European Union Law:
Problem 1:
1. What are the rules regarding the offering of aid by states in Eu competition law?
The prohibition of state aid is mentioned in art 107 lid 1 TFEU, permitted forms of state aid pursuant to art 107 lid 2,3
TFEU, and state aid control procedures.
Art. 107 lid 1 TFEU:
This article can be separated into a number of elements, prohibiting:
a) Any aid granted by a member state or through state resources in any form whatsoever
b) That distorts or threatens to distort competition
c) By favouring certain undertakings or the production of certain goods selectivity
d) In so far as it affects trade between member states.
A)The first of the above-mentioned condition assumes the existence of aid, that is to say, a positive contribution or
benefit. It also embraces interventions which in various forms, mitigate the charges which are normally included in
the budget of an undertaking and which, without therefore being subsidies in the strict meaning of the word, are
similar in character and have the same effect.
Here, the Court of Justice’s functional approach can be witnessed, which focuses on the effect of the aid rather than
the form in which it is granted. In addition to subsidies, the following may also be classified as state aid: tax
exemptions or reductions, investments on non-market terms, loans at non-market interest rates, and the sale or
letting of land and buildings at non-market prices.
According to the court of justice, a benefit does not include the granting of a subsidy to a public undertaking that
does not exceed the costs arising from the performance by that undertaking of a task of general economic interest,
within the meaning of art 106 lid 2 TFEU, with which it has been charged. Under such circumstances, the subsidy
merely enables the undertaking in question to compete with other (non-public) undertakings on an equal footing.
finally, there is no advantage for the recipient undertaking if the state acts like a market economy operator. in this
market economy operator exception, there is no state aid when the state can prove that the recipient company
obtained the same deal, for example a loan, capital investment or debt alleviation, that it would have gotten from a
private market economy operator. This requires a comparison of the measure at hand with the actions a (fictional)
market economy operator would take. This comparison is complicated. As a result a 2-stage approach has been
adopted. In this approach, the Commission will first determine the applicability of the market economy operator
exception and only then test whether it applies to the specific case at hand. This means that the intricacies of
comparing the state’s actions with those of a private market economy operator can be avoided if it is clear that the
market economy operator principle has no applicability in the first place because the state has acted in a public
capacity.
The benefits must be granted by the state in one way or another; either directly, such as a ministry or municipality, or
indirectly by a third party. According to the Court of Justice’s judgment in Stardust, a benefit granted by such a body,
which is often a public undertaking, must be imputable to the state. Only in cases where the government was
involved, in one way or another, in the adoption of the measure concerned can a benefit be imputed to the state and
potentially classified as state aid.
The Court of Justice’s judgement in PreussenElektra suggests that member states can circumvent the prohibition of
state aid by ensuring that benefits are not funded from taxation. This case concerned the statutory obligation of
regional energy distribution companies in Germany to purchase all electricity produced from renewable sources in
their area of supply at fixed prices that exceeded their market value. Despite holding that this arrangement conferred
an economic advantage on renewable energy producers, since it guaranteed them, with no risk, higher profits than
they would make in its absence, the Court of Justice concluded that it did not amount to state aid. Because the
German government had reallocated recourses towards renewable energy products without placing itself in the
middle by levying taxes and distributing the proceeds to renewable energy producers the abovementioned
arrangement did not involve the transfer of ‘state resources’. Later judgements have restricted this exception.
For tax the key question is whether the tax authorities’ approval of a favourable transfer price amounts to state aid,
given that it applies to money that is transferred within a group of undertakings and therefore only potentially gives
rise to a tax liability. The next question concerns the calculation of the benefit enjoyed by the undertaking as a result
of the approval of a favourable transfer price. This is normally done using the arm’s length principle, according to
which the price for the provision of a service or product within a group should be identical to the price that would be
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,charged to a third party for the same service or product. The value of the tax benefit is then calculated on the basis
of the difference between the agreed transfer price and the arm’s length transfer price. The General Court accepted
that the arm’s length principle can be used, given that the member state has incorporated it in its own fiscal rules, as
a tool to determine whether there is an advantage for the company involved.
B and C)These conditions are closely related to one another. A distortion of competition as a result of state aid only
arises in situations where certain undertakings in a member state receive such aid and others do not. This is known
as the selectivity test. When a measure produces a general benefit, such as a universal reduction in corporation tax
or the improvement of the road network, it does not selectively favour certain undertakings. Such a measure does
not fall within the scope of art. 107 TFEU. A subsidy for company X will be selective. Things are more challenging
when there is a measure of general application that enables the distribution of certain funds. In that case a
distinction has to be made between the general scheme and the individual application of that scheme. Selectivity
then exists whenever there is discretion on the part of the member state.
The selectivity test plays a key role in connection with the granting of certain tax exemptions and the determination
of the tax liability of undertakings in specific cases. In Adria-Wien Austria had restricted the reimbursement of an
energy tax to undertakings that manufactured goods. According to the Court such reimbursements were not
selective and therefore did not amount to state aid in cases where they were justified by the nature or general
scheme of the system of which they were part. Art. 107 TFEU allows member states to differentiate between
undertakings on the basis of objective justifications when establishing a system of charges that is in the general
interest. In contrast, when the state enjoys a degree of latitude that enables it to choose the beneficiaries or the
conditions under which aid is provided or exemptions are granted, the selectivity test is deemed to have been met.
Besides specific measures, entire tax systems may also be classified as selective. This was the issue in a case
concerning the Gibraltar tax reform concerning its corporate tax regime, which made it very attractive for shell
companies to register in Gibraltar. The mere fact that a general tax system differentiates between different types of
undertakings does not mean that it is inherently selective. However, when the general rules ensure that shell
companies are required to pay little or no tax, it can be classified as selective.
