessary to safeguard civil aviation against acts of unlawful interference and the investments relating to the infrastructure and equipment necessary to perform these activities’.50 Airports are not considered ‘undertakings’ with respect to the non-economic activities which they carry out. This does not mean, however, that Member States have unencumbered freedom to finance such activities; they must respect two governing principles. First, the State cannot compensate non-economic activities beyond the cost of the activity, as to do so may grant an advantage to the airport.51 Second, the State cannot compensate an airport operator for a non-economic activity where national law requires the operator to bear the costs of the non-economic activity itself.52 Otherwise, the airport may be placed in a more favourable position than its competitors. As set out in the 2014 Guidelines, ‘[p]ublic financing of non-economic activities must not lead to undue discrimination between airports’.53 For example, in the context of proposed operating aid to Erfurt Airport,54 the German authorities submitted that a portion of the aid would finance non-economic activities, includ ibid paras 96 and 100. Case C-288/11 P Mitteldeutsche Flughafen (n 12) para 43. 46 Case T-818/14 BSCA v Commission [2018] EU:​T:​2018:​33. 47 ibid para 100. An ILS is ‘a ground approach instrument which uses a radio signal to increase the landing accuracy of an aircraft approaching a landing runway, thereby allowing a safe landing in adverse weather conditions’. 48 Case T-818/14 BSCA (n 46) para 99 and the case-law cited. 49 ibid para 102. 50 2014 Guidelines (n 7) para 35. See also e.g. Commission Decision of 23 July 2014, cases SA.22030, SA.29404 and SA.32091 (2012/C), recital 192. 51 2014 Guidelines (n 7) para 36. 52 See e.g. Case C-172/03 Heiser EU:​C:​2005:​130, paragraph 36. 53 2014 Guidelines (n 7) para 37. 54 The 2014 Guidelines define operating aid as ‘aid to cover the “operating funding gap”, either in the form of an upfront payment or in the form of periodic instalments to cover expected operating costs (periodic lump sum payments)’ (para 25). The operating funding gap is further defined as ‘the operating 44 45

State aid to airports and airlines  277 ing air traffic control. The Commission analysed the relevant German legislation and noted that certain German airports are required to cover the costs of air traffic control themselves, while others (including Erfurt airport) are eligible for reimbursement from the State. The Commission concluded that this distinction created a possibility that Erfurt could receive an advantage, as compared to its competitor airports, who were not reimbursed for air traffic control costs. Therefore, for the purpose of this Decision, the Commission characterised air traffic control as an economic activity.55 B.

Imputability of the Measure to the State and Financing of Measure through State Resources

While the first condition – existence of an undertaking – focuses on the beneficiary of the alleged aid, the conditions of imputability to the State and use of State resources focus on the party granting the alleged aid. Regarding imputability, measures taken by a public authority, such as a ministry or parliament, are automatically imputed to the State.56 However, the imputability analysis for measures taken by a public undertaking57 is more complex.58 Here, the test is whether the State was ‘involved, in one way or another, in the adoption of those measures’.59 In the seminal Stardust Marine judgment, the Court of Justice set out a non-exhaustive list of indicators by which imputability to the State may be inferred.60 Regarding State resources, Article 107(1) TFEU prohibits aid ‘through State resources in any form whatsoever’.61 The 2014 Guidelines cite ‘direct grants, tax rebates, soft loans, or other types of preferential financing conditions’ as well as ‘benefit[s] in kind’ or ‘subsidised

losses of an airport over the relevant period, discounted to their current value using the cost of capital, that is to say the shortfall (in Net Present Value terms) between airport revenues and operating costs of the airport’ (para 25). 55 Commission Decision of 15 November 2018, case SA. 46945 (2018/NN), recitals 59–67. See also e.g. Commission Decision, SA. 22030 (2007/C) (n 50) recitals 190–207 and Commission Decision of 11 November 2016, case SA. 24221 (2011/C) (ex 2011/NN), recitals 199–222, in which the Commission assessed the nature of the airport’s activities within the specific context of national law. 56 Case C-262/12 Vent De Colère and Others [2013] EU:​C:​2013:​851, paras 17 and 18. See also e.g. Commission Decision of 23 April 2018, case SA.48171 (2018/C) (ex 2018/NN, ex 2017/FC), recital 54. 57 The term ‘public undertaking’ is defined as ‘any undertaking over which the public authorities may exercise directly or indirectly a dominant influence by virtue of their ownership of it, their financial participation therein, or the rules which govern it. A dominant influence on the part of the public authorities shall be presumed when these authorities, directly or indirectly in relation to an undertaking: (i) hold the major part of the undertaking’s subscribed capital; or (ii) control the majority of the votes attaching to shares issued by the undertakings; or (iii) can appoint more than half of the members of the undertaking's administrative, managerial or supervisory body’. Commission Directive 2006/111/EC of 16 November 2006 on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings [2006] OJ L 318/17, Article 2(b). 58 The 2014 Guidelines (n 7) expressly recognise that ‘the resources of a public airport constitute public resources. Consequently, a public airport may grant aid to an airline using the airport if the decision to grant the measure is imputable to the State and the other conditions of Article 107(1) of the Treaty are met’ (para 40). 59 Case C-482/99 France v Commission [2002] EU:​C:​2002:​294, para 52. 60 ibid paras 55–6. 61 Emphasis added.

278  Research handbook on European State aid law services’.62 The transfer of State resources may take place at the national, regional, or local level. A Member State may also transfer ‘State resources’ when it allocates EU funds at its own discretion, such as European Structural and Investment Funds.63 The 2014 Guidelines note that the resources of public airports constitute State resources.64 Therefore, where the other conditions are met, public airports are legally capable of granting State aid to airlines. In 2014, the Commission concluded that airport services and marketing agreements between Veolia Transport Aéroport Nîmes (VTAN), a private subcontractor that operated a publicly owned airport, and Ryanair, a low-cost carrier operating from that airport, constituted unlawful State aid. This case is unusual because the Commission imputed the actions of VTAN, a private undertaking, to the State. To support its position that VTAN’s actions were imputable to the State, the Commission highlighted the following indicators. First, according to the Commission, the public service delegation agreement between VTAN and the French state ‘constrained and influenced VTAN’s commercial policy’. Second, VTAN had indicated during the tender process that it would only ‘pursue’ the airport’s ‘relationship’ with the airline in question ‘in the light of’ the State’s development objectives for the airport. Finally, the Commission considered that VTAN’s remuneration under the public service delegation agreement had been predicated on the conditions under which the airline in question operated from the airport.65 The General Court upheld the Commission’s decision. The General Court accepted that the Commission had established a ‘causal link’ between the terms of the agreement between VTAN and the State, on the one hand, and the agreement between VTAN and Ryanair, on the other. On that basis, the General Court considered that the state was ‘clearly involved in the measures in question’.66 The General Court also upheld the Commission’s finding that State resources had been used.67 In this case, it was common ground that the French state had transferred State resources to VTAN in the form of a flat rate contribution. However, the applicants maintained that VTAN’s resources did not ‘remain under constant public control’ because VTAN had discretion regarding the use of the funds.68 The General Court noted that ‘VTAN enjoyed a certain freedom when negotiating its agreements with the applicants and that there was no mechanical link between the amount of the flat-rate contribution and the parameters of the contracts negotiated’;69 nonetheless, it held that State resources had been used because the flat-rate contribution had enabled VTAN to conclude the agreements with Ryanair, and relieved VTAN of

2014 Guidelines (n 7) para 38. ibid para 38. For an example of the application of this principle, see e.g. Commission Decision of 29 June 2017, case SA. 46408 (2017/NN) – Development of secure and environmentally friendly infrastructure at the Riga international airport, recital 81; Commission Decision of 20 January 2015, case SA. 37582 (2014/NN) – Projet de développement de l’aéroport de La Réunion – Roland Garros, recital 51. 64 2014 Guidelines (n 7) 40. 65 Case T-53/16 Ryanair and Airport Marketing Services v Commission [2018] EU:​T:​2018:​943, para 131. 66 ibid para 132. 67 ibid paras 142–52. 68 ibid para 142. 69 ibid para 151. 62 63

State aid to airports and airlines  279 the costs of the agreements. Therefore, according to the General Court, the alleged advantage ‘result[ed]’ from the payments made to VTAN by the French state.70 C.

Granting of an Advantage

As described by the Court of Justice, an advantage is an economic benefit which an undertaking ‘would not have obtained in normal market conditions’.71 The Commission typically assesses whether an undertaking has received an ‘advantage’ by applying the Market Economy Operator (MEO) test.72 Specifically, the Commission considers ‘whether in similar circumstances a private operator, having regard to the foreseeability of obtaining a return and leaving aside all social, regional-policy and sectoral considerations, would have granted the same funding’.73 Alternatively, in the case of compensation for a public service obligation, the Commission assesses whether an undertaking has received an advantage by reference to the criteria in the Altmark judgment.74 However, the remainder of this section focuses on the MEO test. 1. Airports According to the 2014 Guidelines, the Commission will consider whether the decision to grant funding to an airport was based on ‘sound ex ante profitability prospects for the entity granting the financing’.75 To assess the prospects of profitability, the Commission will review the business plan (if a business plan exists) to determine whether the forecasts in the business plan were ‘realistic’.76 Indeed, the absence of a business plan may indicate that the MEO test is not met.77 While the Commission acknowledges that public financing might be granted to airports for the purpose of regional development or other policy considerations, the Commission does not take these considerations into account when applying the MEO test. However, the Commission may have regard to such factors when assessing whether the aid is compatible.78 2. Airlines (i) Introduction While the type of aid granted to airports may essentially be neatly divided into investment aid or operating aid, airlines have historically received a broader range of types of aid.79 ibid para 151. Case C-39/94 SFEI and Others [1996] EU:​C:​1996:​285, para 60. See also e.g. Joined Cases C-533 and 536/12 P SNCM and France v Commission [2014] EU:​C:​2014:​2142, para 30. 72 This test is also referred to as the ‘Market Economy Investor Test’ or ‘MEIT’. 73 2014 Guidelines (n 7) para 49. For a more detailed discussion of the MEO test, see Chapter 2. 74 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg [2003] EU:​C:​2003:​415, paragraphs 89–93. 75 2014 Guidelines (n 7) para 51. 76 ibid para 51. 77 ibid para 51. 78 ibid para 52. Regarding compatibility, see Section IV, below. 79 For example, in addition to the types of aid discussed in this section, the Commission has also ordered the recovery of State aid to airlines in the form of taxation measures. See Commission Decision of 25 July 2012, case SA.29064 (11/C, ex 11/NN), and the subsequent litigation before the General Court and the Court of Justice (Cases T-473/12 Aer Lingus v Commission [2015] EU:​T:​2015:​78, Case 70 71

280  Research handbook on European State aid law In the 1990s and early 2000s, restructuring aid to failing national flag carriers was particularly prevalent. Indeed, this was one of the primary focuses of the 1994 Guidelines. The Commission has issued separate guidelines covering rescue and restructuring aid, and this type of aid is not considered further in this chapter.80 More recently, the Commission has approved a variety of measures to airlines (and airports) to alleviate the impact of COVID-19 on the sector. The Commission has also scrutinised the financial relationship between airports and airlines. For example, an airport might grant State aid to an airline where the airport has itself been the beneficiary of State aid, and passes this advantage on to an airline. In the case of investment aid, for example, the advantage to the airport is not passed on to an airline where: (1) the infrastructure in question is open to all airlines; and (2) the tariffs paid by the airlines cover the airport’s incremental costs.81 Another scenario in which an airport could be a grantor of State aid is where the airport does not charge the users of the airport fees that are sufficient to cover the airport’s costs. These ‘airport charges’ cases are considered in greater detail below.82 (ii) Airport charges In the 2005 Guidelines, the Commission noted that it had received a number of complaints concerning the ‘negotiating methods’ used by low-cost airlines vis-à-vis public airports.83 The 2005 Guidelines also cited the Commission’s decision concerning Ryanair’s operations at Brussels South Charleroi airport (the Charleroi decision) (which was subsequently annulled by the General Court) as a motivating factor for the issuance of the 2005 Guidelines.84 In the Charleroi decision, the Commission found (inter alia) that the airport and the Walloon region had granted Ryanair advantages through reductions in landing charges and ground-handling services as compared to the official tariffs for these services.85 The Commission also found that marketing contributions and certain other incentives also constituted State aid, but were compatible with the internal market as start-up aid for new routes.86 Although the General Court annulled the Charleroi decision,87 the Commission has continued to scrutinise the finanT-500/12 Ryanair v Commission [2015] EU:​T:​2015:​73 and Case C-164/15 P Commission v Aer Lingus [2016] EU:​C:​2016:​990). 80 2014 Guidelines (n 7), pp 1–28. 81 ibid para 65. For an example of the application of this principle, see Commission Decision (EU) of 20 February 2014, case SA. 22932 (11/C) (ex NN 37/07), paras 401–3. 82 The term ‘airport charges’ is used in this Chapter as an umbrella term to refer generally to the financial relationship between airports and airlines. This relationship may also include, for example, marketing services provided by the airline to the airport. 83 2005 Guidelines (n 4) para 17. 84 For a discussion of the application of the MEO test in this case, see Chapter 2, pages 17–18. 85 Commission Decision of 12 February 2004 concerning advantages granted by the Walloon Region and Brussels South Charleroi Airport to the airline Ryanair in connection with its establishment at Charleroi (notified in Number C(2004) 516) [2004] OJ L137/1, Articles 1 and 2. 86 ibid Article 4. 87 Case T-196/04 Ryanair v Commission [2008] EU:​T:​2008:​585. The General Court overturned the Commission’s decision because the Commission had erroneously considered that the Walloon Region, the owner of the airport, and the airport concessionaire, which was also controlled by the Walloon Region, were not the same legal entity. The General Court also found that the Commission ought to have applied the private investor test to airport charges adopted by the Walloon Region. The General Court’s judgment was not appealed.

State aid to airports and airlines  281 cial relationship between low-cost carriers and certain (regional) airports from which these carriers operate.88 In the 2014 Guidelines, the Commission observes that airports traditionally ‘published [a] scheme of airport charges based on passenger numbers and aircraft weight’.89 However, the Commission notes that ‘the evolution of the market and the close cooperation between airports and airlines have gradually paved the way for a wide variety of commercial practices, including long-term contracts with differentiated tariffs and sometimes substantial amounts of incentives and marketing support paid by airports and/or local authorities to airlines’.90 The 2014 Guidelines go on to state that ‘public funds earmarked for supporting airport operations may be channelled to airlines in order to attract more commercial traffic, thereby distorting air transport markets’.91 In such a case, to assess whether an advantage has been granted, the Commission will apply the MEO test to determine: (1) ‘whether the price charged for the airport services corresponds to the market price’; or (2) whether an ex ante analysis demonstrates ‘that the airport/airline arrangement will lead to a positive incremental profit contribution for the airport’.92 If either of these questions is answered in the negative, the Commission will conclude that the airline has received an advantage. Of course, this assessment is fact-specific, as it involves the specific financial situation of the airport in question. Nonetheless, the 2014 Guidelines provide general principles the Commission will apply, as described below. Comparison with the market price To assess whether the price the airport charges to an airline corresponds to the market price, the Commission must identify an appropriate benchmark. This benchmark serves as the market price with which to compare the price in the case under investigation. The 2014 Guidelines provide that, to identify a suitable benchmark, there must be ‘a sufficient number of comparable airports providing comparable services under normal market conditions …’.93 However, the 2014 Guidelines then observe that, due to the prevalence of public funding in the European airports sector, ‘the Commission has strong doubts that at the present time, an appropriate benchmark can be identified to establish a true market price for services provided by airports’.94 In other words, the Commission considers that the comparative analysis is not a suitable method with which to determine whether an airport has granted an airline an advantage.

88 Examples include Commission Decision of 27 January 2010, case C 12/08 (ex NN 74/07) – Slovakia – Bratislava Airport and Ryanair; Commission decision of 23 October 2007, case C 24/07 (ex NN 71/06) – State aid to Flughafen Lübeck GmbH and Ryanair; Commission decision of 10 July 2007, case SA.23324 – C 25/07 (ex NN 26/07) – Finland Finavia, Airpro and Ryanair; Commission decision of 10 July 2007, case SA.15376 (C 27/07) (ex NN 29/07) – Flughafen Berlin-Schönefeld GmbH; Commission decision of 12 September 2007, C 37/07 (ex NN 36/07) – Alghero airport; Commission decision of 10 July 2007, case C 26/07 (ex NN 28/07) – NERES – Dortmund Airport; Commission decision of 28 November 2007, case C 53/07 (ex NN 12/07) – Aid granted to the company Airport Marketing Services. 89 2014 Guidelines (n 7) para 7. 90 ibid. 91 ibid. 92 ibid para 53. 93 ibid para 55. 94 ibid para 59.

282  Research handbook on European State aid law The Commission has also provided additional reasons for rejecting the comparative approach in this sector in its decisions. For example, the Commission has cited: (1) the liberalisation of the air transport market in general, and the resulting variety of commercial practices; and (2) the differences in costs and cost structure between airports, which may be based on passenger traffic, the number of airlines operating at the airport, or the state of the airport’s infrastructure.95 The Commission’s refusal to rely on the comparative analysis has been upheld by the General Court96 but has not yet been considered by the Court of Justice. The 2014 Guidelines suggest that the absence of suitable benchmarks ‘may change or evolve in the future’.97 However, it remains to be seen whether or not the Commission amends this view when the 2014 Guidelines are updated. In the event the Commission does opt to apply the comparative analysis, the 2014 Guidelines provide that any such benchmarking exercise ‘should be based on a comparison of airport charges, net of any benefits provided to the airline (such as marketing support, discounts or any other incentive), across a sufficient number of suitable “comparator airports”, whose managers behave as market economy operators’.98 Ex ante profitability analysis As noted above, the Commission currently considers that the comparator analysis is not a feasible approach to applying the MEO test to airport-airline agreements. Rather, the Commission considers that the ex ante profitability analysis is ‘the most relevant criterion for the assessment of arrangements concluded by airports with individual airlines’.99 Under this approach, the Commission will assess whether the arrangement between the airport and the airline is such that ‘the airport is capable of covering all costs stemming from the arrangement, over the duration of the arrangement, with a reasonable profit margin on the basis of sound medium-term prospects’.100 Regarding revenues, the Commission considers both aeronautical revenues (i.e. revenues from airport charges) and non-aeronautical revenues (i.e. revenues generated from the traffic to the airport due to the presence of the airline, such as revenues generated from leasing retail

95 Commission Decision of 22 February 2018, case SA. 31149 (2012/C) – Germany – Alleged State aid to Ryanair, paras 61–2. 96 See e.g. Case T-165/15 Ryanair (n 20) paras 138–149, regarding Commission Decision (EU) 2016/287. 97 2014 Guidelines (n 7) para 59. 98 ibid para 60. In particular, the Commission will have regard to the following indicators: ‘(a) traffic volume; (b) type of traffic (business or leisure or outbound destination), the relative importance of freight and the relative importance of revenue stemming from the non-aeronautical activities of the airport; (c) type and level of airport services provided; (d) proximity of the airport to a large city; (e) number of inhabitants in the catchment area of the airport; (f) prosperity of the surrounding area (GDP per capita); (g) different geographical areas from which passengers could be attracted’. 99 ibid para 61. 100 ibid para 63. See also e.g. Commission Decision of 20 February 2014, case SA. 18855 (C 5/08) (ex NN 58/07) – Denmark – The 1999 Agreements, para 90; Commission Decision of 23 July 2014, case SA.22030 (2007/C) – Germany Financing regarding Flughafen Dortmund GmbH, para 241.

State aid to airports and airlines  283 space, parking, restaurants, etc.).101 Regarding costs, the Commission considers the costs ‘incurred by the airport in relation to the airline’s activity at the airport’.102 Directive 2009/12 Finally, it is important to note that State aid law is not the only branch of law relevant to the issue of airport charges. While the State aid jurisprudence tackles airport charges that the Commission deems are too low, the EU legislature has meanwhile made efforts to tackle airport charges that are too high. In 2009, the airport charges Directive entered into force.103 The purpose of the Directive is to ‘establish a common framework regulating the essential features of airport charges and the way they are set, as in the absence of such a framework, basic requirements in the relationship between airport managing bodies and airport users may not be met’.104 The Directive prohibits airport charges that discriminate among airport users.105 It also grants airport users the right to be consulted ‘with respect to the operation of the system of airport charges, the level of airport charges and, as appropriate, the quality of service provided’106 and specifies certain information the airport managing body must provide during these consultations.107 The Directive applies to airports with annual traffic of over five million passenger movements, and to ‘the airport with the highest passenger movement in each Member State’.108 D.

Selectivity of the Measure

To constitute State aid, the measure in question must ‘favour … certain undertakings or the production of certain goods’.109 Where aid is granted on an individual basis, rather than as part of a scheme, there is a presumption that the advantage is ‘selective’.110 However, in the case of general aid schemes, no such presumption applies, and the Commission must investigate whether or not the condition of selectivity is satisfied. For example, the Commission concluded that the condition of selectivity was satisfied in a general aid scheme for French airports as the subsidies in question were only available to airports with less than three million passengers per annum.111

101 2014 Guidelines (n 7) para 64. See also eg Commission Decision of 20 February 2014, case SA.22932 (11/C) (ex NN 37/07) – Marseille Provence Airport, para 348. 102 2014 Guidelines (n 7) para 64. 103 European Parliament and Council Directive (EC) 2009/12 on airport charges [2009] OJ L70/11. 104 ibid recital 2. 105 ibid Article 3. 106 ibid Article 6. 107 ibid Article 7. 108 ibid Article 1(2). 109 ibid Article 107(1). 110 Case C-270/15 P Belgium v Commission [2016] EU:​ C:​ 2016:​ 489, para 49. For example, see Commission Decision of 5 January 2017, case SA. 44097 (2016/N) – Lappeenranta airport in south-eastern Finland, para 32; Commission Decision of 18 December 2017, case SA. 46378 (2017/N) – Modernisation of Debrecen International Airport, para 44. 111 Commission Decision of 8 April 2015, case SA. 38936 (2014/N) – France, para 29.

284  Research handbook on European State aid law To date, the most important case analysing the alleged selectivity of measures, granted by airports to airlines, is the Lübeck case.112 In 2007, the Commission adopted a decision to initiate the formal investigation procedure regarding, inter alia, the schedule of airport charges at Lübeck airport. Regarding selectivity, the Commission found that the schedule of airport charges was selective, because it only applied to airlines operating at Lübeck airport. The airport appealed the Commission’s opening decision to the General Court, which annulled the Commission’s decision. The Court held that, to assess whether or not a schedule of tariffs established by a public entity for the use of a good or service was selective, the correct reference point was the companies using the good or service. In other words, the Commission should only consider the situation of airlines operating at Lübeck airport.113 The Commission appealed this decision to the Court of Justice. The Commission argued that the General Court’s position conflicted with previous jurisprudence of the EU Courts, according to which a measure is selective ‘if it applies only to certain sectors of the economy or to certain undertakings in a given sector’.114 Because the airport charges only applied to airlines operating at Lübeck airport, and not to all airlines, the measure was therefore selective. The Commission also argued that Lübeck airport competes directly with the nearby Hamburg airport, and that the advantage conferred by the airport charges at Lübeck airport only was therefore selective.115 The grand chamber of the Court of Justice rejected the Commission’s arguments. In particular, it held that: whilst it cannot be ruled out that a measure by which a public undertaking lays down the conditions for the use of its goods or services is selective despite applying to all the undertakings using those goods or services, it is necessary, in order to determine whether that is the case, to have regard not to the nature of that measure but to its effects, by examining whether the advantage which it is supposed to procure in fact benefits only some of those undertakings as opposed to others, although, in the light of the objective pursued by the regime concerned, all of the undertakings are in a comparable factual and legal situation.116

The Court of Justice further noted that the ‘examination of whether such a measure is selective is thus, in essence, coextensive with the examination of whether it applies to that set of economic operators in a non-discriminatory manner’.117 Regarding the effect of the airport charges at Lübeck airport on airlines operating from the nearby Hamburg airport, the Court of Justice held that an advantage is selective only if, within the context of a particular legal regime, it has the effect of conferring an advantage on certain undertakings over others, in a different sector or the same sector, which are, in the light of the objective pursued by that regime, in a comparable factual and legal situation. … In order for the [schedule of airport charges] to be selective, it would have to be established that, within the context of a legal regime under which all those airports fall, that schedule confers an advantage on airlines 112 Litigation before the General Court and Court of Justice stemming from Commission Decision of 22 February 2012, cases No SA.27585 and No SA.31149 (2012/C) (ex NN/2012, ex CP 31/2009 and CP 162/2010) – Germany. 113 Case T-461/12 Hansestadt Lübeck v Commission [2014] EU:​T:​2014:​758, paras 51–4. 114 Case C-524/14 Commission v Hansestadt Lübeck [2016] EU:​C:​2016:​971, para 34. 115 ibid para 36. 116 ibid para 49 (emphasis added). 117 ibid para 53.

State aid to airports and airlines  285 using Lübeck Airport to the detriment of airlines using the other airports which are, in the light of the objective pursued by that regime, in a comparable factual and legal situation.118

Under German law, each airport operator establishes its own airport charges. Because of this, the Court of Justice concluded that the ‘relevant reference framework for examining whether the [schedule of airport charges] had the effect of favouring certain airlines over others which were in a comparable factual and legal situation was that of the regime applicable to Lübeck Airport alone’.119 Because these charges applied to all airlines operating at Lübeck Airport in a non-discriminatory manner, the measure was not selective.120 In cases involving alleged aid from airports to airlines, the Commission must be careful to adhere to the principles laid down in the Lübeck judgment when establishing selectivity, or otherwise risk annulment by the General Court.121 E.

Effect of the Measure on Competition and Trade between Member States

This condition contains two distinct elements which are typically considered jointly: the aid must (i) distort or threaten to distort competition by favouring certain undertakings or the production of certain goods and (ii) must affect trade between Member States.122 As regards the first element, the focus is on whether the measure in question will strengthen one undertaking’s competitive position with respect to the other undertakings with which it competes.123 As regards the second element, it is not necessary that the aid has an actual effect on trade but only to establish that it ‘is liable to affect such trade’.124 As mentioned above, the 2014 Guidelines reflect the Commission’s view that airports are commercial ventures that compete with one another. The 2014 Guidelines list various factors to assess competition between airports (from the perspective of airlines) including: (1) the type of airport services provided; (2) congestion; (3) the level of charges; and (4) the overall conditions for use of the airport infrastructure and services.125 The 2014 Guidelines also consider the possibility that funding to airports could distort intermodal competition e.g. competition between airplanes and high speed trains.126 The Commission – and the EU Courts – apply a low threshold, and ‘for a measure to distort competition it is sufficient that the recipient of the aid competes with other undertakings on markets open to competition’.127 Indeed, the EU Courts have held that even subsidies to an

ibid paras 58–9 (emphasis added). ibid para 62. 120 ibid paras 63–4. 121 See for instance Case T-77/16 Ryanair and Airport Marketing Services v Commission [2018] EU:​ T:​2018:​947, paras 29–47. 122 Commission 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] OJ C 262/1, paras 185–6. 123 ibid para 187. 124 ibid para 190. 125 2014 Guidelines (n 7) para 43. 126 ibid para 44. 127 Commission Decision of 29 May 2017, case SA.45863 (2016/N) – Sweden, recital 42; see also e.g. Commission Decision of 31 July 2015, case SA.39757 (2015/N) – Ireland support scheme, recital 49. 118 119

286  Research handbook on European State aid law undertaking that does not provide any services outside its state of origin may have an effect on trade between Member States.128 Despite this low threshold, the Commission nonetheless decided that alleged aid to an airport on the Isles of Scilly did not distort competition or affect trade between Member States. In this case, the Commission found, for example, that the airport was not in competition with any other airport or ferry service, and that the length of the runways precluded airlines from operating additional longer routes.129 However, the Commission also qualified this case as ‘exceptional’.130

IV. COMPATIBILITY A.

Legal Framework

Article 107 TFEU lists a number of instances in which State aid ‘shall be’ or ‘may be considered to be’ compatible with the common market. The 2014 Guidelines focus on Article 107(3) (c), which provides that ‘aid 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’ may be considered to be compatible.131 As noted above (Section II), while the Commission has no discretion vis-à-vis the existence of State aid, it has a considerable margin of discretion in which to assess the compatibility of aid under Article 107(3) TFEU. The 2014 Guidelines therefore list detailed compatibility criteria. In addition to the 2014 Guidelines, the General Block Exemption Regulation, as amended, (GBER) is also relevant to the question of compatibility, as it covers ‘regional airports’.132 The GBER defines ‘regional airport’ as ‘an airport with average annual passenger traffic of up to 3 million passengers’.133 The GBER was scheduled to expire at the end of 2020. However, the Commission has extended the application of the GBER until the end of 2022.134

Case C-280/00 Altmark (n 74) paras 77–82. Commission Decision of 7 May 2014, case SA. 38441 (2016/N), recitals 32–6. 130 ibid, recital 36. 131 The 2014 Guidelines (n 7) also briefly discuss Aid of a Social Character, under Article 107(2)(a). See paras 156–7. 132 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty [2014] OJ L187/1, as amended by Commission Regulation (EU) 2017/1084 of 14 June 2017 amending Regulation (EU) No 651/2014 as regards aid for port and airport infrastructure, notification thresholds for aid for culture and heritage conservation and for aid for sport and multifunctional recreational infrastructures, and regional operating aid schemes for outermost regions and amending Regulation (EU) No 702/2014 as regards the calculation of eligible costs [2017] OJ L156/1. 133 ibid, recital 153. 134 European Commission, ‘State aid: Commission to prolong EU State aid rules and launch evaluation’ (press release, 7 January 219) available at https://​ec​.europa​.eu/​commission/​presscorner/​detail/​en/​IP​ _19​_182, accessed 25 May 2020. 128 129

State aid to airports and airlines  287 B.

2014 Guidelines

1. Introduction The 2014 Guidelines set out six cumulative criteria, further discussed below, to determine whether State aid to airports or airlines is compatible with the common market.135 The application of these criteria varies depending on the type of State aid in question. The 2014 Guidelines consider three types of aid: (1) investment aid to airports; (2) operating aid to airports; and (3) start-up aid to airlines. The Commission considers that operating aid is ‘very distortive’.136 However, in drafting the 2014 Guidelines, the Commission was cognisant that, in fact, ‘regional airports [receive] widespread operating support from public authorities’.137 Therefore, the 2014 Guidelines implement a ‘transitional period’ to phase out operating aid to airports. In this regard, the 2014 Guidelines are more permissive than the 2005 Guidelines. During the ten-year transitional period, which ends in April 2024, operating aid to airports with up to three million passengers is compatible, if the aid meets the requirements of the 2014 Guidelines. After the transitional period, no operating aid to airports will be considered compatible with the internal market (subject to the possibility that the Commission might extend the transitional period following its public consultation on the 2014 Guidelines).138 Therefore, when assessing compliance with the criteria below, the Commission will also consider whether the airport will be able to fully cover its own costs by the end of the transitional period.139 2. Compatibility criteria The six criteria with which the Commission assesses compatibility are described below. As mentioned above, within these six broad criteria, the Commission applies slightly different conditions to: (1) investment aid to airports; (2) operating aid to airports; and (3) start-up aid to airlines. These nuances are mentioned briefly below. The six criteria, and the application of the criteria to each type of aid, are also summarised in Tables 1 and 2 of the Annex to the 2014 Guidelines. (i) Contribution to a well-defined objective of common interest According to the 2014 Guidelines, this first criterion is satisfied when the aid: ‘(a) increases the mobility of Union citizens and the connectivity of the regions by establishing access points for intra-Union flights; … (b) combats air traffic congestion at major Union hub airports; or

135 2014 Guidelines (n 7) para 79. The 2014 Guidelines also list a seventh criterion, transparency, which relates to the type of information that should be published by Member States. See 2014 Guidelines (n 7) paras 161–3, as amended by the Communication from the Commission amending the Communications from the Commission on EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks, on Guidelines on regional State aid for 2014–2020, on State aid for films and other audiovisual works, on Guidelines on State aid to promote risk finance investments and on Guidelines on State aid to airports and airlines [2014] OJ C198/1. 136 2014 Guidelines (n 7) para 13. 137 ibid. 138 That said, operating aid may be justified on the basis of horizonal State aid rules, such as the SGEI framework. 139 See for example 2014 Guidelines (n 7) para 115.

