COVID-19 in the Baltics: State Aid – How Can the State Help Companies Affected by COVID-19?
The Estonian, Latvian and Lithuanian governments have indicated their support for the companies in the form of tax relief and liquidity support. As of 17.03.2020, the initial measures in Estonia and Latvia are expected within this week. Companies with business in Lithuania can already benefit from tax relief, with a draft law on liquidity support expected within 48 hours.
Due to the exceptional circumstances created by COVID-19, many companies have had to restructure their operations. To a lesser or greater extent, this affects all sectors of the economy, in particular, the tourism, transport and hotel sectors.
In order to ensure that sustainable companies are able to survive the resulting economic crisis, the Estonian, Latvian or Lithuanian governments can issue support in the form of State aid schemes. State aid may take many forms and involve, for example, compensation for direct damages resulting from cancelled events as well as compensating some of the operating costs of companies. In order for the State to adopt a State aid scheme, companies affected by COVID-19 will have to notify the State of their damages through an open dialogue.
How can the State mitigate the impact of COVID-19 on businesses?
Member States of the European Union, in cooperation with the European Commission, have available to them several alternative measures. These measures can be broadly divided into three different categories:
- measures that can be taken unilaterally by the State (e.g. tax relief, wage subsidies, VAT reductions, loans up to EUR 200,000);
- sector-specific measures (support schemes). These are subject to prior notification to the European Commission (e.g. loans to small and medium-sized enterprises, compensation of costs); and
- measures for individual companies aimed at solving particular issues for large companies. As with the support schemes, these must be notified to the European Commission prior to their implementation.
A good example for the above is Denmark, whose State aid scheme was approved by the European Commission within 24 hours of its notification. The State aid scheme in question allows the Danish government to compensate companies,inter alia, for the losses resulting from the cancellation of events with more than 1000 participants. Compensation is paid for the following costs:
- the direct expenditure relating to the cancelled event as well as reasonable and documented operational costs of the event organizer; or
- if the loss involved an obligation to re-purchase tickets, the cost of re-purchasing the tickets.
The above compensation may, however, not result in overcompensation, e.g. in case the damages are already covered by insurance.
Whether similar schemes are implemented in the Baltic countries will depend on the respective governments. If Estonia, Latvia or Lithuania wish to implement a new State aid scheme or change an existing one, notification to the European Commission is mandatory. Given the seriousness of the situation, the European Commission has announced that it will adopt as flexible a position as possible and will endeavour to coordinate Member States' support mechanisms within 24 hours of being informed.
In relation to the above, the feedback provided by the companies to the government is also relevant for the development of effective State aid schemes. Without proper support from the companies, the result may be that the State aid schemes do not cover the damages suffered by the affected companies.
What measures have been adopted or proposed so far?
As of 17.03.2020, each of the Baltic States’ governments have indicated that they are working on introducing various support measures aimed at reducing the burden of the COVID-19 outbreak on companies as well as ensuring liquidity in the market.
In Estonia and Latvia, these measures have been indicated to include, amongst others, tax relief, measures supporting the pay for workers as well as liquidity support. Further, both the Estonian and Latvian governments have indicated their willingness to borrow EUR 1 billion to support the relief effort. More information on initial measures for Estonia and Latvia are expected by the end of the current week, with further measures coming in at a later date.
In respect to Lithuania, the Government has already approved a scheme of measures that amount to EUR 2,5 billion. Some of the measures include the suspension of actions for recovery of tax (the criterion of reasonableness applies), taxpayers being exempted from fines, penalties for late payment, municipalities being recommended to exempt taxpayers from commercial real estate, land taxes, state guarantees being used to compensate small and medium-sized enterprises from 50% to 100% of the interest actually paid. Furthermore, the Government has decided to borrow at least EUR 5 billion from the markets to ensure liquidity. While the tax measures are already in place, the draft law for providing State guarantees in Lithuania is expected within 48 hours as of 16.03.2020.
We will provide updates once more information is available.
The required quick response by the governments can happen partially because legally all parties involved, including the companies receiving aid, will carry the risk for the abuse of the possible State aid schemes. In other words, before receiving State aid, it is also necessary for the company to assess whether the potential State aid is limited to remedying the damage caused by COVID-19 or whether it goes further than what is necessary. The risk being that the received State aid will have to be repaid with interest. Thus, it is in the interests of companies to act with due care, both in their cooperation with the State and in the possible receipt of State aid.
Senior Associate Mart Blöndal (Estonia), Partner Ugis Zeltinš (Latvia), Associate Samanta Šereikaite (Lithuania)