The European courts have developed a 3-part test to determine whether a tax measure is selective:
1. Identify and examine the common or normal tax system applicable in the member state concerned;
2. Assess and determine whether the measure concerned derogates from the common rule for undertakings
that are in a comparable situation in the light of the system’s objectives;
3. Examine whether the measure is justified by the nature or overall structure of the system of which it forms
part.
To determine whether the tax ruling is selective, there needs to be a comparison of the taxes payable by the
company in question with those payable by companies that are in a legal and factual situation comparable to that of
the recipient in the light of the objective of the reference framework. Much turns on identifying comparable
companies and then calculating the difference in taxes.
D)Based on the 4th condition outlined in art. 107 sub 1 TFEU, it appears that the Court is quicker to assume that trade
between member states has been affected in cases concerning state aid than it is in cases concerning other aspects
of competition law. According to case-law, when State aid strengthens the position of an undertaking compared with
other undertakings competing in intra-community trade, the latter must be regarded as affected by that aid.
Although the Court has never accepted a de minimis exception, the Commission has provided that aid granted to a
single undertaking which does not exceed €200,00 over a period of 3 fiscal years is deemed to fall outside the scope
of art. 107 lid 1 TFEU (De Minimis Regulation, 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 (OJ
2013, L352/01) (in Cases and Materials EU law)).
Art. 107 lid 2 and 3 TFEU:
State aid measures that fall within the scope of art 107 lid 1 TFEU are prohibited, unless they are compatible with the
internal market pursuant to lid 2 and 3. The difference between those two paragraphs is that the Commission has no
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, discretionary powers with regard to the application of the former, while in the case of the latter it does. The grounds
for compatibility listed in the 3th paragraph are mostly self-explanatory, although a few comments are in order.
Sub 2 = aid falling is legally entitled to be exempted (always)
Sub 3= aid falls within the discretion of the Commission they are not automatically exempted, this lies in the
discretion of the Commission.
State aid is subject to special procedures that are conducted outside the framework of regular infringement
proceedings. These procedures are described in art 108 TFEU and Regulation 2015/1589 and feature in judgements
of the General Court and the Court of Justice. In this context, it is important to distinguish between existing aid and
new aid.
Existing aid is aid that existed prior to the entry into force of the TFEU or aid that has been authorised by the
Commission or the Council. The member states and the Commission keep existing aid under constant review. If the
Commission concludes that existing aid is no longer compatible with the internal market, it can propose appropriate
measures after obtaining all necessary information form the member state concerned. In cases where the member
state concerned does not accept the proposed measures, the Commission can initiate a formal investigation
procedure that may result in a decision to prohibit the aid.
New aid encompasses all aid that is not existing aid, including alternations to existing aid. Pursuant to art 108(3) TFEU
and art 2 of Regulation 2015/1589, any plans to grant new aid must be notified to the Commission. Any aid that has
been notified in this manner may not be put into effect until it has been authorised or is deemed to have been
authorised, due to the expiry of the relevant deadline, by the Commission (art. 3 Regulation 2015/1589). The
Commission has 2 months to arrive at one of the following 3 conclusions (art 4 Regulation 2015/1589). 1:It can find
that the notified measure does not constitute aid. 2:It can find that the notified measure constitutes aid and that it is
compatible with the internal market. 3:It can find that the notified measure constitutes aid but that that there are
doubts as to whether it is compatible with the internal market. In the latter case, the Commission initiates a formal
investigation procedure pursuant to art 108 (2) TFEU (art 6 Regulation 2015/1589). It then has 18 months to adopt a
decision, although this time limit may be extended (art 9(6) Regulation 2015/1589).
In contrast to the preliminary examination, interested parties have a right to a hearing during the formal investigation
procedure. At the end of this procedure, the Commission adopts one of the following 4 decisions. 1. It can find that
the notified measure does not constitute aid. 2. It can find that the notified aid is compatible with the internal
market (positive decision). 3. It can attach to a positive decision conditions subject to which aid may be considered
compatible with the internal market (conditional decision). 4. It can find that the notified aid is not compatible with
the internal market (negative decision). In the latter case, the aid may not be put into effect. The special procedure
outlined in art 108 (2) paragraph 3, under which the Council can decide that the aid which a member state grants or
intends to grant should be considered to be compatible with the internal market if such a decision is justified by
exceptional circumstances, may not be used to reverse a negative decision of the Commission.
Unlawful aid is aid that is put into effect without notification (art 1(f) Regulation 2015/1589). The Commission may
on its own initiative, examine whether such aid is compatible with the internal market (art 12 Regulation 2015/1589).
In cases where unlawful aid is found to be incompatible with the internal market, the Commission can require its
recovery from the beneficiary (art. 16 Regulation 2015/1589).
The aid is illegal when a member state does not inform the Commission (art 108 (3) TFEU). Without a decision of the
Commission on any plans to grant aid, such aid may not be paid out.
- Art. 108 (3) TFEU has direct effect and can be applied by national Courts. Because it is clear and precise
Before and during the investigation of the Commission, the aid is unlawful.
Services of general economic interest (SGIE) (art. 106 (2) TFEU): Compensation is no state aid if the recipient
undertaking must actually have public service obligations to discharge. The compensation cannot exceed what is
necessary to cover all or part of the costs incurred in the discharge of the public service obligations, taking into
account the relevant receipts and a reasonable profit. For example, public transportation (bus).
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