288  Research handbook on European State aid law (c) facilitates regional development’.140 If the aid results in the ‘duplication of unprofitable airports or the creation of additional unused capacity’, the Commission will not consider that the project contributes to an objective of common interest.141 Specifically, the Commission will have regard to airports within the same catchment area. The 2014 Guidelines define ‘catchment area’ as ‘a geographic market boundary that is normally set at around 100 kilometres or around 60 minutes travelling time by car, bus, train or high-speed train’. The 2014 Guidelines further note, however, that ‘[t]he size and shape of the catchment area varies from airport to airport, and depends on various characteristics of the airport, including its business model, location and the destinations it serves’.142 For example, for the purpose of assessing start-up aid to airlines at Comiso airport, the Commission considered whether Comiso airport was in the same catchment area as Catania airport. Catania airport is only 85km away from Comiso airport. However, the Italian authorities argued that the journey between the two airports by car takes over 60 minutes, due to the absence of highways for the majority of the route. The Italian authorities pointed to the high levels of traffic at peak times, and estimated the journey at between 84 and 96 minutes.143 In addition, the authorities argued that previous increases in passenger traffic at Comiso airport had not resulted in corresponding decreases at Catania airport.144 The Commission accepted these arguments, and concluded that the start-up aid in this case would contribute to a well-defined objective of common interest.145 (ii) Need for State intervention Based on the common objective identified as the first criterion above, the Commission will then consider whether State aid is necessary to achieve this objective.146 In other words, the Commission will assess whether the aid ‘can bring about a material improvement that the market itself cannot deliver’.147 The 2014 Guidelines focus on the size of the relevant airport. The 2014 Guidelines note that small airports are more likely than large airports to encounter difficulties in financing investments or financing their operations privately. Similarly, the Commission notes that smaller airports face ‘less favourable conditions’ for developing their services, for example through new routes, than larger airports.148 The 2014 Guidelines describe the likelihood that airports of different sizes would require public financing, based on the number of passengers

2014 Guidelines (n 7) paras 84 and 113. Condition (b) does not apply to start-up aid to airlines. ibid paras 85, 114 and 140. 142 ibid para 25, point 12. 143 Commission Decision of 23 March 2016, case SA. 41815 (2015/N) – Start-up aid for new routes from/to the airport of Comiso, recitals 39–41. 144 ibid recital 42. 145 ibid recital 45. 146 2014 Guidelines (n 7) para 87. 147 ibid para 87; para 116. 148 ibid para 141. 140 141

State aid to airports and airlines  289 per annum.149 In particular, the Commission applies the following cut-off points, above which the condition for the need for State intervention will typically not be fulfilled. ●● Investment aid to airports: five million passengers per annum.150 ●● Operating aid to airports: three million passengers per annum.151 ●● Start-up aid to airlines: five million passengers per annum (at the airport in question).152 However, there is an exception for start-up aid for routes to/from an airport located in a remote region, irrespective of the size of the airport concerned.153 By way of example, in Modernisation of Riga International Airport, the Commission considered investment aid to an airport with between three and five million passengers per annum. The Commission noted that the ‘proposed investment activities cannot generate net economic revenue to offset the capital investment costs during the life time of fixed assets’.154 Therefore, private financing was not a feasible alternative.155 The Commission also noted a number of additional considerations that reinforced its finding that there was a need for State intervention, including that the airport’s infrastructure was less developed than competing airports in other Member States, that there was no other airport in the same catchment area, and that the airport fulfilled a support function for NATO military aircraft.156 (iii) Appropriateness of State aid as a policy instrument In addition to assessing the need for State intervention, the Commission will also consider whether there is an alternative less distortive policy instrument, or aid instrument, that would achieve the same objective. This criterion of appropriateness can generally be fulfilled by the Member State demonstrating that it considered and compared other policy instruments and less distortive aid measures.157 For example, in Regional Airports Programme 2015–2019, the Irish authorities considered providing a loan instead of a direct grant to the relevant airports. The Commission accepted that the requirement to repay the loan would be too burdensome on the airports, and would hinder the airports’ objective to become self-sufficient.158 Therefore, the Commission concluded that, in this case, the direct grant was an appropriate instrument of intervention.159 Regarding operating aid to airports, the amount of the operating aid should be calculated based on the relevant ex ante business plan, rather than ex post, and should be distributed either

ibid para 89; para 118. ‘Airports with annual passenger traffic above 5 million are usually profitable and are able to cover all of their costs, except in very exceptional circumstances’. ibid para 89(e). 151 ‘The Commission considers that in order to be eligible for operating aid, the annual traffic of the airport must not exceed 3 million passengers’. ibid para 119. 152 ‘Start-up aid for routes linking an airport with more than 5 million passengers per annum not located in remote regions cannot be considered compatible with the internal market’. ibid para 145. 153 ibid para 143. This exception was applied in, for example, Commission Decision of 12 October 2015, case SA. 40744 (2015/N) – Trapani airport start-up aid. 154 Commission Decision, case SA. 46408 (n 63) recital 104. 155 ibid recital 104. 156 ibid recitals 105–6. 157 2014 Guidelines (n 7) paras 91 and 120. 158 Commission Decision, case SA. 39757 (n 127) recital 108. 159 ibid recital 109. 149 150

290  Research handbook on European State aid law up-front or in fixed instalments. This is to prevent a scenario in which the airport in question is incentivised to operate inefficiently, in the knowledge that its operating losses will be covered by the operating aid.160 Indeed, in principle, the Commission does not consider that ex post increases in the amount of the operating aid are compatible.161 However, in exceptional circumstances, the amount of the operating aid may be calculated on the basis of the initial operating funding gap at the beginning of the transitional period, rather than on the projected funding gap described in the previous paragraph.162 For example, in Operating aid to Lappeenranta airport, the Finnish authorities calculated a maximum aid amount based on the initial operating funding gap, as they considered that the ‘future costs and revenue developments at the airport of Lappeenranta are surrounded by a high degree of uncertainty’.163 The Commission accepted this approach, due to the ‘small size of the airport and the lack of regular commercial flights’.164 Regarding start-up aid to airlines, the Commission also requires that the ex ante business plan for the new route demonstrates that the route ‘has prospects of becoming profitable without public funding’ after three years.165 In the absence of such a business plan, the airline must commit to operating the route ‘for a period at least equal to the period during which it received start-up aid’.166 (iv) Existence of incentive effect The Commission considers that State aid has an ‘incentive effect’ where, in the absence of the aid, the investment project would not have been undertaken,167 the economic activity at the airport would be reduced,168 or the level of economic activity of the airline at the airport concerned would not be expanded.169 For example, in Alleged aid to Frankfurt Hahn Airport and Ryanair, the Commission noted that ‘without the aid, the scale of the operations at Frankfurt-Hahn airport would be severely impacted and reduced, leading eventually to the market exit of the airport due to uncovered operating losses’.170 The Commission therefore concluded during the preliminary investigation that the operating aid had an incentive effect. In the case of investment aid to airports, the Commission assesses the incentive effect by comparing the investment project with and without the aid.171 Where it is not possible to make such a comparison, the Commission applies an assumption that there is an incentive effect

2014 Guidelines (n 7) para 121. ibid para 121. 162 ibid para 122. The ‘initial operating funding gap’ is defined as ‘the average of the operating funding gaps (that is to say the amount of operating costs not covered by revenues) during the five years preceding the beginning of the transitional period (2009 to 2013)’ para 122. 163 Commission Decision, case SA. 44097 (n 110) recital 56. 164 ibid recital 18. 165 2014 Guidelines (n 7) para 147. 166 ibid para 147. 167 ibid para 94. 168 ibid para 124. 169 ibid para 148. 170 Commission Decision of 26 October 2018, case SA. 43260 (2015/FC) – Alleged aid to Frankfurt Hahn Airport and Ryanair, recital 318. 171 2014 Guidelines (n 7) para 95. 160 161

State aid to airports and airlines  291 in cases where there is a capital cost funding gap.172 The capital cost funding gap is the ‘difference between the positive and negative cash flows (including investment costs into fixed capital assets) over the lifetime of the investment in net present value terms’.173 The Commission also applies the rule that a beneficiary cannot commence the project in question before submitting an application to the granting authority of the Member State. Otherwise, the aid will be deemed incompatible.174 (v)

Proportionality of the aid amount

Investment aid to airports To be compatible with the internal market, the amount of the investment aid cannot exceed the ‘minimum needed to induce the additional investment … in the area concerned’.175 The Commission assesses proportionality by reference to: (1) the amount of the aid; and (2) the intensity of the aid.176 First, the proposed investment aid cannot exceed the capital cost funding gap, as defined above (Section IV.B.2(iv)).177 Second, the investment aid can only contribute to a particular percentage of the financing of the total ‘eligible investment costs’ (described in the 2014 Guidelines as the ‘intensity’ of the aid). Eligible costs are costs ‘relating to the investments in airport infrastructure’.178 It follows that eligible costs exclude costs ‘relating to non-aeronautical activities’ such as ‘parking, hotels, restaurants and offices’.179 The 2014 Guidelines set out different levels of permissible intensity, depending on the number of passengers.180 The Commission notes that airports with over five million passengers per annum may receive investment aid only ‘under very exceptional circumstances, characterised by a clear market failure and taking into account the magnitude of the investment, the impossibility to finance the investment on capital markets, a very high level of positive externalities and the competition distortions’.181 Operating aid to airports As mentioned above, airports are expected to be in a position to cover their operating costs by the end of the transitional period (i.e. April 2024). The 2014 Guidelines limit the maximum amount of permissible operating aid during the transitional period to airports with over

ibid para 94. ibid para 96. 174 ibid para 93; para 149. 175 2014 Guidelines (n 7) para 79(e). 176 For an example of the manner in which the Commission assesses proportionality, see e.g. Commission Decision of 10 November 2015, case SA.39315 (2015/N) – Tallinn Airport airside area development area, recitals 61–71; Commission Decision of 6 November 2015, case SA. 40433 (2015/N) – Investititionsprogramm Flughafen Klagenfurt, recitals 76–84. 177 2014 Guidelines (n 7) para 99. 178 ibid para 97. 179 ibid. 180 ibid. 181 ibid para 105. 172 173

292  Research handbook on European State aid law 700,000 passengers per annum to ‘50% of the initial funding gap’.182 After the transitional period, ‘no operating aid to airports will be considered compatible with the internal market’.183 Regarding airports with less than 700,000 passengers per annum, the maximum amount of permissible operating aid during the first five years of the ten year transitional period referred to above (Section IV.B.1) is ‘80% of the initial operating funding gap’.184 In 2018, the Commission was scheduled to review the application of the 2014 Guidelines with respect to airports with less than 700,000 passengers per annum. The Commission has postponed this review until April 2020, in the context of the overall review of the 2014 Guidelines. Pending this latter review, the rules set out in the 2014 Guidelines continue to apply to airports with up to 700,000 passengers per annum until April 2024.185 Start-up aid to airlines The 2014 Guidelines provide that start-up aid to airlines may cover up to 50% of the airport charges for the route, for a maximum period of three years.186 (vi) Avoidance of undue negative effects on competition and trade The Commission assesses whether the aid will lead to the duplication of unprofitable airports or the creation of additional unused capacity. In particular, operating aid will only be considered compatible where all other airports in the same catchment area ‘will be able to achieve full operating cost coverage at the end of the transitional period’.187 For start-up aid, the Commission will also consider whether the route is already operated by another airline or a high-speed rail service.188 The airport must be open to all users, and cannot be dedicated to one specific user.189 Where the airport faces capacity constraints, the allocation of capacity should be made ‘on the basis of pertinent, objective, transparent and non-discriminatory criteria’.190 Finally, in order to further limit distortions, the 2014 Guidelines also state that investment aid to airports with up to five million passengers per annum should be granted either upfront or annually, based on the capital cost funding gap set out in the ex ante business plan.191 As noted above, ex ante calculations are important to incentivise efficient management.192

ibid para 128. ibid para 129. The 2014 Guidelines nonetheless emphasise that operating aid may still be granted after this date where it respects ‘horizontal State aid rules, such as rules applicable to the financing of SGEIs’. 184 ibid para 130. For an example of the application of this provision, see Decision SA.46945, recitals 100–3. 185 Communication from the Commission concerning the prolongation of the specific regime for operating aid for airports with up to 700,000 passengers per annum provided for in the Guidelines on State aid to airports and airlines [2018] OJ C456/28, paras 7–9. 186 2014 Guidelines (n 7) para 150. 187 ibid para 132. 188 ibid para 151. 189 ibid para 108; para 133. 190 ibid para 108; para 133. 191 ibid para 107. 192 ibid para 107 and footnote 90. 182 183

State aid to airports and airlines  293 C. GBER Under the GBER, investment aid or operating aid to regional airports is compatible State aid and, importantly, is exempt from the notification requirement under Article 108(3) TFEU, where the conditions in the GBER are met.193 For investment aid and operating aid, the airport in question must be open to all users, and the aid cannot be granted for the purpose of relocating an existing airport, creating a new airport, or converting an existing airfield into a passenger airport.194 In the case of investment aid specifically, the investment ‘shall not exceed what is necessary to accommodate the medium-term expected traffic on the basis of reasonable traffic forecasts’, and shall not be granted to an airport within 100km/60 minutes travelling time from another airport.195 The investment aid also cannot be granted to airports with average annual passenger traffic of more than three million passengers, or with average annual freight traffic of more than 200,000 tonnes.196 Regarding the amount of the aid, the investment aid cannot exceed ‘the difference between the eligible costs and the operating profit of the investment’.197 The intensity of the investment aid shall not exceed 50% in respect of airports with between one and three million passengers per year (70% for airports in remote regions), or 75% in respect of airports with less than one million passengers per year (95% for airports in remote regions).198 In the case of operating aid specifically, operating aid cannot be granted to airports with average annual passenger traffic of more than 200,000 passengers, or with average annual freight traffic of more than 200,000 tonnes.199 The ‘amount of the aid shall not exceed what is necessary to cover the operating losses and a reasonable profit over the relevant period’.200 Finally, the ‘granting of the operating aid shall not be made conditional upon the conclusion of arrangements with specific airlines relating to airport charges, marketing payments or other financial aspects of the airlines’ operations at the airport concerned’.201

V.

FUTURE TRENDS

A.

Review of the 2014 Guidelines

In January 2019, the Commission announced a ‘fitness check’ of a number of State aid guidelines that were adopted as part of the State Aid Modernisation reforms of 2012.202 The

193 GBER (n 133) Article 56a. This provision was introduced in 2014; it was not contained in the predecessor to the GBER (Commission Regulation (EC) No 800/2008). 194 ibid Article 56a(2) and Article 56(a)(3). 195 GBER (n 133) Article 56a(5) and Article 56(a)(6). See also the limited exceptions to these provisions in Article 56(a)(7) and Article 56(a)(8). 196 ibid Article 56(a)(9) and (10). 197 ibid Article 56(a)(11). 198 ibid Article 56(a)(13) and 56(a)(14). 199 ibid Article 56(a)(10) and (15). 200 ibid Article 56(a)(16). 201 ibid Article 56(a)(18). 202 See Commission press release (n 134).

294  Research handbook on European State aid law 2014 Guidelines are included in this review, and the Commission held a targeted consultation regarding these guidelines from May to July 2019.203 At the time of writing, the outcome of this consultation was not publicly available. However, the questions included by the Commission in the consultation hint at changes to the 2014 Guidelines that are under consideration by the Commission. For example, the Commission asks stakeholders whether, in their view: ●● the Commission’s position that the comparator analysis is not feasible is still reasonable (Q.2) ●● greater consideration should be given to the environmental impact of airports (Q.3) ●● airports that are part of a network of airports should be treated differently from airports that are not part of a network (Q.7) ●● it is realistic to expect all airports to function without operating aid after 2024 (Q.8) ●● the definition of catchment area (100km/60 minutes driving time) is appropriate (Q.16) The responses to the public consultation, which are publicly available,204 reveal the particular concerns of certain stakeholders, which may also influence revisions to the guidelines. For example, regarding the potential inclusion of environmental criteria, one stakeholder suggested that the permissible intensity of the State aid could vary depending on whether the project in question took environmental effects into account.205 Stakeholders have also criticised the Commission’s application of the MEO test, in particular, the Commission’s practice of considering each agreement an airline has with an airport separately, rather than viewing the relationship between the airline and the airport as a whole.206 There has also been an increase in the level of private ownership of airports, from 22% in 2010207 to 31% in 2016,208 which might, for instance, call into question the Commission’s reluctance to rely on comparative analyses when applying the MEO test. As mentioned above, one of the key questions the Commission will certainly need to address is whether operating aid to airports will be prohibited entirely, which is the Commission’s explicit objective.209 The Commission believes that aid granted under the Services of General Economic Interest (SGEI) framework should be sufficient to address the needs of smaller airports after the transitional period.210 However, in response to the targeted consultation, stakeholders have expressed scepticism that this objective is realistic.211

The Commission is also undertaking a review of the GBER. Available at https://​ec​.europa​.eu/​competition/​consultations/​2019​_aviation​_guidelines/​index​_en​ .html accessed 26 May 2020. 205 Contribution de la Région Bretagne a la Consultation européenne ciblée sur le Bilan de qualité des lignes directrices (2014) sur l’aviation, response to Question 3 (unofficial translation). 206 [Anonymous Airline], response to Question 1; Assaeroporti, response to Question 1. 207 ACI Europe, ‘The Ownership of Europe’s Airports’ (2010) available at http://​81​.47​.175​.201/​sky​ -water/​attachments/​article/​92/​2010​_ownership​_report​.pdf accessed 26 May 2020. 208 ACI Europe, ‘Policy Brief – Airport Ownership, economic regulation and financial performance’ (2017) available at https://​aci​.aero/​Media/​566bca18​-aa8f​-4b3f​-bfee​-00a114058f6c/​ GFi1Cg/ ​ A bout​ % 20ACI/​ P riorities/​ E conomics/​ 2 018/​ A CI​ _ PolicyBrief​ _ Ai​ r portOwnershipEcono​ micRegulationandFinancialPerformance​.pdf accessed 26 May 2020. 209 2014 Guidelines (n 7) para 14. 210 ibid para 14. 211 Contribution de la Région Bretagne (n 205) response to Question 8; Union des aéroports francais et francophones associés (UAF), point 2. 203 204

State aid to airports and airlines  295 Finally, the Commission may have regard to current market conditions, in which case the COVID-19 crisis, and its lasting impact, should be front of mind. B.

COVID-19 Crisis

Aviation is undoubtedly one of the sectors most severely impacted by the COVID-19 crisis, as at the time of writing, most airlines had grounded their fleets entirely or were operating skeleton services. Member States have already intervened to support airlines in difficulty, relying on either Article 107(2)(b) TFEU,212 or the COVID-19 Temporary Framework.213 Measures approved by the Commission thus far include: Danish and Swedish State guarantees for SAS;214 guarantees on new investment or working capital loans for airlines holding a Swedish aviation license;215 liquidity support to Air France;216 deferral of certain French aeronautical taxes;217 and a German State-guaranteed loan to Condor.218 It is difficult to predict the total number of State support schemes for the European aviation sector that will ultimately be pursued by Member States, and approved by the Commission, under Article 107(2)(b) TFEU or the COVID-19 Temporary Framework. But it is possible to predict that these measures might have a long-term, and potentially distortive, impact on competition between European airlines. As noted by the Commission in 2014 in the context of rescue and restructuring aid for airlines, ‘when troubled [airlines] receive aid, their more efficient and more innovative peers see the rewards for their efforts disappear’.219 The risk of competitive distortion is particularly acute because – while COVID-19 has impacted all European airlines – it seems that not all EU Member States intend to adopt support measures. Moreover, the measures that have been approved so far seem tailored to benefit only those airlines headquartered in, or principally operating in, the Member State granting the aid.

212 Article 107(2)(b) TFEU allows ‘aid to make good the damage caused by natural disasters or exceptional occurrences’. The Commission has declared that the COVID-19 outbreak qualifies as an ‘exceptional occurrence’ within the meaning of this provision. 213 Commission, Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak (Communication) [2020] OJ CI 91/1, as amended. 214 Commission Decision of 15 April 2020, case SA.56795 (2020/N) – Compensation for the damage caused by the COVID-19 outbreak to Scandinavian Airlines, Commission Decision of 24 April 2020, case SA.57061 (2020/N) – Sweden – Compensation for the damage caused by the COVID-19 outbreak to Scandinavian Airlines. 215 Commission Decision of 11 April 2020, case SA.56812 (2020/N) – Loan guarantee scheme to airlines under the temporary framework for state aid measures to support the economy in the current COVID-19 outbreak. 216 Commission Decision 4 May 2020, case SA.57082 (2020/N) – COVID-19 – Cadre temporaire 107(3)(b) – Garantie et prêt d’actionnaire au bénéfice d’Air France. 217 Commission Decision 31 March 2020, case SA.56765 (2020/N) – COVID-19 Moratoire sur le paiement de taxes et redevances aéronautiques en faveur des entreprises de transport public aérien sous licences d’exploitation délivrées par la France (31 Mar 2020). 218 Commission Decision 26 April 2020, case SA.56867 (2020/N) – COVID 19 – Support for Condor. 219 European Commission, ‘Competition policy brief – State aid for airline restructuring: Does it give you wings?’ (Issue, July 2014) available at https://​ec​.europa​.eu/​competition/​publications/​cpb/​2014/​010​ _en​.pdf accessed 26 May 2020.

296  Research handbook on European State aid law C.

Regulation 2019/712

The final future trend to consider is Regulation 2019/712 which provides that the Commission may investigate, either on its own initiative or upon receipt of a complaint from a Member State or an EU airline, practices distorting competition adopted by a third country or a third country entity, which has injured, or threatens to injure, EU airlines.220 If, during the course of the investigation, the Commission establishes that ‘a practice distorting competition … has caused injury to the Union carriers concerned’, the Commission may adopt ‘redressive measures’.221 These redressive measures shall be imposed on ‘third-country air carriers benefiting from the practice distorting competition’ and may comprise either financial duties, or ‘any operational measure of equivalent or lesser value, such as the suspension of concessions, of services owed or of other rights of the third-country air carrier’.222 At the time of writing, the Commission had not yet brought any such investigation, so it remains to be seen whether, and to what extent, this regime will be effective in counter-acting distortions of competition caused by third country practices.

220 Regulation (EU) 2019/712 of the European Parliament and of the Council of 17 April 2019 on safeguarding competition in air transport [2019] OJ L123/4, Article 4(1). This Regulation repeals and replaces Regulation (EC) No 868/2004 of the European Parliament and of the Council of 21 April 2004 concerning protection against subsidisation and unfair pricing practices causing injury to Community air carriers in the supply of air services from countries not members of the European Community [2004] OJ L162/1. 221 Regulation 2019/712, ibid Article 14(1). 222 ibid Article 14(3).

15. State aid law beyond the EU Juan Jorge Piernas López1

I. INTRODUCTION This chapter studies the control of State aid (or subsidies) with a competition perspective beyond the European Union (EU) context, including in this context the countries that are in the process of accession to the EU. The chapter will therefore explore a relatively recent phenomenon that has not been fully investigated so far, namely, the emergence of State aid regulations at the national and international level in countries and international organizations that have no prospects, legal possibility ex Article 49 Treaty on European Union (TEU), or even intention of joining the EU. This phenomenon is in line with the European Union’s intention to level the playing field as regards foreign subsidies, a goal that the European Commission has recently underlined with the publication of a White Paper.2 In this regard, the process of adoption and implementation of State aid regulations at the national level has been studied in the context of the accession of new Member States to the EU. Particularly, the legal and institutional implications of such process in Central, Eastern and Southern European countries have been analysed, focusing mainly on the last three enlargements.3 Scholarly analysis has underlined that the adoption of the EU acquis in this context, including the State aid rules, has been mainly triggered by the ultimate reward of EU accession.4 Similarly, a number of works have analysed the international dimension of the EU competition law rules, focusing principally on “the major planks of EU Competition Law”, mergers, abuse of dominant position and cartels.5 In addition, a few recent interesting contributions have studied the inclusion of subsidy control provisions with a competition perspective in the new generation trade agreements signed by the EU with third countries.6

Comments welcome: jjpiernas@​um​.es ORCID https://​orcid​.org/​0000​-0002​-6515​-2094. European Commission, “White paper on levelling the playing field as regards foreign subsidies” COM (2020) 253 final. 3 See, inter alia, Ramona Ianus, “State aid in the accession countries” in Leigh Hancher, Tom Ottervanger and Pieter Jan Slot (eds), EU State Aids (5th edition, Sweet & Maxwell 2017). 4 Frank Schimmelfennig and Ulrich Sedelmeier, “Governance by conditionality: EU rule transfer to the candidate countries of Central and Eastern Europe” (2004) 11(4) Journal of European Public Policy 661; Michael Blauberger, “Compliance with rules of negative integration: European state aid control in the new member states” (2009) 16(7) Journal of European Public Policy 1030. 5 Anestis S Papadopoulos, The International Dimension of EU Competition Law and Policy (Cambridge University Press 2010); Thomas J Doleys, “Promoting Competition Policy Abroad: European Union Efforts in the Developing World” (2012) 57(2) Antitrust Bull 337; or Giorgio Monti, “The Global Reach of EU Competition Law” in M Cremona and J Scott (eds), EU Law Beyond EU Borders The Extraterritorial Reach of EU Law (Oxford University Press 2019). 6 Leonardo S Borlini, “Subsidies Regulation Beyond the WTO Substance, Procedure and Policy Space in the ‘New Generation’ EU Trade Agreements” in Giulina Ziccardi Capaldo (ed), The Global Community: Yearbook of International Law and Jurisprudence 2016 (Oxford University Press 2017). 1 2

297

298  Research handbook on European State aid law In this framework, the aim of this chapter is to complement the existing literature by mapping, as space would not allow to carry out an in-depth analysis for each jurisdiction, the State aid regulations adopted at national level beyond enlargement countries, and by regional organizations distinct from the EU, and to show that the control of State aid is not (or no longer) restricted to the European Union context. The chapter also aims to identify possible avenues for future research in this field. With these aims, the chapter will first map the State aid regulations that have been adopted at national level in recent years beyond enlargement countries. Secondly, the chapter will chart the adoption of State aid regulations by regional organizations distinct from the EU. Finally, the last section of the chapter will draw a number of conclusions and will signal possible paths for future research.

II.

STATE AID CONTROL AT THE NATIONAL LEVEL BEYOND THE EU AND ENLARGEMENT COUNTRIES

A number of governments beyond EU candidate and potential candidate countries have recently started to control State aid as part of their competition regulations. In particular, Armenia, Georgia, Moldova, Ukraine, Russia, Japan and China have introduced, in recent years, provisions to control the granting of State aid measures. In a very different context, the United Kingdom (UK) has also recently adopted its own (post-Brexit) State aid legislation, which underscores the merits of such a regime outside a regional integration process. The regulations of these countries will be discussed in this section, save for the UK rules, which are analysed in detail in Chapter 10 of this book. In addition, other countries, such as Canada or Australia, have tried to reduce State aids through other regulatory means, in particular through agreements among States or provinces to “head off poaching and bidding wars”, yet with no independent monitoring or actual enforcement.7 Finally, many developing and developed countries have accepted the need to reduce distortive subsidies to public enterprises as part of the competitive neutrality principle.8 In this framework, the following provisions adopted at national level to control the granting of State aid beyond the EU context can be underlined. Armenia In Armenia, Article 16 of the Law on Protection of Economic Competition (LPEC)9 prohibits the granting of State aid, defined as “any support (including financial means, such as aid, The existence of subsidy or State aid provisions in recent bilateral trade agreements signed by the EU could lead to the suspension of the new instrument to address foreign subsidies that the European Commission has envisaged in the “White paper on levelling the playing field” (n 2). 7 Kenneth P Thomas, Investment Incentives and the Global Competition for Capital (Palgrave Macmillan 2011) 157. 8 See in this regard, inter alia, the OECD 2012 report entitled “Competitive Neutrality, a compendium of OECD recommendations, guidelines and best practices”, available at accessed 3 May 2020. 9 See Law On Protection of Economic Competition (6 November 2000) (Article 16-1 supplemented by HO-107-N of 22 February 2007, amended by HO-137-N of 12 April 2011).

State aid law beyond the EU  299 credit, loan, property, privileges or other conditions) provided by a state body or its official to a specific economic entity or a certain group of economic entities”, which “directly or indirectly leads or may lead to restriction, prevention or blocking of competition in a goods market, or prejudices or may prejudice consumer interests, except when said support is provided for by law”. The same article allows, yet does not oblige, the entity granting the public support and the recipient of the said support to apply to the State Commission for the Protection of Economic Competition of the Republic of Armenia for an opinion prior to providing the State support or applying for it, respectively. In addition, support aimed at “environmental protection, solution of social issues, compensation for damages caused by natural disasters or other exceptional occurrences, or at fulfilment of obligations provided for by law or an international agreement” is excluded from the scope of this chapter. The possibility of reforming this provision was debated in the context of a twinning project between the Competition Council of Lithuania, the German Federal Ministry of Economics and Technology and the State Commission for the Protection of Economic Competition of the Republic of Armenia.10 Furthermore, the Comprehensive and Enhanced Partnership Agreement between the European Union and the Republic of Armenia11 acknowledges that anti-competitive business practices and State interventions have the potential to distort the proper functioning of markets and undermine the benefits of trade liberalisation (Article 286), and provides that, in principle, the parties shall not grant subsidies to enterprises providing goods or services where such subsidies negatively affect competition or trade, or are likely to do so (Article 290). For these purposes, the Agreement follows the World Trade Organization (WTO) definition of subsidy provided in the Agreement on Subsidies and Countervailing Measures, in relation to both services and goods.12 Georgia The Law on competition defines “State aid (subsidies)” as “a decision made with respect to an undertaking stipulating tax exemptions, tax reductions or tax deferrals, debt relief, debt restructuring, granting loans on favourable terms, transfer of operating assets, monetary assistance, granting of profit guarantees, privileges, or other exclusive rights” (Article 3(r)). Chapter III of the Law (Articles 12–15) provides for a general principle of incompatibility of

10 Twinning project “AM/09/ENP-PCA/TP/05” on strengthening the enforcement of competition and state aid. Information on the twinning project and the final report made are publicly available online at and accessed 3 May 2020. 11 Comprehensive and Enhanced Partnership Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and the Republic of Armenia, of the other part [2018] OJ L 23/4. 12 Ibid Article 291: “For the purposes of this Chapter, a subsidy is a measure which fulfils the conditions set out in Article 1.1 of the Agreement on Subsidies and Countervailing Measures, contained in Annex 1A to the WTO Agreement (‘SCM Agreement’), irrespective of whether it is granted to an enterprise supplying goods or services”.

