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Briefing on State Aid 

Published: April, 2005

Submission: January, 2006


What is State Aid? The State aid rules seek to control the aid or assistance which is provided by EU Member States to businesses. Article 87 of the EC Treaty states that “any aid granted by a Member State or through State resources in any form whatsoever” is incompatible with the common market. The Commission and the European Court of Justice have a considerable discretion in determining what amounts to State aid and have given the term a wide definition. While the classic form of State aid is the direct subsidy to an undertaking, State aid may take many other forms including: subsidies and non-repayable grants; provision of capital (e.g. loans or shareholdings); preferential guarantees and indemnities; preferential access to State contracts; preferential interest rates; acquisition or disposal of land or buildings either gratuitously or on favourable terms; and tax exemptions, tax refunds or reductions in the rate of social security contributions. Whatever form the financial assistance takes, to qualify as aid, it must benefit the recipient. Elements of Aid A State aid involves five elements: an advantage; granted by a Member State or through State resources; favouring certain undertakings or the production of certain goods or services; distorting or threatening to distort competition; and affecting inter-State trade. Each of these elements is briefly considered below. Advantage As stated above, whatever its form, the aid granted must constitute an advantage for the recipient. A measure may constitute aid despite the fact that the recipient has provided some consideration provided that the granting of that aid would not have been made in the “normal course” of business. Put another way, if the State acts in a way in which a market investor or operator would have acted, then the State is not providing a State aid. Granted by a Member State or through State resources A wide approach is taken on the issue of what constitutes State for these purposes. The State covers central, regional and local government as well as other public authorities. It is not important whether the aid is paid directly by the State or indirectly through other (even private) agencies. What is important is that an advantage is received which entails a burden on public finances, whether in the form of expenditure or reduced revenue. Favouring certain undertakings or the production of certain goods or services This element focuses on whether or not the aid in question is “selective”. For example, aid which favours certain industries is selective while aid measures which are aimed at the general promotion of the economy, such as general vocational education or infrastructural development, and which apply to all undertakings in a given Member State are not caught by the State aid rules because they help to sustain the economy as a whole and benefit all enterprises without distinction. Distorting or threatening to distort competition The aid must strengthen the position of an undertaking compared with other undertakings competing in intra-Community trade. Thus, competition within the common market must inevitably differ from the free play of market forces where a State aid is granted. Affecting inter-State trade For a measure to constitute a State aid, there must be an effect on trade between Member States. This element has been widely interpreted: no direct effect has to be demonstrated – it is sufficient that it is reasonably foreseeable that the aid in question will affect trade between Member States. EXEMPTIONS FROM THE STATE AID RULES Notwithstanding that an assistance may constitute a State aid, it may still be permissible by virtue of falling within one of the exemptions contained in Article 87. These exemptions are exceptions to the general prohibition on State aid and are thus to be interpreted narrowly. Automatic exemptions are granted for: (a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; (b) aid to make good the damage caused by natural disasters or by exceptional occurrences; (c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, insofar as such aid is required in order to compensate for the economic disadvantages caused by that division. The Commission may also grant exemptions to aid falling within one of the following categories: (a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment; (b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State; (c) aid to facilitate the development of certain economic activities or certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest; (d) aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Community to an extent that is contrary to the common interest; (e) such other categories of aid as may be specified by decision of the Council acting by qualified majority on a proposal from the Commission. Aid which falls within one of the exemption categories must nonetheless be notified to the Commission. In addition, the Commission has adopted regulations concerning State aid to small and medium-sized enterprises, training aid, employment aid, certain categories of horizontal aid and de minimis aid. Aid fulfilling the criteria laid out in these regulations does not need to be notified to the Commission.


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