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Demystifying State Aid
State aid considerations arise whenever public funds selectively provide entities with an “advantage” over their competitors.
EU law requires all state aid must be notified to the European Commission (“the Commission”) for approval before it is granted.
Breaching this “standstill” obligation can have serious consequences. Those receiving illegal state aid will normally have to repay
the aid in full plus interest. Understanding when state aid may exist and what needs to be notified is not always straightforward.
Such uncertainty can delay projects and stifle investment. Getting state aid clearance can be a lengthy process and it is important
that state aid issues are considered as early in a project as possible. This chart is designed to provide high-level guidance on the
key questions which will help you identify whether state aid exists or not and when notification may be required. Additional notes
provide more detail on key legal concepts. As ever, much depends upon the particular facts of each case and this guide is not
intended as a substitute for specific legal advice. Other legal obligations will also need to be considered on a case by case basis.
This chart is based on the law as at October 2014.
1
Must individually notify aid
to Commission and cannot
implement aid until Commission
approval received [see Note I]
Are state
resources involved?
[See note A]
Note B
State aid rules apply to “undertakings”. Undertakings are entities
which are engaged in any form of economic activity and can
include not-for-profit organisations, charities and even certain
publicly owned entities.
Yes
No
No
2
Is the beneficiary
a private sector entity?
[See note B]
No need
to notify
10
Does the aid fall within an
existing UK scheme approved
by the Commission?
Yes
No
No
9
3
Yes
Is the charity/
public body/social enterprise
involved in commercial activities
and/ or competing with the
private sector?
Yes
No
Note A
State resources are resources of EU Member States (“MS”).
These include funds distributed by central or local government
of an MS or other publicly funded bodies within an MS. Aid
can take various forms including direct grants or soft loans,
as well as measures foregoing revenue such as tax rebates or
exemptions, sales or leases of state assets at an undervalue
and even acting as a guarantor. Funds distributed directly by the
EU are not state resources.
Does the aid fall
within GBER?
[See note H]
Note C
This is one of the key state aid tests. Firstly there must be a selective
advantage (i.e. only certain undertakings will benefit) and secondly
the benefit will give recipients an advantage over their competitors.
This distortion of competition test has a low threshold. For
example, a grant given to one manufacturer to expand its business
or a tax exemption granted for a particular technology, will normally
be considered to distort competition.
Note D
The starting point is that any aid given to an undertaking in one
Member State is capable of distorting inter-state trade even if
products/services are not regularly exported. However, if the aid
is given to entities for products or services that are only traded
locally, such as a café or tea room, there may be no distortion of
inter-state trade.
No
Yes
4
Does the aid provide
the beneficiary with an
advantage over its
competitors?
[See note C]
No state
aid exists
8
Yes
Do SGEI rules apply?
[See note G]
Note E
MEIP provides there will be no aid if the state is acting like any
private sector company would on the market. This depends on the
circumstances but if the state lends money at or above commercial
interest rates, pays the going rate for goods or services or invests in
a company on the same terms as a private sector company would
then in principle, it is likely MEIP will apply. In contrast, lending to an
insolvent company at base rate, or investing in a company without
the right to receive a dividend is unlikely to satisfy MEIP.
State aid rules apply –
a notification may be
required
Note F
When assessing if the threshold is met, remember the
“undertaking” includes all parent and subsidiaries and should
include all state aid received, even if it comes from a number of
different public body grantors.
No
Yes
No
5
Is there a distortion
of interstate trade?
[See note D]
No
Yes
7
Yes
Has the de minimis threshold been
exceeded? i.e. has the undertaking
received aid which in total exceeds
€200,000 in any rolling 3 year period?
[See note F]
Yes
6
Does the market
economy investor
principle (MEIP) apply?
[See note E]
No
Note G
Special rules apply to services of general economic interest
(SGEIs). SGEI’s take many forms but the undertaking must always
be formally “entrusted” with carrying out public service obligations.
Common examples of SGEIs include social housing, certain public
health services, and ferry services to remote areas. You should
seek specific legal advice if you consider SGEI rules are likely to
apply because a notification may still be necessary. Separate de
minimis rules apply to SGEIs.
Note H
EU rules provide that certain types of state aid, primarily for SMEs,
are automatically acceptable as their positive benefits outweigh any
negative impact from any distortion of competition. This aid can be
granted without first needing to notify the Commission for approval
if certain conditions apply. The relevant conditions are set out in the
General Block Exemption (or GBER). Topics covered include aid for
training, R+D, SME investment and some forms of environmental
protection, and for sport and recreational infrastructure.
Note I
In the UK, state aid notifications to the Commission can only
be made via BIS. Approvals can take between 6-18 months
or sometimes even longer. If aid is notifiable, it cannot be
implemented until approval is received. Aid which is granted
without the correct approval will normally need to be repaid by
the aid recipient in full (plus interest).
Case Study 1
Case Study 2
Case Study 3
A local business is seeking funding to help it expand its speciality chocolates
business and has approached a local authority for help. If the Local authority,
subject to identifying appropriate powers, were to lend the company the money
and charge a commercial rate of interest or invest in the company, for example, by
taking shares in the company which will pay out dividends in due course then it is
likely that MEIP would apply and no aid would exist. If the amount involved was
below €200,000 and the company had not received any other “aid” from a public
sector body in the last 3 years, the de minimis principle could be relied on and no
aid would exist. In all other cases, as the company is clearly engaged in commercial
activity, there would be a presumption that any aid could distort trade between
Member States and so further work would be needed to ascertain whether in the
circumstances aid exists and notification may be required.
A charity is renovating an old castle using privately raised funds. It has approached
the local councils to ask for help in building facilities for visitors, explaining that it has
received similar assistance from a number of councils in other areas in the past few
years. Although the entity requesting assistance is a charity, the visitors facilities are
likely to involve an element of commercial activity so state aid rules may apply. De
minimis is unlikely to apply as the charity appears to have received public money on
a number of occasions. Much will depend upon the precise facts – will the facilities
in question be a small gift shop and tea room, or a much larger visitors centre which
is likely to be marketed internationally as a key visitor attraction? The smaller the
facilities and the more locally based the target audience, the more likely it is that
there will be no distortion of inter-state trade and therefore no aid.
A county council has decided to fund a training programme for local unemployed
people. The programme will be run by local businesses (but wholly funded by the
council) and will teach various transferable skills in the hope of moving unemployed
people into work. If the de minimis threshold is not met by any companies to whom
aid is provided to then no state aid would exist. However, the county council must
be careful to ensure that the funds are provided in a fair manner and no businesses
are given any ‘special treatment’. Depending on the size of the company then even
if the aid is not de minimis, the aid may be “approved” under the General Block
Exemption Regulation. The GBER may apply if (i) at least 60% of the training
provided is in transferable rather than specific skills; (ii) the aid is proportionate and
limited to the amount necessary to cover the cost of the training; and (iii) the training
is provided in a transparent way ensuring equal treatment of all applications and
is effectively monitored by the council. The GBER is also more likely to apply if the
aid is provided to an SME rather than a large company. If the GBER applies then,
although state aid exists, there is no need for it to be notified to the Commission.
© King & Wood Mallesons. This guide was developed by King & Wood Mallesons in conjunction with the LGA and Local Partnerships.
Warning: this document has been created for general guidance purposes only and specific legal advice should always be sought when dealing with any particular set of facts or circumstances. 22679