300  Research handbook on European State aid law State aid, and for an ex ante control system based on notification of the planned State aids to the Competition Agency.13 In addition, the Association Agreement between the EU and Georgia comprises provisions on State interventions “including subsidies” that have the potential to distort the proper functioning of the markets, similar to those mentioned in relation to the EU Association Agreement with Armenia,14 although, remarkably, in the agreement with Georgia, there is no general prohibition of subsidies where such subsidies negatively affect competition or trade, or are likely to do so, a prohibition that does appear in the agreement with Armenia. Moldova Moldova has a detailed corpus of State aid regulations inspired by the EU State aid control system. Moldovan State aid rules comprise a State aid law, which includes a general prohibition of State aid and an ex ante review system along the lines of the EU State aid architecture, as well as a number of procedural and substantive regulations to implement the State aid law provisions, also based on the procedures and the compatibility criteria followed by the EU.15 In this regard, planned State aid measures have to be notified to the Competition Council of the Republic of Moldova by granting authorities before putting them into effect. The Competition Council has set up a State aid register and publishes annual reports on the control of State aid in Moldova.16 In particular, the State aid law defines State aid as any support measure which fulfils cumulatively the following conditions: a) is granted by the provider from the state resources or resources of administrative/territorial units, in any form; b) gives an economic advantage to its beneficiary which would not be possible to gain under normal market conditions; c) is given on a selective basis; [and] d) distorts or is likely to distort competition.17

As can been seen, no reference is made to the effect on trade criterion, what is justified for a regulation conceived for the national market of Moldova. Another difference with the EU system relates to the exception from the notification requirement of aid having a social character granted to individual consumers, provided that such aid is granted without discrimination related to the origin of goods or services and aid to remedy damage caused by natural disasters or other emergencies under Article 4 of the State aid law. As it is well known, both types of aid have to be notified to the European Commission

Law of Georgia On Competition, Law of Georgia No 2159 of 21 March 2014. See in particular, Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and Georgia, of the other part [2014] OJ L 261/4, Articles 203 and 206. 15 The regulations adopted by Moldova to implement the State aid law can be consulted at the following link accessed 3 May 2020. 16 The last report, covering 2017, was published in February 2019. The reports are available in English at accessed 3 May 2020. 17 State aid law no. 139 from 15.06.2012. The law is available at accessed 3 May 2020. 13 14

State aid law beyond the EU  301 under EU Law for the compatibility analysis and in particular the Commission to verify that the conditions laid down in Article 107(2) TFEU Treaty are met, and many decisions have been adopted in relation to these types of aid.18 In any event, despite some differences, the Moldovan State aid regulations are largely aligned with the EU rules on State aid. The alignment with the EU acquis, both in substance and procedure, can also be explained by reference to the Association Agreement between the European Union and the Republic of Moldova, according to which Moldova shall adopt or maintain, as appropriate, legislation for the control of State aid, and an operationally independent authority entrusted with the powers necessary for the control of State aid.19 In addition, regarding substance, the Agreement provides that State aid shall be assessed on the basis of the criteria arising from the application of the competition rules applicable in the EU, in particular Article 107 of the Treaty on the Functioning of the European Union and interpretative instruments adopted by the EU institutions, including the relevant jurisprudence of the Court of Justice of the European Union.20

In this regard, the European Commission has recently recognised the progress in legal approximation of Moldovan competition law with the EU rules, although it has also underlined that Moldova “is yet to ensure the factual independence of the Competition Council and remove obstacles to competition”.21 Ukraine In Ukraine, years after the adoption of national competition law provisions, a State Aid Law was adopted in 2014, based on the EU State aid control system.22 The State Aid Law, which became effective on 2 August 2017, establishes the general principle of incompatibility of State aid, and an ex ante control system. Consequently, planned State aid measures have to

18 See, e.g., Commission Decision of 16 May 2009, case State aid N 401/2008 – Slovenia – Aid to compensate for the damage caused by the storm and floods of 18.9.2007 (Ministry of Environment and Spatial Planning), para 2; or Commission Decision of 2 June 2011, case State aid N 274b/2010 – Germany – Disaster Aid Scheme “Bayerischer Härtefonds Finanzhilfen” (beneficiaries in manufacturing and other sectors), para 5; see also Case T-177/07 Mediaset v Commission [2010] EU:​T:​2010:​233, para 76: “[The plaintiff’s] argument that a subsidy granted to consumers cannot be categorised as State aid to traders providing consumer goods or services is also inconsistent with Article 87(2)(a) EC, under which aid having a social character, granted to individual consumers, is compatible with the common market provided that it is granted without discrimination related to the origin of the products concerned. As the Commission contends, if Mediaset’s argument were to be accepted, that provision would be superfluous”. 19 Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and the Republic of Moldova, of the other part [2014] OJ L 260/4, article 339. 20 Ibid Article 340. 21 Commission, “Joint staff working document, Association Implementation Report on Moldova” SWD(2019) 325 final, 16. 22 Law of Ukraine on State Aid to Undertakings No. 1555-VII of 1 July 2014. See also, Eugene Stuart, “State Aid Regulation and Future Industrial Policy in Ukraine” (2016) 15(1) Eur St Aid LQ 59; Oleksandra Bulana, “European state aid law and tax incentives in Ukraine” (2018) 3 Economy and Forecasting 65.

302  Research handbook on European State aid law be notified to the Antimonopoly Committee of Ukraine (AMC). The Law also provides that, by 2 August 2022, existing State aid measures should be in line with the State aid legislation. Since the adoption of the State Aid Law, and particularly since its entering into force, Ukraine has adopted a significant number of procedural and substantive regulations and guidelines on State aid, inspired by the EU model.23 As in the case of Moldova, and contrary to the situation of other countries that have entered into trade agreements with the EU like Armenia, the Association Agreement between the EU and the Ukraine refers to “State aid” and not to “subsidies”. In particular, it provides that Any aid granted by Ukraine or the Member States of the European Union through state resources which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods is incompatible with the proper functioning of this Agreement insofar as it may affect trade between the Parties.24

In addition, as to the criteria for definition and interpretation of the State aid rules, the Association Agreement also refers to Article 107.1 TFEU and to the case-law of the Court of Justice as binding reference.25 Finally, the European Commission has recently observed that, while the Ukrainian State aid provisions are not yet fully in line with EU State aid rules, the current legal framework has allowed the Anti-Monopoly Committee of Ukraine in 2019 to adopt an average of 20 State aid decisions per month, mostly related to small aid amounts.26 Russia The Russian Federation included rules on subsidy control among its competition rules in 2006, particularly under Chapter 5 of Federal Law no. 135-FZ of 26 July 2006 “On Protection of Competition”. Articles 19 to 21 of the Russian Competition Law laid down the conditions under which State or municipal preferences (aid) can be granted, the procedure that has to be followed for these purposes, and the consequences if the procedure is not observed. As summarized by the Russian authorities: In general, granting of state or municipal aid is prohibited because as a matter of fact government interventions distort competition. However, there is left a room for a number of policy objectives for which state aid can be considered compatible. The Law provides for a number of such objectives that are typically socially and culturally oriented. The Law also contains a detailed procedure of State 23 For the enumeration of the regulations and guidelines adopted by Ukrainian authorities see the recent report by Igor Svechkar and Sergiy Glushchenko which can be consulted at accessed 3 May 2020. 24 Association Agreement between the European Union and its Member States, of the one part, and Ukraine, of the other part [2014] OJ L 161/3, article 262. 25 Ibid Article 264, entitled “Interpretation”: “The Parties agree that they will apply Article 262, Article 263(3) or Article 263(4) of this Agreement using as sources of interpretation the criteria arising from the application of Articles 106, 107 and 93 of the Treaty on the Functioning of the European Union, including the relevant jurisprudence of the Court of Justice of the European Union, as well as relevant secondary legislation, frameworks, guidelines and other administrative acts in force in the European Union”. 26 Commission, “Joint staff working document, Association Implementation Report on Ukraine” SWD(2019) 433 final, p 17.

State aid law beyond the EU  303 or municipal aid granting with a number of measures taken in case of misuse of this aid or revealed violation during granting of this aid.27

In 2009, the State aid provisions of the Russian competition law were modified by Federal Law 164-FZ of 17 July 2009 “On introducing of Amendments to the Federal Law on Protection of Competition and Some Legislative Acts of the Russian Federation”. The new wording refers to “state or municipal preferences” as granting advantages to economic entities by the federal executive bodies, the authorities of the constituent territories of the Russian Federation, local self-government bodies, other agencies or organizations exercising the functions of those bodies, which put them in more advantageous conditions for economic activity, by transferring state or municipal property, other objects of civil rights or by providing property allowances; state or municipal guarantees.28

Finally, the Russian Federal Antimonopoly Service has established a Department on Control over State Authorities to monitor the granting of State aid. Japan In Japan, the Japan Fair Trade Commission adopted some principles to minimize the distortive effects of subsidies on competition, in particular concerning public support for the revitalization of companies.29 The guidelines acknowledge that public support for revitalization of companies in difficulties interfere with market mechanisms that should lead inefficient enterprises to exit the market and efficient enterprises to survive. Consequently, the guidelines laid down some principles that supporting organizations should take into account in view of competition policy when they are required to provide public support for companies in difficulties (“revitalization”). The three guiding principles are the principle of subsidiarity, the principle of minimum necessity and the principle of transparency.30 In addition, the guidelines provide for more specific suggestions to minimize the distortions of competition that can also be found under EU Law. For instance, public support for revitalization should be provided on a once-only basis, beneficiaries should procure unilaterally loans and capital increases from private sector financial institutions, and the public support shall be limited to the extent which is necessary for revitalizing the beneficiaries’ businesses. Lastly, structural and behavioural measures to reduce market presence and the activities of the beneficiaries of public support can be adopted.31

27 See OECD, Roundtable on competition, State aids and subsidies [2011] DAF/COMP/GF(2010)5, p 185. 28 See Article 4 (20) of Federal Law “On Protection of Competition” (as amended in 2016), Adopted by the State Duma on 8 July 2006. Approved by the Federation Council on 14 July 2006. 29 Guidelines for Public Support for Revitalization in view of Competition Policy 31 March 2016. The guidelines can consulted online at accessed 3 May 2020. 30 See Guidelines for Public Support (n 29) at III.1, and also note by Japan to the OECD, Roundtable on competitive neutrality in competition enforcement [2015] DAF/COMP(2015)5, particularly in pages 6 to 8. It can be consulted on the Internet at: accessed 3 May 2020. 31 Guidelines for Public Support (n 29) section IV (1–5).

304  Research handbook on European State aid law More recently, on 1 February 2019, the Agreement between the European Union and Japan for an Economic Partnership entered into force.32 The new agreement includes a chapter on subsidy control, notably distinct from the chapter on “competition policy”. In this regard, concerning the definition of subsidies, the chapter provides for a simplified definition for both goods and services in the following terms: “a measure which fulfils mutatis mutandis the conditions set out in Article 1.1 of the SCM Agreement, irrespective of whether the recipients of the subsidy deal in goods or services” (Article 12.2). Similarly, "specific subsidy" is defined as a subsidy which is determined mutatis mutandis to be specific in accordance with Article 2 of the SCM Agreement. The chapter applies to specific subsidies to the extent they are related to economic activities, and in this regard, it clarifies that education provided under the domestic educational system of each party shall be considered as a non-economic activity. Furthermore, the chapter does not apply to subsidies granted to enterprises entrusted by the government with the provision of services to the general public for public policy objectives. To this extent, the chapter clarifies that such exceptions from the rules on subsidies shall be transparent and shall not go beyond their targeted public policy objectives. Interestingly, the chapter also provides for a de minimis provision for the purposes of notification of subsidies and consultations related to them between the parties.33 Finally, the chapter considers as prohibited subsidies, that have or could have a significant negative effect on trade or investment between the parties, the following: (a) legal or other arrangements whereby a government or a public body is responsible for guaranteeing debts or liabilities of an enterprise, without any limitation as to the amount and duration of such guarantee; and (b) subsidies for restructuring an ailing or insolvent enterprise without the enterprise having prepared a credible restructuring plan. Such a restructuring plan shall be prepared within a reasonable time period after such enterprise having received temporary liquidity support. The restructuring plan shall be based on realistic assumptions with a view to ensuring the return to long-term viability of the ailing or insolvent enterprise within a reasonable time period. The enterprise itself or its owners shall contribute significant funds or assets to the costs of restructuring.34

China In the summer of 2015 China announced the establishment of a Fair Competition Review system (FCRS) to subject industrial policies to a competition assessment. The FCRS system was finally approved in 2016. The “Opinions of the State Council on Establishing a FCRS During the Development of Market-Oriented Review System” were adopted in June 2016. The Opinions were followed by the Implementing Rules for the FCRS for Provisional Implementation, issued on October 23, 2017.35 The European Commission soon linked this

32 Agreement between the European Union and Japan for an Economic Partnership [2018] OJ L 330/3. 33 Agreement EU and Japan [2018] (n 32) article 12.3(4): Articles 12.5 and 12.6 do not apply to subsidies, the cumulative amounts or budgets of which are less than 450,000 special drawing rights (hereinafter referred to as “SDR”) per beneficiary for a period of three consecutive years. 34 Ibid article 12.7. 35 In relation to the FCRS see, inter alia, Weiping Ye and Mel Marquis, “Competition policy and industrial policy in China: toward a new equilibrium?” in Adrian Emch and Wendy Ng (eds), Wang Xiaoye the pioneer of competition law in China: Liber Amicorum (Concurrences 2019).

State aid law beyond the EU  305 development in Chinese law to the control of State aid,36 and so did also some Chinese commentators, who considered the FCRS similar to the State aid rules and that the latter “may serve as a good reference” for the FCRS.37 The FCRS is significantly broader than the control of State aid under EU Law, as it requires all policy-making organs to self-assess their policy proposals before adoption under four review standards, namely (i) standards on market entry and exit; (ii) standards on the free movement of commodities; (iii) standards that affect production and operating costs; and (iv) standards that affect production activities and business operations. The four standards are further divided into eighteen forbidden practices or standards that work as guidance for the policy-making organs. As some commentators have already held,38 some of these practices/ standards could be defined as State aid, particularly the following: it is prohibited to grant preferential policies to specific business operators in violation of the law; or it is forbidden to exempt specific operators from paying social insurance fees. The implementing rules further clarify the prohibition to grant preferential policies to specific businesses. The non-exhaustive list of forbidden practices mentioned by the implementing rules include the following: granting financial incentives and subsidies; reimbursing taxes; selling land at a preferential (zero) price; supplying land by means of allocation or price contribution; preferential treatment in terms of environmental protection and pollution discharge; and relieving, levying or suspending administrative fees, government funds, housing funds.39 All these measures can be considered as State aid under Article 107(1) TFEU and the consistent case-law of the EU Courts, as they constitute either “positive benefits” or the mitigation of charges usually borne by undertakings, which are analogous to subsidies in nature and effect.40 The Opinions and Implementing Rules also provide for exemptions to the prohibition of granting preferential treatment, in particular for national economic security, cultural security, or national defence construction; social security purposes, or disaster relief and rescue; social and public interests, such as energy and resource conservation, or ecological and environmental protection, and any other circumstances prescribed by laws and administrative regulations. In relation to these exemptions, Policy-making Organs invoking these exceptions need to meet three conditions: (i) the policy measures must be indispensable for achieving policy objectives; (ii) they will not seriously exclude and restrain market competition; and (iii) the

36 See in this regard, inter alia, the speech of Commissioner for Competition Vestager, “State aid and fair competition worldwide” (High Level Forum on State Aid Modernisation, Brussels, 28 June 2017) accessed 3 May 2020. 37 See Susan Ning, Chai Zhifeng, Gong Ting and Zhang Tianjie, “The establishment of Fair Competition Review in China” (China Law Insight, 9 March 2016) accessed 3 May 2020. 38 See in particular the detailed analysis of Shuping Lyu, Caroline Buts and Marc Jegers, “Comparing China’s Fair Competition Review System to EU State Aid Control” (2019) 18(1) European State Aid Law Quarterly 37. 39 Ibid at 43 for the indicative list. 40 See, among others, Case 30/59 De Gezamenlijke Steenkolenmijnen in Limburg v High Authority [1961] EU:​C:​1961:​2, para 43; Case C-387/92 Banco Exterior de España [1994] EU:​C:​1994:​100, para 13; Case C-39/94 SFEI and Others [1996] EU:​C:​1996:​285, para 58; Case C-518/13 Eventech [2015] EU:​ C:​2015:​9, para 33.

306  Research handbook on European State aid law measures at stake must be temporary (for a fixed period).41 These exceptions also show some resemblance to the compatibility provisions under Articles 107(2) and 107(3) TFEU. After the approval of the FCRS, the EU entered into a formal State aid dialogue with the Chinese National Development and Reform Commission by means of a Memorandum of Understanding (MoU).42 The 2017 MoU underlines the common goal of the FCRS and the State aid rules: “The aim of the State aid control regime and the Fair Competition Review System is to prevent public policies from distorting and restricting competition while maintaining fair market competition and promoting a unified market”. The primary objective of the MoU is to establish a forum of consultation and transparency between the EU and China on the State aid control and the Fair Competition Review System, and to strengthen cooperation and coordination between the EU and China in this area. Regarding the content, the MoU provides for the following exchange of views on: (a) developments in State aid control and FCRS legislation and on their experience in the enforcement of this legislation; (b) enhancement of the operation of the parties’ State aid control and fair competition review authorities – this may help to address some limitations identified by Chinese commentators who advocate for a higher involvement of competition authorities given that the FCRS is currently based on self-assessment by the Policy-organs and they may not have the necessary expertise;43 (c) multilateral state aid control and fair competition review initiatives; (d) State aid control advocacy including on raising awareness of authorities, companies and the wider public of State aid control and fair competition review; and (e) a coordinated approach to technical cooperation between the EU and China in the area of State aid control and fair competition review. Finally, the 2017 MoU foresaw a period of operation of five years. However, a new MoU (with the same content) was signed with China’s State Administration for Market Regulation in April 2019 for another five years.44 The implementation of the Fair Competition Review System was also one of the topics discussed during the 18th EU-China Competition Week between EU and Chinese competition officials in March 2019.45

41 See in this regard, Zhanjiang Zhang and Baiding Wu, “Governing China’s administrative monopolies under the anti-monopoly law: a ten-year review (2008–2018) and beyond” (2019) 15(1) Journal of Competition Law & Economics 718, 746. 42 Commission, Memorandum of Understanding on a dialogue in the area of the State aid control regime and the Fair Competition Review System (NDRC) (2 June 2017). The MoU is available at: accessed 3 May 2020. 43 See in this regard, Zhang and Wu, ‘China’s administrative monopolies’ (n 40) 748. 44 Commission, Memorandum of Understanding on a dialogue in the area of the State Aid Control and the Fair Competition Review (April 2019). The MoU is available at accessed 3 May 2020. 45 A summary of the topics discussed is available at accessed 3 May 2020.

State aid law beyond the EU  307

III.

STATE AID CONTROL BY INTERNATIONAL ORGANIZATIONS BEYOND THE EU

As recently mentioned in an Organisation for Economic Co-operation and Development (OECD) report, a number of regional organizations have adopted “State aid provisions”.46 This section will describe the adoption of State aid (or subsidy) control provisions by international organizations distinct from the EU, with the exception of the World Trade Organization, which is analysed in Chapter 6 of this book. Central African Economic and Monetary Community (CEMAC) Public aid likely to distort competition by favouring certain companies or certain productions is prohibited under article 23(c) of the Convention governing the Economic Union of Central Africa. That provision mandates the organization’s Council of Ministers to adopt regulations related to, inter alia, the prohibition of State aid. The revised community competition rules of the Central African Economic and Monetary Community were adopted in March 2019, during the 14th Conference of Heads of State of CEMAC. The new rules are innovative in a number of ways. For instance, they include a provision establishing gender parity in the composition of the board of the regional competition authority.47 Regarding State aid control, Regulation 06/19 provides for a detailed section related to “Public aid granted to companies by Member States” (Articles 78–101). The regulation follows the EU State aid control system, and even reproduces the Altmark criteria to clarify when the compensation for the provision of “public services” does not amount to State aid (Article 79). The regulation establishes an ex ante review procedure and a standstill obligation for Member States until CEMAC Commission’s final decision regarding a notified aid (Article 84). Interestingly, Article 90 provides that public or private persons may seize national courts, in particular competitors of companies receiving aid, to contest the compatibility with the Common Market of an aid or to claim the damage suffered from the implementation of an aid declared incompatible by the Commission. Finally, the regulation also includes procedural provisions and rules concerning existing aid. Common Market for Eastern and Southern Africa (COMESA) Article 52 of the COMESA Treaty is related to “Subsidies Granted by Member States”.48 Article 52.1 states that

46 OECD, Global Forum on Competition, Regional competition agreements – inventory of provisions in regional competition agreements, Annex to the Background note by the Secretariat [2018] DAF/ COMP/GF(2018)12, 92–8. 47 See in this regard Article 4 of Regulation 06/19‐UEAC‐639‐CM‐33 (April 2019). See also a press release in this regard available at accessed 3 May 2020. 48 See revised COMESA, “COMESA Treaty, amended by Council Meeting of 2009” available at accessed 3 May 2020.

308  Research handbook on European State aid law Except as otherwise provided in this Treaty, any subsidy 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 the Member States, be incompatible with the Common Market.

The second paragraph of Article 52 allows COMESA Member States, for the purposes of offsetting the effects of subsidies, to levy countervailing duties. The same principle of incompatibility is included in Article 52.3 in relation to any subsidy granted by a third country, and also similarly Article 52.4 allows COMESA Member States, for the purposes of offsetting the effects of subsidies, and subject to regulations made by the Council, to levy a countervailing duty on any product of any third country imported into another Member State equal to the amount of the estimated subsidy determined to have been granted directly or indirectly, on the manufacture, production or export of such product in the country of origin or exportation. To this extent, Article 22 of the Council Regulations Governing the COMESA Customs Union refers to the abovementioned Article 52 and underlines the need to notify to the Member States the granting or maintaining of subsidies.49 East African Community (EAC) The EAC Competition Act includes provisions related to the control of subsidies granted by EAC Partner States. Section 2 of the Act clarifies that the term “subsidy” employed by the Act has the meaning assigned thereto in the Protocol on the Establishment of the East African Community Customs Union.50 This Protocol defines “subsidy” as “assistance by a government of a Partner State or a public body to the production, manufacture, or export of specific goods, taking the form of either direct payments, such as grants or loans, or of measures with equivalent effect, such as guarantees, operational or support services or facilities, and fiscal incentives” (Section 1). Section 14 of the Competition Act stipulates that a Partner State may, subject to the Act, grant a subsidy to any undertaking if it is of the opinion that it is in the public interest to do so. Moreover, Section 15 provides that a Partner State shall, before granting any subsidy, notify the EAC Competition Authority (the “Authority”). This section also establishes that the Authority may consider that the subsidy at stake (i) falls within Section 16 of the Act, which prohibits the granting of any subsidy which distorts or threatens to distort competition in the Community, and mentions particularly two categories of banned subsidies, namely, “(a) any subsidy for the promotion of exports or imports between the Partner States; [AND] (b) any subsidy which is granted on the basis of the nationality or residence of persons or country of origin of goods or service”, or (ii) that the subsidy falls within Section 17, which provides for a number of exemptions to the prohibition included in Section 16. In both cases the Authority shall communicate its decision to the Partner State at issue. In addition, under Section 17(2), the Council of Ministers may, on the recommendation of the Authority, exempt other categories of subsidies. Furthermore, Part III of the EAC 49 COMESA, “Council Regulations Governing the COMESA Customs Union” (2009) 15(1) Official Gazette. 50 See Joyce Karanja-Ng’ang’a, “EAC Competition Law” in Emmanuel Ugirashebuja, John Eudes Ruhangisa, Tom Ottervanger and Armin Cuyvers (eds), East African Community Law: Institutional, Substantive and Comparative EU Aspects (Brill 2017).

State aid law beyond the EU  309 Competition regulations (2010), Sections 13 to 15, is devoted to subsidies. Section 13 is concerned with the notification of the intention to grant a subsidy by Partner States, and makes clear that EAC Partner States are obliged to notify their intention to grant a subsidy, hence prior to its implementation. Section 14 is concerned with the decision of the Authority on the intention of Partner State to grant a subsidy. Section 15 relates to the recovery of subsidies. Paragraph 1 states that the Authority shall, where it determines that a Partner State granted a subsidy in contravention of the Act, refer the matter to the Court. If the Court determines that the subsidy granted is illegal, paragraph 2 of this section states that the Court shall order the Partner State to recover the subsidy from the recipient. Finally, Section 15(3) allows the court to assign a monetary value to the subsidy to be recovered where it is not possible to determine such value. Eurasian Economic Union (EEU) The Treaty on the Eurasian Economic Union provides, in Article 93.1, that “common rules for granting subsidies for industrial goods shall be applied on the territories of the Member States, including for the provision or receipt of services that are directly related to the manufacture, sale and consumption of industrial goods …”. The same article provides that the Commission shall ensure the control of the implementation of the provisions of this Article regarding subsidies, and may adopt binding decisions for the Member States provided on the basis of “voluntary coordination of planned” (Article 93.6(3)). In addition, Annex No. 28 to the Treaty establishes Common Rules for the Provision of Industrial Subsidies. In relation to the foregoing, on June 26, 2017, the Heads of Government of the Member States of the Eurasian Economic Union signed an Agreement on voluntary harmonization of specific subsidies for industrial goods and the Commission's proceedings related to their provision.51 Economic Community of West African States (ECOWAS) Article 8 of the Supplementary Act A/SA.1/06/08 essentially reproduces Article 107 TFEU, both as to the notion of State aid and as to the compatibility of aid with the “ECOWAS Common Market”.52 The same article provides, in fine, that other categories of aid, as may be specified by a decision of the Authority of Heads of State and Government on the recommendation of the Council of Ministers acting on a proposal from the ECOWAS Competition Authority, may be declared compatible. However, no similar provision to Article 108 TFEU seems to have been adopted, casting doubts on whether the incompatibility of State aid can be enforced. The recent adoption of the ECOWAS’ Regional Competition Authority (ERCA),

51 See Evgeny Vinokurov, Introduction to the Eurasian Economic Union (Springer 2018) 43. See also in relation to this agreement the following press release, available at accessed 3 May 2020. 52 Economic Community of West African States “Supplementary Act a/sa.1/06/08 adopting community competition rules and the modalities of their application within ECOWAS” (Abuja, 19 December 2008), article 8. See also Jerry Ukaigwe, ECOWAS Law (Springer 2016) 358.

310  Research handbook on European State aid law formally launched on the 31 May 2019, may give a new impetus to the enforcement of the competition rules of this international organization, including its State aid provisions.53 European Free Trade Association (EFTA) Articles 61 to 63 and Annex XV of the EEA Agreement relate to State aid. They laid down a system similar to the EU model. Consequently, State aid is in principle incompatible with the EEA Agreement and has to be notified to the EFTA Surveillance Authority (ESA), which may declare it compatible under a number of public objectives that reflect those included in Article 107 TFEU.54 The Southern Common Market (MERCOSUR) Under Article 32 of the Fortaleza Protocol The States Parties undertake, within a two year period following entry into force of the present Protocol, and for purposes of their incorporation in this instrument, to draft joint standards and mechanisms which shall govern State aid which is susceptible to limit, restrict, falsify or distort competition and to affect trade between the States Parties.55

To this author’s knowledge, the standards and mechanisms at issue have not been implemented, which has prevented the application of this Article. Finally, the situation will not change significantly after the signing of the recent EU-MERCOSUR agreement, as the agreement does not incorporate the control of State aid in the chapter dedicated to “competition” and only includes a few provisions regarding subsidies which refer to the WTO system.56 West African Economic and Monetary Union (WAEMU) Under Article 88 of the WAEMU Treaty “[the Treaty prohibits] public aids that could distort competition by favouring certain undertakings or certain productions”. In addition, Regulation No. 04/2002/CM/UEMOA of 23 May 2002 on the oversight of State aid within the West African Economic and Monetary Union, introduces specific provisions for the control of State aid.57 Regulation 04/2002/CM defines public aid as follows:

53 See in relation to the launching of the regional competition authority: accessed 3 May 2020. 54 For a detailed analysis see Michael Sanchez Rydelski, “State aid” in Carl Baudenbacher (ed), The Handbook of EEA Law (Springer 2016). See also Tony Joris, “The European Economic Area and State Aid” in Inge Govaere et al (eds), The European Union in the World: Essays in Honour of Marc Maresceau (Brill 2014). 55 Protocolo de Defesa da Concorrência do Mercosul, 17.12.1996. 56 The texts of the EU-MERCOSUR agreement (pending signature) are available at accessed 3 May 2020. 57 See also Julia Molestina, Regional Competition Law Enforcement in Developing Countries (Springer 2019) 46; and Mor Bakhoum, “Institutional Coherence and the Effectiveness of a Regional Competition Policy: The Case of the West African Economic and Monetary Union (WAEMU)” (2011) XXV(3) Revue internationale de droit économique 305.

State aid law beyond the EU  311 any measure that (1) generates a direct or indirect cost, or a decrease in revenues for the state, its departments or for any public or private body that the state establishes or designates to manage the aid and (2) thereby gives an advantage to certain companies or to the production of certain goods.58

This regulation establishes an ex ante review system for the control of State aid, enumerates a number of aid measures that can be declared compatible with the common market and distinguishes between existing aid and new aid in line with the European Union model. The regulation also stipulates that some measures are automatically recognised as being incompatible with the Common Market, without there being any need to examine them, namely: (i) aid that is contingent, in law or in fact, whether solely or as one of several other conditions, upon exporting to other Member States; and (ii) aid that is contingent, whether solely or as one of several other conditions, upon the use of domestic goods over goods imported from other Member States.59 According to WAEMU representatives, the “oversight of state aid occupies a significant place in WAEMU’s competition policy [AND WAEMU competition authorities have] more frequently examined cases involving public intervention that could cause market distortions than those involving cartels and abuse of dominant position”.60 In this regard, a number of decisions can be mentioned as examples of the State aid enforcement before WAEMU institutions.61

IV. CONCLUSIONS In light of the foregoing, a number of conclusions can be drawn. First, several governments beyond EU candidate and potential candidate countries have recently started to control State aid as part of their competition regulations, even though some of these governments have no prospects of joining the EU, such as Russia, or even legal possibility to do so under Article 49 TEU, such as China. In addition, a number of regional organizations have adopted “State aid provisions”. Consequently, the control of State aid as part of the competition law provisions might in the near future cease to be perceived as a “European peculiarity”,62 a “unique system inextricably linked to the European Union (EU) integration process”.63 Second, the review of some of the agreements entered into by the EU with third countries, such as Georgia, Armenia, Moldova and the Ukraine, reveals that the European Union has exported its “State aid” provisions to Moldova and the Ukraine, even referring to Article 107.1 58 Règlement n°4/2002/cm/UEMOA relatif aux aides d’état à l’intérieur de l’Union Economique et Monétaire Ouest Africaine et aux modalités d’application de l’article 88 (c) du traite, Article 1.b): “aide publique”: toute mesure qui: (i) entraîne un coût direct ou indirect, ou une diminution des recettes, pour l’État, ses démembrements ou pour tout organisme public ou privé que l’État institue ou désigne en vue de gérer l’aide; et (ii) confère ainsi un avantage sur certaines entreprises ou certaines productions. 59 Ibid article 4 “Aides publiques interdites de plein droit”. 60 OECD, Roundtable [2011] (n 27) 237 and 239–42. 61 See Molestina (n 57). 62 Kellin Bacon, European Union Law of State Aid (3rd edn, Oxford University Press 2017) 4. 63 Tembinkosi Bonakele, “The Case for a BRICS Competition Agenda” in Tembinkosi Bonakele et al (eds), Competition Policy for the New Era: Insights from the BRICS Countries (Oxford University Press 2017) 41.

