COVID-19: The European Commission adopts Temporary Framework for State aid measures

On 19 March 2020, the European Commission adopted a Temporary Framework for State aid measures to enable EU Member States to support the economy during the current COVID-19 outbreak. The aim is to lay down a framework that allows EU Member States to tackle the difficulties undertakings are currently encountering whilst maintaining the integrity of the internal market in EU and ensuring a level playing field. This newsletter provides a brief overview.

Governments all over the world attempt to handle the effects of the COVID-19 outbreak on the economy. The European Commission has issued a communication with a Temporary Framework for State aid measures to enable EU Member States to support the economy in the current COVID-19 outbreak. The communication sets out the possibilities EU Member States have under EU State aid rules to ensure liquidity and access to finance for undertakings of all types that face a sudden shortage. This allows undertakings to recover from the current situation and to preserve the continuity of economic activity during and after the COVID-19 outbreak. At the same time, a level playing field within the EU is preserved.

Background

Under Article 107 of the EU Treaty, State aid consists of aid granted by an EU Member State or through State resources which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods and which affects trade between EU Member States.

State aid can generally only be implemented after approval by the European Commission which is in charge of ensuring that State aid complies with EU rules.

The European Commission may approve State aid that is considered compatible with the internal market.

For example, Article 107(3)(b) of the Treaty provides that “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” may be considered compatible with the internal market.

The Temporary Framework sets out temporary State aid measures that the European Commission considers compatible under Article 107(3)(b) TFEU, and which – according to the communication – can be approved very rapidly upon notification to the European Commission by the Member State concerned.

Other options for EU Member States include:

• Support measures outside the scope of EU State aid control without the involvement of the European Commission, e.g. measures applicable to all undertakings regarding wage subsidies, suspension of payments of corporate and value added taxes or social welfare contributions, or financial support directly to consumers for cancelled services or tickets not reimbursed by the concerned operators.
• Support measures in line with the General Block Exemption Regulation without the involvement of the European Commission.
• Notification to the European Commission of aid schemes to meet acute liquidity needs and support undertakings facing financial difficulties on the basis of Article 107(3)(c) TFEU and as further specified in the Rescue and Restructuring State aid Guidelines.
• Notification to the European Commission of damage compensation measures to undertakings in sectors that have been particularly hit by the outbreak (e.g. transport, tourism, culture, hospitality and retail) and/or organisers of cancelled events for damages suffered due to and directly caused by the COVID-19 outbreak on the basis of Article 107(2)(b) TFEU.
• Notification to the European Commission of alternative State aid approaches – both aid schemes and individual measures.

State aid under Article 107(3)(b) of the Treaty

According to the Temporary Framework, the European Commission considers that State aid is justified and can be declared compatible with the internal market on the basis of Article 107(3)(b), for a limited period, to remedy the liquidity shortage faced by undertakings and ensure that the disruptions caused by the COVID-19 outbreak do not undermine their viability, especially of small and medium enterprises. This is because the COVID-19 outbreak affects all Member States and the containment measures taken by Member States impact undertakings.

The Temporary Framework sets out the compatibility conditions the European Commission will generally apply to aid granted by EU Member States under Article 107(3)(b) until 31 December 2020.

Member States wishing to grant aid under the Temporary Framework must show that the State aid measures notified to the European Commission are necessary, appropriate and proportionate to remedy a serious disturbance in the economy of the Member State concerned and that all the conditions of the European Commission communication regarding the relevant State aid measure are fulfilled.

The Temporary Framework lists the following possible temporary State aid measures:

• Aid in form of direct grants, repayable advances or tax or payments advantages. Member States will be able to set up schemes to grant up to € 800,000 to a company to address its urgent liquidity needs.
• Aid in the form of public guarantees on loans taken by companies from banks. Member States will be able to provide State guarantees for a limited period and loan amount to ensure banks keep providing loans to the customers in need.
• Aid in the form of subsidised interest rates. Member States will be able to grant loans with favourable interest rates for a limited period and loan amount to companies. The loans may help businesses cover immediate working capital and investment needs.
• Safeguards concerning aid in the form of public guarantees and subsidised interest rates channeled through banks. Some Member States plan to build on banks’ existing lending capacities, and use them as a channel for support to businesses, e.g. to small and medium enterprises. The Temporary Framework establishes that such aid channeled through banks is regarded as direct aid to the banks’ customers – not to the banks themselves. The Temporary Framework also gives guidance on how to ensure minimal distortion of competition between banks.
• Short-term export credit insurance. Normally, marketable risks cannot be covered by export-credit insurance with the support of Member States. As a consequence of the current COVID-19 outbreak, it cannot be excluded that, in certain countries cover for marketable risks could be temporarily unavailable. The Temporary Framework introduces additional flexibility on how to demonstrate that certain countries are not-marketable risks. This enables short-term export credit insurance to be provided by the State where needed.

Different conditions apply for the different State aid measures mentioned in the European Commission communication.

Undertakings that may receive State aid are encouraged to seek legal advice since the consequences of receiving illegal State aid, i.e. State aid that has not been notified to and approved by the European Commission, can be severe.

In case of illegal State aid, which is subsequently approved by the European Commission, market interests may have to be paid for the period in which the aid was unlawfully implemented.

In case of illegal State aid, which is not subsequently approved by the European Commission, the full amount may have to be repaid with interests.