312  Research handbook on European State aid law TFEU and to the case-law of the Court of Justice as a binding reference, but not to Armenia and Georgia, in relation to which less demanding “subsidies” provisions were included, and even less so in the case of Georgia vis-à-vis Armenia. Third, most of the national and regional regulations reviewed follow very closely the EU State aid control system by establishing the principle of incompatibility of State aid and an ex ante review procedure. Indeed, some of the most recent international regulations, such as the new competition rules adopted by CEMAC, have even reflected the Altmark case law to exclude the presence of an economic advantage in the compensation for the provision of public services. The EU has therefore been successful in exporting its rules in this area, as it has been in other areas of competition law.64 Fourth, future research could study the enforcement (or lack thereof) of the rules that have been described in this chapter. This study would shed light on the interpretation given in very different socioeconomic and political settings to the notion of State aid and also to the justifications and conditions provided for the granting of State aid in those contexts. To this extent, for example, the recent EU agreement with Japan provides for an exception for subsidies granted to enterprises entrusted by the government with the provision of services to the “general public for public policy objectives”. It would be interesting to explore how these services are defined in the domestic legislation, and whether the EU notion of Service of General Economic Interest, as interpreted by the EU Courts, may serve as reference. Fifth, the study of the national and international regulations that have been adopted to control State aid and subsidies beyond the EU (and the WTO) would also shed light on the objectives that the control of State aid may pursue in different jurisdictions, depending on their policy priorities, which may even go beyond the safeguard of fair competition and trade. In this regard, for instance, in Colombia, the control of State aid has been proposed as a means to reduce corruption.65 Sixth, the analysis carried out in this chapter may also be useful to study the role of the EU as an international legal actor,66 in a field where the EU has a clear first-mover advantage,67 possessing the most sophisticated system of State aid control worldwide, and with a remarkable potential impact, in view of the large number of jurisdictions that have adopted competi-

Monti, in Cremona and Scott (n 5) 193. Jesús Soto Pineda, “Corrupción y Protección de la Libre Competencia: El Caso de las Ayudas Públicas Anticompetitivas (Corruption & Antitrust: The Case of Anti–Competitive State Aid)” (2016), available at accessed 3 May 2020. 66 See Marise Cremona, “Extending the Reach of EU Law: The EU as an International Legal Actor” in Marise Cremona and Joanne Scott (eds), EU Law Beyond EU Borders The Extraterritorial Reach of EU Law (Oxford University Press 2019). See also Anu Bradford, The Brussels Effect How the European Union Rules the World (Oxford University Press 2020). 67 See in this regard, for example, the Statement by Executive Vice-President Margrethe Vestager on adoption of the White Paper on foreign subsidies in the Single Market, which stresses the experience gained by the EU with the application of the State aid rules: “For more than sixty years, the EU state aid rules have made sure that subsidies from EU Member States do not unduly distort the level playing field. But as Europe’s economy has become more open and interlinked to the world around us, it has become clear that controlling subsidies from European governments is not enough.” The statement can be consulted at: accessed 22 June 2020. 64 65

State aid law beyond the EU  313 tion laws in recent years and of the commitment that many of them have made in international fora to reduce subsidies and State aids.68 Finally, the analysis of the State aid regulations beyond the EU may also be useful to inform the production of policy proposals that have the capacity to reduce distortions of competition while increasing transparency in a momentous time when “openness to trade and investment and to rules-based multilateral order are being challenged”69 and when reforms of the international rules on subsidy control are being discussed, particularly after the suspension of the functioning of the WTO’s Appellate Body in December 2019.

68 See in this regard, e.g., the speech by EU Commissioner for Competition Vestager, ‘State aid and fair competition worldwide’ (n 36). 69 See the Statement by Executive Vice-President Margrethe Vestager on adoption of the White Paper on foreign subsidies in the Single Market (n 67).

16. Tax rulings and State aid: musings on recovery Dimitrios Kyriazis1

Treaty on European Union, Article 2: The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. These values are common to the Member States in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevail.

1. INTRODUCTION A state aid lawyer would need to have spent the past few years in a Siberian forest in order to manage to miss the deafening news of the European Commission’s ongoing fiscal state aid “crusade”. Started by Commissioner Almunia in June 2014 and further reinforced by Commissioner (now also Vice-President) Vestager, a wave of fiscal state aid investigations into the tax affairs of household names (like Apple and Amazon) has been making headlines. Most of these investigations have focused on tax rulings “validating” advance pricing agreements (APAs), i.e. have concerned intra-group transactions of multinational companies. Moreover, most of them have been concluded with a negative decision, with DG COMP finding that state aid had been granted, and ordering recovery. Much ink has been spilled by academics and practitioners in relation to the legality and legitimacy of the Commission’s approach.2 The author of this chapter is guilty of spilling a sig1 The author is grateful to Ms Andriani Tzamarou, who has provided research assistance on this chapter. The analysis and conclusions expressed herein are solely those of the author; responsibility for any errors remains his alone. Comments welcome: kyrdimi@​gmail​.com. 2 Conor Quigley, European State Aid Law and Policy (3rd edn, Hart Publishing 2015), 107; Pierpaolo Rossi-Maccanico, “Fiscal State Aids, Tax Base Erosion and Profit Shifting” (2015) 2 EC Tax Review 63; Anna Gunn and Joris Luts, “Tax Rulings, APAs and State Aid: Legal Issues” (2015) 2 EC Tax Review 119; Raymond Luja, “Will the EU’s State Aid Regime Survive BEPS?” (2015) 3 British Tax Review 379; Michael Lang, “Tax Rulings and State Aid Law” (2015) 3 British Tax Review 391; Wolfgang Schön, “Tax Legislation and the Notion of Fiscal Aid – A Review of Five Years of European Jurisprudence” (2015) Max Planck Institute for Tax Law and Public Finance Working Paper; Richard Lyal, “Transfer Pricing Rules and State Aid” (2015) 38 Fordham International Law Journal 1017; Dimitrios Kyriazis, “Luxembourg, Amazon, and the State Aid Connection” (State Aid Hub Blog, 22nd January 2015) accessed 30 June 2019; Shafi U Khan Niazi, “An Account of recent activity of the European Commission on applying state aid rules to income taxes: In retrospect and prospect” (2016) Monash Business School Working Paper No 2016-03-01 accessed 28 August 2019; Liza Lovdahl Gormsen, “EU State Aid Law and Transfer Pricing: A Critical Introduction to a New Saga” [2016] Journal of European Competition Law & Practice; Dimitrios A Kyriazis, “From Soft Law to Soft Law Through Hard Law: The Commission’s Approach to the State Aid Assessment of Tax Rulings” (2016) 15(3) EStAL 428; Conor Quigley, “Tax Rulings and State Aid” [2016] Tax Journal 8; Mario

314

Tax rulings and State aid   315 nificant amount of ink himself.3 However, only a minority of contributions have addressed the validity of the Commission’s decision to order the recovery of state aid in all its negative decisions; these contributions are cited and explored in Part 3 infra. The purpose of this chapter is to contribute to the ongoing recovery debate and not to regurgitate the assessment of the Commission’s substantive state aid analysis. The author has previously argued that the Commission’s analysis is legally problematic for a variety of reasons.4 Thus, our focus in this chapter will not be on whether the Commission was right to classify tax rulings deviating from an EU law-derived arm’s length principle as state aid. Instead, the focus will be on whether, assuming state aid was indeed granted and Article 107 Treaty on the Functioning of the European Union (TFEU) correctly relied on, the Commission was right to order its recovery from the alleged aid beneficiaries, or whether this was in breach of a general principle of EU law (or unwise on different grounds). The structure of this chapter is as follows. In Part 2, the Commission’s soft and hard law approach to state aid recovery will be set out, as well as the General Court’s relevant assertions. As regards soft law, the Commission’s recently (2019) adopted Notice on recovery will be the starting point.5 As regards hard law, the Commission’s final decision in the Fiat case will be the point of reference. There are several reasons for this. First, the Fiat investigation was the first to be launched in June 2014 (along with the ones against Apple and Starbucks) and the first one to be concluded by DG COMP in October 2015 (along with Starbucks). Secondly, it represents the first time the Commission presented its views on the existence of an EU law-derived arm’s length principle (hereafter ‘ALP’). Thirdly, and equally importantly, at the time of writing, the Commission’s decision in the Fiat case (and thus also the relevant recovery order against Fiat) was the only one to have survived the General Court’s scrutiny. Tenore, “APAs and State Aid: A New Era of European Tax Law?” in Dennis Weber (ed), EU Law and the Building of Global Supranational Tax Law (IBFD 2017); Tony Joris and Wout De Cock, “Is Belgium and Forum 187 v Commission a Suitable Legal Source for an EU ‘At Arm’s Length Principle’” [2017] EStAL 607; Jérôme Monsenego, Selectivity in State Aid Law and the Methods for the Allocation of the Corporate Tax Base (Wolters Kluwer 2018); Robin F Hansen, “Taking More Than They Give: MNE Tax Privateering and Apple’s ‘Ocean’ Income” (2018) 19(4) German Law Journal 693; Ricardo André Galendi Júnior, “State Aid and Transfer Pricing: The Inherent Flaw Under a Supranational Reference System” (2018) 46 Intertax 994; Bram Vos, “State Aid, Taxation & Transfer Pricing: Illegal Fiscal State Aid Granted to Starbucks?” (2018) 2 EC Tax Review 113; Cees Peters, “Tax Policy Convergence and EU Fiscal State Aid Control: In Search of Rationality” (2019) 1 EC Tax Review 6; and Peter Wattel, “Case law Notes: Starbucks and Fiat: Arm’s Length Competition Law” (2020) 48(1) Intertax 119. 3 Dimitrios Kyriazis, “Actions for Annulment in the Fiat and Starbucks Cases: A First Taste of What Will Ensue” (Wolters Kluwer Competition Law Blog, 29 February 2016) accessed 30 June 2019; Kyriazis, “From Soft Law to Soft Law Through Hard Law” (n 2); Dimitrios Kyriazis, “The Belgian Excess Profits Case – A State Aid Anticlimax” (Kluwer Competition Law Blog, 5 March 2019) accessed 20 January 2020; Dimitrios Kyriazis, “Playing Chess Like Commissioner Vestager” (European Law Blog, 12 November 2019) accessed 20 January 2020; and Dimitrios Kyriazis, “Why the EU Commission won’t appeal the Starbucks judgment” (MNE Tax, 10 December 2019)

accessed 20 January 2020.  4 Kyriazis, “From Soft Law to Soft Law Through Hard Law” (n 2). 5 European Commission (EC) Notice on the recovery of unlawful and incompatible State Aid [2019] OJ C 247/01, hereafter “Recovery Notice”.

316  Research handbook on European State aid law More specifically, in September 2019, the General Court annulled the Commission’s decision against the Netherlands in its Starbucks judgment,6 but upheld its decision against Luxembourg in its Fiat judgment,7 including the recovery order against Fiat. In other words, the Fiat case is an excellent opportunity to compare, contrast and ultimately assess the hard law approach of the Commission and the General Court to state aid recovery in the case of tax rulings. In Part 3 of this chapter, the aforementioned approach will be dissected and critically examined. It will be argued that, by summarily dismissing certain thoughtful arguments by the applications, the Commission and Court have reached controversial conclusions. Finally, more arguments (and the relevant literature) against recovery in the tax ruling cases will be presented and explored.

2.

THE APPROACH OF THE COMMISSION AND THE GENERAL COURT TO RECOVERY IN THE TAX RULINGS’ CASES: AIN’T NOTHING STOPPING RECOVERY

Article 16 (1) of Regulation 2015/1589 provides that, when a negative state aid decision is adopted, the Commission “shall decide that the Member State concerned shall take all necessary measures to recover the aid from the beneficiary”, unless this would be “contrary to a general principle of Union law”.8 The Commission acknowledges this rule in its soft law, i.e. its Recovery Notice,9 and goes on to correctly note that these principles are not to be found in the Treaty of Lisbon.10 This is a well-known fact and makes them no less potent; even the two most fundamental tenets of the EU’s legal order, i.e. direct effect and supremacy, have not made their way to the Treaty, but remain judge-made law.11 Still, even though recovery is illegal if it contradicts any general EU law principle, given that the Regulation makes no relevant distinction, certain principles are invoked much more often than others.12 The “usual suspects” are the principle of legal certainty and the principle of the protection of legitimate expectations. These are now presented in turn, the way they are described in the Commission’s Recovery Notice (soft law), its Fiat Decision (hard law) and the General Court’s Fiat judgment (case law). According to European Court of Justice (ECJ) case law,13 “the principle of legal certainty, which is a general principle of EU law, requires that legal rules be clear and precise and aims to ensure that situations and legal relationships governed by EU law remain foreseeable”.14 The Commission, in its Notice, has elaborated on this, by adding that legal rules need to be

6 Case T-760/15 and T-636/16 Kingdom of the Netherlands and Others v European Commission (Starbucks) [2019] ECLI:​EU:​T:​2019:​669, hereafter Starbucks GC Judgment. 7 Case T-755/15 and T-759/15 Luxembourg v European Commission (Fiat) ECLI:​EU:​T:​2019:​670, hereafter Fiat GC Judgment. 8 Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union, OJ L 248/9. 9 Recovery Notice (n 5) para 31. 10 Ibid para 32. 11 Declaration 17 to the Treaty of Lisbon is not binding. 12 Recovery Notice (n 5) para 32. 13 Case C-63/93 Duff [1996] EU:​C:​1996:​51, para 20. 14 Fiat GC Judgment, para 405.

Tax rulings and State aid   317 “predictable in their effect, so that interested parties can ascertain their position in situations and legal relationships governed by European Union law”.15 In its final Fiat decision, the Commission summarily dismissed arguments relating to the breach of legal certainty, by asserting, inter alia, that there was “nothing novel in the Commission’s approach to the contested [Fiat] tax ruling”.16 In essence, it argued that there was nothing unforeseeable about it, since it had applied the arm’s length principle in its past decision-making practice.17 This claim, together with more arguments made by the Commission and the General Court, will be scrutinised in Part 3 infra. For now, it is sufficient to note that fiscal state aid is … tricky. As the Commission states in its Notice, re-establishing the status quo ante in fiscal state aid cases means “returning, as far as possible, to the situation which would have prevailed if the operations at issue had been carried out without the tax reduction”.18 For this reason, “the Member State concerned must calculate the correct tax amount that an undertaking should have paid without the unlawful aid measure”.19 The recovery of any type of fiscal state aid raises many thorny issues. They concern, inter alia, “the identification of the unlawful State aids that must be recovered, the bases of the obligation of recovery, the taxpayer’s rights and the State’s obligations”.20 In the case of tax rulings validating advance pricing agreements (APAs), the issues are even thornier, given the inherently protean nature of the arm’s length principle. However, objections of this type will be analysed in Part 3 infra. It is now necessary to briefly set out the second general EU law principle on which alleged aid beneficiaries rely on in order to object to state aid recovery, namely the principle of legitimate expectations. According to the Commission’s definition in the Recovery Notice, it can be invoked by “any person who can entertain expectations which are justified and well founded, having received precise, unconditional and consistent assurances from the competent institutions of the European Union”.21 If the standstill obligation had been breached, i.e. if the State had not notified the alleged state aid measure to DG COMP before implementing it, the alleged aid beneficiary cannot rely on this principle “unless exceptional circumstances apply”, because a “diligent business operator should be able to determine whether the aid was duly approved by the Commission”.22 Of course, the implicit premise here is that the alleged recipient would also need to have known that the measure actually qualified as state aid to begin with, which is a task that sometimes ranges from difficult to quasi-impossible, as will be shown in Part 3. Knowing the outcome of the Fiat Commission decision and of the Fiat case before the General Court, the reader will not be surprised to learn that this defence was rejected. In its 2015 final Fiat decision, the Commission first reminded Luxembourg that Member States Recovery Notice (n 5) para 34. Commission Decision of 21 October 2015 on State Aid which Luxembourg Granted to Fiat, Case SA.38375 (2014/C ex 2014/NN), hereafter Fiat, para 362. 17 ibid. 18 Recovery Notice (n 5) para 105. 19 Ibid para 106. 20 Alexandre Maitrot de la Motte, “The Recovery of the Illegal Fiscal State Aids: Tax Less to Tax More” [2017] EC Tax Review 75, 77. 21 Recovery Notice (n 5) para 39. 22 ibid para 41. 15 16

318  Research handbook on European State aid law cannot invoke this defence; only alleged aid beneficiaries can, since it is their expectations that the aforementioned principle protects.23 In any case, the Commission asserted, even if Fiat had raised such a claim, it would have failed because the assurances on which it would have relied would not have amounted to prior precise assurances by the Commission. In fact, Luxembourg had raised the argument that its tax ruling practice had previously been “cleared” by both the EU’s Code of Conduct Group and the Organisation for Economic Co-operation and Development (OECD)’s Forum on Harmful Tax Practices.24 However, the Commission reminded Luxembourg that “the Code of Conduct, adopted by the ECOFIN Council, is a non-legally binding instrument” and that, more generally, its subject-matter is different to that of Article 107 TFEU.25 As regards the OECD’s Forum, on whose agreement Luxembourg tried to rely, its conclusions are also non-binding, and it is not even an EU institution.26 Therefore, the arguments in relation to the creation of legitimate expectations were summarily shot down by the Commission.27 In Part 3, we will examine whether the Commission actually rendered its “flank” more vulnerable to such objections due to the manner in which it attempted to “invent” an EU law-derived ALP. In any case, the General Court in Fiat was even more dismissive of this line of argument, stating that Fiat had “neither established nor even claimed in what respect it might have received precise assurances from the Commission that” its tax ruling was not state aid.28 Moreover, the fact that the Commission “expressly based certain earlier state aid decisions on the arm’s length principle laid down in Article 9 of the OECD Model Tax Convention” did not amount to precise assurances within the meaning of the relevant case law.29 Having laconically set out the Commission’s and General Court’s soft and hard law approach to recovery in the tax ruling cases, the subsequent part will proceed to critically analyse them.

3.

A CRITICAL ANALYSIS OF THE ARGUMENTS IN FAVOUR OF RECOVERY

The aim of this part is to examine the other side of the coin, the “coin” being Part 2 and the aforecited assertions by the Commission and the General Court. In order to properly undertake this exercise, some background will need to be provided on the legal analysis that underpinned the qualification of the tax rulings as state aid, and the merits thereof. This part will focus on objections (of the author and other academics) against the laconic dismissal of the Member States’ and beneficiaries’ arguments against recovery, especially in relation to legal certainty and legitimate expectations.

Fiat para 357. ibid para 356. 25 ibid paras 357–8. 26 ibid para 359. 27 ibid para 364. 28 Fiat GC Judgment para 186. 29 ibid. 23 24

Tax rulings and State aid   319 3.1

The Rule of Law, Legal Certainty, and the EU Law-Derived ALP

As previously explained in Part 2 of this chapter, legal certainty is a general principle of EU law. As such, according to Article 6 (3) TFEU, it is of the same legal status as primary EU law and needs to be respected by EU institutions and Member States alike. However, apart from being a general EU law principle, it forms part of the rule of law, a concept that represents one of the core values of the European Union. According to Article 2 TEU, the “Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights”. In addition to this, the Preamble to the EU Charter of Fundamental Rights, which is a legally binding document of primary EU law, states that the Union is “based on the principles of democracy and the rule of law”. The rule of law is also considered a key concept by the Council of Europe and the European Convention on Human Rights (ECHR). As the reader surely knows, all EU Member States are also Council of Europe Member States that have ratified (and are bound by) the ECHR. Moreover, the EU itself is obliged, under Article 6 TEU, to accede to the ECHR.30 According to Article 3 of the Statute of the Council of Europe, every Member State must accept the principle of the Rule of Law, human rights and democracy. It has rightly been noted that the rule of law “is – or at least should be – a pillar of any national legal order in the Member States”.31 The rule of law is also mentioned in the Preamble of the European Convention on Human Rights. More importantly, it is part of the Convention’s very fabric: as stated by the ECtHR in the case of Engel v. The Netherlands, the rule of law is considered to be part of the “spirit” of the Convention and to underlie all the Convention’s provisions.32 What the author wishes to stress through the preceding analysis is that the rule of law, within the EU, is not an empty slogan. It is a very real principle that bites and that needs to be respected by both Member States and EU institutions alike. For instance, when a Member State systematically violates the rule of law, Article 7 TEU allows for the so-called “nuclear option”, i.e. a suspension of said State’s voting rights. More specifically, the Commission can trigger the rule of law framework to address systemic threats to the rule of law by EU countries. Disrespecting the rule of law entails serious consequences. The rule of law, and thus also legal certainty, are of paramount significance within the EU’s legal order and need to be upheld. Let us now briefly zoom out. Let us take a step back and examine how prominent legal theorists describe the rule of law and the importance they ascribe to legal certainty as one of its constituent parts. Our focus will then naturally circle back to the EU rule of law concept, before further zooming into EU state aid law. Broadly speaking, rule of law theorists fall into two categories: the first group is in favour of a more substantive, thus also more rigorous (some would say more onerous) rule of law concept. The second group favours a more procedural, less “intrusive” rule of law concept.

30 Its accession was delayed, and arguably complicated, by the CJEU’s (now infamous) Opinion 2/13. 31 Jolien Schukking, “Protection of human rights and the Rule of Law in Europe: A shared responsibility” (2018) 36(2) Netherlands Quarterly of Human Rights 152, 154. 32 Engel and Others v The Netherlands App nos 5100/71, 5101/71, 5354/72 and 5370/72 (ECtHR, 8 June 1976), para 69.

320  Research handbook on European State aid law A popular and renowned proponent of the former was Lord Bingham; Professor Joseph Raz of the latter. Still, as will now be demonstrated, both agree on an element of the rule of law that is important in the context of the argument put forward in this chapter. According to Lord Bingham’s first rule of law principle, the law “must be accessible and so far as possible intelligible, clear and predictable”.33 According to Professor Raz, it is imperative that “laws should be prospective, not retrospective; that they should be relatively stable; that particular laws should be guided by open, general and clear rules”. Moreover, “whatever the content of the law, at least it should be open, clear, stable, general and applied by an impartial judiciary”.34 Both scholars, similarly to the schools of thought they represent, share common ground, namely place great emphasis on the clarity and intelligibility of the law. It will now be demonstrated that the views of the European Court of Justice are actually quite similar on this point, and this is key in the context of state aid recovery. Zooming back into EU legal discourse, it is worth re-emphasising that legal certainty “is a fundamental principle of EU law and part of the general overarching principles of EU law”.35 The existence of this principle was “first acknowledged in 1961, nine years after the Court was created and eight years after its first judgment”.36 According to ECJ jurisprudence, the principle of legal certainty mandates that “rules of law be known, clear, precise, stable, certain and predictable”.37 In the Court’s own words, the application of EU law rules must be “foreseeable by those subject to them”38 and said rules must “enable those concerned to know precisely the extent of the obligations imposed on them” and these persons need to be able “to ascertain unequivocally what their rights and obligations are and take steps accordingly”.39 The bar is set high. Legal certainty’s demands on EU law and EU institutions are exacting, and rightly so. This “highlights the importance of legal certainty in the realm of private economic activity”, especially when tax planning is involved, since taxation “is a complex legal area and its inherent uncertainty can chill desired economic activity”.40 The legal and financial stakes are high. Let us continue to approach the subject-matter at hand in a principled manner and zoom in even more, this time into fiscal state aid in particular. What, exactly, is the purpose of state aid recovery in general? To re-establish the status quo ante. It is not a fine, but “the skimming

Tom Bingham, The Rule of Law (Penguin 2010). See the succinct summary of Raz’s views by Professor Paul Craig in Paul Craig, Stanislas Adam, Nuria Diaz Abad and Lorenzo Salazar, “Rule of Law in Europe: Perspectives from Practitioners and Academics” (2019) European Judicial Training Network accessed 20 January 2020. 35 Liza Lovdahl Gormsen and Clement Mifsud-Bonnici, “Legitimate expectation of Consistent Interpretation of EU State Aid Law: Recovery in State Aid Cases Involving Advanced Pricing Agreements on Tax” [2017] Journal of European Competition Law & Practice 423, 425. 36 Jérémie Van Meerbeeck, “The Principle of Legal Certainty in the Case-Law of the European Court of Justice: From Certainty to Trust” (2016) 41(2) European Law Review 275, 280. 37 ibid 275. 38 Case C-201/08 Plantanol [2009] EU:​C:​2009:​539, para 46. 39 Case C-345/06 Heinrich [2009] EU:​C:​2009:​140, para 44. See also Case C-610/10 Commission v Spain [2012] EU:​C:​2012:​781. 40 Gormsen and Mifsud-Bonnici (n 35) 425. 33 34

Tax rulings and State aid   321 off of an unjustified enrichment”.41 Why “unjustified” in the tax ruling cases? Because, in DG COMP’s view, the alleged beneficiary (and taxpayers) should not have accepted the tax assessments that their tax rulings represented. But what is the purpose, in general, of the “instruments” the Commission is attacking, i.e. of tax rulings? Are they instruments that generally promote or undermine legal certainty? The answer has to be the former. The principal objective of tax rulings is “to increase legal certainty”42 and to “mitigate the risks arising from the increasing complexity of tax law, its ambiguity and the possibility of different interpretations of the same legal provision”.43 In other words, the Commission’s state aid “targets” are tax rulings, instruments that, in general, serve to promote legal certainty. But perhaps this is merited? Perhaps the Commission’s legal premises in its high-profile tax rulings decisions comply with the requirements of legal certainty and the rule of law? In the remainder of this part it will be argued that the answer can only be an emphatic “no”. The Commission’s legal analysis in relation to the classification, as state aid, of the tax rulings it investigated was anything but clear, precise, predictable and foreseeable. For this reason, it will be reasoned that the recovery orders that were based on said classification violate the principle of legal certainty. To begin with, we need to quote the Commission’s most significant (and controversial) legal assertion in full, so that the reader can independently assess it before it is dissected by the author. The paragraph that follows is a key doctrinal paragraph taken from the Commission’s 2016 Notice on the Notion of State Aid:44 This arm’s length principle necessarily forms part of the Commission’s assessment of tax measures granted to group companies under Article 107(1) of the Treaty, independently of whether a Member State has incorporated this principle into its national legal system and in what form. It is used to establish whether the taxable profit of a group company for corporate income tax purposes has been determined on the basis of a methodology that produces a reliable approximation of a market-based outcome. A tax ruling endorsing such a methodology ensures that that company is not treated favourably under the ordinary rules of corporate taxation of profits in the Member State concerned as compared to standalone companies who are taxed on their accounting profit, which reflects prices determined on the market negotiated at arm's length. The arm’s length principle the Commission applies in assessing transfer pricing rulings under the State aid rules is therefore an application of Article 107(1) of the Treaty, which prohibits unequal treatment in taxation of undertakings in a similar factual and legal situation. This principle binds the Member States and the national tax rules are not excluded from its scope.

This was the second ever appearance of this assertion in EU legal discourse. The initial one had taken place a few months earlier, in the Commission’s final decisions in the Fiat and Starbucks cases.45 Yes, the reader understood this correctly. The Commission practically copied and pasted its most fundamental legal premises from its final decisions (binding hard 41 Matthias Vekeman, “Conference Report: State Aid and (In)Direct Taxation: Report on the 12th Frans Vanistendael Lectures” (2019) 28 EC Tax Review 217, 222. 42 Joris and De Cock (n 2) 611. 43 Aleksandra Bal, “Tax Rulings, State Aid and the Rule of Law” in Robert van Brederode (ed), Ethics and Taxation (Springer 2020), 373. 44 European Commission, “Commission Notice on the notion of State aid as referred to in Article 107(1) TFEU” COM (2016), hereafter “Final Notice”, para 172 [footnotes omitted]. 45 See paragraph 264 of the Starbucks decision and paragraph 228 of the Fiat decision.

322  Research handbook on European State aid law law) to its Notice on the Notion of State Aid (non-binding soft law). It gets even better. As has already been remarked elsewhere, in its Notice, out of the eight footnotes in which the Commission set out the sources for what it considered to be the law in relation to the State aid assessment of tax rulings, three (!) footnotes cite the Commission’s recent final decisions in Fiat, Starbucks and the Belgian Excess Profit cases as a source of law. Furthermore, in two out of these three footnotes, the three final Commission decisions were the only source the Commission cited for presenting what it considered to be the law. In other words, out of the entire body of Court jurisprudence and its own decisional practice, the only sources the Commission could apparently find to support its assertion that a departure from a reliable approximation of a market-based outcome confers a selective advantage were its very own 2015–16 decisions.46 Why did the Commission need to be so self-referential? The answer is simple: there is no “EU statute that makes the arm’s length principle an EU-wide rule nor any case law, which confirms that the principle must be applied in all 28 Member States”.47 The Commission, naturally, argues otherwise. It posits that the ECJ’s Forum 187 case introduced an EU law ALP into EU state aid law.48 The author has explained elsewhere why such a claim is not persuasive and why the Forum 187 judgment cannot conceivably be a valid authority for an EU law-derived ALP.49 In a nutshell, the reasons are as follows. The ECJ in Forum 187 “did not explicitly refer to such a principle”; the Commission “uses a very broad interpretation of the wordings of the ECJ by deriving an at arm’s length principle from the words ‘free competition’” used in the ruling.50 It also conceals the fact that Forum 187 was “a particularly extreme case, in which companies were essentially taxed on a completely notional basis”.51 Furthermore, Belgium had actually willingly adopted the OECD’s Guidelines in the 1990s, so their inclusion in the counterfactual scenario of the advantage test was not far-fetched: the ECJ did not need to invent an entirely new EU (non-OECD) ALP to reach a finding of state aid. The fact of the matter is that, even though the Commission “pretends” that the EU law ALP is settled case law, its own “behaviour” during the first wave of the 2000s is wildly different to that in the second wave post-2014. As has aptly been noted, while its “interpretation and application of the arm’s length principle” in the first wave was “superficial and manifested an air of exploration”, in the second wave the Commission “embarked on an aggressive application of the [ALP] as if it were an exact science which produces a precise result on which economic advantage can be determined”.52 In essence, in the second wave the Commission is trying “to

Kyriazis (n 4) 431. Gormsen and Mifsud-Bonnici (n 35) 430-431. 48 Joined Cases C-182/03 & C-217/03 Belgium and Forum 187 ASBL v Commission [2006] EU:​C:​ 2006:​416. The General Court, in the Fiat and Starbucks judgments, seemingly upheld the Commission’s legal approach on this point, but provided no justification for doing so and did not engage with the many convincing counterarguments; see its axiomatic assertion in the Starbucks GC Judgment, para 150. 49 Kyriazis (n 4) 434 et seq. 50 Joris and De Cock (n 2) 613–14. 51 Gormsen and Mifsud-Bonnici (n 35) 431. 52 ibid. 46 47

Tax rulings and State aid   323 impose more or less the current OECD transfer pricing guidelines on Member States when it comes to making arm’s length adjustments”.53 To conclude on this point, there is nothing settled, certain or clear in the Commission’s over-reliance on Forum 187. Neither this judgment’s “logic” nor its wording lend support to the Commission’s assertions; the case is being “overstretched”.54 One should remember that quidquid non agnoscit glossa nec agnoscit curia. The extent to which the Commission’s approach disregards legal certainty is startling, if one delves even deeper. It has rightly been stated that its actions were “novel and unprecedented in several ways” and seemed to neglect “fundamental norms (such as stability and predictability) stemming from the Rule of Law”.55 More specifically, in its Fiat and Starbucks decisions, as well as in its 2016 Notice on the Notion of Aid, the Commission only devoted a couple of paragraphs to this EU Law principle, without “providing specifics on the exact sources of the principle, the reasoning behind it, its interaction with the principle of national fiscal sovereignty and, most importantly, its application in practice”.56 This is why the US Treasury was right in arguing that the Commission’s legal approach was novel and constituted “an unforeseeable departure from the status quo” which is “inconsistent with international norms and undermines the international tax system”.57 The Commission chose to apply “a novel interpretation advanced by none other than itself retroactively”.58 Ironically enough, the Commission itself was ambivalent. In 2014, when the Commission published its Draft Notice on the Notion of Aid,59 there was absolutely no mention of an EU law-derived ALP. In paragraph 176 of the Draft Notice, where one would have expected the Commission to discuss the existence of such a principle if it was already aware of it, we read nothing relevant. This shows that the interpretation of Forum 187 with which the Commission came up in its Fiat and Starbucks decisions (October 2015) had not even been foreseeable to itself 18 months earlier, when it published its Draft Notice! How could one expect, let alone demand, that the alleged aid beneficiaries should have foreseen this interpretation already in 2006, when Forum 187 was handed down? Such a requirement is absurd, “problematic”,60 and constitutes an affront to legal certainty and its “parent” principle, the rule of law.

53 Raymond Luja, “Will the EU’s State Aid Regime Survive BEPS?” (2015) 3 British Tax Review 379, 385. 54 Kyriazis (n 2) 435. 55 Bal (n 43) 373. 56 Kyriazis (n 2) 437. 57 U.S. Department of the Treasury, “The European Commission’s Recent State Aid Investigations of Transfer Pricing Rulings” (24 August 2016) accessed 22 September 2019, p 1. 58 Gormsen and Mifsud-Bonnici (n 35) 432. 59 European Commission, “Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU” COM (2014), hereafter “Draft Notice”. 60 Liza Lovdahl Gormsen, “Has the Commission Taken Too Big a Bite of the Apple?” [2016] European Papers 1137, 1139.

324  Research handbook on European State aid law 3.2

Legitimate Expectations: Arguing by Analogy

Were the Commission and the General Court right in summarily dismissing the applicants’ arguments that the principle of legitimate expectations militates against the recovery of state aid in the tax rulings cases? The answer is, arguably, not straightforward. According to the Commission’s Recovery Notice, in case “the alleged aid beneficiary cannot rely on this principle ‘unless exceptional circumstances apply’, because a diligent business operator should be able to determine whether the aid was duly approved by the Commission”.61 As stated already at the beginning of this chapter, the implicit premise here is that the alleged recipient would also need to have known that the measure actually qualified as state aid to begin with, which is a task that can range from challenging to quasi-impossible. Not only is this true, but the case law on legitimate expectations is very convoluted. In fact, it would be “an understatement to say that the case law dealing with legitimate expectations is not transparent”.62 In addition to this, the ECJ “has adopted a very rigid position”63 and almost never accepts legitimate expectations as a successful defence against recovery. These general objections against the way in which the ECJ has developed its relevant case law are further accentuated in the area of fiscal state aid, and even more so in the tax ruling cases. Let us examine the aforementioned “diligent businessman test”. In cases of un-notified aid, the aid beneficiary practically loses all hope of relying on the legitimate expectations defence, since a diligent businessman would have been able to ascertain that the aid it was offered had not been notified to DG COMP. Of course, this requirement rests on the assumption that the aid beneficiary was actually aware of the fact that it had been granted state aid. While this assumption is not unreasonable when, for instance, a Member State writes a company a cheque, it is rather untenable in more borderline cases, where the very definition of state aid is contested. This is why it has convincingly been contended that the “strict application of this benchmark is only accurate where there are no doubts regarding the aid character of the measure at issue”.64 If not, then the diligent businessman standard “reaches a fairly demanding level in State aid law, which reduces almost to nothing the space left for the exceptional protection of expectations formed over unlawful aid”.65 To avoid rendering the legitimate expectations defence to recovery utterly meaningless in cases of un-notified state aid, the Commission and the EU Courts need to take into account how easily, if at all, the alleged aid beneficiary could have identified that aid was being granted. If this premise is accepted, then the tax ruling cases discussed in this chapter are good candidates for such a newly-minted branch of case law on legitimate expectations. Part 3.1 supra demonstrated how nebulous the Commission’s arm’s length principle is, how difficult it was for any Recovery Notice (n 5) para 41. Adrien Giraud, “A Study of the notion of legitimate expectations in state aid recovery proceedings: ‘Abandon all hope, ye who enter here’?” [2008] CMLR 45 1399, 1400. 63 Eve Fink, “The Possibility of Protection of Legitimate Expectations in Recovery of Unlawful State Aid” (2013) 20 Juridica Int’l 133, 141. 64 Krzysztof Jaros and Nicolai Ritter, “Pleading Legitimate Expectations in the Procedure for the Recovery of State Aid” [2004] EStAL 573, 578. 65 Claudia Saavedra Pinto, “The ‘Narrow’ Meaning of the Legitimate Expectations Principle in State Aid Law Versus the Foreign Investor’s Legitimate Expectations. A Hopeless Clash or an Opportunity for Convergence?” [2016] EStAL 270, 275. 61 62

Tax rulings and State aid   325 taxpayer to foresee such an interpretation of Forum 187 and how detrimental to legal certainty any other conclusion would be. With these arguments at hand, the ECJ is well-equipped to re-examine and clarify its case law, thus answering the accusation of those that have justifiably labelled the treatment of aid beneficiaries by the state aid regime as “draconian”.66 However, in the remainder of this part, it will be maintained that a jurisprudential “clarification”, though welcome, is not the only way in which the legitimate expectations defence could succeed in the tax ruling cases. Arguably, a less radical “path” is also available. In the author’s view, an argument by analogy should, perhaps, be considered. This will now be explicated in more detail. As explained in Part 2 of this chapter, the Commission’s main objection against the legitimate expectations defence raised in Fiat was that the assurances received by Luxembourg did not come from the Commission but from the Code of Conduct Group and the OECD’s Forum on Harmful Tax Practices. Furthermore, the assurances received were not about the compliance of Luxembourg’s tax ruling practice with Article 107 TFEU, but about its compliance with the EU Code of Conduct on business taxation and the OECD’s Guidelines. The Commission’s rejection of this defence, on the basis of the strict line of relevant case law, cannot be said to be unreasonable. The point the author would like to make here is a fine one. It does not aspire to be a decisive argument, or perhaps even an utterly convincing one as the law currently stands, but it is worth voicing it and allowing it to take its place in this debate. What is the nub of the Commission’s legal argumentation in all recent tax ruling/transfer pricing cases? It is simple: the Member States involved conferred an advantage on the taxpayer (e.g. the Fiat subsidiary) by issuing a tax ruling which endorsed a transfer pricing analysis deviating from the EU law-derived ALP that is supposedly based on Forum 187. That is it. And what does this EU law arm’s length principle look like?67 For the time being, it bears a striking resemblance to the OECD’s arm’s length principle. Although both the Commission and the General Court have openly admitted that they cannot turn soft law (OECD Guidelines) into hard law (Article 107 TFEU), they have all but done so. In paragraph 66 of the final Starbucks Commission decision of 2015, it was stated that “the OECD TP Guidelines serve as a focal point and exert a clear influence on the tax practices of OECD member (and even non-member) countries” and that they “capture the international consensus on transfer pricing”. Moreover, in paragraph 173 of its Final Notice on the Notion of State Aid, the Commission stressed that the OECD Guidelines “provide useful guidance to tax administrations and multinational enterprises on how to ensure that a transfer pricing methodology produces an outcome in line with market conditions”. More importantly, it stated that “if a transfer pricing arrangement complies with the guidance provided by the OECD Transfer Pricing Guidelines”, then “a tax ruling endorsing that arrangement is unlikely to give rise to State aid”. In its 2016 Working Paper on State Aid and Tax Rulings, DG COMP further complicated matters when

66 Jeremy Lever, “The EC State Aid Regime: The Need for Reform” in Andrea Biondi and others (eds), The Law of State Aid in the European Union (Oxford University Press 2003), 320. 67 The analysis that follows in the next three paragraphs has been “borrowed” from Dimitrios Kyriazis, “Playing Chess Like Commissioner Vestager” (European Law Blog, 12 November 2019) accessed 20 February 2020.

326  Research handbook on European State aid law it asserted that its “focus is on cases where there is a manifest breach of the arm’s length principle”.  The General Court’s judgments not only failed to provide more detailed guidance as regards the content of this “EU law ALP”, but they seem to have sealed the deal in favour of the OECD Guidelines (a soft law instrument which EU Member States can choose not to abide by). In paragraph 155 of its Starbucks judgment, the General Court emphasised that the OECD Guidelines “are based on important work carried out by groups of renowned experts, that they reflect the international consensus achieved with regard to transfer pricing and that they thus have a certain practical significance in the interpretation of issues relating to transfer pricing”. From the preceding analysis it has become evident that, if one endeavours to decipher the Commission’s approach, one concludes that the question “did the Fiat tax ruling confer a state aid advantage on Fiat?” is synonymous to the question “did the transfer pricing analysis in the Fiat tax ruling deviate from the OECD’s Transfer Pricing Guidelines?”. If this is true, and arguably it is, then if, in theory, a Member State received assurances from the OECD’s Forum, an authoritative interpreter of the OECD’s Guidelines, on its tax ruling practice, such an act cannot be devoid of all legal meaning. The same can be said about assurances by the Code of Conduct Group on the compliance of a State’s tax ruling practice with the Code of Conduct, paragraph B (4) of which introduced compliance with the OECD’s transfer pricing guidelines as a harmfulness criterion.68 The Code of Conduct Group operates within the framework of an EU institution, the Council of the EU (in its ECOFIN iteration). Moreover, it is a respected and well-established group of experts that has collaborated very closely with the Commission during both the first and the second fiscal state aid wave. Again, its assurances cannot be devoid of all legal meaning. To sum up, the Commission, by adopting an audacious legal approach and creatively connecting Article 107 TFEU (the advantage condition) to the OECD’s Transfer Pricing Guidelines, arguably exposed its “flank” to legitimate expectations counterarguments of the sort mentioned above. The author is not submitting that such arguments will be accepted by the ECJ, or that they even apply to the facts of the Fiat case, but they are arguments that pose thought-provoking questions and cannot be dismissed offhandedly. 3.3

Two EU Law Principles versus an EU Competence

State aid policy forms part of competition policy, which belongs to an area of exclusive EU competence, in accordance with Article 3 (b) TFEU. Consequently, the obligation of Member States to recover illegal (and/or incompatible) state aid also falls within the Union’s exclusive competence. On the other hand, we have the principles that could stand in the way of recovery, namely, in the context of this chapter, legal certainty and the principle that legitimate expectations, once created, must be protected. In other words, we have a clash between two EU law principles and an EU competence.69 The plot thickens in the tax ruling cases, since taxation is a sensitive issue on the EU law plane, with Member States’ tax sovereignty (and veto power) being the rule. Where tax rules 68 Council Conclusions of the ECOFIN Council Meeting on 1 Dec 1997 concerning taxation policy [1998] OJ C 2/01, para B (4). 69 Arguably, both principles emanate from the fundamental principle of the rule of law.

Tax rulings and State aid   327 have not been harmonised at the EU level, “it is clear that a balance must be struck between the fiscal sovereignty of the Member States and the effective application of the State aid rules”.70 Let us take a step back. What is the European Union? It is a creation of its Member States. Which principle determines the existence of EU competence? According to Article 5 (1-2) TEU, the “limits of Union competences are governed by the principle of conferral”, the latter meaning that “the Union shall act only within the limits of the competences conferred upon it by the Member States” and that “[c]ompetences not conferred upon the Union in the Treaties remain with the Member States”. Why is this, admittedly self-evident, reminder necessary? Because it reminds us that the EU possesses no kompetenz-kompetenz. There is no presumption that the EU is competent to act, unless the Member States have explicitly granted it the power (competence) to act in a given field. If doubt prevails regarding the existence of an EU competence, the pendulum cannot swing in its favour by default. How is this linked to this chapter’s subject-matter? In the view of the Commission and the General Court, the Union’s state aid competence dictates the recovery of fiscal state aid in the tax ruling cases, as shown in the Fiat case. In the author’s view, two fundamental EU law principles stand in its way and militate in favour of a limitation of said competence: legal certainty and the protection of legitimate expectations, two key aspects of a rule of law Union. No stalemate exists; the latter must prevail. However, should one argue that such an ostensible stalemate exists, two “tiebreakers” tilt the scales in favour of the two aforementioned EU law principles. Firstly, as explained in the preceding paragraphs, the principle of conferral mandates that EU competence must be interpreted restrictively, not expansively: EU competence cannot be presumed. On the contrary, the principle of legal certainty and the protection of legitimate expectations are components of the rule of law, and thus need to be interpreted expansively, in order to grant those subject to EU law more protection against undue incursions and “penalties”. Secondly, such a “tiebreaker” is also, arguably, in line with ECJ case law. The Luxembourg Court has forcefully asserted that “where it is necessary to interpret a provision of secondary Community law, preference should as far as possible be given to the interpretation which renders the provision consistent … with the principle of legal certainty”.71 Even though the Court mentions secondary law in this dictum, this rule of interpretation applies equally, if not more, to primary EU law, such as Article 107 TFEU. Legal certainty is a rule of law principle that permeates the EU legal order and “imbues” all EU rules; more so, in fact, those of higher legal status, since secondary legislation needs to comply with them. Any other interpretation would render the ECJ’s dictum senseless. To sum up the arguments advanced in this part, it has been contended that the two EU law principles examined in Parts 3.1 and 3.2 of this chapter stand in the way of the EU’s exclusive competence to order the recovery of illegal state aid in the tax ruling cases.

70 Paul-John Loewenthal, “Fiscal Selectivity: A Notion in Need of Clarity” in Carla de Pietro (ed), New Perspectives on Fiscal State Aid: Legitimacy and Effectiveness of Fiscal State Aid Control (Wolters Kluwer 2020), 53. 71 Case C-1/02 Borgmann [2004] EU:​C:​2004:​202, para 30.

328  Research handbook on European State aid law

4.

CONCLUDING REMARKS

This contribution has been about matters of principle. The author is not concerned with the outcome of the individual tax ruling cases. The endorsement, by the ECJ, of the arguments raised in this chapter is highly doubtful, especially if the Court sticks to its familiarly strict tone. In any event, irrespective of the author’s lack of oracular skills, any relevant predictions would be both meaningless and premature. Cases come and go, but the principles they give rise to stay. Certain rule of law principles form part of the EU’s very fabric and are, therefore, in the author’s view, too important to be questioned.

17. State aid and EU public procurement: more interactions, fuzzier boundaries Albert Sánchez-Graells1

1. INTRODUCTION To put it briefly, the standard presumption on the interaction between the EU rules on State aid and on public procurement was that compliance with EU procurement law excluded the existence of State aid because public tenders can aptly replicate market conditions and thus suppress any undue economic advantage.2 More generally, ‘public tendering [was] deemed to ensure that a [transaction] takes place under market conditions … [because under] an open, transparent and unconditional tender procedure, it can be presumed that the market price corresponds to the [best] offer’.3 It should be noted, however, that the relationship between public tenders and State aid was not biunivocal, as the absence of a tender procedure would not preclude a finding that State aid rules were not violated.4 Therefore, compliance with EU public procurement rules was presumptively treated as a sufficient but not necessary condition for the exclusion of State aid.5 However practical in its offering of a seemingly bright-line test, this approach relied on a rather formalistic and simplified understanding of procurement procedures as a competitive black-box that excluded the discretion of contracting authorities,6 and thus transferred to the procurement setting the allocative efficiency resulting from competition in the relevant market.7 Whether this properly represented the mechanics of EU public procurement law has 1 Comments welcome to: a.sanchez​-graells@​bristol​.ac​.uk. ORCID http://​orcid​.org/​0000​-0002​ -3602​-1191. 2 Arguing for the mutual exclusivity of State aid and public procurement rules, see Christopher Bovis, ‘Public Procurement and State Aid’ in Herwig C H Hofmann and Claire Micheau (eds), State Aid Law of the European Union (Oxford University Press 2016) 161 ff. Cfr with arguments towards the convergence of both sets of rules by, for example, Mihalis Kekelekis and Kine Neslein, ‘Public Procurement and State aid’ in Christopher Bovis (ed), Research Handbook on EU Public Procurement Law (Edward Elgar Publishing 2016) 452–81. See also Albert Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd edn, Hart 2015) 124–8. 3 Case T-373/15 Ja zum Nürburgring v European Commission [2019] EU:​T:​2019:​432, para 135, with further references to case law. It should be noted, however, that this case law relates to the sale of public assets rather than procurement. 4 T-17/02 Olsen v Commission [2005] EU:​T:​2005:​218, paras 237–9, confirmed by Order of 4 October 2007, C-320/05 P, EU:​C:​2007:​573. Along the same lines, Leigh Hancher, Tom Ottervanger and Piet Jan Slot, EU State Aids (5th edn, Sweet & Maxwell 2016) para 10-061. 5 This approach is in line with the fourth condition of the Altmark test, as developed in Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg [2003] EU:​C:​2003:​415, para 93. 6 Richard Whish, Competition Law (5th edn, Lexis Nexis-Elsevier 2003) 223. 7 For critical assessment, see Baudouin Heuninckx, ‘Defence procurement: The most effective way to grant illegal State Aid and get away with it... or is it?’ (2009) 46(1) Common Market Law Review 191; José Luis Buendía Sierra, ‘Finding the Right Balance: State Aid and Services of General Economic

329

330  Research handbook on European State aid law been the object of contention.8 Notwithstanding those arguments, such broad presumption certainly does not match the complexity and flexibility of the 2014 Public Procurement Package anymore.9 The potential inadequacy of such a broad presumption in a context of more flexible procurement regulation with increased space for discretion and negotiated outcomes was already flagged in the 2012 Communication on State aid and compensation granted for the provision of services of general economic interest (SGEI);10 which, in relation to the 2011 Proposal for new rules that resulted in the 2014 Public Procurement Package,11 warned that it would be necessary ‘to clarify the relevance for State aid purposes of the use of the procedures foreseen in those new rules’.12 Building on that earlier warning, the 2016 Notice on the notion of State aid has introduced much needed nuance on the existing presumption of exclusion of economic advantage through public tendering by restricting its application to some types of procurement procedures, provided they are designed in a specific manner. Indeed, the Notice stresses that if the purchase of assets, goods and services … [is] carried out following a competitive, transparent, non-discriminatory and unconditional tender procedure in line with the principles of the TFEU on public procurement …, it can be presumed that those transactions are in line with market conditions, provided that the appropriate criteria for selecting the … seller … have been used.13

The 2016 Notice then proceeds to offer rather detailed guidance on the specific characteristics that procurement procedures must have to operate as an effective State aid safeguard (see section 2 below). Therefore, the standard presumption that compliance with EU procurement

Interest’ in Gil-Carlos Rodríguez Iglesias et al (eds), EC State Aid Law (Kluwer 2008), 211. See also Albert Sanchez-Graells, ‘Public Procurement and State Aid: Reopening the Debate?’ (2012) 21(6) Public Procurement Law Review 205. 8 For extended discussion, see Cecilie Fanøe Petersen, Award of Public Contracts as a Means to Conferring State Aid, A Legal Analysis of the Interface Between Public Procurement Law and State Aid Law (2018) PhD thesis, Copenhagen Business School. 9 It comprises Directive 2014/23/EU on concession contracts [2014] OJ L94/1, Directive 2014/24/ EU on public procurement [2014] OJ L94/65 and Directive 2014/25/EU on utilities procurement [2014] OJ L94/243. For discussion, see Phedon Nicolaides and Ioana Eleonora Rusu, ‘Competitive Selection of Undertakings and State Aid: Why and When Does It Not Eliminate Advantage’ (2012) 7(1) European Procurement & Public Private Partnership Law Review 5; and Phedon Nicolaides and Sarah Schoenmaekers, ‘The Concept of Advantage in State Aid and Public Procurement and the Application of Public Procurement Rules to Minimise Advantage in the New GBER’ (2015) 14(1) European State Aid Law Quarterly 143. 10 Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest [2012] OJ C8/4, fn 88. For discussion, see Albert Sanchez-Graells, ‘The Commission’s Modernization Agenda for Procurement and SGEI’ in Erika Szyszczak and Johan van de Gronden (eds), Financing SGEIs: State Aid. Reform and Modernisation (TMC Asser Press/Springer 2012). 11 Commission, ‘Proposal for a Directive of the European Parliament on public procurement’ COM(2011) 896 final. 12 However, the announced revision of the 2012 Communication has not yet taken place at the time of writing (8 October 2019) except indirectly, through the Commission 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] OJ C262/1 (the ‘2016 Notice’). 13 2016 Notice (n 12), para 89, emphasis added.

State aid and EU public procurement  331 rules excludes the existence of State aid is now narrower and more conditional than it used to be, both within the detailed guidance of the 2016 Notice on the notion of State aid,14 but also more generally, as the continuous evolution of the case law of the Court of Justice of the European Union (CJEU) keeps generating potential gaps in public procurement’s function as a market-replicating regulatory tool.15 This chapter assesses the increasing number of points of interaction between the EU rules on State aid and on public procurement, and highlights some shortcomings of the standard presumption in relation to: the notion of State aid in the context of procurement (Section 2); R&D and pre-commercial procurement (Section 3); ‘public house’ situations (Section 4); procurement procedures involving negotiations (Section 5); abnormally low tenders (Section 6); the procurement of SGEIs (Section 7); the treatment of procurement itself as an SGEI (Section 8); and the procurement of services provided by ‘special organisations’ (Section 9). The chapter concludes that the boundaries of what constitutes State aid in the context of public procurement are fuzzier than ever. The approach to the discussion is necessarily selective and the only purpose of the chapter is to identify areas where further research could be required. In doing so, the chapter offers a roadmap for further research in this area of EU economic law, as well as identifying areas that could benefit from additional guidance from the European Commission, in particular on benchmarking (Section 10).16

2.

THE NOTION OF AID AND PUBLIC PROCUREMENT

The 2016 Notice on the notion of State aid includes rather detailed criteria that narrow down the scope of the presumption that compliance with EU procurement law excludes the existence of economic advantage and, thus, State aid.17 Its main restrictions concern the choice of procedures, as well as the choice of selection and award criteria, but the 2016 Notice also takes into consideration the outcome of the procurement in a manner that is difficult to anticipate and to react to for contracting authorities. In other words, the 2016 Notice departs from the idea that any EU law-compliant public procurement procedure is apt to exclude the existence of an economic advantage.18

Hancher, Ottervanger and Slot (n 4) para 3-177. See Albert Sanchez-Graells and Constant de Koninck, Shaping EU Public Procurement Law: A Critical Analysis of the CJEU Case Law 2015–2017 (Kluwer 2018) Chapter I. The evolution of State aid case law generates additional complexity; see Juan Jorge Piernas López, ‘The notion of State aid and regulation in the EU: drawing the shape of a moving target’ (2010) 2(2) Cuadernos de Derecho Transnacional 173. 16 For some related discussion on the application of the MEIP test in the context of the activities of the public buyer, see Malgorzata A Cyndecka, The Market Economy Investor Test in EU State Aid Law: Applicability and Application (Wolters Kluwer 2016) 17.8. 17 Other relevant, and criticisable, aspects of the interaction between the 2016 Notice and EU procurement rules cannot be discussed here due to space constraints. See Albert Sanchez-Graells, ‘Commission notice on notion of state aid shows contradictions with EU public procurement rules, in particular concerning aid and contracts for local SGEI’ (howtocrackanut 20 May 2016) accessed 8 October 2019. 18 For extended discussion, see Grith Skovgaard Ølykke, ‘The Notice on the Notion of State Aid and Public Procurement Law’ (2016) 15(4) European State Aid Law Quarterly 508; and idem, ‘Commission 14 15

332  Research handbook on European State aid law Indeed, the 2016 Notice still considers that properly designed ‘competitive procedures’ can exclude State aid,19 and that, in principle, using and complying with the procedures provided for in the 2014 Public Procurement Package can be considered sufficient to meet the applicable requirements of competition,20 transparency21 and equal treatment22—which is rather redundant, because those principles are explicitly enshrined as general principles of mandatory compliance in the relevant Directives (see Section 3 below). However, the 2016 Notice also stresses that not all procedures regulated in the 2014 Public Procurement Package are acceptable from the perspective of ensuring the inexistence of State aid. The 2016 Notice establishes that the presumption of inexistence of economic advantage ‘does not apply in specific circumstances that make it impossible to establish a market price, such as the use of the negotiated procedure without publication of a contract notice’.23 This casts a shadow of doubt on the use of other procedures involving negotiations—such as the competitive procedure with negotiation, the competitive dialogue and the innovation partnership—as they all involve negotiations and the fact that there is a degree of publicity does not necessarily imply that these procedures are reflective of an easily established market price (see Section 5 below). The 2016 Notice also foresees especial rules for cases where only one tender is submitted, as it also considers that in such circumstances the procedure would not normally be sufficient to ensure that the transaction is taking place at market price. In those cases, the Commission will require that either (i) there are particularly strong safeguards in the design of the procedure ensuring genuine and effective competition and it is not apparent that only one operator is realistically able to submit a credible bid or (ii) the public authorities verify through additional means that the outcome corresponds to the market price.24

In practice, given the lack of definition of what constitutes ‘particularly strong’ pro-competitive safeguards—and the fact that the regulatory point of departure of the procurement rules is the opposite, based on a prohibition of ‘artificial narrowing of competition’ that could be interpreted in diverging ways25—in practical terms, this may come to impose on contracting authorities the additional obligation to conduct price/cost benchmarking exercises, not only in the cases where there is only one tender, but more generally in all cases not involving an open or restricted procedure—which are the closest to an ‘auction mechanism’, and thus the traditionally preferred options (see Section 3 below).

Notice on the Notion of State Aid as Referred to in art 107(1) TFEU. Is the Conduct of a Public Procurement Procedure Sufficient to Eliminate the Risk of Granting State Aid?’ (2016) 25(5) Public Procurement Law Review 197. 19 2016 Commission Notice on the notion of State aid (n 12) para 89. 20 ibid para 90. 21 ibid para 91. 22 ibid para 92. 23 ibid para 93. 24 ibid para 93. 25 For extended discussion, see Albert Sanchez-Graells, ‘Some Reflections on the “Artificial Narrowing of Competition” as a Check on Discretion in Public Procurement’ in X Groussot, J Hettne & S Bogojevic (eds), Law and Discretion in EU Public Procurement (Hart 2019).

State aid and EU public procurement  333 However, the way in which any such price/cost benchmarking exercise is to be organised in a procurement system that seeks to move away from the award of public contracts on the basis of price-only considerations and to boost more complex assessments of price/cost-quality ratios, life-cycle costing and other quality-based measures26 is anybody’s guess. In particular because the 2016 Notice continues to put significant emphasis on the position that award criteria ‘should be defined in such a way as to allow for an effectively competitive tendering procedure which leaves the successful bidder with a normal return, not more. In practice, this implies the use of tenders which put significant weight on the “price” component of the bid’.27 Therefore, the 2016 Notice creates legal uncertainty as to the safeguard that complying with the procedures regulated in the 2014 Public Procurement Package provides to contracting authorities seeking to avoid granting State aid through procurement and could, in some instances, generate undesirable chilling effects where the exercise of discretion could be seen ex post as deviating from the potential application of objective price/cost benchmarks. This is not necessarily alleviated by the guidance on benchmarking in the 2016 Notice,28 as it could be rather difficult to establish the relevant comparators and, in any case, procurement markets may operate rather differently than private markets, thus making public/private benchmarking rather tricky. This leaves important uncertainties unresolved. Specific guidance on the assessment of potential State aid in the award of public contracts could be necessary, at least in specific areas that are currently generating uncertainty, such as those covered in the following sections.

3.

STATE AID BEFORE PROCUREMENT: R&D AND PRE-COMMERCIAL PROCUREMENT

Public procurement generally applies to the acquisition of goods, works or services that are already marketed and widely available, whether off-the-shelf or after the necessary adjustments to meet the specific public sector needs (on negotiations, see Section 5 below). As a result of the push for the use of public procurement to foster innovation,29 however, contracting authorities are increasingly awarding contracts for the development of new products and engaging with potential suppliers at stages that are more and more distant from fully competitive markets. R&D and pre-commercial procurement is thus one of the areas that presents a challenge for the reliance on tendering procedures to exclude the existence of State aid. The interaction between State aid and procurement rules in this setting—or, rather, their respective boundaries—is delineated in multiple documents that are, in principle, coordinat-

26 See e.g. Commission, ‘Making Public Procurement work in and for Europe’ (Communication) COM(2017) 572 final 8–9, especially its strategic priority of ‘Ensuring wider uptake of strategic public procurement’. 27 2016 Commission Notice on the notion of State aid (n 12) para 96. 28 ibid para 97 ff. 29 See, for example, Commission, Notice on Guidance on Innovation Procurement C(2018) 3051 final.

334  Research handbook on European State aid law ed.30 The 2014 procurement rules apply to the procurement of ‘exclusive’ R&D services,31 where the benefits accrue exclusively to the contracting authority for its use in the conduct of its own affairs, and the contracting authority wholly remunerates the service.32 In other cases— that is, non-exclusive or only partially-funded R&D—control of the award of the relevant contract will be subjected to State aid rules, as established in the 2014 Framework for State aid for research, development and innovation (the ‘R&D&I Framework’).33 The R&D&I Framework, however, overlaps with the 2014 procurement rules when it regulates the mutually excluding application of both sets of rules, which is slightly confusing. The R&D&I Framework establishes a distinction between exclusive development and pre-commercial procurement procedures.34 It then establishes that ‘[a]s long as an open tender procedure for the public procurement is carried out in accordance with the applicable directives, the Commission will generally consider that no State aid within the meaning of Article 107(1) [TFEU] is awarded to the undertakings delivering the relevant services’.35 However, this can only refer to ‘exclusive development’, as the procurement rules would otherwise not be applicable. Moreover, the R&D&I Framework generates confusion through the caveats to which this general statement is subjected. First, the R&D&I Framework insists on the use of the open procedure as regulated in Article 27 of Directive 2014/24/EU or Article 45 of Directive 2014/25/EU, and would accept the use of a restricted procedure as regulated in the following Article of the respective Directive, ‘unless interested providers are prevented from tendering without valid reasons’36—which is a tautology because a restricted procurement procedure is only compliant with the rules in the Directive if it also complies with the general principles of equality, non-discrimination, transparency, proportionality and the prohibitions on artificial narrowing of competition and favouritism (Article 18(1) Dir 2014/24). In almost the same way as the 2016 Notice on the notion of State aid (discussed in Section 2 above), this puts a rather significant question mark over the use of procedures involving negotiations (see Section 5 below) and, significantly, over the use of the newly-regulated innovation partnership (Article 31 Dir 2014/24)—which is designed on the blueprint of the competitive procedure with negotiation (Article 29 Dir 2014/24)37—at least in cases where the project is under a significant risk of discontinuation during the R&D phase. In all these cases, additional criteria will be applicable (see below). This creates significant pressure on the presumption that compliance with the procurement rules excludes the existence of State aid, as practicalities indicate that these services would hardly ever be tendered under open or restricted procedures. 30 For discussion, see Dacian C Dragos and Bianca Racolța, ‘Comparing Legal Instruments for R&D&I: State Aid and Public Procurement’ (2017) 12(4) European Procurement & Public Private Partnership Law Review 408. 31 At least those covered by CPV codes 73000000-2 to 73120000-9, 73300000-5, 73420000-2 and 73430000-5, as per Commission Regulation (EC) 213/2008/EC of 28 November 2007 amending Regulation 2195/2002/EC on the Common Procurement Vocabulary (CPV) [2008] L 74/1. 32 Directive 2014/24/EU (n 9) art 14. 33 Commission ‘Framework for State aid for research and development and innovation’ (Communication) C(2014) 3282. 34 ibid para 31. This comes from the Commission, ‘Pre-commercial procurement: driving innovation to ensure sustainable high quality public services in Europe’ (Communication) COM(2007) 799 final. 35 R&D&I Framework (n 33) para 32. 36 ibid footnote 27. 37 See recital (49) Directive 2014/24/EU (n 9).

State aid and EU public procurement  335 Second, the R&D&I Framework indicates that the same presumption that there is no State aid will apply ‘where public purchasers procure innovative solutions resulting from a preceding R&D procurement, or non-R&D products and services that are to be delivered to a performance level requiring a product, process or organisational innovation’.38 This is confusing because it is unclear whether the R&D&I Framework simply establishes that there is no need for a separate assessment of any potentially implicit R&D State aid in those circumstances, or that the use of procurement procedures that include an element of innovation (be it follow-on, or self-standing) is considered adequate to exclude the risk of any type of State aid—which would be particularly problematic, for example, in the context of a direct award of a supply contract without competition or prior publicity on the basis of the IPR exclusivity or technical reasons that resulted from an earlier R&D procurement (Article 32(2)(b)(ii) and (iii) Dir 2014/24). If the latter was the correct interpretation, the Commission would be expressing two conflicting tests. Consequently, the only sensible systematic interpretation seems to be that the R&D&I Framework simply aimed to express the same restrictive approach to the procedural choice that is still reflected in the 2016 Notice on the concept of aid, which should thus be applied (see Section 2 above). The R&D&I Framework provides more detailed rules for ‘all other cases, including pre-commercial procurement’. In order to reach the position that no State aid is awarded through these procedures, it will be necessary to meet a market-benchmarking criterion and demonstrate that ‘the price paid for the relevant services fully reflects the market value of the benefits received by the public purchaser and the risks taken by the participating providers’. This is convergent with the general guidance in the 2016 Notice (Section 2 above). In particular, the following conditions will determine the outcome of such test: (a) the selection procedure must be open, transparent and non-discriminatory, and based on objective selection and award criteria specified in advance; (b) the envisaged contractual arrangements describing all rights and obligations of the parties, including with regard to IPR, are made available to all interested tenderers in advance; (c) the procurement does not give any of the participant providers any preferential treatment in the supply of commercial volumes of the final products or services to a public purchaser in the Member State concerned; and (d) one of the following two conditions is fulfilled: either (i) ‘all results which do not give rise to IPR may be widely disseminated, for example through publication, teaching or contribution to standardisation bodies in a way that allows other undertakings to reproduce them, and any IPR are fully allocated to the public purchaser’, or (ii) ‘any service provider to which results giving rise to IPR are allocated is required to grant the public purchaser unlimited access to those results free of charge, and to grant access to third parties, for example by way of non-exclusive licenses, under market conditions’.39 Conditions (a) and (b) are superfluous due to the need to comply with the general principles mentioned above (Article 18(1) Dir 2014/24). If analysed formally, condition (c) will also be relatively straightforward, as it is very unusual for procurement contracts to grant rights beyond their scope.40 Condition (d)(i) is also rather superfluous for ‘exclusive development’ procurement, as it was already clear that, for the rules in Directive 2014/24/EU to apply, the R&D&I Framework (n 33) footnote 28. ibid para 33. 40 If analysed substantially, however, it could be impossible to meet, in particular where the procurement of innovation has the result of setting the de facto standard in a given market or jurisdiction. 38 39

336  Research handbook on European State aid law benefits of the R&D activities must accrue exclusively to the contracting authority. It also seems that the free dissemination of non-IPR protected results va de soi. However, the alternative condition (d)(ii) for non-exclusive R&D is more demanding and will have to be taken into consideration when drafting the IPR clauses applicable to e.g. innovation partnerships (Article 31(6) Dir 2014/24), but also to any procedures involving negotiations and, in particular, competitive dialogues. It may however be impossible to fulfil in a number of cases, as the public contractor may not accept requirements to licence to third parties that went beyond existing legally mandated rules. The difficulty is that this leaves the user of the R&D&I none the wiser in many cases requiring an individual assessment,41 and thus subject to a notification obligation under Article 108(3) TFEU, where establishing that the price paid for the relevant services fully reflects the market value of the benefits received by the public purchaser and the risks taken by the participating providers can be less than straightforward. It is not a common strategy for the public buyer to acquire all IPR related to their procurement activities and it may also be difficult for public buyers to monitor compliance with any IPR-related licencing obligations (which would have to be specified as conditions for contract performance under Article 70 Dir 2014/24 and, perhaps, even as post-contractual conditions if the IPR has a longer life span than the underlying procurement). All of this generates practical difficulties in this area of interaction between State aid and procurement law, which may also require further refined guidance in the future.

4.

STATE AID WITHIN THE ‘PUBLIC HOUSE’

One of the major areas of reform of the procurement rules in the 2014 Public Procurement Package concerns the scope of the exemptions for intra- and inter-administrative relationships within the ‘public house’.42 EU law has progressively set rather prescriptive rules on the award of public contracts,43 which control the exercise of executive discretion by public buyers44 with the aim of ensuring the effectiveness of the internal market fundamental freedoms and EU-wide competition for public contracts.45 Given the transparency and procedural constraints they impose, the rules have at times been seen as too rigid and potentially preventing some forms of intra-administrative cooperation or delegation at domestic level. The interpretation of the EU procurement rules has progressively required the CJEU46 to establish the conditions under which the EU procurement rules are not triggered by instances

R&D&I Framework (n 33) para 34. Dario Casalini, ‘Beyond EU Law: the New “Public House”’ in Carina Risvig Hansen et al (eds), EU Procurement Directives—Modernisation, Growth & Innovation (DJØF 2012). 43 S Arrowsmith, ‘The Past and Future Evolution of EC Procurement Law: From Framework to Common Code?’ (2006) 35(3) Public Contract Law Journal 337. 44 For general discussion, see the contributions to Groussot, Hettne and Bogojevic (n 25). 45 Case C-553/15 Undis Servizi [2016] EU:​C:​2016:​935, para 28; Case C-144/17 Lloyd’s of London [2018] EU:​C:​2018:​78, para 33. 46 This case law was developed in the context of preliminary references under Art 267 TFEU, so the case law belongs to the Court of Justice strictly speaking. However, this chapter will make reference to the CJEU for simplicity. 41 42

State aid and EU public procurement  337 of administrative self-organisation (the Teckal or in-house providing doctrine),47 administrative cooperation (the Hamburg doctrine)48 and administrative delegation (the Remondis or Hannover doctrine).49 This case law has been by and large consolidated in the 2014 Public Procurement Package, which also introduced some additional flexibility for these forms of administrative self-organisation and collaboration and clarified that Member States are free to adopt decisions on self-organisation of their public sector and to promote public-public cooperation without having to comply with the EU procurement rules, provided that those forms of governance do not imply a significant level of interaction with the market.50 Member States can also decide to centralise their procurement activities without such organisational decisions being caught by the EU procurement rules, as long as the centralisation is channelled through central purchasing bodies (CPBs). CPBs are dedicated to the provision of procurement services to other public sector entities.51 CPBs are subjected to compliance with EU procurement law in the award of public contracts to economic operators, and contracting authorities using CPB services are deemed to have complied with otherwise applicable EU law obligations simply by using the services of the CPBs. More importantly, in what could be seen as a soft form of administrative delegation, contracting authorities can directly entrust CPBs with the provision of procurement services, including ancillary procurement services, without having to comply with any EU law requirements. Member States can even provide that certain procurements are to be made by having recourse to CPBs or to one or more specific CPBs (and some are even characterising some CPB activities as an SGEI, see Section 8 below). On the whole, thus, there is a rather developed corpus of rules applicable to public-public contracts (lato sensu, including what would domestically not be treated as contracts, but as conventions, delegations, or other sorts of instruments governed by public law), award of which does not require compliance with all the strictures of the EU public procurement rules.52 This creates regulatory space for both intra- and inter-administrative collaboration in public procurement on a national level. From a State aid perspective, the main difficulty with these forms of organisation is that, while the direct award of the contract to the other entity within the ‘public house’ can be compliant with EU procurement rules, it could at the same time 47 Case C-107/98 Teckal [1999] EU:​C:​1999:​562. The doctrine has been recast in Undis Servizi (n 45). 48 Case C‑480/06 Commission v Germany [2009] EU:​C:​2009:​357; Case C‑386/11 Piepenbrock [2013] EU:​C:​2013:​385. 49 Case C-51/15 Remondis [2016] EU:​C:​2016:​985. 50 Commission, ‘Application of EU Public Procurement Law to Relations between Contracting Authorities’ (Staff Working Paper) SEC(2011) 1169 final. 51 See Directive 2014/24/EU (n 9) art 37. Their ability to offer their services to private purchasers depends, to a large extent, on their domestic regulation and triggers legal issues that exceed the scope of this chapter. For discussion, see Ignacio Herrera Anchustegui, ‘Collaborative Centralized Cross-Border Public Procurement: Where Are We and Where Are We Going To?’ (2017) accessed 20 April 2020; idem, ‘Centralizing Public Procurement and Competitiveness in Directive 2014/24’ (2015) 4(3) European Law Reporter 119; Albert Sanchez-Graells and Ignacio Herrera Anchustegui, ‘Impact of Public Procurement Aggregation on Competition: Risks, Rationale and Justification for the Rules in Directive 2014/24’ in Rafael Fernández Acevedo and Patricia Valcárcel Fernández (eds), Centralización de compras públicas (Civitas 2016). 52 Willem A Janssen, EU Public Procurement Law & Self-organisation: A Nexus of Tensions & Reconciliations (Eleven Publishing 2018); idem, ‘The Institutionalised and Non-Institutionalised Exemptions from EU Public Procurement Law: Towards a More Coherent Approach?’ (2014) 10(5) Utrecht Law Journal 168.

338  Research handbook on European State aid law imply an economic advantage derived from the absence of competition and the willingness of the contracting authority to support the public contractor. In that regard, while there is emerging case law at national level that recognises that the improper award of a ‘public house’ contract can result in the breach of EU State aid rules,53 the opposite situation does not seem to be gaining much needed clarity. As things stand, there is no clarity on how to assess that a direct public contract award covered by one of the ‘public house’ exemptions from compliance with EU procurement rules does not entail an advantage under the Altmark test. It is submitted here that the ‘procedural emptiness’ that follows from the ‘public house’ exemption nullifies the possibility of considering that the contract has been tendered for those purposes, and thus restricts the possible analysis to an assessment of whether the price paid is determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with [material] means … so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations.54

However, in this context, even the generation of profits is problematic and, in any case, this could imply an extension of the Altmark test to non-SGEI contexts, which would also require some more careful consideration. This would thus seem like another area ripe for future research, as well as guidance.

5.

STATE AID THROUGH NEGOTIATED PROCUREMENT

One of the issues that has already been repeatedly identified above concerns the State aid risks that can arise from the conduit of negotiations in the context of public procurement procedures. While this is not a new risk, this can be particularly relevant in the context of the national implementation of the 2014 Public Procurement Package, as the increased scope for the use of procedures involving negotiations is a key feature of the more flexible approach adopted in the revision of the pre-existing EU rules. As already mentioned, the 2014 R&D&I Framework shows a distrust of negotiations by requiring resort to open or restricted procedures as the only ones capable of generating a presumption ‘that no State aid within the meaning of Article 107(1) [TFEU] is awarded to the undertakings delivering the relevant services’ (Section 3 above). More generally, the 2016 Notice on the notion of State aid takes a similar approach and excludes procedures involving negotiations—in particular those not followed by a prior notice advertising the contract opportunity—from those capable of ensuring the establishment of a reliable market price (Section 2 above). Therefore, all available guidance seems to point in the direction of imposing additional cost/price benchmarking exercises on contracting authorities engaged in negotiated procurement. While this may be relatively unavoidable, it should be stressed that the difficulty in the practical implementation of such benchmarking exercises can be rather significant. There are

53 For example, the judgment of the Italian Consiglio di Stato of 22 October 2018 in the case Cineca, n. 6009. 54 Altmark (n 5) para 93.

State aid and EU public procurement  339 differences depending on ‘how far from the market’ the outcome of the negotiations lands, both in terms of the object of the contractual obligations and the consideration payable by the contracting authority. While a benchmarking exercise can be modestly complicated in cases where the adaptations of the readily available solutions are relatively minor—which is likely to be the case in the context of competitive procedures with negotiation—at the other end of the spectrum, the benchmarking can be nigh impossible in the case of innovation partnerships, as their object is precisely to try to satisfy ‘the need for an innovative product, service or works that cannot be met by purchasing products, services or works already available on the market’ (Article 31(1) Dir 2014/24). This logically entails the unavailability of a readily identifiable benchmark. In these cases, the additional guidance in the 2016 Notice on benchmarking may not be particularly useful, as it assumes the existence of relatively close comparators (see Section 2 above). Moreover, the level of uncertainty implicit in all innovation partnerships makes establishing a pricing mechanism for the split of risks between the public buyer and the participating undertakings almost impossible, not least because they probably will be undertaken in areas where only public investment is to be identified.55 In that regard, the recommendation to follow the application of the general criteria in the R&D&I Framework favoured by the 2018 Guidance on the procurement of innovation56 is simply circular and unhelpful. Similarly, it does not seem to be a thought-through position for the Commission to have indicated in relation to the risk of advantaging the undertaking involved in the innovation partnership in the future exploitation of the innovation and, in particular, in the future purchase of commercial volumes, that in order to minimise this risk, the presumption of absence of State aid only holds in situations where a public purchaser procures products or services that are so unique or specialised that the public buyer is the only potential buyer and there are no other potential providers on the market outside of the innovation partnership that could be disadvantaged. In order to avoid State aid, the public purchaser must be able to identify in advance of the procedure all economic operators that can both perform the development and supply the final products or services.57

To put it mildly, this would require contracting authorities to engage in impossible exercises of futurology, as well as restricting the potential application of the innovation partnership to very narrow fields (perhaps only defence), as it is very unlikely that relevant innovations will not be applicable beyond the narrow needs of the contracting authority.58 It is thus submitted here that there is also ample scope for future research on how to develop effective evaluation methodologies to assess the (in)existence of economic advantage as a result of procurement procedures involving negotiations and, in particular, innovation partnerships. And such research should lead to revised guidance.

55 For the historical validity of this claim, see Mariana Mazzucatto, The Entrepreneurial State. Debunking Public vs Private Sector Myths (Penguin 2017). 56 Commission Notice on Innovation Procurement (n 29) footnotes 4 and 8. 57 ibid section 4.2.3.4. 58 Again, for the historical validity of this claim, see Mazzucatto (n 55).

340  Research handbook on European State aid law

6.

STATE AID DURING PROCUREMENT: ABNORMALLY LOW TENDERS

Another of the areas where the interaction between State aid and procurement has been traditionally problematic concerns the evaluation of tenders tainted by State aid.59 Under Article 69 of Directive 2014/24/EU, contracting authorities ‘shall require economic operators to explain the price or costs proposed in the tender where tenders appear to be abnormally low in relation to the works, supplies or services’. One of the specific aspects on which contracting authorities must seek additional information concerns ‘the possibility of the tenderer obtaining State aid’. Additionally, Where a contracting authority establishes that a tender is abnormally low because the tenderer has obtained State aid, the tender may be rejected on that ground alone only after consultation with the tenderer where the latter is unable to prove, within a sufficient time limit fixed by the contracting authority, that the aid in question was compatible with the internal market within the meaning of Article 107 TFEU.

There is thus a positive obligation to investigate seemingly abnormally low tenders for receipt of State aid. However, identifying seemingly abnormally low tenders is not straightforward. In the past, the Commission had recommended the development of price benchmarks to screen for abnormality,60 but this approach now seems to have been abandoned.61 The Commission could thus also revisit this issue and publish additional guidance on how to identify abnormally low tenders. Moreover, there is no obligation to reject those tenders,62 and any such rejection on grounds of incompatible State aid can only take place after an inter partes investigation aimed at obtaining reassurances that the aid is exempted or was otherwise authorised by the European Commission. Given the growing complexity of the EU State aid rules, it seems plain that this provision creates perverse incentives for contracting authorities—in particular if the underlying State aid dispute concerned two ‘foreign’ EU Member States, in which case the contracting authority could feel tempted to take advantage of the bargain and obviate any potential claims or make flexible interpretations of the applicable State aid rules. In that regard, it would seem desirable for the European Commission to enable a functioning helpdesk to allow contract-

59 For extended discussion, see Grith Skovgaard Ølykke, Abnormally Low Tenders. With an Emphasis on Public Tenderers (DJØF 2010); and idem, ‘The provision on abnormally low tenders: a safeguard for fair competition?’ in idem and Albert Sanchez-Graells (eds), Reformation or Deformation of the EU Public Procurement Rules (Edward Elgar Publishing 2016). See also Grith Skovgaard Ølykke and Johan Nyström, ‘Defining Abnormally Low Tenders—A comparison between Sweden and Denmark’ (2017) 13(4) Journal of Competition Law & Economics 666. 60 European Commission, Guidance for practitioners on the avoidance of the most common errors in projects funded by the European Structural and Investment Funds (2015) accessed 8 October 2019. 61 European Commission, Guidance for practitioners on avoiding the most common errors in projects funded by the European Structural and Investment Funds (2018) accessed 8 October 2019. 62 Cfr with the obligation to reject abnormally low tenders that would breach applicable employment, social or environmental obligations, under Art 69(3)II Directive 2014/24 (n 9).

State aid and EU public procurement  341 ing authorities to refer questions concerning the compatibility of aid with Article 107(1) TFEU, in particular where tenderers claim cover under block exemption regulations or other non-individualised instruments. In this specific case, the issuance of guidance may not be of much help, given the complexity of the subject matter and the fact that relevant volumes of guidance on the existing State aid rules already exists.

7.

PROCURING SERVICES OF GENERAL ECONOMIC INTEREST

The use of procurement procedures to exclude the existence of State aid in the context of SGEIs is also a well-known area of interaction of both sets of rules and the relevant test has seemingly been rather stable since its formulation in Altmark in 2003.63 In simple terms, the Altmark test consists of four cumulative conditions to establish that support for an SGEI does not constitute State aid: first, the beneficiary is actually required to discharge public service obligations and those obligations have been clearly defined; second, the parameters of the compensation have been established beforehand in an objective and transparent manner; third, the compensation does not exceed what is necessary to cover all or part of the costs incurred in discharging the public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations; and, fourth (and as mentioned in Section 4 above), there is an alternative requirement for the choice of the undertaking entrusted with the SGEI to be chosen following a public procurement procedure (which would allow for the selection of the tenderer capable of providing those services at the least cost to the community), or for its benchmarking against the compensation that would be required by a notional efficiently run undertaking. There is also a relatively stable body of guidance from the European Commission in the so-called Almunia Package, approved in 201264 and currently under evaluation.65 There would thus seem not to be much left to say about this. However, the application of the relevant tests does generate problems, and the CJEU seems to be creating a line of case law that can result in over-compliance with (or over-use of) the EU public procurement rules, in the narrow terms favoured by the 2016 Notice on the notion of State aid (as discussed in Section 2 above). This is particularly the result of the CJEU’s 2016 Judgment in the case of the German slaughterhouses,66 which concerned the analysis of State aid regarding a system of financial support for an SGEI consisting in the maintenance of reserve animal disposal capacity in the case of epizootic in a public abattoir. In order to identify the extent to which the CJEU may have modified the scope of the Altmark test, it is necessary to stress that the CJEU has generally been very clear that ‘the four conditions set out in Altmark … are distinct from

Altmark (n 5). European Commission, Services of General Economic Interest (undated) accessed 8 October 2019. For detailed analysis, see the contributions to Szyszczak and van de Gronden (n 10). 65 European Commission, Evaluation of State aid rules for health and social services of general economic interest (SGEI) and of the SGEI de minimis Regulation (2019) accessed 8 October 2019. 66 Case C-446/14 P Germany v Commission (Zweckverband Tierkörperbeseitigung) [2016] EU:​C:​ 2016:​97, only available in German and French. 63 64

342  Research handbook on European State aid law one another, each pursuing its own finality’.67 In particular, it stressed that the first condition requires ‘that the recipient undertaking must actually be required to discharge public service obligations and those obligations must be clearly defined for such compensation to escape the classification as State aid’,68 while the fourth condition determines that when the choice of the undertaking which is to discharge public service obligations, in a specific case, is not in the framework of a public procurement procedure, the level of compensation needed must be determined based on an analysis of the costs which a typical, well run, undertaking would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations.69

In that regard, these would seem to require separate, independent assessments of each of the Altmark conditions. In contrast, in the challenged decision, the General Court (GC) had determined that as part of the review of the question whether the fourth Altmark criterion … is satisfied, there is certainly room to take into consideration the nature of the service in question and the circumstances of the case, and it is therefore possible that this criterion, which requires a comparison of the costs and revenues directly related to the provision of the SGEI, cannot be applied strictly … Indeed, the Court has already held that … although the conditions set out in Altmark … concern without distinction all sectors of the economy, their implementation must take into account the specificity of a certain sector and, given the particular nature of the SGEI mission in specific sectors, it should be flexible in the application of the Altmark judgment … in relation to the spirit and purpose that led to the establishment of said conditions, so that they are suitable to the particular facts of the case.70

This was criticised by Germany as a conflation of the first and fourth Altmark conditions, particularly because the analysis supported by these general remarks implied dismissing the existence of an SGEI in the specific case in Rhineland-Palatinate, and a general consideration of the costs incurred by undertakings active in the same sector in other German states that, however, may have been subjected to different public service obligations, or where no SGEI may have existed at all.71 In Germany's submission, this would have led the GC to a tautological conclusion. The CJEU dismissed the argument on the following basis: the [GC] cannot be criticized for having reached a tautological conclusion that would have linked the lack of satisfaction of that fourth condition to a finding of lack of qualification of maintaining a reserve capacity as a service of general economic interest [first condition]. Indeed … the Court, first, discussed the situation in which the maintenance of a reserve capacity in case of an outbreak could have validly received such qualification [of SGEI] and on the other hand, felt that, given the obligations of the competent public authorities in all German states to eliminate the largest quantity of substances … received during an outbreak [regardless of the way they organised the discharge of that public obligation, and regardless of whether they defined an equivalent SGEI], it was necessary to take into account the existing situation in other German states to determine the necessary level

ibid para 31, own translation from French. ibid para 26, own translation from French. 69 ibid para 29, own translation from French. 70 Case T-295/12 Germany v Commission [2014] EU:​T:​2014:​675, para 131, own translation from French, references omitted. 71 ibid para 130. 67 68

State aid and EU public procurement  343 of compensation on the basis of an analysis of the costs which a typical undertaking, well run and adequately equipped, would have incurred in meeting the public service requirements.72

Thus, the general conclusion of the CJEU is that the GC did not err in law by conflating the different conditions established in Altmark. This position cannot be shared because, even if the conditions ‘are distinct from one another, each pursuing its own finality’, the logic in their application to a same set of factual circumstances requires that, once the scope of the economic activity that the Member State claims is an SGEI is properly established for the purposes of the judicial review (and regardless of whether the first condition is upheld or not in terms of whether those obligations are clearly defined), the analysis of the fourth condition (that is, either procurement of that ‘alleged’ SGEI or analysis of the costs of a notional well-run undertaking providing that ‘alleged’ SGEI) needs to remain within that context. Otherwise, the assessment of the notional, well-run undertaking’s cost structure outside of the remit of the ‘alleged’ SGEI under dispute comes to basically neutralise the second alternative test in the fourth Altmark condition by allowing the Commission and the GC (and ultimately the CJEU) to find any other comparator they deem to be sufficiently close to that economic activity, which nullifies the economic concept of the notional, well-run competitor. Immediately, this could push Member States to try to avoid these types of assessment, which can only be done by resorting to (certain types of) public procurement procedures under the first test in the fourth Altmark condition, as discussed above. This could well be cornering Member States in an impossible situation where, regardless of the way they conceive and delineate an SGEI,73 an assessment of the fourth Altmark condition only allows them to operate with sufficient legal certainty if they contract out the provision of that service in a way that complies with the EU public procurement rules (and not all of them, at that, but only those covered in the 2016 Notice, see Section 2 above). This is certainly not a necessary or desirable outcome74 and, once more, the developments supported by the CJEU require a rethinking of the coordination of State aid and public procurement rules, in particular in the area of SGEIs.75

8. PROCUREMENT ITSELF AS A SERVICE OF GENERAL ECONOMIC INTEREST The considerations made in the previous section are only bound to gain more relevance as Member States seek to organise some procurement activities as SGEIs. This is particularly the case of the provision of support for electronic procurement (eProcurement), or the oversight and coordination of centralised purchasing activities by sectoral CPBs (e.g. healthcare). These

Case C-446/14 P Germany v Commission (n 66) para 35, own translation from French. Which they have exclusive competence to do, under Art 14 TFEU and Protocol No (26) therewith, and as currently stressed in Article 1(4) of Directive 2014/24/EU (n 9). 74 Not least, because EU law does not impose outsourcing, as discussed in detail in Albert Sanchez-Graells, ‘Against the Grain? Member State Interests and EU Procurement Law’ in Márton Varju (ed), Between Compliance and Particularism: Member State Interests and European Union Law (Springer 2019). 75 For discussion, particularly in the setting of procurement challenges, see Albert Sanchez-Graells, ‘Enforcement of State Aid Rules for Services of General Economic Interest before Public Procurement Review Bodies and Courts’ (2014) 10(1) Competition Law Review 3. 72 73

344  Research handbook on European State aid law developments show how procurement itself can become an SGEI, at least in some Member States—which will continue to raise issues of compliance with State aid rules. The consideration of eProcurement as an SGEI in the Netherlands arose precisely in a State aid case (so-called TenderNed).76 The background to the dispute is rather complex and not necessarily relevant to our discussion.77 The most relevant point is that, in its initial Decision,78 the European Commission had considered that eProcurement services are not ‘an inherent economic activity, but rather a service of general interest, which can be commercially exploited only so long as the State fails to offer that service itself.’79 The GC supported this position on the basis that the trend in the development of public procurement systems in Europe is towards e-procurement. The fact that Directives 2014/24 and 2014/25 were adopted is indicative of the intention to harmonise public procurement within the European Union … so that it is carried out electronically throughout the European Union. In addition, the Netherlands authorities stated … that the existing commercial platforms did not offer the conditions relating to price, objective quality characteristics, continuity and access to the services provided that would be necessary to fulfil the general interest objectives established by those authorities. Thus, in the light of those developments in public procurement rules, driven by public interest considerations, the Commission was entitled to state … that e-procurement was a service of general interest, and not an inherent economic activity, which could be commercially exploited so long as the State did not offer that service itself.80

The CJEU rejected the appeal and left intact the GC’s upholding of the European Commission’s finding that e-procurement can be classed as a service of general interest.81 However, it is worth stressing that the CJEU did not rely on the consideration of eProcurement as a service of general interest as such (which is a less than persuasive argument), but rather on the basis of its persistently confusing case law on the separability of economic activities and those connected with the exercise of public powers.82 It is submitted that an explicit consolidation of the Commission and the GC’s approach to the treatment of eProcurement as a service of general interest by the CJEU would have been very problematic, not least because, at its extreme, it would support the idea that any activity covered or mandated by the EU procurement rules—such as eProcurement, but also eg procurement centralisation—could be exempted from compliance with State aid rules (and 76 Case T-138/15 Aanbestedingskalender BV and Others v European Commission [2017] EU:​T:​ 2017:​675. 77 See Albert Sanchez-Graells, ‘Funding of in-house entities, CPBs and risks of state aid, some thoughts .howtocrackanut​ re Aanbestedingskalender (T-138/15)’ (howtocrackanut 18 January 2018) accessed 8 October 2019. 78 Commission Decision of 18 December 2014, case SA.34646 (2014/NN) (ex 2012/CP) – E-procurement platform TenderNed. 79 Decision SA.34646 para 68. 80 Case T-138/15 Aanbestedingskalender BV (n 76), paras 105–8. 81 Case C-687/17 P Aanbestedingskalender and Others v Commission [2019] EU:​C:​2019:​932. 82 See Albert Sanchez-Graells, ‘10 Years On, the CJEU Creates More Uncertainty About the (In) Divisibility of Public Powers and Economic Activities in Public Procurement (C-687/17 P)’ (howtocrackanut 18 November 2019) accessed 11 May 2020.

State aid and EU public procurement  345 the rest of the competition provisions of the TFEU, subject only to a weak proportionality test derived from the assessment of the extent to which compliance would undermine their ‘public service mission’), in particular under very fuzzy tests for the benchmarking applicable under the Altmark test, which continues to be distorted (see Sections 7 and 9). These concerns are however not entirely speculative, as demonstrated by recent developments concerning the English National Health System (NHS).83 Indeed, after establishing an arm’s-length entity (SCCL) and assigning it the development during 2017 of a new operating model for the centralised procurement of medical equipment and consumables, as well as of general supplies and services of general use in the NHS, the Department for Health and Social Care decided in 2019 to declare that certain procurement-related activities are an SGEI and to entrust their development to that entity.84 The financing model is yet to be publicly disclosed, but it seems to involve payments of around £250 million a year to SCCL. The methodology for the calculation of the compensation is unclear in the entrustment letter, which generates risks of State aid under the second and third Altmark conditions. However, these could be clarified in the future. What seems more problematic is to establish the way in which the compensation to SCCL needs to be assessed under the fourth Altmark condition, in particular because SCCL has an unclear position within the ‘public house’ (see Section 4 above) and because the construction of the operating model for the NHS supply chain has only partially been subjected to procurement procedures. These developments point, once more, to the need for further research and, more importantly, additional guidance in this area of interaction of procurement and State aid rules.

9.

PROCURING SERVICES FROM ‘SPECIAL ORGANISATIONS’

The difficulties deriving from the developments discussed in the two earlier sections are finally compounded by the confusing case law generated by the CJEU in the context of the procurement of services from ‘special organisations’. This is particularly clear in the two decisions in Spezzino and Casta,85 where the CJEU created additional uncertainty concerning the interpretation and application of the Altmark test by determining that as a matter of principle EU law does not preclude

83 For extended discussion, see Albert Sanchez-Graells, ‘Centralisation of procurement and supply chain management in the English NHS: some governance and compliance challenges’ (2019) 70(1) Northern Ireland Legal Quarterly 53. 84 See Letter of 28 March 2019 from the Rt Hon Matt Hancock MP, Secretary of State for Health and Social Care, to Jin Sahota Chief Executive Officer, Supply Chain Coordination Ltd accessed 8 October 2019. 85 Case C-113/13 Azienda sanitaria locale n. 5 ‘Spezzino’ and Others [2014] EU:​C:​2014:​2440; and Case C-50/14 CASTA and Others [2016] EU:​C:​2016:​56. For extended discussion, see the special issue on Spezzino, (2016) 11(1) European Procurement & Public Private Partnership Law Review. See also David McGowan, ‘Does the Reservation of Ambulance Services to Voluntary Organisations on a Cost Reimbursement Basis Give Rise to a Public Service Contract? Case C-113/13, Azienda Sanitaria Locale No. 5 “Spezzino” v San Lorenzo Società Cooperativa Sociale’ (2015) 24(3) Public Procurement Law Review NA61-NA66.

346  Research handbook on European State aid law national legislation … which provides that the provision of [certain social] services must be entrusted on a preferential basis and awarded directly, without any advertising, to the voluntary associations covered by [sectoral] agreements, in so far as the legal and contractual framework in which the activity of those associations is carried out actually contributes to the social purpose and the pursuit of the objectives of the good of the community and budgetary efficiency on which that legislation is based.86

The uncertainty deriving from Spezzino is particularly acute regarding the rules applicable to the choice of provider and the remuneration payable for the provision of those services by voluntary (third sector, non-profit) entities, in particular where they develop their activities within a legal and contractual framework aimed to ensure that they ‘actually contribute to the social purpose and the pursuit of the objectives of the good of the community and budgetary efficiency’,87 as established by the domestic legislation of the Member States. Such entities seem to be exempted from the general requirements for the selection and remuneration of public service providers and, in particular, the fourth Altmark condition. After Spezzino, where the voluntary entities are not chosen following a public procurement procedure (so as to ensure that they are the tenderer capable of providing those services at the least cost to the community), they seem to also not be subjected to the ‘Altmark benchmarking’ against the economic standard of a typically efficient undertaking. Instead, they are subjected to the rather different and potentially much lower standard of ‘contribution to budgetary efficiency’—which, in any case, is a new test riddled with interpretive difficulties. Remarkably, this test seems to be gaining traction and could be extended in future cases.88 Therefore, this is yet one more area where additional research and guidance would be desirable.

10. CONCLUSION This chapter has probed the standard presumption that compliance with EU procurement rules excludes the existence of State aid because public tenders are apt to replicate market conditions and thus suppress any undue economic advantage. It has shown that the boundaries of what constitutes State aid in the context of public procurement are fuzzier than ever. By looking at the main novelties of the 2014 Public Procurement Package and recent CJEU case law, it has shown the insufficiency of existing guidance—including the 2012 Almunia Package, the 2014 R&D&I Framework and the 2016 Notice on the notion of State aid. More research and guidance are necessary on the difficult benchmarking exercises required to assess the existence of economic advantage, as well as on the interpretation of the new case law that creates fuzziness in the boundaries of EU public procurement law as a market-replicating regulatory tool capable of excluding it. Hopefully the mapping in this chapter will be useful for future research or policy-making efforts.

Spezzino (n 85) general ruling, emphasis added. ibid para 65. 88 See Case C-465/17 Falck Rettungsdienste and Falck [2018] EU:​C:​2018:​907, Opinion of AG Campos Sánchez-Bordona, para 68. 86 87

Index

Adler, E 269–96 admissibility issues, taxation, special purpose levies 51–2, 55 advance pricing agreements (APAs) 28–9, 314–15, 317 adverse effects, WTO and actionable subsidies causing 121–2, 125, 126, 127 Africa Common Market for Eastern and Southern Africa (COMESA) 307–8 East African Community (EAC) 308–9 Aggregate Measurement of Support (AMS), agricultural subsidies 123 Agreement on Subsidies and Countervailing Measures (ASCM) see under international trade law, WTO (1995 to Date) agriculture 7, 107, 123–4 Ahlborn, C 138, 139, 140 airports and airlines 269–96 airport charges 280–82, 285 Airport Charges Directive 283 airport charges and marketing incentives 280–82 applicability of Guidelines 273–4 Commission decisions, legal effect 272 competition distortion complaints 296 competition and trade between Member States 285–6, 292 COVID-19 crisis 295 discretionary capacity 271–2, 278 discrimination issues 276–7, 283, 285, 292 economic activity undertaking, existence of 274–7 European Structural and Investment Funds 278 future direction 293–6 granting of aid and imputability to the State and use of State resources 277–9 infrastructure projects 275–6 investment aid 280, 290–91, 293 legal status of Commission’s Guidelines 271–4 legal status of Commission’s Guidelines, assessment measures 271 non-economic activities 276–7 operating aid 276–7 regional airport definition 286–7 restructuring aid 280 selectivity issues 283–5

unlawful State aid 278 airports and airlines, advantage as economic benefit 279–83 airlines 279–83 airports 279 ex ante profitability analysis 282–3 Market Economy Operator (MEO) test 279, 282–3, 294 airports and airlines, compatibility considerations 286–93 capital cost funding gap 291, 292 catchment areas 288 compatibility criteria 287–92 contribution to a well-defined objective of common interest 288 General Block Exemption Regulation (GBER) 286–7, 293 operating aid to airports 276–7, 289–90, 291–2, 293, 294 proportionality of the aid amount 291–2 start-up aid 288–9, 292 State aid as policy instrument 289–90 State intervention requirements 288–9 Almeida, A 236, 237 Almunia Package see social services, services of general economic interest (SGEI) anti-abuse measures, taxation see taxation, anti-abuse measures arbitration 163–82 bilateral investment treaties (BITs) 165, 168–9, 171, 173, 174, 175, 177, 179–80, 182 commercial arbitration 164, 166–7, 171 dispute resolution mechanisms 164–5 ‘failure to notify’ conditions 166–7 market economy operator principle 167 New York Convention terms 167 Notice on cooperation with national judges 166 and ‘right to aid’ principle 163 arbitration, investor-state dispute settlement (ISDS) 164–5, 167–82 Commission’s approach 172–6 compatibility with EU law 180–82 compensation 163, 166, 172–4, 175, 176–7, 181 enforcement in countries other than respondent Member State 178–9

347

348  Research handbook on European State aid law

enforcement within respondent Member State 178 Member States with obligations to third countries 180 national courts’ role 170–71 Power Purchase Agreements (PPAs) 170, 172–3 prior international obligations of relevant Member States 179–80 renewable energy sources (RES) 174–6 role of State aid law 168–70 role of State aid law, and Energy Charter Treaty 170 role of State aid law, post-accession countries 170 stranded cost scheme 172–3 within and outside EU 176–9 Armenia and Enhanced Partnership Agreements 298–300 arm’s length principle (ALP) market economy operator principle (MEOP) 28–9 tax rulings 44–6, 62–3, 317, 318, 321, 322–3, 325–6 Aydin, U 3, 5, 8, 9, 13, 14 Bacon, K 252, 258, 311 Bal, A 321, 323 Bank Recovery and Resolution Directive (BRRD) 142, 143, 148, 152 Banking Communication and ‘rapid treatment of state aid investigations’ 137–8, 139, 140, 142, 148 Banking Union regulations, granting aid under 141–3, 152 Bartosch, A 153–62 benchmarking market economy operator principle (MEOP) 24–9 public procurement 333, 335, 336, 339, 345 Bermejo, N 231, 232, 246 Berrisch, G 236, 240 bilateral investment treaties (BITs) 165, 168–9, 171, 173, 174, 175, 177, 179–80, 182 see also arbitration; international trade law Biondi, A 87–102, 189, 262 Blauberger, M 6, 7, 9, 10, 12, 297 block exemption see General Block Exemption Regulation (GBER) Bonhage, J 20, 21, 150 Botta, M 4, 11, 13 Bovis, C 239, 329 Brandtner, B 235 Brexit 183–205



Article 50 Treaty 183–4, 186 Benn Act and Article 50 extension 186–7 Chequers White Paper 185 Covid-19 crisis effect 187, 194 Democratic Unionist Party (DUP) support 184–6, 187 discretionary capacity 192–3 EU’s handling of State aid, criticism of 192, 193 Ireland/Northern Ireland Protocol 186, 191–2, 194–6, 201, 204 Ireland/Northern Ireland Protocol, and effect on trade 194 Johnson Government 186–7, 190 Johnson Government, State aid control policy 192–7 judicial procedures and State aid law 183–4, 192, 193, 195, 196, 198, 202, 203 May Government 2016–17 183–4 May Government 2017–19 184–6, 190 May Government, State aid control policy 191–2 no-deal Brexit 186, 191 Northern Ireland border and backstop arrangements 184–6 post-Brexit State aid regime 189–97 Referendum 183 Referendum, and State aid 189 transition period 197–8 transition period, run-off provisions 198 UK Competition and Markets Authority (CMA) 191, 192 and UK devolution settlement 190 UK Internal Market Bill 196–7 UK’s experience as EU Member State and State aid rules 188–9 Webber paper 196, 204 Withdrawal Agreement 185, 186–7, 191–2, 194–7 WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) 190, 193, 200, 201–2, 204 Brexit, final agreement prospects 198–205 Canada/EU Comprehensive Economic and Trade Agreement (CETA) 200, 201–2 EU position on State aid 200–201 optimism, tentative 203–5 Political Declaration 201–3 Switzerland/EU position 198–9 Ukraine/EU Association Agreement 200, 201 burden of proof free movement of goods and inter-State trade 95–7

Index  349 taxation, special purpose levies 55, 56 Byrne, B 236, 240, 269–96 Canada/EU Comprehensive Economic and Trade Agreement (CETA) 200, 201–2 Cao, X 8 capacity mechanisms and procedural rules 263–4 capacity remuneration mechanisms (CRM), energy sector 82–3, 84–5 capital cost funding gap, airports and airlines 291, 292 central purchasing bodies (CPBs), public procurement 337, 343–4 China Fair Competition Review system (FCRS) 304–6 Cini, M 1–14 clean energy support see international trade law, WTO (1995 to Date), clean energy support coal-fired plants and compensation, energy sector 84 Colomb, C 6, 11 commercial activities and public policy activities, distinction between 17–21 commercial arbitration 164, 166–7, 171 compatibility airports and airlines see airports and airlines, compatibility considerations arbitration, investor-state dispute settlement (ISDS) 180–82 procedural rules 255, 258–9, 261, 263 compensation arbitration, investor-state dispute settlement (ISDS) 163, 166, 172–4, 175, 176–7, 181 energy sector 69, 76–7, 82, 84 services of general economic interest (SGEI) 208, 209, 212, 215–21, 222, 223 see also damages competition policy airports and airlines 285–6, 296 market economy operator principle (MEOP) 23–4 political science perspective 2, 5–6, 8, 10 procedural rules 254–5 public procurement 332–3 State aid law beyond the EU 298–306 tax rulings and recovery 326–7 conferral principle, tax rulings and recovery 327 conflict-avoidance and conflict-resolution tool, primacy principle as 245–6 controlled foreign companies (CFC) rules, taxation, anti-abuse measures 46, 50–51 corporate income tax rules 43–6 Cosbey, A 116 Coughlan, J 237, 244

countervailing measures, ACSM see under international trade law, WTO (1995 to Date) COVID-19 crisis effect 85–6, 151–2, 187, 194, 209, 225, 268, 295 credit default swaps (CDS) 25, 26, 140 Crivelli, P 120, 127 Cyndecka, M 16, 20, 21, 34, 134–52, 331 damages private enforcement of State aid law 235–7 see also compensation De Cock, W 315, 321, 322 De Koninck, C 331 de minimis threshold international trade law 123, 131 private enforcement of State aid law 228–30, 231 procedural rules 252 social services, services of general economic interest (SGEI) 208, 215–16, 225 decentralization question 228–9, 254–5 Derenne, J 228, 236 derogation issues free movement of goods 89, 94–5 international trade law, WTO (1995 to Date) 111, 112 taxation 45–6, 47, 48, 50, 58, 59–60, 71, 72 discretionary capacity airports and airlines 271–2, 278 Brexit 192–3 energy sector 78–9 political science perspective 4 public procurement 329–30, 333, 336 social services 213, 215, 218, 224 taxation 55, 56, 61 discrimination issues airports and airlines 276–7, 283, 285, 292 energy sector 75 financial sector and financial crisis 137, 147–8 free movement of goods 88, 90, 92–3, 97 international trade law 106 material selectivity outside field of taxation 157, 160–61, 162 taxation 45, 54, 55, 58, 59–60, 61 Doleys, T 4, 13, 134, 297 Dons, M 235, 236, 237, 244 doom loop and sovereign crisis 142 e-procurement 343–5 see also public procurement economic activities airports and airlines 274–7

350  Research handbook on European State aid law

energy sector 78–9 healthcare providers 211–13, 222–3 international trade law, WTO (1995 to Date) 115–16 economic advantage airports and airlines see airports and airlines, advantage as economic benefit energy sector 66, 67, 73 market economy operator principle (MEOP) see market economy operator principle (MEOP) and economic advantage material selectivity outside field of taxation 158 public procurement 330, 332, 338 economic nature, social services 209–15 economic threshold, lack of, services of general economic interest (SGEI) 219–21 Eeckhout, P 89 EFTA (European Free Trade Association) 310 Sjóvá 144 Ehlermann, C-D 108, 121, 133, 228, 255 emergency measures and fast-track procedure concerns, financial crisis 138 energy sector 64–86 2014 Guidelines for environmental protection and energy 79–84 aid concept 65–75 automatic exceptions 75 capacity remuneration mechanisms (CRM) and security of supply 82–3, 84–5 clean energy support see international trade law, WTO (1995 to Date), clean energy support coal-fired plants and compensation 84 compatibility 75–85 compensation 69, 76–7, 82, 84 COVID-19 impact 85–6 deployment of resources for the benefit of a particular undertaking 70–71 discretionary exceptions 78–9 district heating distribution networks 84 economic activities that do not adversely affect trading conditions 78–9 economic advantage concept 66, 67, 73 Emission Performance Standard (EPS) 84–5 Energy Charter 170 Energy Strategy for Europe 77 Euratom Treaty 79 European Climate Law 64 European Green Deal Investment Plan 64–5, 84–5 feed-in tariffs 69, 113, 116–18



future developments 84–5 future research 85–6 General Block Exemption Regulation (GBER) 83–4 illegal aid 73, 83 important projects of common European interest (IPCEI) 75, 77–8 imputability and State resources 70–71 inter-State trade 74–5 market economy operator (MEO) test 67–8 market economy operator (MEO) test, and aid through public undertakings 68 origin of products and non-discrimination 75 private investor test 67 proportionality principle 81–2, 84 R&D and Innovation Framework and the Environmental Guidelines 77–8 renewable energy sources (RES) 69–70, 71, 74, 76, 80 renewable energy sources (RES) generation, use of auctions and levelised costs of producing energy (LCOE) 81–2 selective advantage 72, 73 selectivity issues and taxation 71–3 State aid modernisation program (SAM) 79, 80 State resources 69–70 tradable certificates and permits 73–4 transmission network 67, 68, 71, 77 EU, State aid beyond see State aid law beyond the EU EU Commission decisions Austria: Recapitalisation of Landes-Hypothekenbank 145 Austria: Sale of RZB shares by Hypo Niederösterreich 148 Belgium: Public financing of Brussels IRIS public hospitals 211, 222 Czech Republic: Funding to public hospitals 211 Czech Republic: Renewable Energy Sources (RES) 171, 174–5, 176 Danish Wind Turbines 81 Denmark: Aid for all forms of biogas use 80 Denmark: Roskilde Bank 136 Denmark: Taxation of Saturated Fat in Certain Food Products 55 Denmark; CO2 quotas 73 Estonia: Tallinn Airport airside area development area 291 Finland: Finavia, Airpro and Ryanair 281

Index  351

Finland: Operating aid to Lappeenranta airport 283–4, 290 France: Financing of Marseille Provence Airport 283 Germany: Alleged aid to Frankfurt Hahn Airport and Ryanair 31–2, 290 Germany: Alleged State aid to Ryanair 282 Germany: Alleged unlawful State aid for Klinikum Osnabrück 222–3 Germany: Disaster Aid Scheme 301 Germany: Financing Arrangements for Munich Airport Terminal 2 25 Germany: Rescue aid for Hypo Real Estate 145 Germany: Rescue aid to NORD/LB 37–8 Germany: SachsenLB 134, 136, 145 Germany: State aid Flugplatz Altenburg-Nobitz and Ryanair 273 Germany: State aid to Flughafen Lübeck and Ryanair 281, 283, 291 Germany: WestLB risk shield 134, 136 Greece: Resolution of Cooperative Bank of Peloponnese 148 Greece: Restructuring aid to Piraeus Bank 147 Greece: Restructuring aid to Proton Bank 147, 149 Hungary: advertisement tax 162 Hungary: Food Chain Inspection Fee 56–7 Hungary: Health Contribution of Tobacco Industry Businesses 57, 162 Hungary: Stranded costs scheme 172, 173 Hungary: Taxation of Advertisement Turnover 57, 60 IPCEI Microelectronics 78 Ireland: Aid to Apple 43 Ireland: Change of ownership of Anglo-Irish Bank 146–7 Ireland: Health Insurance Risk Equalisation 221 Ireland: Tax on Sugar Sweetened Drinks 55–6 Italy: Alleged compensation of public hospitals 212 Italy: Investment Aid to the Port of Salerno 23–4, 27 Italy: Rescue aid to healthcare services 211 Italy: start-up aid to airlines at Comiso airport 288 Latvia: Modernisation of Riga International Airport 289 Latvia: Public support measures to JSC Parex Banka 145 Luxembourg: Aid to Amazon 43



Luxembourg: Restructuring aid to Fortis Bank 146 Luxembourg: sale of Dexia BIL 146, 147 Netherlands: Citynet Amsterdam 22–3 Netherlands: Existing and special project aid to housing corporations 223–4 Netherlands: Loans to Shipping Companies 26 Netherlands Alleged aid to Starbucks 28–9, 43, 45, 61–2 Poland: Setting up the Gdynia-Kosakowo Airport 273–4 Poland: Tax on the Retail Sector 57, 58–60, 162 Romania: State aid to Wizz Air and Cluj-Napoca Airport 273 Slovak Republic: Health insurance schemes 212–15 Slovakia: Bratislava Airport and Ryanair 281 Slovenia: Aid to compensate for storm and floods damage 301 Spain: Renewable Energy Sources (RES) 82, 171, 174, 175–6 UK: Rescue aid to Bradford & Bingley 136 UK: Rescue aid to Northern Rock 134, 136, 143 UK: Restructuring of Lloyds Banking Group 145 EU court cases A&O Hostel and Hotel Berlin v Commission 258, 259 A-Brauerei 61, 156 A-Fonds 101 Aanbestedingskalender 344 ABN v Commission 141, 145, 146 Acea Electrabel v Commission 65, 74 Achema 69, 77, 265 Achmea 164, 171, 176, 180–81, 182 Administración del Estado v Xunta de Galicia 243, 244 Adria-Wien Pipeline 41, 71, 112, 167 AEM v Autorità per l’energia elettrica e per il gas 72 Aer Lingus v Commission 280 Aéroports de Paris v Commission 18, 272, 275 Air Liquide Industries Belgium 99, 233, 234, 237, 238 Alouminion v Commission 73 Altmark 76–7, 95, 118, 131, 208, 209, 216–19, 279, 286, 329, 338, 341, 342–3, 345, 346 AlzChem v Commission 259

352  Research handbook on European State aid law

Amministrazione delle finanze dello Stato v Denkavit Italiana 176, 177 Analir 218 ANGED 52, 54, 55, 60, 61, 94–5 AOK Bundesverband 212, 214 Aragonesa de Publicidad and Publivía v Departamento de Sanidad 95 Arriva Italia 161, 254, 261 Associação Peço a Palavra 94 Asteris v Greece 176–7, 181 Athinaïki Techniki v Commission 255 Austria v Commission [2018] 79 Banco Exterior de España 305 Banks & Co. Ltd v The Coal Authority and Secretary of State for Trade and Industry 237 Belgium and Forum 187 44, 322, 323, 325 Belgium and Magnetrol International v Commission 46–7, 267–8 Belgium v Commission [1986] 244 Belgium v Commission [1990] 216 Belgium v Commission [1996] 52, 214 Belgium v Commission [2016] 283 Belgium v Commission (Belgian Excess Profit Exemption) 157, 322 Belgium v Commission (‘Tubemeuse’) 121 Belgium v Deutsche Post 258 Biehl v Administration des contributions du Grand-duché de Luxembourg 93 Black Cabs (Eventech Ltd v The Parking Adjudicator) 154–5, 158 Borgmann 327 Bouygues v Commission 157, 160, 257, 263 BP Chemicals v Commission 150, 157 British Aggregates v Commission 51, 258 British Airways v Commission 65 Brussels South Charleroi Airport v Commission 276 BSCA v Commission 276 Budějovicky Budvar 179 Buonotourist 254 BUPA 216, 217, 219 Cadbury Schweppes 93 Cassa di Risparmio di Firenze 93 CASTA 345 CBI 219 CELF v SIDE 234, 235, 242, 243, 262 Cellnex Telecom v Commission 217 CETA 180, 181 Christian Poucet v Assurances Générales de France 212 Chronopost 116, 253 Commission and Spain v Government of Gibraltar and United Kingdom 48, 267



Commission v Aer Lingus and Ryanair 52 Commission v Austria [2005] 180 Commission v Austria [2019] 96 Commission v EDF 115, 116 Commission v France [1985] 90 Commission v France [2013] 157 Commission v France and IFP 66 Commission v French Republic and IFP 267 Commission v Germany [1984] 258 Commission v Germany [2009] 337 Commission v Hansestadt Lübeck 42, 71, 72 Commission v Hungary [2018] 218 Commission v Ireland (Buy Irish) 90, 91 Commission v Italy and Wam 96 Commission v Kingdom of Netherlands and ING Group 68 Commission v Kingdom of Spain 44 Commission v MOL 42, 73, 74 Commission v Netherlands [2006] 94 Commission v Netherlands and ING 149 Commission v Slovak Republic [2010] 242 Commission v Slovakia [2011] 179 Commission v Spain [2011] 96 Commission v Spain [2012] 320 Commission v Spain [2014] 88 Commission v Sytraval and Brink’s France 253 Commission v Technische Glaswerke Ilmenau 259 Commission v World Duty Free Group 41, 44, 50, 60, 94, 161 Compagnie Commerciale de l’Ouest 90, 98 Comunidad Autónoma de Galicia and Retegal v Commission 72 Congregación de Escuelas Pías Provincia Betania v Ayuntamiento de Getafe 96, 211 Cook v Commission 228 Costa v ENEL 227 CSTP Azienda della Mobilità 254 Danske Bilimportører 97 Dassonville v Procureur du Roi 89, 90 De Gezamenlijke Steenkolenmijnen in Limburg v High Authority 305 DEI and European Commission v Alouminion 73, 254, 262 DEI v Commission 232 Deufil v Commission 264 Deutsche Bahn v Commission 71, 177, 178 Deutsche Lufthansa v Flughafen Frankfurt-Hahn 234, 242, 246, 262

Index  353



Deutsche Post and DHL International v Commission 258, 259 Dirk Andres v Commission 48 Distribution Casino France 98, 100 Dôvera 210, 212–15 DTS Distribuidora de Televisión Digital v Commission 100 Du Pont de Nemours Italiana 90 Duff 316 EasyJet 267 Eco Swiss 166, 167, 171 EDF v Commission 19–20, 67–8, 74 EDP España 262 Eesti Pagar 161, 231, 235 ENEA v Prezes Urzêdu Regulacji Energetyki 69, 71 Engel v The Netherlands 319 Enirisorse v Ministero delle Finanze 98 Enirisorse v Sotacarbo 118 Essent Netwerk Noord 69, 98 European Food 164, 169, 173, 178 Eventech 95, 96, 305 Falck Rettungsdienste and Falck 346 Fédération nationale du commerce extérieur des produits alimentaires et Syndicatnational des négociants et transformateurs de saumon 262 Federconsumatori 94 Federutility 218 FENIN 212 FIH Holding v Commission 20–21, 34, 150 Finanzamt B v A-Brauerei 49, 50 Finanzamt Linz v Bundesfinanzgericht (Austrian Financial Goodwill) 101–2, 162 Fineco Asset Management v Commission 65 Flughafen Lübeck v Air Berlin plc & Co. Luftverkehrs 246 FNCEPA v France 161, 243 Fondul Propietatea 254 France v Commission [1970] 98, 99 France v Commission [1990] 261, 264 France v Commission [1996] 52 France v Commission [2002] 277 France v Commission [2014] 266 France v Commission (Boussac) 243 France v Commission (Stardust Marine) 17, 30, 70–71 Franked Investment Income Group Litigation v Commissioners of Inland Revenue 93 Freistaat Sachsen v Commission 249, 271, 272, 275



French Community and Walloon Government v Flemish Government 95 Frucona 34, 35–6, 241–2 Fútbal Club Barcelona v Commission 43, 265, 266 FVE Holýšov I v Commission 176 Gemeente Nijmegen 246 Germany and Arcor AG & Co. KG v Germany 241 Germany and Pleuger Worthingenton v Commission 267 Germany v Commission [1984] 246 Germany v Commission [2000] 66, 93 Germany v Commission [2012] 70 Germany v Commission [2014] 342–3 Germany v Commission (Zweckverband Tierkörperbeseitigung) 341 GFKL Financial Services AG v Commission 62 Gibraltar v Commission 111 GIL Insurance v Commissioners of Customs & Excise 61 Gmina Miasto Gdynia and Port Lotniczy Gdynia Kosakowo v Commission 274 Greece v Commission [2016] 272 Gröditzer Stahlwerke 149 Hansestadt Lübeck v Commission 155, 158, 159, 284–5 Heinrich 320 Heiser 121, 276 Heitkamp BauHolding v Commission 47, 48, 49, 62 Hellenic Republic v Commission 42 HH Ferries v Commission 77, 259, 267 Höfner and Elser v Macrotron 66 Hornbach-Baumarkt v Finanzamt Lindau 63 Hungary v Commission [2019] 57, 74 Hungary v Commission [2020] 260 Iannelli v Meroni 88–91, 93, 101 Ireland and Aughinish Alumina v Commission 254 Iride Energia v Commission 69 Italian Republic and Eurallumina v Commission 254 Italy v Commission [1974] 51, 52, 250 Italy v Commission [1991] 264 Italy v Commission [1993] 65 Italy v Commission [2002] 264 Italy v Commission [2007] 257 Ja zum Nürburgring v European Commission 329 Kempter KG v Hauptzollamt Hamburg-Jonas 241–2 Kernkraftwerke Lippe-Ems 53–4, 72

354  Research handbook on European State aid law

Klausner Holz Niedersachsen 167, 242 Kotnik 271 Kronofrance v Commission 257, 263 Kühne & Heitz NV v Produktschap voor Pluimvee en Eieren 241 Laboratoires Boiron 240 Ladbroke Racing v Commission 271 Land Burgenland v Commission 147 Land Rheinland-Pfalz v Alcan Deutschland 241 Lankhorst-Hohorst v Finanzamt Steinfurt 63 Libert v Gouvernement flamand 231 Lloyd’s of London 336 Lorenz v Germany 227, 231 Lornoy 90, 238 Loutraki 258 Luxembourg v Commission (Fiat) 42, 44, 45–6, 61–2, 158, 316, 317–18, 321–2, 323, 325, 326 Luxury Tax 92 Marinvest 253, 259 Marketing Display v VR Van RaalteReclame 171 Marks & Spencer 93 Matteucci 179 Mauro Alzetta v Commission 264 Mediaset v Commission 154–5, 158, 301 Ministerio de Defensa and Navantia SA v Concello de Ferrol 41 Ministero dell’Economia e delle Finanze v Cassa di Risparmio di Firenze 245 Ministero dell’Industria, del Commercio e dell’Artigianato v Lucchini 241–2, 245 Mitteldeutsche Flughafen v Commission 271, 272, 275–6 MOL v Commission 157–8, 160–61 MTU Friedrichshafen 260 Mytilinaios Anonymos Etairia – Omilos Epicheiriseon v Commission 73 Naviera Armas v Commission 259 Neckarpri v EDF 166–7 Netherlands and ING v Commission 36–7, 149 Netherlands Maritime Technology Association v Commission 257 Netherlands and Starbucks v Commission 160, 316, 321–2, 323 Netherlands v Commission [2002] 66 Netherlands v Commission [2008] 73–4 Netherlands v Commission [2019] 44 NeXovation v Commission 257, 266 Nordsee 164, 166 Nuova Agricast 255 Nygård v Svineafgiftsfonden 97



Olsen v Commission 329 Olympiaki Aeroporia v Commission 70 Ordem dos Técnicos Oficiais de Contas 219 OTP Bank 233, 261 Outokumpu Oy 97 P&O Ferries (Vizcaya) v Commission 75, 234, 252 P Oy 47, 48–9, 61 Paint Graphos 42, 44, 46, 62, 94, 95 Pavlov 274 Piepenbrock 337 Plantanol 320 Poland v Commission [2019] 52, 56, 57, 58–60, 162 Prayon-Rupel v Commission 257, 258, 263 Presidenza del Consiglio dei Ministri v Regione Sardegna 92 Preussen Elektra 69, 91–2, 95, 113, 114, 118 Prym v Commission 20 Regione autonoma della Sardegna v Commission 255, 258 Regione Siciliana v Commission 261 Remondis 337 Residex Capital IV 261 Retegal v Commission 42 Rewe-Zentral v Landwirtschaftskammer für das Saarland 238 Ryanair and Airport Marketing Services v Commission 278–9, 285 Ryanair v Commission 17–18, 27, 30, 258, 259, 272, 280, 281, 282 SAT Fluggesellschaft v Eurocontrol 274 Schmidberger v Austria 95 Scor SE 258 SFEI v La Poste 232, 235, 237, 242, 254, 262, 279, 305 SGI v Belgian State 62, 63 SIC v Commission 258 SIDE v Commission 263 Smurfit Kappa Group v Commission 258 SNCM and France v Commission 279 Société d’Importation Edouard Leclerc-Siplec v TF1 Publicité SA and M6 Publicité 97 Spain and City of Luz v Commission 68 Spain v Commission [2002] 216 Spain v Commission [2003] 52, 264 Spain v Commission [2014] 272 Spain v Commission [2016] 266 Spain v Commission (Ciudad de la Luz) 32–4 Spezzino 345, 346 Stardust Marine 277

Index  355

Steinike und Weinlig v Germany 98 Stichting Woonlinie v Commission 223–4 Streekgewest 98, 99, 238, 239 Superfoz. 52 Sytraval v Commission 228, 251 Tadej Kotnik 141 Teckal 337 Tempus Energy 256–7, 264–5 Tesco-Global Áruházak 57, 60 Thin Cap Group Litigation v Commissioners of Inland Revenue 63 Transalpine Ölleitung in Österreich 89, 233, 234, 238, 254, 261 Trapeza Eurobank Ergasias v ATE 233 Undis Servizi 336, 337 UNESA v Administración General del Estado 51, 53–4, 72 UTECA 92 Van Calster 98, 99, 238, 243, 254 Van der Kooy 16 Vent De Colère 70, 277 Viasat Broadcasting 207, 219 Vodafone Magyarország 49, 57, 60, 100–101, 161, 254 Wells v Secretary of State for Transport 241 Westfälisch-Lippischer Sparkassen 141 Eurasian Economic Union (EEU) 309 Euratom Treaty 79 European Green Deal Investment Plan, energy sector 64–5, 84–5 European Pillar of Social Rights (EPSR) 225 European Structural and Investment Funds, airports and airlines 278 excess profit Belgium v Commission (Belgian Excess Profit Exemption) 157, 322 taxation, tax rulings and selectivity assessment 46–7 export subsidies, international trade law 106–7, 120, 123, 125, 128, 129 ‘failure to notify’ conditions, arbitration 166–7 feed-in tariffs 69, 113, 116–18 Ferri, D 206–25 Ferruz, M 234, 243, 246 Fiedziuk, N 206–7, 255 financial contribution and income support, international trade law 109–19 financial sector and financial crisis 4, 13, 134–52 bank credit default swap (CDS) spreads 140 Bank Recovery and Resolution Directive (BRRD) 142, 143, 148, 152



Banking Communication and ‘rapid treatment of state aid investigations’ 137–8, 139, 140, 142, 148 Banking Union regulations, granting aid under 141–3, 152 COVID-19 and Temporary Framework for State aid measures 151–2 crisis Communications 137–41 discrimination issues 137, 147–8 doom loop and sovereign crisis 142 emergency measures and fast-track procedure concerns 138 fundamentally sound and unsound banks, distinction between 139 Impaired Asset Communication 137, 139, 146 market economy operator principle (MEOP) 36–8 New Banking Communication 140–41, 142 New Banking Communication, burden-sharing requirement 141 pari passu principle 144–5 Prolongation Communications 137, 140 Recapitalisation Communication 138–9, 140 Rescue and Restructuring Guidelines 136–7, 140 Restructuring Communication 137, 139–40, 148 sector-specific rules on granting aid to financial institutions, lack of 135–6 Single Resolution Mechanism (SRM) 142–3, 152 State aid control issues 135–7, 143 State aid policy U-turn concerns 138 State guarantees 149, 151 financial sector and financial crisis, Market Economy Operator Principle (MEOP) and recapitalisation schemes 143–50 pari passu transactions 145–6 pollution theory 149–50 privatisation or nationalisation of a financial institution 146–7 valuation of assets 146 fiscal measures, taxation see taxation, and fiscal measures Flynn, J 236 Forwood, G 163–82 Franchino, F 9, 12 free movement of goods and inter-State trade 87–102 commercial freedom issues 101–2 convergence of two sets of rules 93–7

356  Research handbook on European State aid law

convergence of two sets of rules, effect on trade and burden of proof 95–7 convergence of two sets of rules, and proportionality principle 94–5 convergence of two sets of rules, State’s holding of special shares 94 derogation issues 89, 94–5 direct taxation measures 92–3, 95 discrimination issues 88, 90, 92–3, 97 indirect taxation rules 97–9 interpretation requirements by national courts 91–2 Market Operator Principle 94 parafiscal charges 97–9 severability test 90, 91, 92 Spaak Report 87 and state aid rules, differences between 88–91 and state aid rules, interaction between 91–7 and state aid rules, separation arguments 100–102 violation of free movement 100–101 future direction airports and airlines 293–6 energy sector 84–5 future research energy sector 85–6 political science perspective 14 public procurement 338, 339, 346 State aid law beyond the EU 312–13 Gallo, D 207, 209 Geldof, H 18 general availability test 49–50, 156–9 General Block Exemption Regulation (GBER) airports and airlines 286–7, 293 de minimis threshold 228–30, 231, 252 energy sector 83–4 Georgia and Association Agreement 299–300 Gormsen, L 314, 320, 322, 323 Goyder, J 235, 236, 237, 244 Grespan, D 250, 254 Grossman, E 10, 12 Hancher, L 34, 64–86, 228, 329, 331 healthcare provision 211–15, 222–3 see also social services Honoré, M 235, 236, 237, 244 housing, social housing 223–4 Howse, R 123, 126 Hudec, R 107 Hufbauer, G 106, 107 ICSID 165



9REN Holding Sarl v Spain 175 AES Summit Generation v Hungary 170, 173 Eiser Infrastructure v Spain 175 Electrabel v Hungary 170, 172, 173, 179 Masdar Solar & Wind Cooperatief v Spain 175, 176 Micula v Romania 163–4, 168–9, 171–2, 173, 176, 177, 178, 179–80, 181 RREEF v Spain 182 Sodexo Pass International v Hungary 182 UP and CD Holding Internationale v Hungary 182 Vattenfall v Germany 182 illegal/unlawful aid airports and airlines 278 energy sector 73, 83 international trade law 125, 127 market economy operator principle (MEOP) 19, 28, 32 political science perspective 5, 12–13 private enforcement of State aid law, third-party rights and role of national courts 231–2, 237–8 procedural rules 250, 253, 255, 257, 260, 261–2 illegality interest, private enforcement of State aid law 234–5 Impaired Asset Communication, and financial crisis 137, 139, 146 important projects of common European interest (IPCEI), energy sector 75, 77–8 imputability and State resources 70–71, 277–9 income support as benefit, international trade law 115–18 individual aid measures material selectivity outside field of taxation 157, 158 scheme versus individual aid, procedural rules 266–8 taxation, and fiscal measures 42, 43, 49 infrastructure provision 27, 114–15, 275–6 institutional framework, international trade law 10, 106–7, 124–7 inter-State trade energy sector 74–5 and free movement of goods see free movement of goods and inter-State trade international obligations, arbitration, investor-state dispute settlement (ISDS) 179–80 international organizations, and State aid law beyond the EU 307–11 international trade law 103–33

Index  357

de minimis threshold 123, 131 discrimination prohibition 106 economic principles 103–4 illegal aid 125, 127 institutional framework 10, 106–7, 124–7 non-violation complaints 106 subsidy rules 103–4, 105–6 subsidy rules, multilateral regulation 104 WTO General Agreement on Tariffs and Trade (GATT) (1948–94) 105–7 see also bilateral investment treaties (BITs) international trade law, Preferential Trade Agreements (PTAs) 129–32 EU–Japan 131 EU–Viet Nam 130–32 public policy objectives 130–31 specificity test 131 subsidy definition 131 Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations 132 Trans-Pacific Partnership (TPP) 132 UK and post-Brexit negotiations 131–2 international trade law, WTO (1995 to Date) 107–28 actionable subsidies causing adverse effects 121–2, 125, 126, 127 Agreement on Subsidies and Countervailing Measures (ASCM) 107, 108, 109–10, 115, 119–20, 121, 122, 123–5, 126, 131 Agreement on Subsidies and Countervailing Measures (ASCM), and Brexit 190, 193, 200, 201–2, 204 agricultural subsidies 107, 123–4 agricultural subsidies, domestic subsidization and Aggregate Measurement of Support (AMS) 123 Committee on Subsidies and Countervailing Measures 124–5 countervailing duties on subsidised imports 126 derogation test 111, 112 export subsidies 106–7, 120, 123, 125, 128, 129 financial contribution and income or price support 109–19 General Agreement on Trade in Services (GATS) 107 income support as benefit 115–18 income support as benefit, economic and non-economic conduct of governments, distinction between 115–16 infrastructure provision 114–15 multilateral or unilateral action 126



non-actionable subsidies and notification requirement 122–3 ‘peace clause’ 123–4 price-discovery mechanisms 117, 118 prohibited (red-light) subsidies 120–21 prohibited (red-light) subsidies, de facto export contingency 120 renewable energy sources (RES) 113, 114, 116–18, 127 service subsidies 124 and State-Owned Enterprises (SOEs) 110–11 subsidy definition 108–9 subsidy definition, EU State aid comparison 109, 111, 112, 113, 116, 117–18, 119, 120, 121, 122, 124, 125, 127 subsidy rules 107–24 subsidy specificity 119–20 tax incentives 111–12 transparency 124–6, 131, 132 withdrawal conditions 126–7 WTO Dispute Settlement Body (DSB) 126 international trade law, WTO (1995 to Date), clean energy support 112–14 action via an intermediary 113–14 ‘benefit’ requirement 113 feed-in tariffs 69, 113, 116–18 ‘financial contribution’ route 114 see also energy sector International Union of Tenants (IUT) 221 investment aid, airports and airlines 280, 290–91, 293 investor-state dispute settlement (ISDS) see arbitration, investor-state dispute settlement (ISDS) Ireland Brexit and backstop arrangements 184–6 Brexit and Northern Ireland Protocol 186, 191–2, 194–6, 201, 204 Regional Airports Programme 289 Italy, Cineca 338 Jaeger, T 136, 138 Japan Economic Partnership 303–4 EU–Japan Preferential Trade Agreement (PTA) 131 Jensen, N 235, 236, 237, 244 Joris, T 310, 315, 321, 322 judicial procedures, Brexit 183–4, 192, 193, 195, 196, 198, 202, 203 Kaczmarek, C 228, 236 Kadri, A 163–82

358  Research handbook on European State aid law Kassim, H 1, 2, 3 Kekelekis, M 73, 329 Klasse, M 72 Koenig, C 138, 248 Köhler, M 226, 230, 240 Krämer, R 9 Kreuschitz, V 231, 232, 239, 246 Kyriazis, D 314–28 Lang, J 233, 253 Laprévote, C 141, 143 Lavdas, K 3, 6 Le Mouël, L 140 legal certainty private enforcement of State aid law 240–42 tax rulings and recovery 316–17, 319–23 legal uncertainty, public procurement 333 legitimate expectations principle, tax rulings and recovery 316, 317–18, 324–6 Lever, J 233, 325 Lienemeyer, M 140, 141 loan agreements, market economy operator principle (MEOP) 24–5 loss carry-forward rule, taxation 47–50 Luja, R 135, 314, 323 Lyons, B 1, 2, 3, 13 McGowan, L 4, 6 McLachlan, C 165, 171 Maier, M 135, 136, 138 Mainenti, M 9, 12 manifest inappropriate test, taxation 55 market benchmarking see benchmarking market economy operator (MEO) test airports and airlines 279, 282–3, 294 energy sector 67–8 market economy operator principle (MEOP) and economic advantage 15–39 applicability 17–21 arbitration 167 commercial activities and its public policy activities, distinction between 17–21 illegal aid 19, 28, 32 private creditor test 16–17, 20, 26, 34, 35 private investor test 19, 20–21, 22–3, 24, 33, 34, 37, 67 public measures assessment 16–17 market economy operator principle (MEOP) and economic advantage, compliance methods 21–38 advance pricing agreements (APAs) 28–9 arm’s-length principle 28–9 benchmarking analysis 24–9 competitive tender procedures 23–4



credit default swaps (CDS) 25, 26 direct methods 21–4 indirect methods 24–38 infrastructure user agreements 27 loan agreements 24–5 and OECD Transfer Pricing Guidelines 28–9 pari passu transactions and risk factors 21–3 profitability analysis 29–38 profitability analysis, benchmark return assessment 31 profitability analysis, and duration of contract 30 profitability analysis, financial crisis and financial services sector 36–8 profitability analysis, net present value (NPV) assessment 30–31, 32–4 State guarantees 25–6 tax arrangements 27–9 weighted average cost of capital (WACC) 22, 31 market failure conditions, services of general economic interest (SGEI) 218 market information tools (MIT), procedural rules 259, 263 Market Operator Principle, free movement of goods 94 market-orientation of benefit test, renewables and feed-in tariffs 116–18 material selectivity outside field of taxation 153–62 discrimination test 157, 160–61, 162 economic advantage 158 individual aid measures 157, 158 national boundaries 159–60 reference systems 159–62 reference systems, delineation of pertinent 160–62 reference systems, number controversy 161–2 see also taxation material selectivity outside field of taxation, three-step test 153–9 assessment of 156–9 Black Cabs case and bus lanes and “particular legal regime” 154–5, 158 general availability test alternative 156–9 Hansestadt Lübeck case and delineation of the relevant reference system 155, 158, 159, 284–5 Mediaset case and granting of subsidies 154, 158, 301 Mavroidis, P 104, 109, 116, 120, 126, 127 Mederer, W 228

Index  359 Melcher, M 206, 217 Mendrinou, M 3, 6 MERCOSUR (Southern Common Market) 310 Merola, M 91, 251 Mifsud-Bonnici, C 320, 322, 323 Moldova and Association Agreement 300–301 Molestina, J 310 Møllgaard, P 216, 217, 218 Monsenego, J 52, 315 Monti, G 232, 233, 234, 235, 240, 245, 297, 312 national boundaries, material selectivity outside field of taxation 159–60 national courts role arbitration 166, 170–71 free movement of goods and inter-State trade 91–2 procedural rules 253–4, 262 and third-party rights see private enforcement of State aid law, third-party rights and role of national courts national state aid policies see political science perspective, national state aid policies, EU impact on Neslein, K 329 net present value (NPV) assessment, market economy operator principle (MEOP) and economic advantage 30–31, 32–4 Netherlands Association of Housing Corporations 220–21 Neven, D 7, 9 New Banking Communication, and financial crisis 140–41, 142 New York Convention terms, and arbitration 167, 170–71 Nicolaides, P 114, 141, 143, 150, 152, 212, 215, 246, 330 no-aid decisions, taxation, special purpose levies 55–6 non-economic activities airports and airlines 276–7 social services 210, 211, 212, 213 non-violation complaints, international trade law 106 Notice on the Notion of State aid 94, 96, 160, 321, 322, 323, 325, 330, 331–3, 338, 341 obligation to notify, and procedural rules 252, 261–2 OECD Transfer Pricing Guidelines 28–9 operating aid to airports 276–7, 289–90, 291–2, 293, 294 parafiscal charges, free movement of goods 97–9

pari passu principle financial sector and financial crisis 144–5 market economy operator principle (MEOP) and economic advantage 21–3 Pastor-Merchante, F 226–48 ‘peace clause’, international trade law 123–4 Pelin, A 250, 254 Peretz, G 183–205 Piccinin, D 138, 139, 140 Piernas López, J 133, 209, 216, 218, 297–313, 331 policy instrument, airports and airlines, compatibility considerations 289–90 Political Declaration, Brexit 201–3 political science perspective 1–14 Commission and national agri-environment schemes 7 Commission State Aid Action Plan (SAAP) 7 competition policy 2, 5–6, 8, 10 drivers of state aid control 2–5 future research 14 integrated market argument 3 politics of state aid policy 5–8 Regional Aid Guidelines 6–7 SME aid 6, 119 soft law approach 3–4 political science perspective, Commission’s strategic framing of the State aid issue 3–8 balancing test 7 and Court of Justice 4–5, 7, 12 discretionary capacity 4 financial crisis effects see financial sector and financial crisis Guidelines and Frameworks 4 information access 5 private complainants’ role 5 Procedural Regulation 4 political science perspective, national state aid policies, EU impact on 8–13 Central and Eastern Europe (CEE) 11 compatible aid 12 electoral institutions and distributive decision-making 9 illegal aid concerns 5, 12–13 institutional incompatibilities 10 Member and non-Member States comparison 9–10 negative decisions, effects of 12 territorial relations within federal member states 10–11 pollution theory, financial sector and financial crisis 149–50 post-accession countries, investor-state dispute settlement (ISDS) 170

360  Research handbook on European State aid law Power Purchase Agreements (PPAs), investor-state dispute settlement (ISDS) 170, 172–3 Preferential Trade Agreements (PTAs) see international trade law, Preferential Trade Agreements (PTAs) price support, international trade law 109–19 price-discovery mechanisms, international trade law 117, 118 primacy principle as conflict-avoidance and conflict-resolution tool 245–6 prior international obligations, investor-state dispute settlement (ISDS) 179–80 private creditor test, market economy operator principle (MEOP) 16–17, 20, 26, 34, 35 private enforcement of State aid law 226–48 Commission powers 227, 228, 229–30, 234, 242–6 Commission powers, separation theory 242–3 constitutional problems 247 de minimis threshold and block exemption regulations 228–30, 231 and decentralization of State aid control system 228–9 economic incentives 247 primacy principle as conflict-avoidance and conflict-resolution tool 245–6 standstill clause and interested parties 227–8, 231, 238–9 private enforcement of State aid law, procedural autonomy and effectiveness 238–42 actions and remedies 239–40 and administrative laws of Member States 241, 267 Commission outreach policy 244 conflict-avoidance tools 243–5 cooperation tools 244–5 legal certainty 240–42 res judicata principle 241–2, 245 State aid definition 243–4 private enforcement of State aid law, third-party rights and role of national courts 227–38, 240 damages against beneficiaries of State aid 237 damages compensation 235–7 damages compensation, problems and solutions 236–7 prophylactic dimension 232–3, 246 recovery measures 233–5 recovery measures, exceptions 234 recovery measures, illegality interest 234–5



restitution of charges levied to finance unlawful State aid measures 237–8 restorative dimension 233–8 right against unlawful State aid 231–2 private investor test 19, 20–21, 22–3, 24, 33, 34, 37, 67 privatisation or nationalisation of a financial institution 146–7 procedural autonomy see private enforcement of State aid law, procedural autonomy and effectiveness procedural rules 249–68 aid measures, assessment of 255–62 antitrust enforcement 254–5 Commission role 254–5, 264–6 compatibility assessment 255, 258–9, 261, 263 complaints 252–3 COVID-19-related State aid measures 268 de minimis and block exemption regulation 252 decentralization question 254–5 diligent and impartial examination duty 266 Enabling Regulation 251 final decisions 260–62 history and evolution 249–52 illegal aid 250, 255, 257, 261–2 in-depth investigation 259–60 information injunctions 259–60 market information tools (MIT) 259, 263 national court’s obligation to protect individual rights 262 national courts’ role 253–4 new Commission’s investigative tools 262–4 obligation to notify 252, 261–2 pre-notification phase 256–7 preliminary examination 257–9 preliminary examination, duty to seek additional information 264–6 recovery of illegal aid 250, 260, 261–2 recovery injunctions 260 scheme versus individual aid 266–8 sector inquiries and capacity mechanisms 263–4 Simplification Package 251 Single European Act 250–51 standstill requirements 250, 254, 261 State Aid Modernisation (SAM) 251–2, 263 State aid procedures 252–62 suspension injunction 260 unlawful aid 253 procurement, public see public procurement

Index  361 profitability analysis airports and airlines, advantage as economic benefit 282–3 market economy operator principle (MEOP) and economic advantage 29–38 progressive turnover taxes see under taxation Prolongation Communications, financial crisis 137, 140 proportionality principle airports and airlines, compatibility considerations 291–2 energy sector 81–2, 84 free movement of goods and inter-State trade 94–5 social services, services of general economic interest (SGEI) 219 taxation 46, 55, 59, 62 public compensation, services of general economic interest (SGEI) 215–21 see also compensation public policy international trade law, Preferential Trade Agreements (PTAs) 130–31 market economy operator principle (MEOP) and economic advantage 17–21 public procurement 329–46 administrative self-organisation and collaboration 337 allocative efficiency 329–30 central purchasing bodies (CPBs) 337, 343–4 competitive tendering procedures 332–3 discretionary capacity 329–30, 333, 336 economic advantage issues 330, 332, 338 future research 346 legal uncertainty 333 negotiated procurement 338–9 Notice on the Notion of State aid 330, 331–3, 338, 341 price/cost benchmarking exercise 333 public house, State aid within 336–8 R&D, innovation and pre-commercial procurement 333–6 R&D, innovation and pre-commercial procurement, exclusive development criteria 335–6 R&D, innovation and pre-commercial procurement, market-benchmarking criterion 335, 336, 339, 345 R&D, innovation and pre-commercial procurement, open procedure 334, 335 services of general economic interest (SGEI) 330, 341–3



services of general economic interest (SGEI), Almunia Package 341 services of general economic interest (SGEI), e-procurement 343–5 services of general economic interest (SGEI), procurement as 343–5 services of general economic interest (SGEI), public service obligations requirement 342–3 single tender submission 332 special organisations, procuring services from 345–6 tenders, abnormally low 340–41 Public Service Obligation (PSO), services of general economic interest (SGEI) 217, 222 Puglisi, L 15–39, 94 Quigley, C 244, 314 R&D

energy sector 77–8 pre-commercial procurement see under public procurement Rapp, J 40–63, 92 recapitalisation schemes see financial sector and financial crisis, Market Economy Operator Principle (MEOP) and recapitalisation schemes recovery of illegal aid, procedural rules 250, 260, 261–2 recovery measures private enforcement of State aid law, third-party rights and role of national courts 233–5 and tax rulings see tax rulings and recovery reference system material selectivity outside field of taxation 159–62 taxation, anti-abuse measures 47–8, 50, 51, 61 taxation, and fiscal measures 41–3 taxation, special purpose levies 52, 54 Regional Aid Guidelines 6–7 renewable energy sources (RES) arbitration, investor-state dispute settlement (ISDS) 174–6 energy sector 69–70, 71, 74, 76, 80, 81–2 international trade law 113, 114, 116–18, 127 res judicata principle, private enforcement of State aid law 241–2, 245 Rescue and Restructuring Guidelines, and financial crisis 136–7, 140

362  Research handbook on European State aid law restitution of charges levied to finance unlawful State aid measures 237–8 restorative dimension, private enforcement of State aid law 233–8 restructuring aid, airports and airlines 280 Restructuring Communication, financial sector and financial crisis 137, 139–40, 148 Righini, E 249–68 ‘right to aid’ principle, and arbitration 163 Rivas, J 36, 149 Robins, N 15–39, 94 Röller, L-H 9 Rubini, L 103–33 rule of law, tax rulings and recovery 319–23 Russia subsidy control 302–3 Rusu, I 330 Salerno, F 64–86 Sánchez-Graells, A 207, 208, 329–46 Santinha, C 6, 11 Schoenmaekers, S 330 Schwellnus, G 11 sector inquiries and capacity mechanisms, procedural rules 263–4 sector-specific rules on granting aid to financial institutions, lack of 135–6 selectivity assessment airports and airlines 283–5 energy sector 71–3 and tax rulings see taxation, tax rulings and selectivity assessment taxation 41–3, 44, 49, 51, 54–5, 57–9, 60–62 self-standing levies or special taxes, and taxation 52–4 separation theory, private enforcement of State aid law 242–3 service subsidies, international trade law 124 services of general economic interest (SGEI) see social services, services of general economic interest (SGEI) shares, State’s holding of special, and free movement of goods 94 Shelton-Erb, J 106, 107 Sierra, J 87, 234, 243, 246, 329–30 Simplification Package, procedural rules 251 Single Resolution Mechanism (SRM), financial sector and financial crisis 142–3, 152 Sinnaeve, A 207, 208, 228, 236, 244, 250 Skovgaard Ølykke, G 216, 217, 218, 331–2, 340 SME aid 6, 119 Smith, M 3, 5, 8, 12 Smulders, B 87 social services 206–25 COVID-19 pandemic effect 209, 225



discretionary capacity 213, 215, 218, 224 economic nature 209–15 European Pillar of Social Rights (EPSR) 225 healthcare provision 211–15, 222–3 International Union of Tenants (IUT) 221 Netherlands Association of Housing Corporations 220–21 non-economic activities 210, 211, 212, 213 social housing 223–4 solidarity based evaluation 211–12 social services, services of general economic interest (SGEI) 207–8, 209, 215–21 Altmark conditions 208, 209, 216-19, 222 see also EU court cases, Altmark Commission practice and SGEI Package application 222–4 compensation 208, 209, 212, 215–21, 222, 223 de minimis threshold 208, 215–16, 225 definition, lack of clear 216–17, 218 economic threshold, lack of 219–21 Evaluation and Fitness Check Roadmap 208, 215–16 market failure conditions 218 necessity test 219 proportionality test 219 Public Service Obligation (PSO) 217, 222 universal obligation 217–18 solidarity based evaluation, social services 211–12 Southern Common Market (MERCOSUR) 310 Spaak Report 87 special organisations, procuring services from 345–6 special purpose levies see taxation, special purpose levies specificity test, international trade law 119–20, 131 standstill requirements private enforcement of State aid law 227–8, 231, 238–9 procedural rules 250, 254, 261 tax rulings and recovery 317 start-up aid, airports and airlines 288–9, 292 State Aid Action Plan (SAAP) 7 State aid law beyond the EU 297–313 Armenia and Enhanced Partnership Agreements 298–300 China Fair Competition Review system (FCRS) 304–6 Common Market for Eastern and Southern Africa (COMESA) 307–8 East African Community (EAC) 308–9 Economic Community of West African States (ECOWAS) 309–10

Index  363

Eurasian Economic Union (EEU) 309 European Free Trade Association (EFTA) 310 future research 312–13 Georgia and Association Agreement 299–300 international organizations 307–11 Japan and Economic Partnership 303–4 Moldova and Association Agreement 300–301 national competition regulations 298–306 Russia subsidy control 302–3 Southern Common Market (MERCOSUR) 310 Ukraine and Association Agreement 301–2 West African Economic and Monetary Union (WAEMU) 310–11 State Aid Modernisation (SAM) energy sector 79, 80 procedural rules 251–2, 263 State guarantees 25–6, 149, 151, 295 State resources airports and airlines 277–9 energy sector 69–71 State-Owned Enterprises (SOEs), and international trade law 110–11 Struckmann, K 163–82 subsidies Agreement on Subsidies and Countervailing Measures (ASCM), see under international trade law, WTO (1995 to Date) agricultural 107, 123–4 definition 109, 111, 112, 113, 116, 117–18, 119, 120, 121, 122, 124, 125, 127, 131 international trade law 103–4, 105–6, 121–2 international trade law, WTO (1995 to Date) 107–24, 108–9 material selectivity outside field of taxation, three-step test 154, 158 suspension injunction, procedural rules 260 Sweden, Novenergia II 171 Switzerland/EU position, and Brexit 198–9 Sykes, A 103, 107 Szyszczak, E 209, 244 tax rulings and recovery 314–28 advance pricing agreements (APAs) 314–15, 317 arm’s length principle (ALP) 317, 318, 321, 322–3, 325–6



Commission and General Court approach 316–18 competition policy and EU competence 326–7 conferral principle 327 legal certainty principle 316–17, 319–23 legitimate expectations principle 316, 317–18, 324–6 recovery, arguments in favour 318–27 rule of law 319–23 rule of law, accessibility 320 standstill obligation 317 state aid recovery purpose 320–22 transfer pricing analysis 325–6 un-notified state aid 324–5 taxation 40–63 derogation issues 45–6, 47, 48, 50, 58, 59–60, 71, 72 discretionary capacity 55, 56, 61 discrimination issues 45, 54, 55, 58, 59–60, 61 energy sector 71–3 free movement of goods and inter-State trade 92–3, 95, 97–9 market economy operator principle (MEOP) 27–9 progressive turnover taxes 51–2, 56–61 progressive turnover taxes, selectivity analysis 57–9, 60–61 progressive turnover taxes, three-step test 60 proportionality principle 44, 46, 49, 51, 55, 59, 62 selective advantage consideration 43, 44, 49, 51, 59, 62 selectivity assessment 41–3, 44, 49, 51, 54–5, 57–9, 60–62 see also material selectivity outside field of taxation taxation, anti-abuse measures 47–51 controlled foreign companies (CFC) rules 46, 50–51 general availability test 49–50 intra-group transformation procedures 49–50 loss carry-forward rule 47–50 and reference system 47–8, 50, 51, 61 three-step test issues 49–50 taxation, and fiscal measures 41–3 individual aid measure 42, 43, 49 reference system and selectivity requirement 41–3 scheme undertaking 42 three-step test 42–3 taxation, special purpose levies 51–6

364  Research handbook on European State aid law

admissibility issues 51–2, 55 burden of proof 55, 56 manifest inappropriate test 55 no-aid decisions 55–6 and reference system 52, 54 selectivity assessment 51, 54–5, 61–2 self-standing levies or special taxes 52–4 State measures according to their aim 52, 53, 54, 55 taxation, tax rulings and selectivity assessment 43–7 arm’s length principle 44–6, 62–3 corporate income tax rules 43–6 excess profit scheme 46–7 justification issue 46 tendering, public procurement see public procurement third countries, Member States with obligations to 180 third-party rights, private enforcement of State aid law see private enforcement of State aid law, third-party rights and role of national courts Thomas, K 3, 8, 9, 13 three-step test material selectivity see material selectivity outside field of taxation, three-step test taxation, anti-abuse measures 49–50 taxation, and fiscal measures 42–3 taxation, progressive turnover taxes 60 Tomat, F 249–69 tradable certificates and permits, energy sector 73–4 trade law, international see international trade law Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations, international trade law, Preferential Trade Agreements (PTAs) 132 Trans-Pacific Partnership (TPP) 132 transfer pricing analysis, tax rulings 325–6 transmission network, energy sector 67, 68, 71, 77 transparency, international trade law, WTO (1995 to Date) 124–6, 131, 132 Trichkovska, I 163–82 UK

Brexit see Brexit Competition and Markets Authority (CMA) 191, 192 Internal Market Bill 196–7 Miller v Secretary of State for Exiting the EU 183 post-Brexit negotiations, Preferential Trade Agreements (PTAs) 131–2 Ukraine and Association Agreement 200, 201, 301–2

un-notified state aid, tax rulings and recovery 324–5 UNCITRAL EDF International SA v Hungary 172 Invesmart v Czech Republic 168, 169 Ungerer, H 135, 137 universal obligation, services of general economic interest (SGEI) 217–18 unlawful aid see illegal/unlawful aid value chains, energy sector 78 Verouden, V 7 Viet Nam, Preferential Trade Agreement (PTA) 130–32 violation of free movement 100–101 Wehlander, C 209, 217 weighted average cost of capital (WACC), market economy operator principle (MEOP) 22, 31 Werner, P 135, 136, 138 West African Economic and Monetary Union (WAEMU) 310–11 Wishlade, F 2, 6, 7, 10 withdrawal conditions, international trade law, WTO (1995 to Date) 126–7 Wolf, D 8, 9, 12 Wollenschläger, F 230, 237 WTO Agreement on Subsidies and Countervailing Measures (ASCM) 107, 108, 109–10, 115, 119–20, 121, 122, 123–5, 126, 131 Agreement on Subsidies and Countervailing Measures (ASCM Agreement), Brexit 190, 193, 200, 201–2, 204 General Agreement on Tariffs and Trade (GATT) 105–7 General Agreement on Trade in Services (GATS) 107 and international trade law see international trade law, WTO (1995 to Date) WTO Dispute Settlement Body 126 Australia – Leather 127 Brazil – Export Financing Programme for Aircraft 109 Canada – Renewable Energy/FIT 113, 114, 116–18, 127 China – GOES 110, 113, 114 EC – Large Civil Aircraft 114, 115, 120, 122 US – AD/CVD 111, 113, 116, 127 US – Countervailing Measures 116, 120 US – DRAMS 110 US – Export Restraints 110

Index  365

US – FSC 111, 112 US – Large Civil Aircraft 111, 112, 115 US – Softwood Lumber IV 110, 116, 119 US – Tax Incentives 127

Wurmnest, W 237 Zahariadis, N 3, 4, 8, 9 Zhu, M 13